Pzena Investment Management Annual Report 2012

FY2012 Annual Report · Pzena Investment Management
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2012

or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

(cid:2)

□

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
(State or Other Jurisdiction of
Incorporation or Organization)

20-8999751
(I.R.S. Employer
Identiﬁcation No.)

120 West 45th Street
New York, New York 10036
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (212) 355-1600

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Class A Common Stock, par value $.01 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Act. Yes (cid:4) No (cid:2)
Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:2)

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 (cid:2) No (cid:4)

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 (cid:2) No (cid:4)

Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in deﬁnitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. □

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’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the
Exchange Act.

Large accelerated ﬁler □

Accelerated ﬁler □

Non-accelerated ﬁler □
(Do not check if a smaller
reporting company)

Smaller reporting company (cid:2)

Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Exchange Act) Yes (cid:4) No (cid:2)

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 29, 2012, the last business day of its
most recently completed second ﬁscal quarter, was approximately $46,721,593 based on the closing sale price of $4.43 per share of Class A
common stock of the registrant on such date on the New York Stock Exchange. For purposes of this calculation only, it is assumed that the
affiliates of the registrant include only directors and executive officers of the registrant.

As of March 11, 2013, there were 11,049,049 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.

As of March 11, 2013, there were 53,676,316 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . .

PART I

Item 1.

Business

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1A.

Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Item 3.

Item 4.

Properties

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Removed and Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.

Item 7.

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Discussion and Analysis of Financial Condition and

Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . .

Item 8.

Item 9.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9A.

Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10.

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . .

Item 11.

Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 12.

Security Ownership of Certain Beneﬁcial Owners and Management and Related

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 13.

Certain Relationships and Related Transactions, and Director Independence . . . . . . .

Item 14.

Principal Accountant Fees and Services

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

Item 15.

Exhibits and Financial Statement Schedules

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements.

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

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on
potentially inaccurate assumptions that could cause actual results to differ materially from those expected or
implied by the forward-looking statements. Our actual results could differ materially from those anticipated in
forward-looking statements for many reasons, including the factors described in Item 1A, ‘‘Risk Factors’’ in
Part I of this Annual Report. Accordingly, you should not unduly rely on these forward-looking statements,
which speak only as of the date of this Annual Report. We undertake no obligation to publicly revise any
forward-looking statements to reﬂect circumstances or events after the date of this Annual 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, or SEC, after the date of
this Annual Report.

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

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our anticipated future results of operations and operating cash ﬂows;

our 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;

potential growth opportunities available to us;

the recruitment and retention of our 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 expectation 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

Preliminary Notes

In this Annual Report, ‘‘we,’’ ‘‘our,’’ and ‘‘us’’ refers to Pzena Investment Management, Inc. (also referred

to as the ‘‘Company’’) and its consolidated subsidiaries.

Each Russell Index referred to in this Annual Report is a registered trademark or trade name of The
Frank Russell Company(cid:5). The Frank Russell Company(cid:5) is the owner of all copyrights relating to these
indices and is the source of the performance statistics of these indices that are referred to herein.

The Morgan Stanley Capital International EAFE(cid:5) Index, which we refer to as the MSCI EAFE(cid:5) Index,

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

The S&P 500(cid:5) Index is a registered trademark of Standard & Poor’s, a division of The McGraw Hill
Companies, Inc., which is the owner of all copyrights relating to this index and the source of the performance
statistics of this index that are referred to herein.

ITEM 1. BUSINESS

Overview

PART I.

Pzena Investment Management, Inc. is the sole managing member of Pzena Investment Management,

LLC, which is our operating company. Founded in 1995, Pzena Investment Management, LLC is a
value-oriented investment management ﬁrm. We believe that we have established a positive, team-oriented
culture that enables us to attract and retain very qualiﬁed people. Over the past seventeen years, we have built
a diverse, global client base of respected and sophisticated institutional investors, high net worth individuals
and select third-party distributed mutual funds for which we act as sub-investment adviser.

1

The graphic below illustrates our holding company structure and ownership as of December 31, 2012.

Principals (1) 

Public 
Stockholders 

Class A 
Common Stock, 
4.0% Voting 
Interest (2) 

Class B 
Common Stock, 
96.0% Voting 
Interest (3) 

Pzena Investment 
Management, Inc. 

Class B Units 
82.8% Economic Interest (5) 

Sole Managing Member 
Class A Units, 
17.2% Economic Interest (4) 

Pzena Investment 
Management, LLC 

(1) As of December 31, 2012, the members of Pzena Investment Management, LLC, other than us, consisted of:

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Five of our named executive officers and their estate planning vehicles, excluding our former Chief Financial Officer
(‘‘CFO’’), who collectively held approximately 59.8% of the economic interests in Pzena Investment Management, LLC. In
addition, certain of our named executive officers held 1.3% of the economic interest in Pzena Investment Management, LLC
through ownership of our Class A common stock. For more detail on executive officer ownership, see Item 12 ‘‘Security
Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters’’.

30 of our other employee members, who collectively held approximately 4.2% of the economic interests in Pzena Investment
Management, LLC.

Certain other members of our operating company, including one of our directors and his related entities, and six former
employees, who collectively held approximately 18.8% of the economic interests in us.

Each share of Class A common stock is entitled to one vote per share. Class A common stockholders have 100% of the rights of all
classes of our capital stock to receive distributions.

Each share of Class B common stock is entitled to ﬁve votes per share for so long as the number of shares of Class B common
stock outstanding represents at least 20% of all shares of common stock outstanding. Class B common stockholders have the right
to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up, but do not share in
dividends.

(2)

(3)

(4) As of December 31, 2012, we held 11,149,941 Class A units of Pzena Investment Management, LLC, which represented the right to

receive 17.2% of the distributions made by Pzena Investment Management, LLC.

(5) As of December 31, 2012, the Principals collectively held 53,657,799 Class B units of Pzena Investment Management, LLC, which

represented the right to receive 82.8% of the distributions made by Pzena Investment Management, LLC.

We utilize a classic value approach to investing and seek to make investments in good businesses at low

prices. Our approach and process have helped us achieve attractive returns over the long term. As of
December 31, 2012, we managed assets in fourteen value-oriented investment strategies across a wide range
of market capitalizations in both U.S. and non-U.S. capital markets. Our assets under management, or AUM,
were $17.1 billion at December 31, 2012, and we managed money on behalf of institutions and high net
worth individuals, and acted as sub-investment adviser to a variety of SEC-registered mutual funds and
offshore funds.

Our investment discipline and our commitment to a classic value approach have been important elements
of our success. We construct concentrated portfolios selected through a rigorous fundamental research process.
Our investment decisions are not motivated by short-term results or aimed at closely tracking speciﬁc market
benchmarks. Generating excess returns by utilizing a classic value investment approach requires:

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willingness to invest in companies before their stock prices reﬂect signs of business improvement,
and

signiﬁcant patience, based upon our understanding of the business’ fundamentals, and our long-term
investment horizon.

As of December 31, 2012, we had 70 employees, including 35 employee members who collectively
owned 64.0% of the ownership interests in our operating company. Our operating company is led by an
executive committee, consisting of our Chief Executive Officer (CEO), two Presidents, and two Executive
Vice Presidents.

Our Competitive Strengths

We believe that the following are our competitive strengths:

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Focus on Investment Excellence. We recognize that we must achieve investment excellence in
order to attain long-term business success. All of our business decisions, including the design of our
investment process and our willingness to limit AUM in our investment strategies, are focused on
producing attractive long-term investment results. We believe that our long-term investment
performance, together with our willingness to close our strategies to new investors in order to
optimize the prospects for future performance, has contributed to our positive reputation among our
clients and the institutional consultants who advise them.

Consistency of Investment Process. Since our inception over seventeen years ago, we have utilized
a classic value investment approach and a systematic, disciplined investment process to construct
portfolios for our investment strategies in U.S. and non-U.S. markets across all market
capitalizations. The consistency of our process has allowed us to leverage the same investment team
to launch new products. We believe that our consistent investment process has resulted in strong
brand recognition of our ﬁrm in the investment community.

Diverse and High Quality Client Base. We believe that we have developed a favorable reputation
in the institutional investment community. This is evidenced by our strong relationships with
institutional investors, investment consultants, and mutual fund providers, as well as the diversity
and sophistication of our investors. For more information concerning our client base, see ‘‘Our
Client Relationships and Distribution Approach’’ below.

Experienced Investment Professionals and a Team-Oriented Approach. Our greatest asset is the
experience of the individuals on our team. For more information on our investment team, see
‘‘Our Investment Team’’ below.

Employee Retention. We have focused on building an environment that we believe is attractive to
talented investment professionals. Important among our practices are our team-oriented approach to
investment decisions, rotation of coverage areas among individuals, and a culture of employee
ownership of our ﬁrm.

Culture of Ownership. We believe in signiﬁcant ownership of our business by the key contributors
to our success. Since our inception, we have communicated to all our employees that they have the
opportunity to become partners in our operating company. As of December 31, 2012, we had 35
employee members positioned within all functional areas of the ﬁrm. We believe this ownership
model results in a shared sense of purpose with our clients and their advisers. We intend to continue
fostering a culture of ownership through our equity incentive plans, which are designed to align our
team’s interests with those of our stockholders and clients. We believe this culture of ownership
contributes to our team orientation and connection with clients.

Our Business Strategy

The key to our success is continued long-term investment performance. In conjunction with this, we

believe the following strategies will enable us to grow our business over time.

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Unwavering Focus on Investment Excellence. We view our unwavering focus on long-term
investment excellence to be the key driver of our business success.

Capitalize on Growth Opportunities Created By Our Global Strategies. Among both institutional
and retail investors industry-wide, over the past few years, there have been increasing levels of
investments in portfolios including non-U.S. equities. As of December 31, 2012, the total AUM in
our Global Value strategies, International (ex-U.S.) Value strategies, Emerging Markets Focused
Value strategy, and other non-U.S. strategies was $6.2 billion, or 36.3% of our overall AUM. Our
global capability provides opportunity for all of our strategies around the world.

Employ Our Proven Process to Introduce New Products. We anticipate continuing to offer new
investment strategies over time, on a measured basis, consistent with our past practice, utilizing our
proven investment process.

• Work with Our Strong Consultant Relationships. We believe that we have built strong

relationships with the leading investment consulting ﬁrms who advise potential institutional clients.
Historically, new accounts sourced through consultant-led searches have been a large driver of our
inﬂows and are expected to be a major component of our future inﬂows.

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Expand Our Non-U.S. Client Base.
In recent years, we have increased our efforts to develop our
non-U.S. client base. Through our strong relationships with global consultants, we have been able to
accelerate the development of our relationships with their non-U.S. branches. Over time, we aim to
achieve growth of this client base through these relationships and by directly calling on the world’s
largest institutional investors. We have also sought to expand our non-U.S. base through our
relationships with non-U.S. mutual funds and other investment fund advisors. During 2010 we
opened a representative office in Melbourne, Australia to more effectively service existing clients and
develop new relationships in the geographic area. To date, these marketing efforts have resulted in
client relationships in more than seven non-U.S. countries, such as the United Kingdom, Australia
and Canada. As of December 31, 2012, we managed $4.8 billion in separate accounts, commingled
funds and sub-advised funds on behalf of non-U.S. clients.

Expand Our Sales Effort. Over the course of the last several years we have expanded our sales
and marketing efforts from a team of 3 to a team of 8. This team is focused geographically along
with one individual focused particularly on the sub-advisory and investment-only deﬁned
contribution distribution channels. In addition to our representative office in Melbourne, Australia,
we now have two other professionals dedicated to business development throughout Europe and the
Middle East.

Our Investment Team

We believe we have built an investment team that is well-suited to implementing our classic value
investment strategy. The members of our investment team have a diverse set of backgrounds, including former
corporate management, private equity, management consulting, legal, accounting and Wall Street professionals.
Their diverse business backgrounds are instrumental in enabling us to make investments in companies where
we would be comfortable owning the entire business for a three- to ﬁve-year period. We look beyond
temporary earnings shortfalls that result in stock price declines, which may lead others to forego investment
opportunities, if we believe the long-term fundamentals of a company remain attractive.

As of December 31, 2012, we had a 23-member investment team. Each member serves as a research
analyst, and certain members of the team also have portfolio management responsibilities. There are generally
three portfolio managers for each investment strategy. These three managers have joint decision-making
responsibility, and each has ‘‘veto authority’’ over all decisions regarding the relevant portfolio. Research
analysts have sector and company-level research responsibilities which span all of our investment strategies,
including those with a non-U.S. focus. In order to facilitate the professional development of our team, and to
keep a fresh perspective on our portfolio companies, our research analysts generally rotate industry coverage
every three to four years.

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We follow a collaborative, consensus-oriented approach to making investment decisions, such that all
members of our investment team, irrespective of their seniority, can play a signiﬁcant role in this decision
making process. We hold weekly research review meetings attended by all portfolio managers and relevant
research analysts, and are open to other members of our ﬁrm, at which we openly discuss and debate our
ﬁndings regarding the normalized earnings power of potential portfolio companies. In addition, we hold daily
morning meetings, attended by our portfolio managers, research analysts, portfolio administration, and client
service personnel, in order to review developments in our holdings and set a trading strategy for the day.
These meetings are critical for sharing relevant developments and analysis of the companies in our portfolios.
We believe that our collaborative culture is attractive to our investment professionals.

Our Investment Strategies

As of December 31, 2012, our approximately $17.1 billion in AUM was invested in a variety of value-
oriented investment strategies, representing differing degrees of concentration and capitalization segments of
U.S. and non-U.S. markets. The following table describes the largest of our current U.S. and non-U.S.
investment strategies, and the allocation of our approximately $17.1 billion in AUM among them, as of
December 31, 2012.

Strategy

U.S. Strategies

Large Cap Focused Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Large Cap Expanded Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Focused Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small Cap Focused Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. Strategies(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-U.S. Strategies

Global Focused Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International (ex-U.S.) Expanded Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Non-U.S. Strategies(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AUM
(in billions)

$

4.2
3.6
1.5
1.1
0.5

4.0
1.7
0.5
$ 17.1

(1) Our other U.S. investment strategies include, but are not limited to: Mid Cap Focused Value, Financial Opportunities Service, and

All Cap Focused Value.

(2) Our other non-U.S. investment strategies include, but are not limited to: International (ex-U.S.) Focused Value, Global Expanded

Value, European Focused Value and Emerging Markets Focused Value.

During 2012, we changed the names of certain of our investment strategies. Going forward, they will be

referred to as Focused Value strategies (formerly known as our Value strategies) and Expanded Value
strategies (formerly known as our Diversiﬁed Value strategies). These new names will be referenced
throughout our Annual Report on Form 10-K. 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. In addition, the number of holdings typically found in the portfolios of each of
our investment strategies may vary, with the Focused Value strategies being more concentrated in fewer
positions.

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Our six largest investment strategies as of December 31, 2012 are further described below.

U.S. Strategies

Large Cap Focused Value. We screen a universe of the 500 largest U.S.-listed companies, based on
market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in
October 2000.

Large Cap Expanded Value. We screen a universe of the 500 largest U.S. — listed companies, based on
market capitalization, to build a portfolio generally consisting of 50 to 80 stocks. We launched this strategy in
July 2012.

Focused Value. We screen a universe of the 1,000 largest U.S.-listed companies, based on market

capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in
January 1996.

Small Cap Focused Value. We screen a universe of U.S.-listed companies ranked from the 1,001st to
3,000th largest, based on market capitalization, to build a portfolio generally consisting of 40 to 50 stocks. We
launched this strategy in January 1996.

Non-U.S. Strategies

Global Focused Value. We screen a universe of the 1,500 largest non U.S.-listed companies, based on

market capitalization, and the 500 largest U.S.-listed companies, based on market capitalization, to build a
portfolio generally consisting of 40 to 60 stocks. We launched this strategy in January 2004.

International (ex-U.S.) Expanded Value. We screen a universe of the 1,500 largest non-U.S.-listed

companies, based on market capitalization, to build a portfolio generally consisting of 60 to 80 stocks. We
launched this strategy in November 2008.

We understand that our ability to retain and grow assets as a ﬁrm has been, and will be, driven primarily
by delivering attractive long-term investment results to our clients. As a consequence, we have prioritized, and
will continue to prioritize, investment performance over asset accumulation. Where we deemed it necessary,
we have, at times, closed certain products to new investors in order to preserve capacity to effectively
implement our concentrated investment strategies for the beneﬁt of existing clients. Currently, all of our
investment strategies are open to new investors.

Our Product Development Approach

Historically, a major component of our growth has been the development of new products. Prior to
incubating a new product, we perform in-depth research on the potential market for the product, as well as its
overall compatibility with our investment expertise. This process involves analysis by our client team, as well
as by our investment professionals. We will only launch a new product if we believe that it can add value to a
client’s investment portfolio. In the past, as appropriate, we have created partnerships with third parties to
enhance the distribution of a product or add expertise that we do not have in-house. Prior to marketing a new
product, we generally incubate the product for a period of one to ﬁve years, so that we can test and reﬁne our
investment strategy and process before actively marketing the product to our clients.

Furthermore, we continually seek to identify opportunities to extend our investment process into new

markets or to apply it in different ways to offer clients additional strategies. We are currently incubating
several products which we believe may be attractive to our clients in the future.

Our Investment Performance

Since we are long-term fundamental investors, we believe that our investment strategies yield the most
beneﬁts and are best evaluated, over a long-term timeframe. For more information on our performance, see
‘‘Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Operating Results.’’

6

Advisory Fees

We earn advisory fees on the accounts that we manage for institutional clients, retail clients, mutual

funds and other investment funds.

On 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 in which
the rate we earn on the AUM declines as the amount of AUM increases. 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.

As of December 31, 2012, we sub-advised twelve SEC-registered mutual funds that each have an initial
two-year term and are subject to annual renewal by each fund’s board of directors pursuant to the Investment
Company Act of 1940, as amended (the ‘‘Investment Company Act’’). Nine of these twelve sub-investment
advisory agreements are beyond their initial two-year terms as of December 31, 2012. In addition, we sub-
advise nine offshore funds. Pursuant to these agreements, 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 assets under management, are lower
than the advisory fees we earn on our institutional accounts. The majority of the advisory fees we earn on
institutional accounts are based on the value of AUM at a speciﬁc date on a quarterly basis, either in arrears
or in advance. Advisory fees on certain of our institutional accounts, and with respect to all of the mutual
funds that we sub-advise, are calculated based on the average of the monthly or daily market value of the
account. 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 method used to calculate the fee according to the fee rate schedule may differ, as described
above.

Our Client Relationships and Distribution Approach

We manage separate accounts on behalf of institutions and high net worth individuals and, as of

December 31, 2012, acted as sub-investment adviser for twelve SEC-registered mutual funds and nine offshore
funds. We believe that strong relationships with our clients are critical to our ability to succeed and to grow
our AUM. In building these relationships, we have focused our efforts where we can efficiently access and
service large pools of sophisticated clients with our team of dedicated marketing and client service
professionals. We distribute our products to institutional and retail clients primarily through the efforts of our
internal sales team, who calls on them directly and on the consultants who serve them, as well as through the
marketing programs of our sub-investment advisory partners. Since our objective is to attract long-term
investors with an investment horizon in excess of three years, our sales and client service efforts focus on
educating our investors regarding our disciplined value investment process and philosophy.

Our marketing effort is led by our eight person business development team, which is responsible for:

•

•

•

identifying and marketing to prospective institutional clients;

responding to requests for investment management proposals; and

developing and maintaining relationships with independent consultants.

Direct Institutional Relationships

Since our inception, we have directly offered institutional investment products to public and corporate

pension funds, endowments, foundations and Taft-Hartley plans. Wherever possible, we have sought to
develop direct relationships with the largest U.S. institutional investors, a universe we deﬁne to include plan
sponsors with greater than $300 million in plan assets. Over the past few years, we have focused on
expanding this direct calling effort to potential institutional clients outside of the United States.

7

Investment Consultants

We estimate that approximately 70% of all retirement plan assets are advised by investment consultants,
with a relatively small number of these consultants representing a signiﬁcant majority of these relationships.
As a result of a consistent servicing effort over our history, we have built strong relationships with those
consulting ﬁrms that we believe are the most important and believe that most of them rate our investment
strategies favorably. New accounts sourced through consultant-led searches have been a large driver of our
historical growth and are expected to be a major component of our future growth. We seek to develop direct
relationships with accounts sourced through consultant-led searches by our ongoing marketing and client
service efforts, as described below under ‘‘Client Service.’’

Sub-Investment Advisory Distribution

We have established relationships with mutual fund and fund providers domestically and internationally,
who offer us opportunities to efficiently access new market segments through sub-investment advisory roles.

We sub-advise a mutual fund that is advised by John Hancock Advisers, namely the John Hancock
Classic Value Fund. As of December 31, 2012, this fund represented $1.5 billion, or 8.8%, of our AUM. For
the years ended December 31, 2012, 2011, and 2010 approximately 7.0%, 7.7%, and 9.8%, respectively, of
our total revenue was generated from our sub-investment advisory agreement with John Hancock Advisers.

We currently sub-advise three mutual funds that are advised by The Vanguard Group. In August 2012, we

expanded our sub-advisory relationship with The Vanguard Group as we were hired as a co-manager to
manage approximately 28% of the Vanguard Windsor Fund. As of December 31, 2012, these three mutual
funds represented $3.5 billion, or 20.5%, of our AUM. For the year ended December 31, 2012, approximately
3.1% of our total revenue was generated from our sub-investment advisory agreement with The Vanguard
Group. Our sub-investment advisory agreement with the Vanguard Windsor Fund represented substantially all
of this revenue during this period. For the years ended December 31, 2011 and 2010, less than 1% of our total
revenue was generated from our sub-investment advisory agreement with The Vanguard Group.

High Net Worth Advisory Firms

We have accessed the high net worth segment of the investing community through relationships with

wealth advisers who utilize our investment strategies in investment programs they construct for their clients.
Similar to our approach with consultants, we have targeted select ﬁrms around the world serving the family
office and ultra high net worth market. We believe this approach leads to an efficient client servicing model
and strong relationships with wealth advisers, who ultimately view us as partners in their investment
programs. Occasionally, we establish direct separate account relationships with high net worth individuals.

Client Service

Our client service team’s efforts are instrumental to maintaining our direct relationships with institutional

and individual separate account clients, and developing direct relationships with separate accounts sourced
through consultant-led searches. We have a dedicated client service team, which is primarily responsible for
addressing all ongoing client needs, including periodic updates and reporting requirements. Our business
development team assists in providing ongoing client service to existing institutional accounts. Our
institutional distribution, sales and client service efforts are also supported, as necessary, by members of our
investment team.

Our client service team consists of individuals with both general business backgrounds and investment
research experience. Our client service team members are fully integrated into our research team, attending
both research and company management meetings to ensure our clients receive primary information. As
appropriate, we introduce members of our research and portfolio management team into client portfolio
reviews to ensure that our clients are exposed to the full breadth of our investment resources. We also provide
quarterly reports to our clients in order to share our investment perspectives with them. We additionally meet
and hold conference calls regularly with clients to share perspectives on the portfolio and the current
investment environment.

8

Competition

We compete in all aspects of our business with a large number of investment management ﬁrms,

commercial banks, broker-dealers, insurance companies and other ﬁnancial institutions.

In order to grow our business, we must be able to compete effectively to maintain existing AUM and

attract additional AUM. Historically, we have competed for AUM principally on the basis of:

•

•

•

•

•

•

the performance of our investment strategies;

our clients’ perceptions of our drive, focus and alignment of our interests with theirs;

the quality of the service we provide to our clients and the duration of our relationships with them;

our brand recognition and reputation within the investing community;

the range of products we offer; and

the level of advisory fees we charge for our investment management services.

Our ability to continue to compete effectively will also depend upon our ability to attract highly qualiﬁed

investment professionals and retain our existing employees. For additional information concerning the
competitive risks that we face, see ‘‘Item 1A — Risk Factors — Risks Related to Our Business — The
investment management business is intensely competitive.’’

Employees

At December 31, 2012, we had 70 full-time employees, consisting of 26 research department personnel;

3 traders; 16 client service and marketing personnel; 12 employees in operations; and 13 legal, compliance
and ﬁnance personnel.

Available Information

We maintain a website at www.pzena.com. The contents of our website are not part of, nor are they

incorporated by reference into, this Annual Report.

We make available through our website our annual reports on Form 10-K, our quarterly reports on Form

10-Q and our current reports on Form 8-K, as well as amendments to those reports, as soon as reasonably
practicable after they are electronically ﬁled with the Securities and Exchange Commission. To retrieve these
reports, and any amendments thereto, visit the Investor Relations section of our website.

9

REGULATORY ENVIRONMENT AND COMPLIANCE

Our business is subject to extensive regulation in the United States at both the federal and state level, as
well as by self-regulatory organizations. Under these laws and regulations, agencies that regulate investment
advisers have broad administrative powers, including the power to limit, restrict or prohibit an investment
adviser from carrying on its business in the event that it fails to comply with such laws and regulations.
Possible sanctions that may be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for speciﬁed periods of time, revocation of investment adviser and other
registrations, censures and ﬁnes.

SEC Regulation

Our operating company, Pzena Investment Management, LLC, is registered as an investment adviser with

the SEC. As a registered investment adviser, it is subject to the requirements of the Investment Advisers Act
of 1940, as amended, which we refer to as the Investment Advisers Act, and the SEC’s regulations thereunder,
as well as to examination by the SEC’s staff. The Investment Advisers Act imposes substantive regulation on
virtually all aspects of our business and our relationships with our clients. Applicable requirements relate to,
among other things, ﬁduciary duties to clients, engaging in transactions with clients, maintaining an effective
compliance program, performance fees, solicitation arrangements, conﬂicts of interest, advertising,
recordkeeping, reporting and disclosure requirements. Twelve of the U.S. funds for which Pzena Investment
Management, LLC acts as the sub-investment adviser are registered with the SEC under the Investment
Company Act. The Investment Company Act imposes additional obligations, including detailed operational
requirements for both the funds and their advisers. Moreover, an investment adviser’s contract with a
registered fund may be terminated by the fund on not more than 60 days’ notice, and is subject to annual
renewal by the fund’s board after an initial two-year term. Both the Investment Advisers Act and the
Investment Company Act regulate the ‘‘assignment’’ of advisory contracts by the investment adviser. The SEC
is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and
the Investment Company Act, ranging from ﬁnes and censures to termination of an investment adviser’s
registration. The failure of Pzena Investment Management, LLC, or the registered funds for which Pzena
Investment Management, LLC acts as sub-investment adviser, to comply with the requirements of the SEC
could have a material adverse effect on us.

ERISA-Related Regulation

To the extent that Pzena Investment Management, LLC is a ‘‘ﬁduciary’’ under the Employment

Retirement Act of 1974, or ERISA, with respect to beneﬁt plan clients, it is subject to ERISA, and to
regulations promulgated thereunder. ERISA and applicable provisions of the Internal Revenue Code impose
certain duties on persons who are ﬁduciaries under ERISA, prohibit certain transactions involving ERISA plan
clients and provide monetary penalties for violations of these prohibitions. Our failure to comply with these
requirements could have a material adverse effect on our business.

Foreign Regulation

Pzena Investment Management, LLC is currently availing itself of the international adviser exemption in
Ontario, Canada. In addition, Pzena Investment Management, LLC is registered as an exempt market dealer in
Ontario, Canada. As an exempt adviser, Pzena Investment Management, LLC is only permitted to provide
advice in Ontario to certain institutional and high net worth individual clients. As an exempt market dealer,
Pzena Investment Management, LLC is permitted to act as a market intermediary for only certain types of
trades, and is permitted to market, sell and distribute prospectus-exempt securities to accredited investors. An
exempt adviser and market dealer must, upon the request of the Ontario Securities Commission, or OSC,
produce all books, papers, documents, records and correspondence relating to its activities in Ontario, and
inform the OSC if it becomes the subject of an investigation or disciplinary action by any ﬁnancial services or
securities regulatory authority or self-regulatory authority.

Pzena Investment Management, LLC maintains a representative office in Melbourne, Australia, where it

maintains an exemption from the Australian Financial Services license requirement under the Corporations Act
2001.

10

We operate in various other foreign jurisdictions without registration in reliance upon applicable

exemptions under the laws of those jurisdictions.

Compliance

Our ﬁrm maintains a Legal and Compliance Department with two full-time lawyers, including our
General Counsel/Chief Compliance Officer. Other members of the Department, as well as the ﬁrm in general,
also devote signiﬁcant time to compliance matters.

11

ITEM 1A. RISK FACTORS

We face a variety of signiﬁcant and diverse risks, many of which are inherent in our business. Described

below are the risks we currently believe could materially and adversely affect our business, ﬁnancial
condition, results of operations or cash ﬂow.

Risks Related to Our Business

Our primary source of revenue is derived from management fees, which are directly tied to our assets
under management. Fluctuations in AUM may directly impact our revenue and earnings.

Substantially all of our revenue is derived from management fees paid by our clients, based on a
percentage of the market value of our AUM. Any decline and/or signiﬁcant impairment in AUM may greatly
affect our revenue and earnings and could occur due to a variety of factors, including:

•

•

•

•

•

Poor performance of our strategies: Poor performance of our investment strategies may result in
decreased market value of AUM. In addition, underperformance could impact our ability to maintain
our existing client base and develop new relationships, both of which could negatively impact AUM.

Poor market environment: We could expect our business to generate lower revenue in a
depressed equities market or general economic downturn. Any decline in the market value of
securities held in client portfolios due to such adverse conditions could lower AUM signiﬁcantly and
lead to a decrease in revenue. Investor sentiment in a poor equities market environment could also
decrease inﬂows and increase outﬂows from our investment strategies in favor of investments
perceived as more attractive.

Geo-political conditions: As a company that invests in both U.S. and non-U.S. markets, and with
a global client base, our business is subject to changing conditions in the global ﬁnancial markets,
and may also be affected by worldwide political, social and economic conditions, all of which could
negatively impact AUM.

Termination of signiﬁcant relationships: As of December 31, 2012, four client relationships
represented 45% of our AUM. For the year ended December 31, 2012, these relationships
represented 22% of our total revenue. Our clients can generally terminate our advisory agreements
or reduce assets managed upon short notice and for any reason, and there can be no assurance that
our agreements with respect to these relationships will remain in place. The termination of any of
these relationships could signiﬁcantly reduce our revenue and earnings, and we may not be able to
establish relationships with other clients in order to replace the lost revenue and earnings.

Intermediary dependence: New accounts sourced through consultant-led searches have been a
large driver of our inﬂows in the past, and are expected to be a major component of our inﬂows
going forward. In addition, we have established relationships with certain mutual fund providers who
have offered us opportunities to access certain market segments through sub-investment advisory
roles. We have also accessed the high-net worth segment of the investing community through
relationships with well-respected wealth advisers who utilize our investment strategies in investment
programs they construct for their clients. Our intermediaries routinely review and evaluate our
organization and the services we offer, and poor evaluations may result in client outﬂows and impact
our ability to attract new assets through such intermediaries.

During 2012, the majority of our investment strategies have outperformed their benchmarks, particularly
those with European exposure. Improved market conditions for the year have signiﬁcantly contributed to asset
inﬂows. However, no assurance can be given that improved market conditions will continue indeﬁnitely, and
there can be no assurance that there will not be declines in our AUM, revenue and proﬁtability in the future.

Market pressures to lower our advisory fees could lead to a decline in our proﬁt margin and increase the
volatility of our revenue and earnings.

Market pressures in recent years have created a trend towards lower fees in the asset management
industry and there can be no assurance that we will be able to maintain our current fee structure going

12

forward. Additionally, a shift in the composition of our AUM from higher to lower fee-generating client
relationships may result in a decrease in revenue, even if our aggregate level of AUM remains unchanged
or increases.

A small portion of our investment advisory revenue is currently derived from performance fees. We
generally earn performance fees under certain client agreements according to the performance in the accounts
relative to an agreed-upon benchmark. This fee structure results in a lower base fee but allows for us to earn
higher fees if the investment strategy outperforms the benchmark. In addition, 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. Therefore, if we fail to achieve the performance target for a particular
period, we will not earn a performance fee for that period and, for accounts with a high-water mark provision,
our ability to earn future performance fees may be impaired. During ﬁscal years 2012 and 2011, we earned
$0.3 million and $3.8 million in performance fees, respectively. An increase in performance fees, or in
performance-based fee arrangements with clients, could create greater ﬂuctuations in our revenue and
earnings.

The potential decreases in management fees and uncertainty in performance fee income could lead to

volatility in our proﬁt margins and impact our revenue and earnings.

Loss of key employees, and difficulties in attracting qualiﬁed investment professionals, could have a
material adverse effect on the performance of our strategies, which may lead to a decrease in revenue
and proﬁtability.

The success of our business largely depends on the participation of Richard S. Pzena, John P. Goetz,

William L. Lipsey, Antonio DeSpirito, III, and Michael D. Peterson, our CEO, two Presidents, and two
Executive Vice Presidents, respectively. Their professional reputations, expertise in investing, and relationships
with our clients and within the investing community in the U.S. and abroad are critical to executing our
business strategy and attracting and retaining clients. Accordingly, the retention of these individuals is crucial
to our future success. There is no guarantee that they will not resign, join our competitors or form a
competing company. The terms of the current operating agreement of our operating company restrict each of
these individuals from competing with us or soliciting our clients or employees during the term of their
employment with us and for a certain period thereafter. The penalty for breach of these restrictive covenants
will be the forfeiture of a number of Class B units held by the individual and his permitted transferees as of
the earlier of the date of his breach or the termination of his employment, unless our Board of Directors, in its
sole discretion, determines otherwise. Although we may also seek speciﬁc performance of these restrictive
covenants, there can be no assurance that we would be successful in obtaining this relief. Further, after this
post-employment restrictive period, we will not be able to prohibit them from competing with us or soliciting
our clients or employees. If any of these individuals were to join a competitor or form a competing company,
some of our current clients or other prominent members of the investing community could choose to invest
with that competitor rather than us.

In addition, our success depends on our ability to retain the senior members of our investment team and

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

13

Future growth of our business may place signiﬁcant demands on our resources and employees, and may
increase our expenses.

Future growth of our business may place signiﬁcant demands on our infrastructure, our investment team
and other employees, which may increase our expenses. In addition, we are required to continuously develop
our infrastructure in response to the increasing sophistication of the investment management market, as well
as compliance with legal and regulatory developments. We may face signiﬁcant challenges in maintaining:
adequate ﬁnancial and operational controls; implementing new or updated information and ﬁnancial systems,
and procedures and training; and managing and appropriately sizing our work force, and other components of
our business on a timely and cost-effective basis. There can be no assurance that we will be able to manage
the growth of our business effectively, or that we will be able to continue to grow, and any failure to do so
could adversely affect our ability to generate revenue and control our expenses.

The potential inability of our systems to accommodate an increasing volume of transactions could also

constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded
the capabilities of our data processing systems and other operating technology, and we expect that we will
need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints
on, our operations.

We face risks, and corresponding potential costs and expenses, associated with conducting operations and
growing our business in numerous countries.

We offer investment management services in many different regulatory jurisdictions around the world,
and intend to continue to expand our operations internationally. In order to remain competitive, we must be
proactive and prepared to deploy necessary resources when growth opportunities present themselves. The
necessary resources and/or personnel may be unavailable to take full advantage of strategic opportunities when
they appear, or that strategic decisions can be efficiently implemented. Local regulatory environments may
vary widely, as well as the adequacy and sophistication of each. Local requirements or needs may also place
additional demands on sales and compliance personnel and resources, such as meeting local requirements and
complying with local industry standards. Finding and hiring additional, well-qualiﬁed personnel and crafting
and adopting policies, procedures and controls to address local or regional requirements remain a challenge as
we expand our operations internationally. Moreover, regulators in non-U.S. jurisdictions could also change
their policies or laws in a manner that might restrict or otherwise impede our ability to offer our investment
products in their respective markets. Any of these local requirements, activities, or needs could increase the
costs and expenses we incur in a speciﬁc jurisdiction without any corresponding increase in revenue and
income from operating in the jurisdiction.

The investment management business is intensely competitive.

Competition in the investment management business is based on a variety of factors, including
investment performance; investor perception of an investment manager’s drive, focus and alignment of
interest; quality of service provided to, and duration of, relationships with clients; business reputation; and
level of fees charged for services. We compete in all aspects of our business with a large number of
investment management ﬁrms, commercial banks, broker-dealers, insurance companies and other ﬁnancial
institutions. Our competitive risks are heightened by the fact that some of our competitors may invest
according to different investment styles or in alternative asset classes which the markets may perceive as more
attractive than our investment approach in the public equity markets. If we are unable to compete effectively,
our revenue could be reduced, and our business could be materially affected.

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

Pursuant to the Investment Company Act, each of the sub-investment advisory agreements for the
SEC-registered mutual funds that we sub-advise automatically terminates upon its deemed ‘‘assignment,’’ and
a fund’s board and shareholders must approve a new agreement in order for us to continue to act as its sub-
investment adviser. In addition, pursuant to the Investment Advisers Act, each of our investment advisory

14

agreements for the separate accounts we manage may not be ‘‘assigned’’ without the consent of the client. A
sale of a controlling block of our voting securities and certain other transactions would be deemed an
‘‘assignment’’ pursuant to both the Investment Company Act and the Investment Advisers Act. Such an
assignment may be deemed to occur in the event that the holders of the Class B units of our operating
company exchange enough of their Class B units for shares of our Class A common stock such that they no
longer own a controlling interest in us. If such a deemed assignment occurs, there can be no assurance that we
will be able to obtain the necessary consents from clients whose funds are managed pursuant to separate
accounts, or the necessary approvals from the boards and shareholders of the SEC-registered funds that we
sub-advise. An assignment, actual or constructive, would trigger these termination and consent provisions and,
unless the necessary approvals and consents are obtained, could adversely affect our ability to continue
managing client accounts, resulting in the loss of AUM and a corresponding loss of revenue.

Extensive regulation of our business has been and will be expensive and time consuming, and exposes us
to the potential for signiﬁcant penalties, including ﬁnes or limitations on our ability to conduct our
business.

We are subject to extensive regulation of our investment management business and operations. As a

registered investment adviser, the SEC oversees our activities pursuant to its regulatory authority under the
Investment Advisers Act. In addition, we must comply with certain requirements under the Investment
Company Act with respect to the SEC-registered funds for which we act as sub-investment adviser. Each of
the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of ﬁnancial
services, including the authority to grant, and, in speciﬁc circumstances to cancel, permissions to carry on
particular businesses. Our failure to comply with applicable laws or regulations could result in ﬁnes, censure,
suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser.
Even if a sanction imposed against us is small in monetary amount, the adverse publicity arising from the
imposition of such sanctions by regulators could harm our reputation, result in withdrawal by our clients
and/or impede our ability to retain clients and develop new client relationships. As we expand into the
international market, we will also be under the regulatory scope of local regulatory authorities and
non-compliance with any of these authorities may result in ﬁnes, sanctions and inability to operate in that
local market.

We also face the risk of signiﬁcant intervention by regulatory authorities, including extended investigation

and surveillance activity, adoption of costly or restrictive new regulations, and judicial or administrative
proceedings that may result in substantial penalties. The requirements imposed by our regulators are designed
to ensure the integrity of the ﬁnancial markets and to protect customers and other third parties who deal with
us, and are not designed to protect our stockholders.

In addition, the regulatory environment in which we operate is subject to ongoing modiﬁcation and
further regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘the Dodd-
Frank Act’’) is one such example. While we do not believe that the Dodd-Frank Act will fundamentally
change the investment management industry, certain provisions may have unintended consequences on the
ﬁnancial market as a whole that could negatively affect our business. Many aspects of the Dodd-Frank Act are
still subject to rulemaking and will continue to take effect over several years, making it difficult to anticipate
both the impact on the manner in which we conduct business as well as the increased regulatory requirements
and related compliance costs.

Also, we are required to implement speciﬁc corporate governance practices and adhere to a variety of

reporting requirements under the Sarbanes-Oxley Act of 2002 (‘‘Sarbanes-Oxley’’ or ‘‘SOX’’). Our
management is required to conduct an annual assessment of the effectiveness of our internal controls over
ﬁnancial reporting and include a report on our internal controls in our annual reports on Form 10-K pursuant
to Section 404 of SOX. In addition, we are required to have our independent registered public accounting ﬁrm
attest to and report on the effectiveness of our internal controls over ﬁnancial reporting. We will continue to
incur costs in order to maintain our internal control over ﬁnancial reporting and comply with Section 404 of
SOX, including necessary auditing and legal fees, and costs associated with accounting, internal audit,
information technology, compliance and administrative staff. If we are unable to maintain effective internal

15

control over ﬁnancial reporting, this could lead to a loss of conﬁdence in the reliability of our ﬁnancial
statements, thus adversely affecting the value of our common stock.

Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our
ﬁnancial condition, results of operations and liquidity.

We are subject to income as well as non-income based taxes, in both the U.S. and non-U.S. jurisdictions.

We are also subject to potential tax audits in various jurisdictions. Tax authorities may disagree with certain
positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these potential
audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that
we will accurately predict the outcomes of these potential audits, and the actual outcomes of these potential
audits could have a material impact on our net income or ﬁnancial condition. Changes in tax laws or tax
rulings could materially impact our effective tax rate and earnings.

Certain changes in accounting and/or ﬁnancial reporting standards issued by the Financial Accounting
Standards Board (‘‘FASB’’), the SEC or other standard-setting bodies could have a material impact on our
ﬁnancial position or results of our operations.

We are subject to the application of generally accepted accounting principles in the United States

(‘‘GAAP’’), which are periodically revised and/or expanded. As such, we are required to adopt new or revised
accounting and/or ﬁnancial reporting standards issued by recognized accounting standard setters or regulators,
such as the FASB and the SEC.

In addition, the FASB is currently working with the International Accounting Standards Board (‘‘IASB’’)

to converge certain accounting principles and to facilitate more comparable ﬁnancial reporting between
companies that are required to follow GAAP and those that are required to follow International Financial
Reporting Standards (‘‘IFRS’’). These projects may result in different accounting principles under GAAP,
which may have a material impact on the way in which we report ﬁnancial results. A change in accounting
principles from GAAP to IFRS would also have a material impact on our ﬁnancial statements should IFRS be
incorporated into the ﬁnancial reporting system for U.S. companies.

Inadequate business continuity plans could lead to material ﬁnancial loss, reputational harm and inability
to continue business.

We rely heavily on our ﬁnancial, accounting, trading, compliance and other data processing systems. Any

failure or interruption of these systems, whether caused by ﬁre, other natural disaster, power or
telecommunications failure, act of terrorism or war, security breach or otherwise, could result in a disruption
of our business, liability to clients, regulatory intervention or reputational damage, and thus materially
adversely affect our business. Although we have back-up systems in place and have taken other protective
measures, our back-up procedures and capabilities in the event of a failure or interruption may not be
adequate and our technology system may still be vulnerable to unauthorized access, computer viruses or other
events that have a security impact.

We depend on our headquarters in New York City for the continued operation of our business. A disaster
or a disruption in the infrastructure that supports our business, or directly affecting our headquarters, may have
a material adverse impact on our ability to continue to operate our business without interruption. We have a
sound business continuity plan in place that is tested on a yearly basis, but there can be no assurance that this
plan will be sufficient to mitigate the harm that may result from such a disaster or disruption.

Operational risks, including any signiﬁcant limitation, failure or security breach of our software
applications, technology or other systems critical to our operations, may disrupt our business or cause us to
lose sensitive and conﬁdential information.

As part of our normal operations, we rely on secure processing, storage and transmission of conﬁdential

client and ﬁrm information through computer systems and networks. Breach of such systems and networks
could lead to loss of conﬁdential client and proprietary information, liability for stolen information, additional
cost to repair damage and prevent future incidents and litigation cost from loss of information. We maintain

16

and rely on a system of internal controls designed to provide reasonable assurance that unauthorized access to
sensitive or conﬁdential data is prevented or timely detected. However, our technology systems may still be
vulnerable to unauthorized access or may be corrupted by computer virus, malicious software or access by
unauthorized individuals especially when related to portable devices. We take precautions to password protect
all portable devices but that will not prevent unauthorized access if the device is misplaced or lost. Loss of
conﬁdential information will greatly harm our reputation and adversely affect our ability to maintain current or
attract new relationships.

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

We depend to a large extent on our relationships with our clients and our reputation for integrity and
high-caliber professional services to attract and retain clients. As a result, dissatisfaction with our services
could be more damaging to our business than to other types of businesses. If our clients suffer signiﬁcant
losses, or are otherwise dissatisﬁed with our services, such as for breach of trading guidelines and/or
perceived conﬂicts of interest, we could be subject to the risk of legal liabilities or actions alleging negligent
misconduct, breach of ﬁduciary duty, or breach of contract. These risks are often difficult to assess or quantify
and their existence and magnitude often remain unknown for substantial periods of time. We may incur
signiﬁcant legal expenses in defending against litigation. Substantial legal liability or signiﬁcant regulatory
action against us could materially adversely affect our business, ﬁnancial condition or results of operations, or
cause signiﬁcant reputational harm to us. For information on our legal proceedings, see ‘‘Item 3 — Legal
Proceedings.’’

Insurance coverage may not protect us from all of the liabilities that could arise from the risks inherent in
our business.

We maintain insurance coverage focused on reducing potential losses related to our operations. We
purchase insurance in amounts, and against risks, that we consider appropriate. There can be no assurance,
however, that a claim or claims will be completely covered by insurance or, if covered, will not exceed the
limits of our existing insurance coverage. If a loss occurs that is partially or completely uninsured, we may be
exposed to substantial liability. Insurance costs are impacted by market conditions, our risk proﬁle, and may
increase signiﬁcantly over relatively short periods. Renewals of insurance policies may result in additional
costs through higher premiums or the assumption of higher deductibles or co-insurance liability. Furthermore,
we do not carry any ‘‘key man’’ insurance that would provide us with proceeds in the event of the death or
disability of any of our key employees. The loss of the services of any of these individuals could have a
material adverse effect on our business and could impact our future performance. In addition, insurance and
other safeguards might only partially reimburse us for our losses in the event our business continuity plan fails
and our operations are signiﬁcantly disrupted.

Risks Related to Our Investment Strategies

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

We generally invest in companies after they have experienced, or are expected by the market to soon

experience, a shortfall in their historic earnings, due to an adverse business development, management error,
accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business
momentum. While very few investors are willing to invest when companies lack earnings visibility, our classic
value investment approach seeks to capture the return that can be obtained by investing in a company before
the market has conﬁdence in its ability to achieve earnings recovery. However, our investment approach
entails the risk that the companies included in our portfolios are not able to execute as we had expected when
we originally invested in them, thereby reducing the performance of our strategies. Since our positions in
these investments are often substantial, there is the risk that we may be unable to ﬁnd willing purchasers for
our investments when we decide to sell them. Many of our strategies construct concentrated portfolios,

17

generally ranging from 30 to 80 holdings, of companies underperforming their historical earnings power,
which is subject to a higher risk of underperformance relative to benchmarks than the investment approaches
of some of our competitors.

Since we apply the same investment process across all of our investment strategies, utilizing one analyst

team, and given the overlapping universes of many of our investment strategies, we could have common
positions and industry or sector concentrations across many of our investment strategies at the same time. As
such, factors leading one of our investment strategies to underperform may lead other strategies to
underperform simultaneously.

Our investment approach may underperform other investment approaches during certain market conditions.

Our products are best suited for investors with long-term investment horizons. In order for our classic
value investment approach to yield attractive returns, we must typically hold securities for an average of three
to ﬁve years. Our investment strategies may not perform well during certain periods of time. The disruption in
the global credit markets and the deterioration of the economy and the ﬁnancial markets beginning in the
second half of 2007, and continuing through early 2009, created difficult conditions for most companies,
including many of those in which we invest. In addition, our strategies may not perform well during points in
the economic cycle when value-oriented stocks are relatively less attractive. For instance, during the late
stages of an economic cycle, investors may purchase relatively expensive stocks in order to obtain access to
above average growth, as was the case in the late 1990s. Value-oriented strategies may also experience
weakness during periods when the markets are focused on one investment thesis or sector.

Even when securities prices are rising generally, portfolio performance can be affected by our investment

approach. The classic value approach has outperformed the market in some economic and market
environments and underperformed it in others. In particular, a prolonged period in which the growth style of
investing outperforms the value style may cause our investment strategy to go out of favor with clients,
consultants and sub-advised relationships. Our investment strategy may be less favored during certain time
periods for other reasons as well, including due to perceived riskiness or volatility of our approach. Poor
performance relative to peers, coupled with changes in personnel, extensive periods in particular market
environments, or other difficulties may result in decline in AUM.

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

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

Our Global Focused Value, International (ex-US) Focused Value, Global Expanded Value, International
(ex-US) Expanded Value, European Focused Value and Emerging Markets Focused Value strategies consist
primarily of investments in the securities of issuers located outside of the United States, which may involve
foreign currency exchange, political, social and economic uncertainties and risks.

Our Global Focused Value, International (ex-US) Focused Value, Global Expanded Value, International
(ex-US) Expanded Value, European Focused Value and Emerging Markets Focused Value strategies, which
together represented $6.2 billion, $5.6 billion, and $5.5 billion of our AUM as of December 31, 2012, 2011
and 2010, respectively, are primarily invested in securities of companies located outside the United States.
Investments in non-U.S. issuers may be affected by political, social and economic uncertainty affecting a
country or region in which we are invested. Many emerging ﬁnancial markets are not as developed, or as
efficient, as the U.S. ﬁnancial market, and, as a result, liquidity may be reduced and price volatility may

18

increase. The legal and regulatory environments, including ﬁnancial accounting standards and practices, may
also be different, and there may be less publicly available information in respect of such companies. These
risks could adversely impact the performance of our strategies that are invested in securities of non-U.S.
issuers. In addition, ﬂuctuations in foreign currency exchange rates will affect AUM as we do not engage in
any hedging activities for these portfolios and continue to market these products as unhedged. Due to these
factors, our AUM may ﬂuctuate from one reporting period to another causing volatility in earnings.

Risks Related to Our Structure

We are dependent upon distributions from our operating company to make distributions to our Class A
stockholders, and to pay taxes and other expenses.

We are a holding company and have no material assets other than our ownership of membership units of

our operating company. We have no independent means of generating revenue and cash ﬂow. Our operating
company is treated as a partnership for U.S. federal income tax purposes and, as such, is not itself subject to
U.S. federal income tax. Instead, its taxable income is allocated to its members, including us, pro-rata
according to the number of membership units each owns. Accordingly, we incur income taxes on our
proportionate share of any net taxable income of our operating company. We also incur expenses related to
our operations. We intend to have our operating company distribute cash to its members in an amount at least
equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of our operating
company. To the extent we need funds to pay our tax or other liabilities or to fund our operations, and our
operating company is restricted from making distributions to us under applicable laws or regulations, or
contractual restrictions, or does not have sufficient earnings to make these distributions, we may have to
borrow funds to meet these obligations and run our business and, thus, our liquidity and ﬁnancial condition
could be materially adversely affected. There can be no assurance that funds will be available to borrow under
such circumstances on terms acceptable to us, or at all.

We are required to pay certain former and current members of our operating company who sold to us
membership units of our operating company in October 2007, and the other holders of Class B units of our
operating company who subsequently have exchanged and will exchange their Class B units for shares of
our Class A common stock, most of the tax beneﬁt of any amortization deductions we may claim as a result
of the tax basis step up we receive in connection with these sales of membership units and any future
exchanges of Class B units.

As part of the reorganization we implemented with our initial public offering (IPO), we purchased
membership units of our operating company from three of its members, or the selling members. In addition,
holders of Class B units may, at least once each year, exchange their Class B units of our operating company
for shares of our Class A common stock. These purchases and subsequent exchanges have and are expected to
continue to result in increases in our share of the tax basis in the tangible and intangible assets of our
operating company that otherwise would not have been available. These increases in tax basis have and are
expected to continue to reduce the amount of tax that we would otherwise be required to pay in the future,
although the Internal Revenue Service (IRS) might challenge all or part of this tax basis increase, and a court
might sustain such a challenge.

Pursuant to a tax receivable agreement dated October 30, 2007, among the selling members, all holders

of Class B units after our October 2007 IPO, and us, we are required to pay the selling members, and any
holders of Class B units who elect to exchange their Class B units for shares of our Class A common stock,
85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize as a
result of the increases in amortizable tax basis due to the sale to us of their membership units. The actual
increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary
depending upon a number of factors, including the timing of exchanges, the price of our Class A common
stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of
our income, and the tax rates then applicable. Payments under the tax receivable agreement are expected to
give rise to certain additional tax beneﬁts attributable to further increases in basis. Any such beneﬁts are
covered by the tax receivable agreement and will increase the amounts due thereunder. We expect that, as a

19

result of the size and increases in our share of the tax basis in the tangible and intangible assets of our
operating company attributable to our interest therein, the payments that we may make to these members
likely will be substantial.

If we exercise our right to terminate the tax receivable agreement early, we will be obligated to make an
early termination payment to the selling and converting shareholders, based upon the net present value of all
payments that would be required to be paid by us. If certain change of control events were to occur, we
would also be obligated to make an early termination payment.

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

Risks Related to Our Class A Common Stock

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

The market price of our Class A common stock has been and may continue to be highly volatile and
subject to wide ﬂuctuations. In addition, the trading volume of our Class A common stock may ﬂuctuate and
cause signiﬁcant price variations to occur. If the market price of our Class A common stock declines
signiﬁcantly, you may be unable to resell your shares of our Class A common stock at or above your purchase
price, if at all. We cannot assure you that the market price of our Class A common stock will not ﬂuctuate
or decline signiﬁcantly in the future.

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

Pursuant to the operating agreement of our operating company, on at least one date designated by us each

year, certain holders of Class B units may exchange up to 15% of their Class B units for an equivalent
number of shares of our Class A common stock, subject to certain restrictions set forth in the operating
agreement. Also, as of October 30, 2011, the fourth anniversary of our initial public offering, the
non-employee members of our operating company may exchange all of their vested Class B units, in
accordance with the timing restrictions set forth in the operating agreement.

Pursuant to the resale and registration rights agreement, dated October 30, 2007, among the holders of
Class B units and us, on at least one date designated by us each year these holders may resell the shares of
Class A common stock issued to them upon the exchange of up to 15% of their Class B units, or, in the case
of non-employee members, all of their Class B units.

We ﬁled a Form S-3 registration statement, which became effective in February 2009, in order to register

our issuance to these holders of 57,937,910 shares of Class A common stock issuable upon exchange of all
Class B units outstanding immediately after the consummation of our operating company’s reorganization. On
January 27, 2012, the SEC declared effective a subsequent registration statement on Form S-3 which registers
the resale of 40,114,701 shares of our Class A common stock by the selling stockholders named therein. We
designated August 31, 2012, March 28, 2011, September 15, 2011 and March 31, 2010 as the 2012, 2011, and
2010 exchange dates. Certain executive officers, employee members, and non-employee members, elected to
exchange an aggregate of 722,521, 536,528, 670,902 and 734,618, respectively, of their Class B units for an
equivalent number of shares of our Class A common stock, which, with the exception of those held by our
executive officers, are freely tradable. The market price of our Class A common stock could decline as a result
of sales pursuant to the Form S-3 registration statements, or the perception that such sales could occur. These
sales, or the possibility that these sales may occur, also might make it more difficult for us to raise additional
capital by selling equity securities in the future, at a time and price that we deem appropriate.

20

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

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

Control by our Class B stockholders of 96.0% of the combined voting power of our common stock may give
rise to conﬂicts of interest.

Our Class B stockholders collectively hold approximately 96.0% of the combined voting power of our
common stock. These stockholders consist of ﬁve of our named executive officers, 30 of our other employees,
certain other members of our operating company, including one of our directors and his related entities, and
six former employees. Holders of shares of our Class B common stock have entered into a Class B
Stockholders’ Agreement with respect to all shares of Class B common stock then held by them and any
additional shares of Class B common stock they may acquire in the future. Pursuant to this agreement, they
will vote these shares of Class B common stock together on all matters submitted to a vote of our common
stockholders. To the extent that we cause our operating company to issue additional Class B units, which may
be granted, subject to vesting, to our employees pursuant to the PIM LLC 2006 Equity Incentive Plan, these
employees will be entitled to receive an equivalent number of shares of our Class B common stock, subject to
the condition that they agree to enter into this Class B Stockholders’ Agreement. Each share of our Class B
common stock entitles its holder to ﬁve votes per share for so long as the Class B stockholders collectively
hold 20% of the total number of shares of our common stock outstanding. When a Class B unit is exchanged
for a share of our Class A common stock, an unvested Class B unit is forfeited due to the employee holder’s
failure to satisfy the conditions of the award agreement pursuant to which it was granted, or any Class B unit
is forfeited as a result of a breach of any restrictive covenants contained in our operating company’s amended
and restated operating agreement, a corresponding share of our Class B common stock will automatically be
redeemed by us. For so long as our Class B stockholders hold at least 20% of the total number of shares of
our common stock outstanding, they will be able to elect all of the members of our Board of Directors and
thereby control our management and affairs, including determinations with respect to acquisitions,
dispositions, borrowings, issuances of securities, and the declaration and payment of dividends. In addition,
they will be able to determine the outcome of all matters requiring approval of stockholders, and will be able
to cause or prevent a change of control of our Company or a change in the composition of our Board of
Directors, and could preclude any unsolicited acquisition of our Company. Our Class B stockholders have the
ability to prevent the consummation of mergers, takeovers or other transactions that may be in the best
interests of our Class A stockholders. In particular, this concentration of voting power could deprive Class A
stockholders of an opportunity to receive a premium for their shares of Class A common stock as part of a
sale of our company, and could ultimately affect the market price of our Class A common stock.

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

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by
stockholders generally, while each share of our Class B common stock entitles its holder to ﬁve votes for so
long as the number of shares of Class B common stock represents 20% of the total number of shares of our

21

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

Our ability to pay dividends is subject to the discretion of our Board of Directors and may be limited by our
holding company structure and applicable provisions of Delaware law.

We currently intend to pay cash dividends on a quarterly basis. However, our Board of Directors may, in
its discretion, decrease the level of dividends, or discontinue the payment of dividends entirely. In addition, as
a holding company, we depend upon the ability of Pzena Investment Management, LLC to generate earnings
and cash ﬂows and distribute them to us so that we may pay our obligations and expenses and pay dividends
to our stockholders. We expect to cause Pzena Investment Management, LLC to make distributions to its
members, including us. However, the ability of Pzena Investment Management, LLC to make such
distributions is subject to its operating results, cash requirements and ﬁnancial condition, and applicable
Delaware laws (which may limit the amount of funds available for distribution to its members), as well as any
contractual restrictions. If, as a consequence of these various limitations and restrictions, we are unable to
generate sufficient distributions from our business, we may not be able to make, or may have to reduce or
eliminate, the payment of dividends on our Class A common stock. Because of these various limitations and
restrictions, we have, in the past, had to suspend our quarterly dividend payment. See ‘‘Item 5 — Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Our
Dividend Policy.’’

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our corporate headquarters and principal offices are located at 120 West 45th Street, New York,
New York 10036, where we occupy approximately 22,000 square feet out of 32,000 square feet of space
under our non-cancellable operating lease, the term of which expires in October 2015. During the year ended
December 31, 2011, we entered into a non-cancellable sublease agreement for approximately 10,000 square
feet of excess office space associated with the operating lease, see ‘‘Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations,’’ and Exhibit 10.7 of the Company’s 2011 Annual
Report on Form 10-K. We believe the space we occupy is adequate for our current needs.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, the Company may be subject to various legal and

administrative proceedings.

Currently, there are no material legal proceedings pending against us.

ITEM 4. REMOVED AND RESERVED

22

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A common stock is listed for trading on the New York Stock Exchange (the ‘‘NYSE’’) under

the symbol ‘‘PZN’’. As of March 1, 2013, there were approximately 30 record holders of our Class A
common stock and 71 record holders of our Class B common shares. These numbers do not include
shareholders who hold their shares through one or more intermediaries, such as banks, brokers or depositories.

The following table sets forth the quarterly high and low sales prices of our Class A common stock on

the NYSE for the periods indicated and dividends declared during such periods.

Quarter
Quarter Ended March 31 . . . . . . .
Quarter Ended June 30 . . . . . . . .
Quarter Ended September 30 . . . .
Quarter Ended December 31 . . . .

High
$ 6.66
$ 7.39
$ 5.82
$ 5.66

2012

Low
$ 4.30
$ 3.82
$ 3.68
$ 4.51

Dividends
Declared
Per Share
0.19
$
0.03
$
0.03
$
0.03
$

High
$ 8.00
$ 8.03
$ 6.53
$ 5.06

2011

Low
$ 6.47
$ 5.00
$ 3.20
$ 3.18

Dividends
Declared
Per Share
0.03
$
0.03
$
0.03
$
0.03
$

Our Dividend Policy

Our Board of Directors has targeted a cash dividend payout ratio of approximately 70% to 80% of annual

non-GAAP net income, subject to growth initiatives and other funding needs. We use non-GAAP measures,
discussed in further detail in ‘‘Item 7 — Management’s Discussion and Analysis of Financial Condition and
Results of Operation — Non-GAAP Net Income’’ in Part II of this Annual Report to assess the strength of the
underlying operations of the business. We believe non-GAAP measures provide information to better analyze
our operations between periods, and over time. We are a holding company and have no material assets other
than 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, if any. 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. We may not pay dividends to our Class A common stockholders 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, or any of our ﬁnancing facilities or other agreements restrict us from doing so. 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.

Our ability to pay dividends is subject to Board of Director discretion and may be limited by our holding
company structure and applicable provisions of Delaware law. See ‘‘Item 1A — Risk Factors — Risks Related
to Our Class A Common Stock-Our ability to pay dividends is subject to the discretion of our Board of
Directors and may be limited by our holding company structure and applicable provisions of Delaware law.’’

Recent Sales of Unregistered Securities

For 2012, in connection with new employee member grants and year-end compensation, we issued an

aggregate of 124,718 Class B units of our operating company, and the related 124,718 shares of Class B
common stock to employee members. We also awarded an aggregate of 51,625 options to acquire Class B
units of our operating company to certain employee members, at an exercise price of $5.24 per unit.

Additionally, in 2012, we issued an aggregate of 72,288 shares of Phantom Class A common stock to our

non-employee directors, see ‘‘Item 11 — Executive Compensation — 2012 Non-Employee Director

23

Compensation,’’ and an aggregate of 4,184,727 shares of Phantom Class B units to certain employee members
in connection with year-end compensation, see Note 3 to our consolidated ﬁnancial statements beginning on
page F-14 of this Annual Report.

The issuances did not involve any public offering, general advertising or general solicitation. The

certiﬁcates representing the securities bear a restrictive legend. On the basis of these facts, 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(2) of the Securities Act of 1933, as amended (the ‘‘Securities Act’’).

Performance Graph

The following graph compares the cumulative total stockholder return on our Class A common stock over

the ﬁve-year period ending December 31, 2012, with the cumulative total return of the S&P 500(cid:5) and the
SNL Asset Manager Index*. The graph assumes the investment of $100 in our common stock, and in each of
the two indices, on December 31, 2007 and the reinvestment of all dividends, if any.

120

100

80

60

40

20

)
$
(

e
u
l
a
V
x
e
d
n
I

0
2007

Total Return Performance

Pzena Investment Management, Inc.
SNL Asset Manager Index
S&P 500 Index

2008

2009

2010

2011

2012

Index
Pzena Investment Management, Inc.
. .
SNL Asset Manager Index . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . .

2007
$100.00
$100.00
$100.00

2008
$37.85
$47.52
$63.00

2009
$73.00
$77.09
$79.67

2010
$68.04
$88.74
$91.68

2011
$40.94
$76.76
$93.61

2012
$ 53.47
$ 98.48
$108.59

Period Ending

*

The SNL Asset Manager Index is comprised of the securities of the following publicly traded companies: Affiliated Managers
Group, Inc.; Alliance Bernstein Holding L.P; Apollo Global Management, LLC; Artio Global Investors Inc.; Blackrock, Inc.; The
Blackstone Group L.P.; Brookﬁeld Asset Management Inc.; Calamos Asset Management, Inc.; Carlyle Group L.P.; Cohen & Steers,
Inc.; Diamond Hill Investment Group, Inc.; Eaton Vance Corp.; Epoch Holding Corporation; Federated Investors, Inc.; Financial
Engines, Inc.; Fortress Investment Group LLC; Franklin Resources, Inc.; GAMCO Investors, Inc.; Hennessy Advisors, Inc.; Invesco
Ltd.; Janus Capital Group Inc.; KKR & Co. L.P.; Legg Mason, Inc.; Manning & Napier Advisors, LLC; Oaktree Capital Group
LLC; Och-Ziff Capital Management Group LLC; Pzena Investment Management, Inc.; Resource America, Inc.; SEI Investments
Company; T. Rowe Price Group, Inc.; U.S. Global Investors, Inc.; Value Line, Inc.; Virtus Investment Partners, Inc.; Waddell &
Reed Financial, Inc.; Westwood Holdings Group, Inc.; and WisdomTree Investments, Inc.

24

 
 
In accordance with the rules of the SEC, this section entitled ‘‘Performance Graph’’ shall not be

incorporated by reference into any future ﬁlings by us under the Securities Act or the Securities Exchange Act
of 1934, as amended (the ‘‘Exchange Act’’), and shall not be deemed to be soliciting material or to be ﬁled
under the Securities Act or the Exchange Act.

Issuer Purchases of Equity Securities

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

(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 of
Publicly
Announced Plans
or Programs(1)

(d) Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)
(in millions)

Period

October 1, 2012 through

October 31, 2012 . . . . . . . . .

7,251

$

5.27

November 1, 2012 through

November 30, 2012 . . . . . . .

34,155

December 1, 2012 through

December 31, 2012 . . . . . . .
. . . . . . . . . . . . . . . . .
Total

53,143
94,549

5.15

5.28
5.23

$

7,251

34,155

53,143
94,549

$

9.7

9.5

9.1
9.1

$

(1) Our current 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. 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, or for any reason.

(2)

Total Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs also reﬂects the repurchase of 33,027 of the
operating company’s Class B Units during December 2012 for an average price of $5.27 per share.

Equity Compensation Plan Information

For certain information concerning securities authorized for issuance under our equity compensation

plans, see ‘‘Item 12 — Security Ownership of Certain Beneﬁcial Owners and Management and Related
Stockholder Matters — Equity Compensation Plan Information.’’

25

ITEM 6.

SELECTED FINANCIAL DATA

The following tables set forth selected historical consolidated ﬁnancial data of Pzena Investment

Management, Inc. The selected consolidated statements of operations data for the years ended December 31,
2012, 2011, and 2010 and the selected consolidated statements of ﬁnancial condition data as of December 31,
2012 and 2011, have been derived from Pzena Investment Management, Inc.’s audited consolidated ﬁnancial
statements included elsewhere in this Annual Report on Form 10-K.

The selected consolidated statement of operations data for the years ended December 31, 2009 and 2008,
and the selected consolidated statements of ﬁnancial condition as of December 31, 2010, 2009 and 2008, have
been derived from Pzena Investment Management, Inc.’s audited consolidated ﬁnancial statements not
included in this report.

You should read the following selected historical consolidated ﬁnancial data together with

‘‘Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the
historical consolidated ﬁnancial statements and the related notes included elsewhere in this Annual Report.

Statements of Operations Data:
REVENUE

Management Fees .
.
Performance Fees
.
Total Revenue .

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

EXPENSES

.

.

.
.

.
.

.
.

.
.

.
Cash Compensation and Beneﬁts .
Other Non-Cash Compensation .
.
.
Total Compensation and Beneﬁts Expense .
.
General and Administrative Expenses
.
.
.
.
.
.

.
TOTAL OPERATING EXPENSES .
.
.
Operating Income
Other Income/(Expense)
.
INCOME BEFORE INCOME TAXES .
.
Income Tax Provision/(Beneﬁt)
Consolidated Net Income
.
.
.
Less: Net Income Attributable to
.
Non-Controlling Interests. .

.
NET INCOME/(LOSS) Attributable to Pzena
.

Investment Management, Inc. .

.
.
.
.
.
.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.
.

.
.
.
.
.
.
.
.
.
.

.
.
.

.
.
.
.
.
.
.
.
.
.

.

.

.
.
.

.
.
.
.
.
.
.
.
.
.

.

.

2012

For the Year Ended December 31,
2009
2010
2011
(in thousands, except share and per share amounts)

2008

$

. . . .
. . . .
. . . .

. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .

. . . .

$

75,980
300
76,280

28,690
3,065
31,755
7,346
39,101
37,179
(863)
36,316
1,911
34,405

$

79,230
3,815
83,045

29,518
5,047
34,565
10,626
45,191
37,854
(1,466)
36,388
3,145
33,243

$

77,025
500
77,525

25,895
3,653
29,548
8,007
37,555
39,970
(2,744)
37,226
741
36,485

63,039
—
63,039

22,057
2,934
24,991
8,261
33,252
29,787
1,601
31,388
(1,307)
32,695

$ 101,404
—
101,404

20,703
4,952
25,655
11,356
37,011
64,393
35,685
100,078
67,680
32,398

30,565

29,861

32,674

29,326

36,095

. . . .

$

3,840

$

3,382

$

3,811

$

3,369

Per Share Data(1):
.
Net Income/(Loss) for Basic Earnings per Share .
.
.
Basic Earnings/(Loss) per Share .
.
Basic Weighted Average Shares Outstanding .
.
.
Net Income/(Loss) for Diluted Earnings per Share .
.
.
Diluted Earnings/(Loss) per Share .
.
Diluted Weighted Average Shares Outstanding .
.
.
Cash Dividends Declared Per Share .

.
.
.

.
.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .

$
$

3,840
0.36
10,787,540
20,821
0.32
65,491,273
0.28
$

$
$

$
$

3,382
0.34
9,972,978
20,631
$
0.32
$
65,095,797
0.12
$

$
$

3,811
0.41
9,186,520
22,419
$
0.34
$
64,985,753
0.24
$

$

$
$

$
$

(3,697)

(3,697)
(0.60)
6,122,569
(3,697)
(0.60)
6,122,569
0.27

$
$

3,369
0.41
8,217,561
18,106
$
0.28
$
64,853,824
$

— $

(1)

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

26

2012

For the Year Ended December 31,
2009
2010
(in thousands)

2011

2008

Statements of Financial Condition Data:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . $ 32,645 $ 35,083 $ 16,381 $ 15,908 $ 27,421
62,519
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . .
— 22,000
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,000
Senior Subordinated Debt
. . . . . . . . . . . . . . . . .
46,179
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . .
11,819
. . . . . . . . . . . . . . . . .
Non-Controlling Interests
4,521
EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,569 $ 13,937 $ 10,572 $

48,402
—
—
14,606
23,224

66,678
—
—
20,454
32,287

64,679
—
—
16,713
33,397

10,000
21,160
19,088

8,270 $

48,518

27

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

We are a public-equity 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
December 31, 2012, our assets under management, or AUM, was $17.1 billion. We manage separate accounts
on behalf of institutions and high net worth individuals, and act as sub-investment adviser for a variety of
SEC-registered mutual 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 December 31, 2012, the holders of Class A common
stock (through the Company) and the holders of Class B units of our operating company held approximately
17.2% and 82.8%, respectively, of the economic interests in the operations of our business.

Non-GAAP Net Income

Our results for the years ended December 31, 2012, 2011, and 2010 included recurring adjustments

related to the Company’s tax receivable agreement and the associated liability to its selling and converting
shareholders, in addition to adjustments related to certain one-time charges recognized in operating expense in
the fourth quarter of 2011. We believe that these accounting adjustments add a measure of non-operational
complexity which partially obscures the underlying performance of our business. In evaluating our ﬁnancial
condition and results of operations, we also review certain non-GAAP measures of earnings, which exclude
these items. Excluding these adjustments, non-GAAP diluted net income and non-GAAP diluted earnings per
share were $20.4 million and $0.31, respectively, for the year ended December 31, 2012, $23.2 million and
$0.36, respectively, for the year ended December 31, 2011, and $21.7 million and $0.33, respectively, for the
year ended December 31, 2010. 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 prior period and other adjustments,
the adjustments related to our tax receivable agreement and the associated liability to selling and converting
shareholders, and adjustments related to the one-time charges recognized in operating expense in the fourth
quarter of 2011. Our effective tax rate, exclusive of these adjustments, was approximately 42.9% for the years
ended December 31, 2012 and 2011, respectively, and was approximately 42.7% for the year ended
December 31, 2010. 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. Investors should consider these non-GAAP measures
in addition to, and not as a substitute for, ﬁnancial measures prepared in accordance with GAAP.

28

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is included below:

For the Year Ended December 31,
2011
(in thousands, except share and per share amounts)

2010

2012

$

$

$

GAAP Net Income . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Net Effect of One-time Adjustments
. . . . . . .
Net Effect of Tax Receivable Agreement
Non-GAAP Net Income . . . . . . . . . . . . . . . . .

GAAP Income Attributable to Non-Controlling

Interest of Pzena Investment
Management, LLC . . . . . . . . . . . . . . . . . . . .
Effect of One-time Adjustments . . . . . . . . . . . . .
Non-GAAP Income Attributable to

Non-Controlling Interest of Pzena Investment
Management, LLC . . . . . . . . . . . . . . . . . . . .
Less: Assumed Corporate Income Taxes . . . . . .

Assumed After-Tax Income of Pzena Investment

$

$

$

3,840
—
(421)
3,419

29,711
—

29,711
12,730

$

$

$

3,382
443
(214)
3,611

30,188
4,017

34,205
14,660

3,811
—
(695)
3,116

32,445
—

32,445
13,837

Management, LLC . . . . . . . . . . . . . . . . . . . .

16,981

19,545

18,608

Non-GAAP Net Income of Pzena Investment

Management, Inc.
. . . . . . . . . . . . . . . . . . . . .
Non-GAAP Diluted Net Income . . . . . . . . . . .

Non-GAAP Diluted Earnings Per Share
Attributable to Pzena Investment
Management, Inc. Common Stockholders:

Non-GAAP Net Income for Diluted Earnings

per Share . . . . . . . . . . . . . . . . . . . . . . .
. . . .

Non-GAAP Diluted Earnings Per Share
Non-GAAP Diluted Weighted-Average

$

$
$

3,419
20,400

20,400
0.31

$

$
$

3,611
23,156

23,156
0.36

$

$
$

3,116
21,724

21,724
0.33

Shares Outstanding . . . . . . . . . . . . . . . . .

65,491,273

65,095,797

64,985,753

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, will
depend on a variety of factors including, among other things:

•

•

our ability to educate our target clients about our classic value investment strategies and provide
them with exceptional client service;

the relative investment performance of our investment strategies, as compared to competing products
and market indices;

29

•

•

•

•

competitive conditions in the investment management and broader ﬁnancial services sectors;

general economic conditions;

investor sentiment and conﬁdence; and

our decision to close strategies when we deem it to be in the best interests of our clients.

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 in 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, 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.

Certain of our clients pay us fees according to the performance of their accounts relative to certain
agreed-upon benchmarks, which results in a lower base fee, but allows us to earn higher fees if the relevant
investment strategy outperforms the agreed-upon benchmark.

The majority of advisory fees we earn on institutional accounts is based on the value of our AUM at a

speciﬁc date on a quarterly basis, either in arrears or advance. Advisory fees on certain of our institutional
accounts, and with respect to 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 method used to calculate the fee according to the fee rate schedule
may differ as described above.

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.

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 office rent and other expenses, professional and outside services fees, depreciation, and the costs
associated with operating and maintaining our research, trading, and portfolio accounting systems. 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.

We incur additional expenses associated with being a public company for, among other things, director
and officer insurance, director fees, SEC reporting and compliance (including Sarbanes-Oxley and Dodd-Frank
compliance), professional fees, transfer agent fees, and other similar expenses. These additional expenses have
and will continue to reduce our net income.

30

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 subsidiaries, income or loss generated by our investments in third-party mutual funds, 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 investment partnerships and other investments.

Non-Controlling Interests

Our operating company has historically consolidated the results of operations of the private investment

partnerships over which we exercise a controlling inﬂuence. 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’ interest in our operating company, we have reﬂected
their membership interests as a non-controlling interest in our consolidated ﬁnancial statements. As a result,
our income is generated by our economic interest in our operating company’s net income. As of December 31,
2012, the holders of Class A common stock (through the Company) and the holders of Class B units of the
operating company held approximately 17.2% and 82.8%, respectively, of the economic interests in the
operations of the business.

Operating Results

Assets Under Management and Flows

As of December 31, 2012, our approximately $17.1 billion of AUM was invested in a variety of value-

oriented investment strategies, representing distinct capitalization segments of U.S. and non-U.S. equity
markets. The performance of our largest investment strategies as of December 31, 2012 is further described
below. As of July 1, 2012, we launched a Large Cap Expanded Value strategy which, by asset size, is now
one of our largest investment strategies. 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.

31

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 six largest investment strategies from their
inception to December 31, 2012, and in the ﬁve-year, three-year, and one-year periods ended December 31,
2012, relative to the performance of: (i) the market index which is most commonly used by our clients to
compare the performance of the relevant investment strategy, and (ii) the S&P 500(cid:5) Index, which is provided
for the limited purpose of providing a comparison to the broader equity market.

Investment Strategy (Inception Date)
Large Cap Focused Value (October 2000)
Annualized Gross Returns . . . . . . . . . . . . . . . . .
Annualized Net Returns
. . . . . . . . . . . . . . . . . .
Russell 1000(cid:5) Value Index . . . . . . . . . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

Global Focused Value (January 2004)
Annualized Gross Returns . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Annualized Net Returns
MSCI World(SM) Index − Net/U.S.$(2)
. . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

Large Cap Expanded Value (July 2012)
Annualized Gross Returns(3) . . . . . . . . . . . . . . . .
Annualized Net Returns(3)
. . . . . . . . . . . . . . . . .
Russell 1000(cid:5) Value Index . . . . . . . . . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

International (ex-U.S.) Expanded Value

(November 2008)

Annualized Gross Returns . . . . . . . . . . . . . . . . .
Annualized Net Returns
. . . . . . . . . . . . . . . . . .
MSCI EAFE(cid:5) Index − Net/U.S.$(2)
. . . . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

Focused Value (January 1996)
Annualized Gross Returns . . . . . . . . . . . . . . . . .
Annualized Net Returns
. . . . . . . . . . . . . . . . . .
Russell 1000(cid:5) Value Index . . . . . . . . . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

Small Cap Focused Value (January 1996)
Annualized Gross Returns . . . . . . . . . . . . . . . . .
Annualized Net Returns
. . . . . . . . . . . . . . . . . .
Russell 2000(cid:5) Value Index . . . . . . . . . . . . . . . .
S&P 500(cid:5) Index . . . . . . . . . . . . . . . . . . . . . . .

Period Ended December 31, 2012(1)

Since
Inception

5 Years

3 Years

1 Year

4.7%
4.2%
4.3%
1.9%

3.0%
2.3%
5.0%
4.9%

8.7%
8.7%
8.1%
5.9%

14.6%
14.3%
9.6%
12.2%

9.7%
8.9%
7.7%
7.0%

13.4%
12.1%
9.3%
7.0%

(0.3)%
(0.7)%
0.6%
1.7%

(3.0)%
(3.7)%
(1.2)%
1.7%

—
—
—
—

—
—
—
—

0.5%
(0.2)%
0.6%
1.7%

8.5%
7.4%
3.5%
1.7%

8.4%
8.0%
10.9%
10.9%

6.0%
5.3%
6.9%
10.9%

—
—
—
—

6.1%
5.8%
3.6%
10.9%

9.5%
8.8%
10.9%
10.9%

12.3%
11.2%
11.6%
10.9%

15.8%
15.3%
17.5%
16.0%

22.0%
21.3%
15.8%
16.0%

—
—
—
—

24.0%
23.7%
17.3%
16.0%

16.9%
16.2%
17.5%
16.0%

21.3%
20.1%
18.1%
16.0%

(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) Net of applicable withholding taxes and presented in U.S.$.

(3)

For Large Cap Expanded Value strategy, launched in July 2012, Annualized Gross and Net returns appear to be equal due to timing
of advisory fee payments.

32

Large Cap Focused Value. We screen a universe of the 500 largest U.S. listed companies, based on
market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in
October 2000. At December 31, 2012, the Large Cap Focused Value strategy generated a one-year annualized
gross return of 15.8%, underperforming its benchmark but relatively even with the broader equity market in
general. The main drivers of this underperformance relative to the benchmark were certain holdings in the
consumer discretionary and technology sectors partially offset by our exposure to the generally strong ﬁnancial
services sector and the portfolio’s housing-related holdings.

Global Focused Value. We screen a universe of the 1,500 largest non U.S. listed companies, based on

market capitalization, and the 500 largest U.S. listed companies, based on market capitalization, to build a
portfolio generally consisting of 40 to 60 stocks. We launched this strategy in January 2004. At December 31,
2012, the Global Focused Value strategy generated a one-year annualized gross return of 22.0%,
outperforming both its benchmark and the broader equity market in general. This outperformance relative to
the benchmark was due primarily to our European investments. The portfolio’s top contributors to relative
performance were the ﬁnancial services, industrials, materials and consumer discretionary sector holdings
partially offset by the weak performers in the information technology sector.

Large Cap Expanded Value. We screen a universe of the 500 largest U.S. listed companies, based on
market capitalization, to build a portfolio generally consisting of 50 to 80 stocks. We launched this strategy in
July 2012. At December 31, 2012, the Large Cap Expanded Value strategy generated a gross return of 8.7%
since inception, outperforming both its benchmark and the broader equity market in general. This
outperformance relative to the benchmark was driven primarily by the ﬁnancial services sector partially offset
certain holdings in the consumer discretionary and technology sectors.

International (ex-U.S.) Expanded Value. We screen a universe of the 1,500 largest non-U.S. listed

companies, based on market capitalization, to build a portfolio generally consisting of 60 to 80 stocks. We
launched this strategy in November 2008. At December 31, 2012, the International (ex-U.S.) Expanded Value
strategy generated a one-year annualized gross return of 24.0%, outperforming both its benchmark and the
broader equity market in general. From a regional perspective, this outperformance relative to the benchmark
was due primarily to our investment exposure to Europe and Asia. The biggest contributors to this
outperformance were the ﬁnancial services, industrials, materials and consumer discretionary holdings which
were partially offset by certain holdings in the information technology sector.

Focused Value. We screen a universe of the 1,000 largest U.S. listed companies, based on market

capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in
January 1996. At December 31, 2012, the Focused Value strategy generated a one-year annualized gross return
of 16.9%, underperforming its benchmark but outperforming the broader equity market in general. This
underperformance relative to the benchmark were certain holdings in the consumer discretionary and
technology sectors partially offset by our the ﬁnancial services sector and the portfolio’s housing-related
holdings.

Small Cap Focused Value. We screen a universe of U.S. listed companies ranked from the 1,001st to
3,000th largest, based on market capitalization, to build a portfolio generally consisting of 40 to 50 stocks. We
launched this strategy in January 1996. At December 31, 2012, the Small Cap Focused Value strategy
generated a one-year annualized gross return of 21.3%, outperforming both its benchmark and the broader
equity market in general. This outperformance relative to the benchmark was driven primarily by a generally
strong ﬁnancial services sector and the portfolio’s housing-related holdings, partially offset by our stock
selection in the producer durables sector.

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.

The change in AUM in our institutional accounts and our retail accounts for the years ended

December 31, 2012, 2011, and 2010 is described below. Inﬂows are composed solely of the investment of
new or additional assets by new or existing clients. Outﬂows consist solely of redemptions of assets by
existing clients.

33

Assets Under Management

Institutional Accounts

Assets

Beginning of Period . . . . . . . . . . . . . . . . . .
Inﬂows . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outﬂows . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Net Flows
. . . . . . .
Market Appreciation/(Depreciation)
End of Period . . . . . . . . . . . . . . . . . . . . . . . .

Retail Accounts

Assets

Beginning of Period Assets . . . . . . . . . . . . .
Inﬂows . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outﬂows . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Net Flows
. . . . . . .
Market Appreciation/(Depreciation)
End of Period . . . . . . . . . . . . . . . . . . . . . . . .

Total

Assets

Beginning of Period . . . . . . . . . . . . . . . . . .
Inﬂows . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outﬂows . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Net Flows
. . . . . . .
Market Appreciation/(Depreciation)
End of Period . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

$

$

2012

For the Year Ended December 31,
2011
(in billions)

2010

11.3
0.7
(2.8)
(2.1)
2.0
11.2

2.2
4.0
(1.0)
3.0
0.7
5.9

13.5
4.7
(3.8)
0.9
2.7
17.1

$

$

$

$

$

$

12.5
2.1
(2.2)
(0.1)
(1.1)
11.3

3.1
0.9
(1.6)
(0.7)
(0.2)
2.2

15.6
3.0
(3.8)
(0.8)
(1.3)
13.5

$

$

$

$

$

$

10.7
1.8
(1.7)
0.1
1.7
12.5

3.6
1.3
(2.2)
(0.9)
0.4
3.1

14.3
3.1
(3.9)
(0.8)
2.1
15.6

The following table describes the allocation of our AUM among our investment strategies, as of

December 31, 2012, 2011, and 2010:

Investment Strategy

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

2012

$

$

10.9
4.0
2.2
17.1

AUM at December 31,
2011
(in billions)

$

7.9
3.7
1.9
$ 13.5

2010

$

$

10.1
3.4
2.1
15.6

During the year ended December 31, 2012, our AUM increased $3.6 billion, or 26.7%, from $13.5 billion

at December 30, 2011. This increase is primarily due to inﬂows in our retail Large Cap Expanded Value
strategy and market appreciation during the year ended December 31, 2012.

At December 31, 2012, we managed $11.2 billion in institutional accounts and $5.9 billion in retail
accounts, for a total of $17.1 billion in assets. For the year ended December 31, 2012, we experienced total
gross inﬂows of $4.7 billion and $2.7 billion in market appreciation, which were partially offset by total gross
outﬂows of $3.8 billion. Assets in institutional accounts decreased by $0.1 billion, or 0.9%, from $11.3 billion
at December 31, 2011, due to $2.8 billion in gross outﬂows partially offset by $2.0 billion in market
appreciation and $0.7 billion in gross inﬂows. Assets in retail accounts increased by $3.7 billion, or 168%,
from $2.2 billion at December 31, 2011 as a result of $4.0 billion in gross inﬂows and $0.7 billion in market
appreciation, partially offset by $1.0 billion in gross outﬂows. Retail inﬂows are primarily associated with our
assignment to manage 28% of the Vanguard Windsor Fund as of the beginning of August 2012.

34

At December 31, 2011, we managed $11.3 billion in institutional accounts and $2.2 billion in retail
accounts, for a total of $13.5 billion in assets. For the year ended December 31, 2011, we experienced total
gross outﬂows of $3.8 billion, which were partially offset by total gross inﬂows of $3.0 billion. Assets in
institutional accounts decreased by $1.2 billion, or 9.6%, from $12.5 billion at December 31, 2010, due to
$2.2 billion in gross outﬂows and $1.1 billion in market depreciation, partially offset by $2.1 billion in gross
inﬂows. Assets in retail accounts decreased by $0.9 billion, or 29%, from $3.1 billion at December 31, 2010,
as a result of $1.6 billion in gross outﬂows and $0.2 billion in market depreciation, partially offset by
$0.9 billion in gross inﬂows.

At December 31, 2010, we managed $12.5 billion in institutional accounts and $3.1 billion in retail
accounts, for a total of $15.6 billion in assets. For the year ended December 31, 2010, we experienced total
gross inﬂows of $3.1 billion, which were offset by total gross outﬂows of $3.9 billion. Assets in institutional
accounts increased by $1.8 billion, or 16.8%, from $10.7 billion at December 31, 2009, due to $1.8 billion in
gross inﬂows and $1.7 billion in market appreciation, partially offset by $1.7 billion in gross outﬂows. Assets
in retail accounts decreased by $0.5 billion, or 13.9%, from $3.6 billion at December 31, 2009, as a result of
$2.2 billion in gross outﬂows, partially offset by $1.3 billion in gross inﬂows and $0.4 billion in market
appreciation.

Our revenues are generally correlated with the levels of our weighted average AUM. Our weighted
average AUM ﬂuctuates based on changes in the market value of accounts advised and managed by us, and
on our fund ﬂows. Since we are long-term fundamental investors, we believe that our investment strategies
yield the most beneﬁts, and are best evaluated, over a long-term timeframe. We believe that our investment
strategies are generally evaluated by our clients and our potential future clients based on their relative
performance since inception, and the previous one-year, three-year, and ﬁve-year periods. There has typically
been a correlation between our strategies’ investment performance and the size and direction of asset ﬂows
over the long-term. To the extent that our returns for these periods outperform client benchmarks, we would
generally anticipate increased asset ﬂows over the long term. Correspondingly, negative returns relative to
client benchmarks could cause existing clients to reduce their exposure to our products, or hinder new
client acquisition.

In addition, an increase in weighted average AUM and in revenues typically results in higher operating

income and net income, while a decrease in weighted average AUM and in revenues typically results in lower
operating income, net income, and operating margins. We would expect pressure on our operating income, net
income and operating margins in the future if average AUM and revenues were to decline.

Revenues

Our revenue from advisory fees earned on our institutional accounts and our retail accounts for the three

years ended December 31, 2012, 2011, and 2010 is described below:

Revenue

2012

For the Year Ended December 31,
2011
(in thousands)

2010

Institutional Accounts . . . . . . . . . . . . . . . . . . . .
Retail Accounts . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

64,919
11,361
76,280

$

$

72,002
11,043
83,045

$

$

65,254
12,271
77,525

Year Ended December 31, 2012 versus December 31, 2011

Our total revenue decreased $6.7 million, or 8.1%, to $76.3 million for the year ended December 31,

2012, from $83.0 million for the year ended December 31, 2011. This change was driven primarily by a
$3.5 million decrease in performance fees recognized, as well as a shift in the mix of weighted average AUM
between our institutional and retail strategies. For the year ended December 31, 2012, weighted average assets
in our institutional and retail strategies were 75.8% and 24.2%, respectively, of total weighted average AUM.
For the year ended December 31, 2011, weighted average assets in our institutional and retail strategies were
81.3% and 18.7%, respectively of total weighted average AUM. As discussed above, due to the substantially

35

large account size of certain of our retail accounts, these accounts generally carry lower weighted average fee
rates. This shift in mix was driven by retail inﬂows primarily associated with our assignment to manage 28%
of the Vanguard Windsor Fund as of the beginning of August 2012 as well as net outﬂows in our institutional
accounts. To the extent that we experience further shifts in weighted average AUM, our revenue could be
affected.

Our weighted average fees were 0.512% and 0.553% for the years ended December 31, 2012 and 2011,

respectively. This decrease was primarily due to the decrease of performance fees recognized in 2012 as noted
above combined with the partial period impact of a higher mix of assets in our retail Large Cap Diversiﬁed
strategy which carries a lower fee rate. Weighted average assets in institutional accounts decreased
$0.9 billion, or 7.4%, to $11.3 billion for the year ended December 31, 2012, from $12.2 billion for the year
ended December 31, 2011, and had weighted average fees of 0.574% and 0.591% for the years ended
December 31, 2012 and 2011, respectively. Weighted-average fee rates decreased primarily due to the decrease
in performance fees recognized during 2012, partially offset by a higher mix of assets in our Global Focused
Value strategy, which generally carries higher fee rates. Our tiered fee schedules typically charge lower rates
as account size increases. Weighted average assets in retail accounts increased $0.8 billion, or 28.6%, to $3.6
billion for the year ended December 31, 2012, from $2.8 billion for the year ended December 31, 2011, and
had weighted average fees of 0.316% and 0.389% for the years ended December 31, 2012 and 2011,
respectively. The decrease in weighted average fees in retail accounts was due primarily to partial period
impact of the Vanguard assignment.

Year Ended December 31, 2011 versus December 31, 2010

Our total revenue increased $5.5 million, or 7.1%, to $83.0 million for the year ended December 31,
2011, from $77.5 million for the year ended December 31, 2010. This change was driven primarily by a
$3.3 million increase in performance fees recognized, as well as increases in weighted average AUM, which
increased $0.7 billion, or 4.9%, to $15.0 billion for the year ended December 31, 2011, from $14.3 billion for
the year ended December 31, 2010.

Our weighted average fees were 0.553% and 0.541% for the years ended December 31, 2011 and 2010,

respectively. This increase was primarily due to performance fees recognized, as noted above. Weighted
average assets in institutional accounts increased $1.2 billion, or 10.9%, to $12.2 billion for the year ended
December 31, 2011, from $11.0 billion for the year ended December 31, 2010, and had weighted average fees
of 0.591% for each of the years ended December 31, 2011 and 2010. Weighted-average fee rates remained ﬂat
year-over-year, beneﬁtting from performance fees recognized, as noted above, offset by a decrease related to
larger average institutional account size. Our tiered fee schedules typically charge lower rates as account size
increases. Weighted average assets in retail accounts decreased $0.5 billion, or 15.2%, to $2.8 billion for the
year ended December 31, 2011, from $3.3 billion for the year ended December 31, 2010, and had weighted
average fees of 0.389% and 0.372% for the years ended December 31, 2011 and 2010, respectively. The
increase in weighted average fees in retail accounts was due to the full-year effect of the expiration of a prior
year voluntary partial fee waiver for the John Hancock Classic Value Fund, and a higher mix of assets in our
retail Emerging Markets Focused Value strategy, which carries a higher fee rate. The timing of asset ﬂows in
our other retail accounts also contributed to the change in our retail weighted-average fee rate.

36

Expenses

Our operating expense is driven primarily by our compensation costs. The table below describes the

components of our operating expense for the years ended December 31, 2012, 2011, and 2010.

2012

For the Year Ended December 31,
2011
(in thousands)

2010

Cash Compensation and Other Beneﬁts . . . . . . . .
Other Non-Cash Compensation . . . . . . . . . . . . . .
. . . .
General and Administrative Expense . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . .

Total Compensation and Beneﬁts Expense

$

$

28,690
3,065
31,755
7,346
39,101

$

$

29,518
5,047
34,565
10,626
45,191

$

$

25,895
3,653
29,548
8,007
37,555

Year Ended December 31, 2012 versus December 31, 2011

Total operating expense decreased by $6.1 million, or 13.5%, to $39.1 million for the year ended
December 31, 2012, from $45.2 million for the year ended December 31, 2011. This decrease was primarily
attributable to one-time charges associated with the sublease of excess real estate and a charge related to
certain employee departures, both realized in the fourth quarter of 2011.

Compensation and beneﬁts expense decreased by $2.8 million, or 8.1%, to $31.8 million for the year
ended December 31, 2012, from $34.6 million for the year ended December 31, 2011. This decrease was
primarily attributable to $2.2 million in charges related to certain employee departures recognized during the
fourth quarter of 2011 and a decrease of $0.6 million in discretionary bonus amounts in 2012. The
$0.8 decrease in cash compensation is primarily due to the one-time charges recognized during the fourth
quarter of 2011, partially offset by a shift in compensation mix. The $2.0 million decrease in other non-cash
compensation was primarily due to a shift in compensation mix and a reduction in amortization associated
with previously issued awards. We would expect non-cash compensation expense in subsequent years to
depend on the size and composition of awards granted under our equity incentive plans.

General and administrative expense decreased by $3.3 million, or 30.9%, to $7.3 million for the year

ended December 31, 2012, from $10.6 million for the year ended December 31, 2011. This decrease is
primarily due to a decrease in rent and real estate costs recognized during 2012. During the year ended
December 31, 2011, we entered into a noncancelable sublease agreement for certain excess office space
associated with our operating lease agreement. As discussed below, we recognized a $2.5 million loss
associated with this operating sublease during 2011. No such loss was recognized during 2012.

Year Ended December 31, 2011 versus December 31, 2010

Total operating expense increased by $7.6 million, or 20.3%, to $45.2 million for the year ended
December 31, 2011, from $37.6 million for the year ended December 31, 2010. This increase was primarily
attributable to one-time charges associated with the sublease of excess real estate and a charge related to
certain employee departures, as well as increases in the Company’s discretionary bonus amounts.

Compensation and beneﬁts expense increased by $5.1 million, or 17.0%, to $34.6 million for the year

ended December 31, 2011, from $29.5 million for the year ended December 31, 2010. This increase was
primarily attributable to $2.2 million in charges related to certain employee departures and an increase in
discretionary bonus accruals. The $1.3 million increase in other non-cash compensation relates to annual
equity awards to our members, and arose in part as a result of a shift in compensation mix and the
amortization of previously issued awards.

General and administrative expense increased by $2.6 million, or 32.7%, to $10.6 million for the year

ended December 31, 2011, from $8.0 million for the year ended December 31, 2010. During the year ended
December 31, 2011, we entered into a noncancelable sublease agreement for certain excess office space
associated with our operating lease agreement and recognized a $1.6 million loss in general and administrative
expense for the aggregate excess of the costs expected to be incurred over the anticipated sublease income

37

associated with this operating sublease. In addition, we recognized a $0.9 million loss on disposal of ﬁxed
assets associated with this sublease, which is also included in general and administrative expense.

Other Income/(Expense)

Year Ended December 31, 2012 versus December 31, 2011

Other income/(expense) was an expense of $0.9 million for the year ended December 31, 2012, and

consisted primarily of $2.6 million in expense related to adjustments to our liability to our selling and
converting shareholders, partially offset by $1.5 million of net realized and unrealized gain from investments
and $0.3 million in interest and dividend income. Other income/(expense) was an expense of $1.5 million for
the year ended December 31, 2011, and consisted primarily of $1.6 million in expense related to adjustments
to our liability to our selling and converting shareholders, and $0.4 million of net realized and unrealized
losses from investments, partially offset by $0.4 million in interest and 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. The
$1.9 million year-over-year change in net realized and unrealized gains/(losses) was due to investment
performance.

Year Ended December 31, 2011 versus December 31, 2010

Other income/(expense) was an expense of $1.5 million for the year ended December 31, 2011, and

consisted primarily of $1.6 million in expense related to adjustments to our liability to our selling and
converting shareholders, and $0.4 million of net realized and unrealized losses from investments, partially
offset by $0.4 million in interest and dividend income. Other income/(expense) was an expense of
$2.7 million for the year ended December 31, 2010, and consisted primarily of $3.3 million in expense related
to adjustments to our liability to our selling and converting shareholders, and $0.2 million in interest expense,
partially offset by $0.4 million of net realized and unrealized gains from investments, and $0.3 million in
interest and dividend income. The $0.8 million year-over-year change in net realized and unrealized
gains/(losses) was due to investment performance, while the decline in interest expense was the result of the
full repayment of our outstanding debt in 2010.

Income Tax Expense

Our results for the years ended December 31, 2012, 2011, and 2010 included the effects of adjustments
related to our tax receivable agreement and the associated liability to selling and converting shareholders and
certain one-time charges discussed in ‘‘Expenses,’’ above. Our effective corporate tax rate, exclusive of
adjustments related to our tax receivable agreement and the associated liability to selling and converting
shareholders and adjustments related to certain one-time charges recognized in operating expense in the fourth
quarter of 2011, was 42.8%, 42.4%, and 42.7% for the years ended December 31, 2012, 2011, and
2010, respectively.

38

Non-GAAP income before corporate income taxes used to calculate our income before income taxes for

the years ended December 31, 2012, 2011, and 2010 are as follows:

Income Before Income Taxes . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

One-time adjustments
Change in Liability to Selling and

Converting Shareholders . . . . . . . . . . . . . . .
. . .

Non-GAAP Unincorporated Business Taxes
Non-GAAP Net Income Attributable to

Non-Controlling Interests . . . . . . . . . . . . . .
Non-GAAP Income Before Corporate Taxes . . . . .

Unincorporated Business Taxes . . . . . . . . . . . . . .
. . .
Non-GAAP Unincorporated Business Taxes . . . . .

Add back: Effect of One-Time Adjustments

Net Income Attributable to

2012

For the Year Ended December 31,
2011
(in thousands)
$ 36,388
4,798

$ 37,226
—

2010

$ 36,316
—

2,647
(2,420)

(30,565)
$ 5,978

$ 2,420
—
$ 2,420

1,581
(2,622)

(33,878)
$ 6,267

$ 2,617
5
$ 2,622

3,312
(2,431)

(32,674)
$ 5,433

$ 2,431
—
$ 2,431

Non-Controlling Interests . . . . . . . . . . . . . . . .
. . .
Add back: Effect of One-Time Adjustments

$ 30,565
—

$ 29,861
4,017

$ 32,674
—

Non-GAAP Net Income Attributable to

Non-Controlling Interests . . . . . . . . . . . . . . . .

$ 30,565

$ 33,878

$ 32,674

Our non-GAAP effective corporate tax rate, which is exclusive of adjustments related to our tax
receivable agreement and the associated liability to selling and converting shareholders, was determined
as follows:

For the Year Ended December 31,

2012

2011

2010

Tax

(in thousands)

% of
Non-GAAP
Pre-tax Income

Tax

(in thousands)

% of
Non-GAAP
Pre-tax Income

% of
Non-GAAP
Pre-tax Income

Tax

(in thousands)

Federal Corporate

Tax . . . . . . . . . . .

$

2,032

34.0% $

2,131

34.0% $

1,847

34.0%

State and Local Taxes,

Net of Federal
Beneﬁt . . . . . . . . .

Prior Period and Other

Adjustments
. . . . .
Non-GAAP Effective
Taxes . . . . . . . .

529

(2)

8.9%

(0.1)%

556

(31)

8.9%

(0.5)%

470

—

8.7%

—

$

2,559

42.8% $

2,656

42.4% $

2,317

42.7%

Year Ended December 31, 2012 versus December 31, 2011

Income tax expense decreased $1.2 million, from $3.1 million for the year ended December 31, 2011, to

$1.9 million for the year ended December 31, 2012. The 2012 and 2011 income tax expense included
$3.1 million and $1.8 million, respectively, of beneﬁt associated with adjustments to the valuation allowance
recorded against our deferred tax asset related to our tax receivable agreement. Exclusive of these adjustments,
the remaining income tax expense for the year ended December 31, 2012 consisted of $2.4 million in
operating company unincorporated business taxes and $2.6 million of corporate income taxes. On a similar
basis, the remaining income tax expense for the year ended December 31, 2011 consisted of $2.6 million of
operating company unincorporated business taxes and $2.7 million of corporate income taxes. The decrease in
these taxes is attributable primarily to a decrease in taxable income. The increase in the non-GAAP effective

39

tax rate was attributable to the decrease in prior period adjustments recognized in 2012. A comparison of the
GAAP effective tax rates for the years ended December 31, 2012 and 2011 is not meaningful due to the
valuation allowance adjustments.

Year Ended December 31, 2011 versus December 31, 2010

Income tax expense increased $2.4 million, from $0.7 million for the year ended December 31, 2010, to

$3.1 million for the year ended December 31, 2011. The 2011 and 2010 income tax expense included
$1.8 million and $4.0 million, respectively, of beneﬁt associated with adjustments to the valuation allowance
recorded against our deferred tax asset related to our tax receivable agreement. Exclusive of these adjustments,
the remaining income tax expense for the year ended December 31, 2011 consisted of $2.6 million in
operating company unincorporated business taxes and $2.7 million of corporate income taxes. On a similar
basis, the remaining income tax expense for the year ended December 31, 2010 consisted of $2.4 million of
operating company unincorporated business taxes and $2.3 million of corporate income taxes. The increase in
these taxes is attributable primarily to an increase in taxable income. The decline in the non-GAAP effective
tax rate was attributable to the effect of prior period adjustments.

Non-Controlling Interests

Year Ended December 31, 2012 versus December 31, 2011

Net income attributable to non-controlling interests was $30.6 million for the year ended December 31,

2012, and consisted of $29.7 million associated with our employees’ and outside investors’ approximately
83.3% weighted-average interest in the income of the operating company, and approximately $0.9 million
associated with our consolidated subsidiaries’ interest in the income of our consolidated investment
partnerships. Net income attributable to non-controlling interests was $29.9 million for the year ended
December 31, 2011. The one-time adjustments discussed above in ‘‘Expenses’’ reduced net income attributable
to non-controlling interests by $4.0 million in 2011. Exclusive of these one-time adjustments, net income
attributable to non-controlling interests was $33.9 million for the year ended December 31, 2011, and
consisted of $34.2 million associated with our employees’ and outside investors’ approximately 84.8%
weighted-average interest in the income of the operating company, offset by the $0.3 million effect of the
absorption, by our consolidated subsidiaries, of their share of the losses of our consolidated investment
partnerships. The change in net income attributable to non-controlling interests, excluding the impact of
one-time adjustments, reﬂects primarily the decrease in performance fees recognized and in our weighted
average AUM, each of which had a corresponding negative impact on operating company revenues and
income. This decrease was offset by positive performance in our consolidated investment partnerships in 2012
compared to 2011.

Year Ended December 31, 2011 versus December 31, 2010

Net income attributable to non-controlling interests was $29.9 million for the year ended December 31,

2011. The one-time adjustments discussed above in ‘‘Expenses’’ reduced net income attributable to
non-controlling interests by $4.0 million in 2011. Exclusive of these one-time adjustments, net income
attributable to non-controlling interests was $33.9 million for the year ended December 31, 2011, and
consisted of $34.2 million associated with our employees’ and outside investors’ approximately 84.8%
weighted-average interest in the income of the operating company, offset by the $0.3 million effect of the
absorption, by our consolidated subsidiaries, of their share of the losses of our consolidated investment
partnerships. Net income attributable to non-controlling interests was $32.7 million for the year ended
December 31, 2010, and consisted of $32.4 million associated with our employees’ and outside investors’
approximately 85.7% weighted-average interest in the income of the operating company, and approximately
$0.2 million associated with our consolidated subsidiaries’ interest in the income of our consolidated
investment partnerships. The change in net income attributable to non-controlling interests reﬂects primarily
the increase in performance fees recognized and in our weighted average AUM, each of which had a
corresponding positive impact on operating company revenues and income. This increase was offset by
negative performance in our consolidated investment partnerships in 2011 compared to 2010.

40

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
from ﬁnancing activities. Investing activities have historically been investments in our own investment
strategies, purchases and sales of investments to fund our deferred compensation program, and, to a lesser
extent, capital expenditures.

At December 31, 2012, our cash and cash equivalents was $32.6 million, inclusive of $3.2 million in

cash held by our consolidated subsidiaries. Advisory fees receivable was $14.6 million. We also had
approximately $2.9 million in investments and $1.1 million in our cash and cash equivalents set aside to
satisfy our obligations under our deferred compensation program.

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 ﬁrm, our business has been
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 year ended December 31, 2012, our weighted average AUM and
revenues decreased by 0.7% and 8.1%, respectively, compared to our weighted average AUM and revenues
for the year ended December 31, 2011.

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, debt obligations, 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 continuously 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 consisted of 35 of our employees, certain 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 do not anticipate meaningful outlays for internal investment or capital expenditures over the next

twelve months.

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 have no material assets other than 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

41

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 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. See ‘‘Item 1A — Risk Factors — Risks Relating to Our
Class A Common Stock.’’ Our ability to pay dividends is subject to the discretion of our Board of Directors
and may be limited by our holding company structure and applicable provisions of Delaware law.’’

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 have 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 of its membership units to us in
connection with our initial public offering, and any future holders of Class B units, that requires us to pay
them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually
realize (or are deemed to realize in the case of an early termination payment by us, or a change in control, as
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

Year Ended December 31, 2012 versus December 31, 2011

Cash and Cash Equivalents decreased $2.4 million to $32.6 million in 2012 compared to $35.1 million in

2011. Net cash provided by operating activities decreased $14.1 million in 2012 to $32.0 million from
$46.1 million in 2011. The decrease was primarily due to payments made in association with our tax
receivable agreement during 2012, combined with 2011 one-time charges that were paid in 2012 and a higher
mix of cash compensation paid during the year.

Net cash used in investing activities was $0.1 million in 2012 compared to $0.4 million used in 2011.
The $0.3 million decrease was primarily attributable to a $1.0 million decrease in purchases from investments
in deferred compensation partially offset by a $0.7 million decrease in proceeds from investments in our
deferred compensation plan during 2012.

Net cash used in ﬁnancing activities increased $7.2 million in 2012 to $34.3 million from $27.1 million

in 2011. This increase is primarily due to the special dividend payments made in March of 2012 and the
repurchase and retirement of Class A common stock, Class B units, and Class B unit options during 2012.

Year Ended December 31, 2011 versus December 31, 2010

Cash and Cash Equivalents increased $18.7 million to $35.1 million in 2011 compared to $16.4 million

in 2010. Net cash provided by operating activities increased $4.0 million in 2011 compared to 2010 primarily
reﬂecting changes in working capital, in addition to an increase in net income, exclusive of the effects of
on-time charges in operating expense in 2011.

42

Net cash used in investing activities of $0.4 million in 2011 decreased $1.7 million compared to $2.1
million in 2010 primarily due to an increase of $1.2 million in proceeds from investments in our deferred
compensation plan and a decrease of $0.5 million in purchases of investments in our deferred compensation
plan during 2011.

Net cash used in ﬁnancing activities decreased $12.4 million in 2011 to $27.1 million from $39.5 million

in 2010 primarily due to the $10.0 million repayment of our senior subordinated notes in 2010 and a $5.3
million decrease in distributions to non-controlling interests partially offset by a decrease of $3.8 million in
contributions from non-controlling interests.

Contractual Obligations

The following table sets forth information regarding our consolidated contractual obligations as of

December 31, 2012.

Payments Due by Period

Total

Less Than
1 Year

1 − 3 Years
(in thousands)

3 − 5 Years

More Than
5 Years

Operating Lease Expenses, Net of

Sublease Rental Income
Total

. . . . . .
. . . . . . . . . . . . . . . . . . .

$ 4,880
$ 4,880

$ 1,722
$ 1,722

$ 3,158
$ 3,158

$ —
$ —

$ —
$ —

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2012.

Critical Accounting Policies and Estimates

The preparation of our consolidated ﬁnancial statements in accordance with U.S. generally accepted
accounting principles (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 also
consolidate non-variable-interest entities which we control as the general partner or managing member. 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

43

company’s taxable income or loss. Similarly, the income of our consolidated investment partnerships 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 (UBT).

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 maintained for deferred tax assets that we
estimate are more likely than not to go unrealizable based on available evidence at the time the estimate is
made. Determining the valuation allowance requires management to make signiﬁcant judgments and
assumptions. In determining the valuation allowance, we use historical and forecasted future operating results,
based upon approved business plans, including a review of the eligible carryforward periods, tax planning
opportunities and other relevant considerations. Each quarter, we re-evaluate our estimate related to the
valuation allowance, including our assumptions about future taxable income.

We believe that the accounting estimate related to the $59.9 million valuation allowance, recorded against

the deferred tax asset associated with our acquisition of operating company membership units, 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.

Management 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 our estimate of tax liabilities proves
to be less than the ultimate assessment, a further charge to earnings would result.

44

ITEM 7A. 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. As noted in
Item 1A, ‘‘Risk Factors,’’ we could experience declines in AUM due to poor performance of our investment
strategies or a general economic downturn. These conditions could lead to declines in revenue and
proﬁtability, and there can be no assurance that there will not be declines in our AUM, revenue and
proﬁtability again in the future. An economic downturn, and volatility in the global ﬁnancial markets, could
also signiﬁcantly affect the estimates, judgments, and assumptions used in the valuation of our ﬁnancial
instruments.

Our revenue for the three years ended December 31, 2012 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.

We are also subject to market risk due to a decline in the value of the holdings of our consolidated

subsidiaries, which consist primarily of marketable securities and investments in mutual funds. At
December 31, 2012, the fair value of these assets was $2.2 million and $3.0 million, respectively. Assuming a
10% increase or decrease, the fair value would increase or decrease by $0.2 million and $0.3 million,
respectively, at December 31, 2012.

Interest Rate Risk

Since the Company does not have any debt that bears interest at a variable rate, it does not have any

direct exposure to interest rate risk at December 31, 2012.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated ﬁnancial statements and notes thereto begin on page F-1 of this Annual Report and are

incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

During the course of their review of our consolidated ﬁnancial statements as of December 31, 2012, 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 Exchange Act. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31,
2012, 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.

45

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over our
ﬁnancial reporting, as deﬁned in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
system is designed to provide reasonable assurance regarding the reliability of our ﬁnancial reporting and the
preparation of our ﬁnancial statements for external purposes in accordance with U.S. generally accepted
accounting principles. There are inherent limitations in the effectiveness of any internal controls, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal
controls can provide only reasonable assurances with respect to ﬁnancial statement preparation. Further,
because of changes in conditions, the effectiveness of internal controls may vary over time.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer,

has assessed the effectiveness of our internal control over ﬁnancial reporting as of December 31, 2012. In
making this assessment, management used the criteria set forth in the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

Based on the assessment using those criteria, management concluded that, as of December 31, 2012, our

internal control over ﬁnancial reporting was effective.

Our independent registered public accounting ﬁrm audited the ﬁnancial statements included in this
Annual Report and have issued an audit report on our internal control over ﬁnancial reporting. This report
appears on page F-3 of this Annual Report.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over ﬁnancial reporting during the quarter ended

December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal
control over ﬁnancial reporting.

ITEM 9B. OTHER INFORMATION

There was no information that we were required to disclose in a current report on Form 8-K during the

fourth quarter of ﬁscal 2012 that was not so disclosed.

46

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table provides certain information relating to our directors and executive officers.

Name
Richard S. Pzena . . . . . . . . . .
John P. Goetz . . . . . . . . . . . .
William L. Lipsey . . . . . . . . .
Gary J. Bachman . . . . . . . . . .
. . . . . .
Antonio DeSpirito, III
Michael D. Peterson . . . . . . . .
Steven M. Galbraith . . . . . . . .
Joel M. Greenblatt . . . . . . . . .
Richard P. Meyerowich . . . . . .
Ronald W. Tysoe . . . . . . . . . .

Age
54
55
54
45
44
48
50
55
70
59

Position
Chairman, Chief Executive Officer, Co-Chief Investment Officer
President, Co-Chief Investment Officer, Director
President, Head of Marketing and Client Service, Director
Chief Financial Officer
Executive Vice President
Executive Vice President
Director
Director
Director
Director

Richard S. Pzena was appointed our Chairman, Chief Executive Officer and Co-Chief Investment Officer

in May 2007. Prior to forming Pzena Investment Management, LLC in 1995, Mr. Pzena was the Director of
U.S. Equity Investments and Chief Research Officer for Sanford C. Bernstein & Company. Mr. Pzena joined
Sanford C. Bernstein & Company in 1986 as an oil industry analyst. During 1990 and 1991, Mr. Pzena served
as Chief Investment Officer, Small Cap Equities, and assumed his broader domestic equity role in 1991. Prior
to joining Bernstein, Mr. Pzena worked for the Amoco Corporation in various ﬁnancial and planning roles. He
earned a B.S. summa cum laude and an M.B.A. from the Wharton School of the University of Pennsylvania
in 1979 and 1980, respectively.

John P. Goetz was appointed our President, Co-Chief Investment Officer in June 2007, and became a
member of our Board of Directors in May 2011. Mr. Goetz joined us in 1996 as Director of Research and has
been Co-Chief Investment Officer since 2005. Previously, Mr. Goetz held a range of key positions at Amoco
Corporation for over 14 years, most recently as the Global Business Manager for Amoco’s $1 billion
polypropylene business, where he had bottom-line responsibility for operations and development worldwide.
Prior positions at Amoco included strategic planning, joint venture investments and project ﬁnancing in
various oil and chemical businesses. Prior to joining Amoco, Mr. Goetz had been employed by The Northern
Trust Company and Bank of America. He earned a B.A. summa cum laude in Mathematics and Economics
from Wheaton College in 1979 and an M.B.A. from the Kellogg School at Northwestern University in 1982.

William L. Lipsey was appointed our President, and Head of Marketing and Client Service in June 2007,
and became a member of our Board of Directors in May 2011. Before joining Pzena Investment Management
in 1997, Mr. Lipsey was an Investment Advisory Consultant and a Senior Vice President at Oppenheimer &
Company, Inc. Prior to joining Oppenheimer, Mr. Lipsey’s career included positions at Morgan Stanley,
Kidder Peabody and Hewitt Associates. At Morgan Stanley and Kidder Peabody, Mr. Lipsey managed assets
for institutional and private clients. He earned a B.S. in Economics from the Wharton School of the
University of Pennsylvania in 1980 and an M.B.A. in Finance from the University of Chicago in 1986.

Gary J. Bachman was appointed our Chief Financial Officer in September 2012. Prior to joining Pzena

Investment Management, Mr. Bachman served as Executive Director of the Investment Bank Finance
Department at JP Morgan Chase, from 2008 to 2012. Previous to this, Mr. Bachman worked in the Structured
Capital Market group at Barclay’s Capital, and both the Strategic Transaction and Accounting Policy and
External Reporting groups at Lehman Brothers, from 2000 to 2008. Mr. Bachman received his B.S. from
Binghamton University in 1990 and an M.B.A. from Fordham University in 1998. Mr. Bachman is a Certiﬁed
Public Accountant.

Antonio DeSpirito, III was appointed Executive Vice President in February 2011. He is also a Portfolio
Manager of our Large Cap Focused Value, Focused Value Service, and All Cap Focused Value strategies. Prior
to joining Pzena Investment Management in 1996, Mr. DeSpirito was an Associate in the Corporate

47

Department of Ropes & Gray LLP. He earned a B.S. summa cum laude from the Wharton School of the
University of Pennsylvania in 1990 and a J.D. magna cum laude from Harvard Law School in 1993.

Michael D. Peterson was appointed Executive Vice President in February 2011. He is also a Portfolio

Manager of our Global Focused Value, International (ex-US) Focused Value, International (ex-US) Expanded
Value, Global Expanded Value, and European Focused Value strategies. Prior to joining Pzena Investment
Management in 1998, Mr. Peterson was an Engagement Manager at McKinsey & Company. At McKinsey, he
was a member of the Financial Institutions Group, as well as the Pricing Practice. Prior to joining McKinsey,
he was an Assistant Professor at the Indiana University School of Public and Environmental Affairs, where he
taught operations research and operations management. He holds a PhD in Management (Operations Research)
from the M.I.T. Sloan School of Management, where he was a National Science Foundation fellow from 1989
to 1992. Prior to that, he received a M.A. in Mathematics from the University of Cambridge in 1988 and an
A.B. summa cum laude in Economics from Princeton University.

Steven M. Galbraith has been a member of our Board of Directors since October 2007. Mr. Galbraith is a

Managing Member of Herring Creek Capital, a registered investment advisor managing private investment
funds exclusively for qualiﬁed investors. Previously, he had been a partner at Maverick Capital where he had
portfolio and general management responsibilities. Prior to joining Maverick Capital in 2004, Mr. Galbraith
served as Chief Investment Officer and Chief U.S. Investment Strategist at Morgan Stanley from June 2000 to
December 2003. Before joining Morgan Stanley, he was a partner at Sanford Bernstein, where he was an
analyst in the packaged foods sector and the securities industry. Mr. Galbraith was also an employee of our
operating company from June 1998 to March 1999. Mr. Galbraith is an Adjunct Professor at Columbia
University Business School where he teaches securities analysis. He serves on the board of trustees of Tufts
University and the National Constitution Center in Philadelphia. Mr. Galbraith is also a member of the board
of directors of the Harlem Success Academy, Narragansett Brewing Company, and OnLive. He received his
B.A. summa cum laude from Tufts University, where he was elected to Phi Beta Kappa.

Joel M. Greenblatt has been a member of our Board of Directors since October 2007. Mr. Greenblatt has
been a Managing Partner of Gotham Capital, a hedge fund that he founded, since 1985, and of Gotham Asset
Management since 2002. Mr. Greenblatt is also the Managing Principal of Gotham Asset Management, LLC, a
registered investment adviser (formerly known as Formula Investing, LLC). For the past thirteen years, he has
been an Adjunct Professor at Columbia University Business School, where he teaches Value and Special
Situation Investing. Mr. Greenblatt is the former Chairman of the board of Alliant Techsystems, a NYSE-listed
aerospace and defense company. He is the co-chairman of Harlem Success Academy, a charter school in
New York City. He is the author of three books, You Can Be A Stock Market Genius (Simon & Schuster,
1997), The Little Book That Beats The Market (John Wiley & Sons, 2005), and The Big Secret for the Small
Investor (John Wiley & Sons, 2011). Mr. Greenblatt earned a B.S. and an M.B.A. from the Wharton School of
the University of Pennsylvania in 1979 and 1980, respectively.

Richard P. Meyerowich has been a member of our Board of Directors since October 2007.

Mr. Meyerowich worked in the New York office of Deloitte & Touche LLP from 1966 to 2005, including as a
Senior Partner from 1978 to 2005. Mr. Meyerowich headed the National Investment Management Practice for
over ten years and served as lead partner on major investment management entities, including SEC-registered
mutual funds, unit investment funds, hedge funds, investment partnerships, separate accounts of insurance
companies and commodity pools. He served two terms on the Investment Companies Committee of the
American Institute of Certiﬁed Public Accountants. From 2005 through 2009, he served as an external
consultant for Deloitte & Touche on quality control and technical advice. In March 2011, Mr. Meyerowich
became a member of the board of directors of AIG Property Casualty, a global property and casualty
insurance subsidiary of American International Group, Inc. Mr. Meyerowich is also a member of the AIG
Property Casualty audit committee. Mr. Meyerowich earned a B.S. in Economics from Wagner College in
1965.

48

Ronald W. Tysoe has been a member of our Board of Directors since December 2008. Mr. Tysoe served
as a senior advisor at Perella Weinberg Partners LP, a boutique investment banking ﬁrm in New York, from
October 2006 through September 2007. Prior to that he was vice chairman, ﬁnance and real estate, of
Federated Department Stores, Inc. (now Macy’s, Inc.), a position he held since April of 1990. He served as
Chief Financial Officer of Federated from 1990 to 1997, and served on the Federated board of directors from
1988 until May of 2005. Mr. Tysoe is a member of the board of directors of Cintas Corporation, a
publicly-traded uniform rental and supply company, where he serves as chairman of the audit committee and a
member of the corporate governance committee. He is also a member of the board of directors of Taubman
Centers, Inc., a publicly-traded real estate investment trust, where he serves as a member of the audit
committee and executive committee. Mr. Tysoe is a member of the board of directors of Scripps Networks
Interactive, Inc., a publicly-traded media and broadcasting enterprise, where he serves as chairman of the audit
committee and as a member of the compensation committee. He is also a member of the board of directors of
Canadian Imperial Bank of Commerce, a publicly-traded commercial banking company, and serves as
chairman of its audit committee and a member of the corporate governance committee. From 2007 to 2009,
Mr. Tysoe was a member of the board of directors of Retail Opportunity Investment Corporation, a real estate
investment trust. Mr. Tysoe also served as a member of the board of directors of Ohio Casualty Corporation, a
property and casualty insurance company, from 2006 to 2007. Mr. Tysoe earned Bachelor of Commerce and
Bachelor of Law degrees from the University of British Columbia in 1977 and 1978, respectively.

There are no family relationships among any of our directors or executive officers.

Board Composition

Our Board of Directors currently consists of seven directors. For the year ended December 31, 2012, we

have determined that each of Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe is an ‘‘independent’’
director within the meaning of the applicable rules of the SEC and the NYSE.

Our bylaws provide that our Board of Directors will consist of ﬁve directors, or such number of directors
as ﬁxed by our Board of Directors from time to time, and that the directors are elected for one-year terms and
will continue to serve until the next annual meeting of stockholders, or until such director’s earlier death,
resignation or removal.

Factors Involved In Selecting Directors

When considering whether the Board’s directors have the experience, qualiﬁcations, attributes and skills,
taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively, in light
of the Company’s business and structure, the Nominating and Corporate Governance Committee focused on
the information described in each of the Board members’ biographical information set forth above. With
regard to Mr. Pzena, the Nominating and Corporate Governance Committee considered his experience as
founder and CEO of the Company, and his breadth of knowledge regarding all aspects of the business,
including its strategies, operations, and markets, as well as his acute business judgment. With respect to
Messrs. Goetz and Lipsey, the Nominating and Corporate Governance Committee considered their experience
as founding executive committee members of our operating company, their broad-based knowledge of the
business, as well as their extensive industry knowledge. With regard to Messrs. Galbraith and Greenblatt, the
Nominating and Corporate Governance Committee considered their extensive investment management
experience and their professional standing in the industry. With regard to Messrs. Tysoe and Greenblatt, the
Nominating and Corporate Governance Committee considered their prior and current Board experiences and
governance skills. With regard to Messrs. Meyerowich and Tysoe, the Nominating and Corporate Governance
Committee considered their expertise and background in accounting matters, and their leadership roles at
Deloitte & Touche LLP and Federated Department Stores, Inc., respectively, as well as their designations as
audit committee ﬁnancial experts.

Board Leadership Structure

The Nominating and Corporate Governance Committee is responsible for reviewing the leadership
structure of our Board of Directors, and additionally reviewing the performance of the Chairman of the Board
and Chief Executive Officer.

49

Since the inception of the Company in October 2007, as permitted by the Company’s Corporate

Governance Guidelines, the Chairman of the Board position has been held by Richard S. Pzena, the CEO of
our Company and our operating company. The Nominating and Corporate Governance Committee has
considered the issue of Mr. Pzena’s combined role, and approved the continuation of this structure for the
following reasons:

•

•

•

The CEO is most familiar with the day to day operations of the Company.

The CEO is in the best position to bring matters before our Board of Directors and serve as its
Chairman.

A combined CEO and Chairman role provides consistent leadership, stability and continuity for the
Company.

The Board of Directors has additionally affirmed the combination of the CEO and Chairman roles for the

reasons set forth above.

In accordance with our Corporate Governance guidelines, the Company has the option of alternating
directors to lead executive sessions of the Board of Directors, or to select a lead independent director. To date,
the Company’s independent directors have not named a lead independent director. Accordingly, no single
director presides at all executive sessions of the non-management directors, but rather alternate directors lead
each of the executive sessions. Accordingly, the role of presiding director at each executive session of non-
management directors is regularly rotated among Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe.

Board Risk Oversight Role

Our Board of Directors has delegated the role of risk oversight to its Audit Committee pursuant to the
Audit Committee’s charter. Our Audit Committee continues to concentrate on determining the adequacy of the
Company’s risk-management programs.

The Company’s approach to risk management includes a variety of internal procedures, test protocols and

examinations, including the following:

•

•

•

•

•

Sarbanes-Oxley annual testing and audit — covering internal controls and ﬁnancial reporting;

SSAE 16 — covering operational risks;

Compliance policies and procedures, including annual risk-based testing;

Ongoing compliance training; and

Disaster recovery procedures and annual testing.

Issues of note resulting from any of the above-enumerated risk management items are brought to the

attention of the Audit Committee, when appropriate.

In order to ensure ongoing coordination among its various risk management programs, during the ﬁrst
quarter of 2010, the Audit Committee approved, and the Board of Directors affirmed, the establishment of a
Risk Management Committee of our operating company. The purpose of the Risk Management Committee,
whose members include department heads or their delegates, is to identify business risks and evaluate the
effectiveness of all risk mitigation activities. The Risk Management Committee met three times during 2012.

Board Committees

Although we qualify for the ‘‘controlled company’’ exemption from certain of the corporate governance
rules of the NYSE, our Board of Directors has established an Audit Committee, a Compensation Committee
and a Nominating and Corporate Governance Committee, each consisting solely of independent directors, and
our Board of Directors has adopted charters for its committees that comply with the NYSE and SEC rules
relating to corporate governance matters.

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including

our Chief Executive Officer and our Chief Financial Officer, and a Code of Ethics for Senior Financial

50

Officers. Copies of the board committee charters, as well as our Corporate Governance Guidelines, Code of
Business Conduct and Ethics, and Code of Ethics for Senior Financial Officers, are available on our website at
www.pzena.com. If we make any amendments to our Code of Business Conduct and Ethics or our Code of
Ethics for Senior Financial Officers, other than technical, administrative or other non-substantive amendments,
or grant any waivers, including implicit waivers, from a provision of these codes to our Chief Executive
Officer or Chief Financial Officer, we will disclose the nature of the amendment or waiver, its effective date,
and to whom it applies on our website at www.pzena.com, or in a report on Form 8-K ﬁled with the SEC.

In order to communicate any concerns with our non-management directors, interested parties should send

comments to the attention of our Corporate Secretary, Joan F. Berger, at our primary offices located at
120 West 45th Street, 20th Floor, New York, New York 10036. All appropriate correspondence will be
forwarded to our non-management directors.

Audit Committee

Our Audit Committee assists our Board of Directors in its oversight of the integrity of our consolidated
ﬁnancial statements, our independent registered public accounting ﬁrm’s qualiﬁcations and independence, and
the performance of our independent registered public accounting ﬁrm.

Our Audit Committee’s responsibilities include, among others:

•

•

•

•

reviewing the audit plans and ﬁndings of our independent registered public accounting ﬁrm and our
internal audit and risk review staff, as well as the results of regulatory examinations, if any, and
tracking management’s corrective action plans, where necessary;

reviewing our ﬁnancial statements, including any signiﬁcant ﬁnancial items and/or changes in
accounting policies, and/or internal control, with our senior management and independent registered
public accounting ﬁrm;

reviewing our ﬁnancial risk and control procedures, compliance programs and signiﬁcant tax, legal
and regulatory matters; and

having the sole discretion to appoint annually our independent registered public accounting ﬁrm,
evaluate its independence and performance, and set clear hiring policies for employees or former
employees of the independent registered public accounting ﬁrm.

Messrs. Galbraith, Meyerowich and Tysoe currently serve on the Audit Committee and Mr. Meyerowich
serves as its chair. Our Board of Directors has determined that each of Messrs. Meyerowich and Tysoe is an
‘‘audit committee ﬁnancial expert’’ as such term is deﬁned in the rules and regulations of the SEC.

In addition to serving on our Audit Committee, Mr. Tysoe serves on the audit committees of four other

public companies. Our Board of Directors has determined that such simultaneous service does not impair
Mr. Tysoe’s ability to effectively serve on our Audit Committee.

Compensation Committee

Our Compensation Committee assists our Board of Directors in the discharge of its responsibilities

relating to the compensation of our executive officers.

Our Compensation Committee’s responsibilities include:

•

•

•

reviewing and approving, or making recommendations to our Board of Directors with respect to, the
compensation of our executive officers;

overseeing and administering, and making recommendations to our Board of Directors with respect
to, our cash and equity incentive plans; and

reviewing and making recommendations to the Board of Directors with respect to director
compensation.

Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe currently serve on the Compensation Committee

and Mr. Galbraith serves as its chair.

51

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee assists our Board of Directors by:

•

•

•

•

identifying and recommending to our Board of Directors individuals qualiﬁed to serve as directors of
the Company and on committees of the Board of Directors;

advising the Board of Directors on Board composition, procedures and committees;

initiating and overseeing governance policies such as our Corporate Governance Guidelines, Code of
Business Conduct and Ethics, and Code of Ethics for Senior Financial Officers; and

overseeing the evaluation of the Board and Company management.

As part of its responsibility to identify and recommend director nominees, our Nominating and Corporate

Governance Committee is guided by the diversity considerations set forth in its charter, which state that it
shall look at a variety of attributes in selecting candidates for nomination to our Board of Directors, including
experience, skills, expertise, diversity, personal and professional integrity, character, business judgment,
dedication, and lack of conﬂicts of interest. As part of its periodic self-assessment process, our Nominating
and Corporate Governance Committee annually assesses the occupational and personal backgrounds of the
members of our Board in order to determine if our Board of Directors, considered as a group, has a sufficient
composite mix of experience, knowledge and abilities.

Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe currently serve on the Nominating and Corporate

Governance Committee and Mr. Tysoe serves as its chair.

Section 16(a) Beneﬁcial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own

more than 10% of a registered class of our equity securities, to ﬁle with the SEC and NYSE reports of
ownership on Form 3 and changes in ownership (including changes in ownership of derivative securities
representing the right to acquire our securities) on Forms 4 and 5. Such executive officers, directors and
greater than 10% shareholders are required by SEC rules to furnish us with copies of all Section 16(a) forms
they ﬁle.

Based on a review of such reports, we believe that all Section 16(a) ﬁling requirements applicable to our

directors, executive officers and greater than 10% shareholders were complied with in respect of our ﬁscal
year ended December 31, 2012.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors is responsible for determining executive officer

compensation. The Compensation Committee, consisting of Messrs. Galbraith, Greenblatt, Meyerowich and
Tysoe, is comprised entirely of independent directors, as deﬁned in the NYSE rules. Members of the
Compensation Committee additionally qualify as ‘‘non-employee directors’’ within the meaning of Rule 16b-3
promulgated under the Exchange Act, and ‘‘outside directors’’ within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended.

During ﬁscal 2012, none of our executive officers served as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of any entity that had one or
more of its executive officers serving as a member of our Board of Directors or our Compensation Committee.

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the Compensation
Discussion and Analysis set forth below, and based upon such review and discussions, the Compensation
Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be
included in this Annual Report.

52

Respectfully submitted,

Compensation Committee
Steven M. Galbraith, Chairman
Joel M. Greenblatt
Richard P. Meyerowich
Ronald W. Tysoe

Compensation Discussion and Analysis

This section summarizes the principles underlying our policies relating to our executive officers’

compensation. It generally describes the manner and context in which compensation is earned by, and awarded
to, our executive officers and provides perspective on the tables and narratives that follow.

Philosophy and Objectives of Our Executive Compensation Program

Our executive compensation is intended to produce the best possible long-term results for both our
investor clients and shareholders. The primary means of alignment between executive officers and shareholder
interests is evidenced by the signiﬁcant holdings held by most of our individual executive officers. This
alignment is further enhanced by our annual compensation structure, which is designed to reward performance
leading to excellent long-term results. Executive compensation has a base salary component and a bonus
component. The bonus itself can be granted in the form of cash or various forms of equity participation.
Regardless of form, a portion of the bonus must be deferred pursuant to the Bonus Plan, which absent certain
articulated exemptions, is dependent on continued employment with the ﬁrm. See ‘‘Item 12 — Security
Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters — Bonus Plan’’
for a description of the Bonus Plan.

It is intended that the magnitude of the bonus reﬂect the industry standards for executive responsibilities,
and reﬂect the actual achievement of goals and objectives the Company has set. However, no ﬁxed criteria or
formula is used in determining the amount of a bonus. Rather, the Compensation Committee uses its
discretion to make a determination of the effectiveness of the executive and the extent of the executive’s
contributions to the Company’s success and, based on that determination, recommends bonus amounts to the
full Board. The minimum bonus would generally entail compensation below industry norms and reﬂect poor
performance on objectives, while the maximum bonus would reﬂect superior performance on objectives.

Consistent with this philosophy, 2012 compensation was established to reﬂect executive officer

contributions to the following:

(i) Develop new leaders to provide succession options for executive committee and other

managerial responsibilities.

(ii) Manage the overall business in a manner consistent with shareholder interests, including:

• Managing the cost structure to maintain a margin of proﬁtability consistent with leading asset

management ﬁrms and the overall investment environment.

•

Enhancing the ﬁrm’s overall growth through developing global capabilities and introducing new
products consistent with clients’ interests.

(iii) Set an example for employees of the ﬁrm in business behavior at an exceptional ethical level, and in

compliance with regulatory guidelines.

(iv) Enhance the reputation and asset gathering capability of the ﬁrm, with existing and future clients,

through quality interaction and communication.

In addition to the above guidelines, for other than our CEO, who is responsible for all aspects of our

operations, speciﬁc goals were developed for each executive officer.

53

For Co-Chief Investment Offıcers and Executive Vice Presidents:

(i) Lead the investment team in a manner to promote excellent long term investment performance via

superior investment research.

(ii) Maintain a team-oriented culture that develops and retains the best investment talent.

For President and Head of Marketing and Client Service:

(i) Expand the business development team and exposure of the Pzena brand in the international

marketplace.

(ii) Lead the client team in a manner which promotes the Pzena brand in the broader institutional

investment community and creates lasting client relationships, minimizes client attrition, and raises
assets from new and existing clients.

For Chief Financial Offıcer:

(i) Oversee the ﬁrm’s ﬁnancial reporting process to achieve accurate and effective ﬁnancial statements.

(ii) Enhance the ﬁrm’s controllership and ﬁnancial functions through exemplary leadership.

In determining compensation for all executive officers, the Compensation Committee discusses each

named executive officer to determine appropriate bonus levels.

Principal Components of Executive Compensation

We have established compensation practices that directly link compensation with our performance, as
described below. These practices apply to all of our professionals, including our named executive officers.
Ultimately, ownership in our Company is the primary tool that we use to attract and retain professionals,
including the named executive officers. As of December 31, 2012, our employee members excluding our
former Chief Financial Officer, held approximately 64.0% of the ownership interests in our operating
company, the substantial majority of which is held by our executive officers, together with their estate
planning vehicles.

We provide the following elements of compensation to our named executive officers:

(i)

cash compensation, consisting of a base salary;

(ii) annual cash bonuses;

(iii) mandatory deferred compensation;

(iv) equity-based compensation and related distributions of earnings of our operating company; and

(v) perquisites.

The Compensation Committee has not adopted any formal or informal policies or guidelines for

allocating compensation between currently paid out and long-term compensation, between cash and non-cash
compensation, or among different forms of non-cash compensation. In order to attract and retain qualiﬁed
personnel, compensation and beneﬁts packages, including those of certain of our named executive officers, are
reviewed against relevant industry and geographic peer groups, as compiled by McLagan Partners, a
compensation specialist focusing on the asset management industry, but we do not benchmark against peer
group data. The universe of companies in the McLagan Partners’ analysis includes over 200 publicly traded
asset managers and asset management subsidiaries of larger ﬁnancial services ﬁrms with which we compete,
among others. To the extent applicable, the Compensation Committee reviews McLagan Partners’ data by
position for the entire universe of companies on a summary basis, as well as data by position for certain
subgroups on a summary basis, such as companies with assets under management similar to that of the
Company, and a geographic location similar to that of the Company, rather than speciﬁc compensation data
for individual competitors.

54

It is customary in the investment management industry to provide for base salaries and discretionary

bonuses to be paid to executives upon whom the Company relies for its success. Cash compensation in the
form of a ﬁxed base salary and discretionary cash bonuses constitutes only a portion of the compensation that
we pay our named executive officers.

(i) Base Salary. Consistent with industry practice, the base salaries for our named executive officers
generally account for a relatively small portion of their overall compensation. Pursuant to their
respective Executive Employment Agreements, as amended, and as further discussed below, Messrs.
Pzena, Goetz and Lipsey are each entitled to receive a base salary at the annual rate of $300,000.
For 2012, Messrs. Pzena, Goetz and Lipsey each received a base salary at the annual rate of
$277,500, after a contribution of $22,500 to each of their respective 401(k) accounts.

We have not entered into employment contracts with Mr. Bachman, our Chief Financial Officer, or
either of our Executive Vice Presidents, Messrs. DeSpirito and Peterson. We also did not have an
employment agreement in place with Mr. Martin, who served as our Chief Financial Officer until
September 18, 2012. For 2012, Messrs. DeSpirito and Peterson each received a base salary at the
annual rate of $277,500, after a contribution of $22,500 to each of their respective 401(k) accounts.
Mr. Martin also received a base salary for 2012 at an annual rate of $285,000, after a 401(k)
contribution in the amount of $15,000. For 2012, Mr. Bachman received a base salary at an annual
rate of $300,000 and was not eligible to participate in the Company’s 401(k) plan.

(ii) Cash Bonuses. As further discussed below under ‘‘Executive Employment Agreements,’’ each of

Messrs. Pzena, Goetz and Lipsey may be paid an annual bonus as determined by the Compensation
Committee. In 2012, the Compensation Committee reviewed the aforementioned objectives for the
named executive officers, both by individual position, and as a group. Based on an analysis of the
relevant objectives, the Compensation Committee determined that for 2012, Messrs. Pzena, Goetz,
Lipsey, DeSpirito and Peterson should each receive a total cash bonus in the amount of $1,080,000,
which excludes amounts deferred pursuant to the Bonus Plan. In addition, the Compensation
Committee approved an additional $540,000 payable to Mr. Lipsey (also subject to the Company’s
deferred compensation practices under the Bonus Plan) as a result of compensation modiﬁcations
relating to the years 2010 and 2011. Of this amount, Mr. Lipsey was paid $100,000 in 2012,
consisting of $60,000 in additional cash bonus and $40,000 in the form of deferred compensation
(included in the amount reﬂected for Mr. Lipsey in the ‘‘All Other Compensation’’ column of the
‘‘Summary Compensation Table’’ below). The remaining $440,000 was granted in 2013 in the form
of deferred compensation which will vest ratably over a four year period.

Mr. Pzena’s cash bonus was reduced by $45,097 for certain business expenses not reimburseable
under the Company’s expense reimbursement policy.

The Compensation Committee also determined that Mr. Bachman, our Chief Financial Officer,
should be awarded a cash bonus in the amount of $150,000 for 2012. In addition to the base salary
referenced above, in 2012, Mr. Martin, our former Chief Financial Officer, also received a cash
payment of $300,000 as determined by the Compensation Committee.

(iii) Mandatory Deferred Compensation. The purpose of the Bonus Plan is to enable us to attract,

retain, motivate and reward highly qualiﬁed individuals who provide services to us by, among other
things: (a) providing for grants of bonus compensation; and (b) providing that a portion of the bonus
awards made to certain highly compensated individuals, including the named executive officers, shall
be deferred on a mandatory basis and shall vest, and become payable, over a four-year period. These
amounts are reﬂected in the ‘‘All Other Compensation’’ column of the ‘‘Summary Compensation
Table’’ below.

(iv) Equity Based Compensation and Distribution of Earnings of Our Operating Company. We have

awarded many of our employees, including our named executive officers, ownership interests in our
operating company. Historically, the substantial majority of the remuneration that our CEO and two
Presidents received from us consisted of cash distributions in proportion to their respective
ownership interests of our operating company. These three executive officers have substantial

55

ownership interests in our operating company. They receive distributions in respect of their
membership units in the same amount, and at the same time as distributions are made on all other
membership units, including Class A units, which creates an alignment of their interests with those
of our Class A stockholders. The amounts of these distributions are not shown in the Summary
Compensation Table below because they arise out of their ownership interest in our operating
company. At December 31, 2012, 2011 and 2010, our CEO and two Presidents, owned
approximately 55.3%, 56.2%, and 56.4%, respectively, of the economic interest in the operating
company.

We adopted the PIM LLC 2006 Equity Incentive Plan, effective January 1, 2007, which permits the
grant of a variety of equity awards relating to membership units of our operating company, including
membership units, options to purchase membership units, and other unit-based awards, all of which
are subject to vesting provisions. In order to allow for increased equity ownership in our operating
company by employee members other than our CEO and two Presidents, we implemented in 2012,
an equity incentive program that we intend will result in these other employee members owning up
to 25% of the operating company over the next ten years. In this regard, in 2012, we granted
Phantom Class B Units of our operating company to certain employees, including both of our
Executive Vice Presidents, Messrs. DeSpirito and Peterson. These Phantom Class B Units vest
ratably over a ten year period, are subject to continued employment with us, and are not entitled to
receive dividends or dividend equivalents until vested into Class B Units. These unit-based awards
are reﬂected in the ‘‘Unit Awards’’ column of the ‘‘Summary Compensation Table’’ below. See
‘‘Item 12 — Security Ownership of Certain Beneﬁcial Owners and Management and Related
Stockholder Matters — Equity Incentive Plans — PIM LLC 2006 Equity Incentive Plan’’ for a
description of the PIM LLC 2006 Equity Incentive Plan.

In connection with the commencement of his employment with us, in September 2012, we also
awarded 44,484 shares of restricted Class A common stock pursuant to the 2007 Equity Incentive
Plan to Mr. Bachman, our Chief Financial Officer (as further described below under ‘‘2012 Grants of
Plan-Based Awards’’). These shares are subject to vesting provisions, and are not entitled to receive
dividends or dividend equivalents until vested.

As conditions allow, we intend to continue to award equity-based awards under the PIM LLC 2006
Equity Incentive Plan and the 2007 Equity Incentive Plan as an incentive to encourage ownership.

(v) Perquisites. We offer each of our employees, including each of the named executive officers, our
investment management services, if they place their funds with us, without charging any advisory
fees typically associated with these services; see ‘‘Item 13 — Certain Relationships and Related
Transactions, and Director Independence — Other Related Party Transactions.’’ This beneﬁt is
provided at no incremental cost to us.

Consideration of Prior Shareholder Advisory Vote on Executive Compensation

At our 2011 annual meeting of shareholders, our shareholders overwhelmingly approved, on an advisory

basis, the compensation of our named executive officers. Our Compensation Committee was mindful of the
results of the vote, but did not take any compensation actions speciﬁcally in response to the executive
compensation advisory vote.

As a result of the shareholder vote, on an advisory basis, on the frequency of the advisory vote on
executive compensation, we will not be holding another advisory vote on executive compensation until our
2014 annual meeting of shareholders.

Executive Employment Agreements

On October 30, 2007 we entered into employment agreements with each of Messrs. Pzena, Goetz and
Lipsey. Pursuant to the terms of the individual employment agreements, (i) Mr. Pzena serves as our Chief
Executive Officer, Co-Chief Investment Officer; (ii) Mr. Goetz serves as our President, Co-Chief Investment
Officer; and (iii) Mr. Lipsey serves as our President, and Head of Marketing and Client Service. Under the
terms of the employment agreements, each of Messrs. Pzena, Goetz and Lipsey served for an initial term of

56

three years, ending October 30, 2010, subject to automatic, successive one-year extensions thereafter unless
either party gives the other 60 days prior notice that the term will not be extended. Since then, these
agreements have been automatically extended for three successive one-year extensions through
October 30, 2013.

In order to be consistent with the philosophy and objectives of the Company’s executive compensation
program, as outlined above, on November 1, 2012, we entered into amended employment agreements with
each of Messrs. Pzena, Goetz and Lipsey, in order to eliminate ‘‘guaranteed payments’’ to these executive
officers. The ‘‘guaranteed payments’’ consisted of a base salary at the annual rate of $300,000, as well as a
performance component not to exceed $2,700,000 for any single ﬁscal year. Under their amended employment
agreements, our CEO and two Presidents will continue to receive an annual base salary of $300,000; however
any annual bonus amount will be solely determined by our Compensation Committee and is subject to the
provisions of our Bonus Plan. We have not entered into an employment agreements with Messrs. Bachman,
DeSpirito and Peterson.

The following is a description of certain restrictive covenants by which our executive officers, as well as

other employee members, have agreed to be bound.

Non-Competition

Pursuant to the terms of the amended and restated operating agreement of Pzena Investment

Management, LLC, all employees who are members of Pzena Investment Management, LLC have agreed not
to compete with us during the term of their employment with us. In addition, each of Messrs. Pzena, Goetz
and Lipsey have agreed not to compete with us for a period of three years following the termination of his
employment. Other employee members of Pzena Investment Management, LLC, including Messrs. DeSpirito
and Peterson, have agreed not to compete with us for a period of up to six months following the termination
of his or her employment, if the employee member and his or her permitted transferees collectively hold at
that time more than 1.0% of all the Class B units outstanding, and if he or she continues to receive
compensation during this non-competition period.

Non-Solicitation

Messrs. Pzena, Goetz and Lipsey have agreed not to solicit our clients or any other employees of Pzena

Investment Management, LLC during the term of their employment and for three years thereafter. Other
employee members of Pzena Investment Management, LLC, including Messrs. DeSpirito and Peterson, are
subject to similar non-solicitation provisions during the term of their employment and 18 months thereafter.

Forfeiture of Class B Units

Unless otherwise determined by our Board of Directors, in its sole discretion, or previously agreed to by

the employee member, his or her permitted transferees and us:

•

•

if an employee member (including our executive officers) is terminated for cause, the employee
member and any of his or her permitted transferees would forfeit all of his, her or their unvested
Class B units, if any, and a number of vested Class B units that is equal to 75% of the number of
vested Class B units collectively held by the employee member and his or her permitted transferees,
in each case as of the date of the termination of his or her employment, and

if our CEO or two Presidents breach any of the non-competition or non-solicitation covenants
described above, then he and any of his permitted transferees would forfeit all of his, her or their
unvested Class B units, if any, and an aggregate number of vested Class B units that is equal to 50%
of the number of vested Class B units collectively held by him and his or her permitted transferees,
in each case as of the earlier of the date of his breach or the termination of his employment. If an
employee member, including our Executive Vice Presidents, breach any of the non-competition or
non-solicitation covenants, then he and any of his permitted transferees would forfeit all of his, her

57

or their unvested Class B units, if any, and an aggregate number of vested Class B units that is
equal to 25% of the number of vested Class B units collectively held by him and his or her
permitted transferees, in each case as of the earlier of the date of his breach or the termination of
his employment.

Executive Compensation

The following table sets forth certain summary information concerning compensation provided by Pzena
Investment Management, LLC during the ﬁscal years ended December 31, 2012, 2011 and 2010 to our Chief
Executive Officer, our Chief Financial Officer, our two Presidents, our two Executive Vice Presidents and our
former Chief Financial Officer, whom we refer to collectively as the named executive officers. The amounts
set forth under the Stock and Unit Awards and columns are calculated in accordance with the rules of the SEC
and may not reﬂect actual amounts received by the named executive officer.

Summary Compensation Table

Name and Principal Position

Year

Salary($)(1)

Bonus($)(2)

Stock
Awards($)(3)

Unit
Awards($)(4)

All Other

Compensation($)(5) Total($)

Richard S. Pzena, .

. .
Chief Executive Officer,
Co-Chief Investment Officer

.

.

.

.

.

.

. 2012
2011
2010

$277,500
300,000
300,000

$1,034,903
999,731
865,642

—
—
—

Gary J. Bachman,

.
Chief Financial Officer(6)

.

.

.

.

.

.

.

. 2012

$300,000

$ 150,000

$233,096

.

John P. Goetz,.

.
President, Co-Chief
Investment Officer

.

.

William L. Lipsey,

.
President, Marketing
and Client Services

.

. .

.

.

.

.

. 2012
2011
2010

.

.

.

.

.

.

2012
2011
2010

$277,500
300,000
300,000

$277,500
300,000
300,000

Antonio DeSpirito, III,

.
Executive Vice President(7)

.

.

Michael D. Peterson, .

.
Executive Vice President(7)

.

.

.

.

.

. 2012
2011

$277,500
300,000

.

.

. 2012
2011

$277,500
300,000

$1,080,000
1,050,000
930,000

$1,140,000
695,250
600,000

$1,080,000
1,050,000

$1,080,000
1,050,000

Greg S. Martin,

.
.
.
Former Chief Financial Officer(9)

.

.

.

.

.

.

. 2012
2011
2010

$285,000
300,000
300,000

$ 300,000

235,002(10)
206,673(11)

—
—
—

—
—
—

—
—

—
—

—
—
—

—
—
—

—

—
—
—

—
—
—

$3,000,000
—

$3,000,000
—

—
76,554
39,227

$362,436
316,487
227,095

$1,674,839
1,616,218
1,392,737

—

$ 683,096

$392,500
350,000
270,000

$432,500
131,750
100,000

$392,500
350,000

$392,500(8)
350,000(8)

$ 16,979
—
—

$1,750,000
1,700,000
1,500,000

$1,850,000
1,127,000
1,000,000

$4,750,000
1,700,000

$4,750,000
1,700,000

$ 601,979
611,556
545,900

(1) Amounts represent payments of salary made to the named executive officers pursuant to their respective employment agreements,
with the exceptions of Messrs. Bachman, DeSpirito, Peterson and Martin, with whom we have not entered into employment
agreements.

(2) Amounts represent discretionary bonuses paid to the named executive officers as further discussed above under ‘‘Compensation

Discussion and Analysis — Principal Components of Executive Compensation — Cash Bonuses.’’

(3) Amounts reﬂected represent the aggregate grant date fair value of restricted Class A common stock, calculated in accordance with
the Stock Compensation Topic of the FASB ASC. For a discussion of the assumptions utilized in calculating grant date fair value,
see Note 3 to our consolidated ﬁnancial statements beginning on page F-14 of this Annual Report on Form 10-K.

(4) Amounts reﬂected represent the aggregate grant date fair value of Class B unit based awards of our operating company, on the date

of grant, calculated in accordance with the Stock Compensation Topic of the FASB ASC. In December 2012 we granted phantom
operating company Class B units under the 2006 Equity Incentive Plan to certain employee members including Messrs. DeSpirito
and Mr. Peterson. Amounts reﬂected represent the aggregate grant date fair value of these phantom units, calculated in accordance
with the Stock Compensation Topic of the FASB ASC. These units vest ratably over ten years, are subject to continued employment
with the Company and are not entitled to receive dividends or dividend equivalents until vested. For a discussion of the
assumptions utilized in calculating grant date fair value, see Note 3 to our consolidated ﬁnancial statements beginning on page F-14
of this Annual Report on Form 10-K.

(5)

Includes 401(k) contributions plus deferred compensation associated with the Bonus Plan. On January 1, 2007, we instituted the
Bonus Plan, pursuant to which employees whose cash compensation is in excess of $600,000 per year are required to defer a
portion of their compensation in excess of this amount. Deferred amounts contributed by named executive officers may be credited

58

to an investment account, take the form of Phantom Class B units, or be invested in money market funds, at the employee’s
discretion. Amounts shown represent the cash compensation deferred. Pursuant to the plan, each deferred amount vests as follows:
(i) 25% on the ﬁrst anniversary; (ii) 50% on the second anniversary; (iii) 75% on the third anniversary; and (iv) 100% on the fourth
anniversary, provided that the named executive officer continues in service with us.

With the exception of Mr. Peterson, the amounts shown do not represent Phantom Class B units, but rather reﬂect deferrals in one
of the other options mentioned above.

Beginning in 2012, the Company initiated an employer sponsored 401(k) contribution plan. Amounts contributed in 2012 were
$22,500 for Messrs. Pzena, Goetz, Lipsey, DeSpirito and Peterson. Mr. Martin received $15,000 in 2012.

(6) Mr. Bachman became our CFO on September 18, 2012.

(7) Messrs. DeSpirito and Peterson became our Executive Vice Presidents in February 2011.

(8) Mr. Peterson elected to receive his deferred compensation for 2012 and 2011 in the form of Phantom Class B units, as described in

footnote 5 above. These amounts represent the value of 68,518 and 80,831 Phantom Class B units issued on December 31, 2012
and 2011 at $5.40 and $4.33 per unit, respectively.

(9) Mr. Martin ceased to serve as our Chief Financial Officer in September of 2012.

(10)

(11)

Includes the grant of a $65,002 restricted cash-based award made to Mr. Martin on December 21, 2011, of which $21,668 vested
immediately, and $43,334 that was deferred, and paid during 2012.

Includes the grant of a $66,673 restricted cash-based award made to Mr. Martin on December 20, 2010, of which $33,340 vested
immediately, and $33,333 was deferred, and paid in two equal annual installments during 2011 and 2012.

2012 Grants of Plan-Based Awards

The following table sets forth information concerning stock grants and unit-based awards made in 2012

to our named executive officers.

Grant Date
Name
September 18, 2012
Gary J. Bachman . . . . . . . . . . .
Antonio DeSpirito, III
. . . . . . . December 20, 2012
Michael D. Peterson . . . . . . . . . December 20, 2012

All Other Stock Awards:
Number of Shares of Stock
or Units (#)
44,484(2)
779,221(3)
779,221(3)

Grant Date Fair Value
of Stock or
Unit Awards ($)(1)
$ 233,096
$3,000,000
$3,000,000

(1) Amounts reﬂected represent the fair value of stock grants and unit-based awards, on the date of grant, calculated in accordance with
the Stock Compensation Topic of the FASB ASC. For a discussion of the assumptions utilized, see Note 3 to our consolidated
ﬁnancial statements beginning on page F-14 of this Annual Report.

(2)

(3)

Represents shares of restricted Class A common stock (the ‘‘Shares’’) of the Company awarded under the 2007 Equity Incentive
Plan on September 18, 2012. Of these 44,484 Shares, 7,414 vest on January 1, 2013; 18,535 Shares vest on January 1, 2014; and
18,535 Shares vest on January 1, 2015. The Shares are not entitled to receive dividends or dividend equivalents until vested.
Although the Shares were granted pursuant to the 2007 Equity Incentive Plan, we do not consider these awards to have been made
pursuant to an ‘‘equity incentive plan,’’ as such term is deﬁned in the rules of the SEC, since vesting of the Shares is not tied to our
Company’s or our stock’s performance.

Represents Phantom Class B Units (the ‘‘Units’’) of the operating company awarded under the 2006 Equity Incentive Plan on
December 20, 2012. These Units vest ratably over ten years, are subject to continued employment with the Company and are not
entitled to receive dividends or dividend equivalents until vested. Although the Units were granted pursuant to the 2006 Equity
Incentive Plan, we do not consider these awards to have been made pursuant to an ‘‘equity incentive plan,’’ as such term is deﬁned
in the rules of the SEC, since vesting of the Units is not tied to our Company’s or our stock’s performance.

We do not include in this table Phantom Class B units issued to Mr. Peterson in connection with his
2012 mandatory deferral of a portion of his compensation, pursuant to the Bonus Plan. However, information
related to the issuance of these Phantom Class B units is included under the ‘‘All Other Compensation’’
column of the ‘‘Summary Compensation Table’’ above.

59

Outstanding Equity Awards at 2012 Fiscal Year-End

The following table sets forth information relating to unexercised options, and unvested stock and units,

held by any named executive officer as of December 31, 2012.

Option Awards

Stock Awards

Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(1)

Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable

200,000
—
200,000
200,000
175,000
95,000
148,301
250,000
—
—
159,869
—
—
—
—
—
10,000

—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—

Option
Exercise
Price ($)(2)

Option
Expiration
Date

$ 4.22 December 31, 2018

— —

4.22 December 31, 2018
4.22 December 31, 2018

January 1, 2017
January 1, 2018

13.53
11.40
4.22 December 31, 2018
8.00 December 21, 2019

— —
— —

4.22 December 31, 2018

— —
— —
— —
— —
— —

4.22 December 31, 2018

Number of
Shares
or Units of
Stock That
Have Not
Vested (#)

—
44,484(4)
—
—
—
—
—
—
11,905(6)(7)
779,221(8)

—
10,000(6)(10)
23,811(6)(11)
60,624(6)(12)
779,221(8)
68,518(6)(13)
—

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)(3)

—

$ 240,214(5)

—
—
—
—
—
—
64,287
4,207,793(9)

—
54,000
128,579
327,370
4,207,793(9)
369,997
—

Name

Grant Date

.
Richard S. Pzena .
.
Gary J. Bachman .
.
John P. Goetz .
.
.
William L. Lipsey
.
Antonio DeSpirito, III

. December 31, 2008
. September 18, 2012
. December 31, 2008
. December 31, 2008

January 1, 2007
January 1, 2008
December 31, 2008
December 21, 2009
December 31, 2010
December 20, 2012
Michael D. Peterson . December 31, 2008
December 31, 2009
December 31, 2010
December 31, 2011
December 20, 2012
December 31, 2012
Gregory S. Martin(14) . December 31, 2008

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Except for Mr. DeSpirito’s December 21, 2009 grant of 250,000 options to acquire the Company’s Class A common stock,
represents options to purchase Class B units of our operating company.

Except for the fair market value of Mr. DeSpirito’s December 21, 2009 grant of 250,000 options to acquire the Company’s Class A
common stock (which is the fair market value of a share of Class A common stock on the date of grant, as determined by the
committee administering the 2007 Equity Incentive Plan), represents the fair market value of a Class B unit on the date of grant, as
determined by the committee administering the PIM LLC 2006 Equity Incentive Plan.

Based on the NYSE closing price of $5.40 for the Company’s Class A common stock on December 31, 2012. The fair value of
operating company Class B units is determined by reference to the closing price of our Class A common stock since Class B units
are exchangeable for shares of our Class A common stock on a one-for-one basis.

Represents restricted shares of Class A common stock awarded under the 2007 Equity Incentive Plan on September 18, 2012. Of
these 44,484 restricted shares, 7,414 vest on January 1, 2013; 18,535 vest on January 1, 2014; and 18,535 vest on January 1, 2015.
The restricted shares are not entitled to receive dividends or dividend equivalents until vested.

The market value of these restricted Class A common stock, which are not entitled to receive dividends or dividend equivalents
until vested, does not reﬂect the discount that would be applied to such restricted shares as they are not entitled to receive
dividends.

Represents Phantom Class B units issued in connection with the named executive officer’s mandatory deferral of his Restricted
Amount pursuant to the Bonus Plan, see ‘‘Item 12 — Security Ownership of Certain Beneﬁcial Owners and Management and
Related Stockholder Matters — Bonus Plan — Mandatory Cash Deferral of Restricted Amounts’’ for a discussion of Restricted
Amounts. These Phantom Class B units vest ratably over four years. Upon vesting, each Phantom Class B unit becomes a Class B
unit of the operating company.

Represents Phantom Class B units, the next installment of which will vest on December 31, 2013, with the remaining 5,953
Phantom Class B units vesting on December 31, 2014.

Represents Phantom Class B units of our operating company awarded under the PIM LLC 2006 Equity Incentive Plan on
December 20, 2012. These Phantom Class B units vest ratably over ten years, beginning on December 20, 2013, are subject to
continued employment with the Company, and are not entitled to receive dividends or dividend equivalents until vested.

The market value of these Phantom Class B units, which are not entitled to receive dividends or dividend equivalents until vested,
does not reﬂect the discount that would be applied to such phantom units, as they are not entitled to receive dividends.

60

(10) Represents Phantom Class B units which vest on December 31, 2013.

(11) Represents Phantom Class B units, the next installment of which will vest on December 31, 2013, with the remaining 11,905

Phantom Class B units vesting on December 31, 2014.

(12) Represents Phantom Class B units, of which 20,207 will vest on December 31, 2013, 20,207 will vest on December 31, 2014, and

the remaining 20,210 will vest on December 31, 2015

(13) Represents Phantom Class B units which vest ratably over four years, beginning on December 31, 2013.

(14) Mr. Martin ceased to serve as our Chief Financial Officer in September of 2012.

2012 Stock And Units Vested

The following table sets forth information relating to the vesting of units during 2012.

Name
Antonio DeSpirito, III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael D. Peterson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gregory S. Martin(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Shares or
Units
Acquired on
Vesting (#)
5,952(1)
42,111(1)
13,286(4)

Value Realized on
Vesting ($)
$ 32,141(2)
227,399(2)
71,744(5)

(1)

(2)

Represents Phantom Class B units which vested on December 31, 2012 and became Class B units of our operating company. The
Phantom Class B units were issued in connection with the named executive officer’s mandatory deferral of his Restricted Amount,
pursuant to the Bonus Plan.

Based on the closing price of the Company’s Class A common stock of $5.40 per share on December 31, 2012. The value realized
at vesting for operating company Class B units is determined by reference to the closing price of our Class A common stock since
Class B units are exchangeable for shares of our Class A common stock on a one-for-one basis.

(3) Mr. Martin ceased to serve as our Chief Financial Officer in September of 2012.

(4)

(5)

Represents Class B units of our operating company which vested on November 23, 2012.

Based on the closing price of the Company’s Class A common stock of $5.40 per share on November 23, 2012. The value realized
at vesting for operating company Class B units is determined by reference to the closing price of our Class A common stock since
Class B units are exchangeable for shares of our Class A common stock on a one-for-one basis.

2012 Non-Qualiﬁed Deferred Compensation

The following table sets forth information relating to non tax-qualiﬁed deferral of compensation by the

named executive officers for the year ended December 31, 2012.

Name
Richard S. Pzena . . . . . . .
John P. Goetz . . . . . . . . .
William L. Lipsey . . . . . .
Antonio DeSpirito, III.
. . .
Michael D. Peterson . . . . .

$

Executive
Contributions
for Year Ended
December 31, 2012
($)(1)(2)
339,936
370,000
410,000
370,000
370,000

$

Aggregate Earnings
for Year Ended
December 31, 2012
($)(3)
125,572
72,692
66,101
58,073
146,099

$

Aggregate
Withdrawals/
Distributions
($)
304,652
296,388
201,975
190,063
227,399

$

Aggregate Balance
at Year Ended
December 31, 2012
($)(4)
897,469
921,649
716,555
821,195
879,946

(1) On January 1, 2007, we instituted the Bonus Plan, pursuant to which employees who earn in excess of $600,000 per year in cash

compensation are required to defer a portion of their compensation in excess of this amount. Deferred amounts contributed by
named executive officers may be credited to an investment account, take the form of phantom Class B units, or be invested in
money market funds, at each named executive officer’s discretion. See ‘‘Item 12 — Security Ownership of Certain Beneﬁcial
Owners and Management and Related Stockholder Matters — Bonus Plan.’’ The amounts in this column reﬂect the deferred portion
of our named executive officer’s compensation.

61

(2) All amounts reported in this column are included in the ‘‘All Other Compensation’’ column for 2012 of the Summary

Compensation Table above.

(3) Amounts reﬂect earnings on the total value of non-qualiﬁed deferred compensation.

(4)

Includes amounts reported in previous years, plus or less any gains or losses experienced on such previous contributions in prior
years, less any withdrawals and distributions.

Pension Beneﬁts

As of December 31, 2012, none of the named executive officers was a participant in any deﬁned beneﬁt
pension plan, whether tax-qualiﬁed or supplemental, which was maintained by us, our operating company, or
any of its affiliates.

Termination or Change of Control

Neither we nor our operating company maintain any termination or change of control programs.

However, the PIM LLC 2006 Equity Incentive Plan and the 2007 Equity Incentive Plan both provide that the
Compensation Committee will have the discretion to accelerate the vesting of awards granted thereunder upon
the occurrence of certain events, including a change of control of us. Also, pursuant to the tax receivable
agreement, as further described in ‘‘Item 13 — Certain Relationships and Related Transactions, and Director
Independence — Tax Receivable Agreement,’’ if certain change of control events were to occur, we would be
obligated to make early termination payments to the parties to such tax receivable agreement (including the
named executive officers). Furthermore, the Pzena Investment Management, Inc. Non-Employee Director
Deferred Compensation Plan provides that each plan participant’s account shall be distributed in shares of our
Class A common stock immediately prior to a change in control of us, as further described below.

2012 Non-Employee Director Compensation

The following table sets forth information concerning non-employee director compensation for the year

ended December 31, 2012. It is our policy not to pay director compensation to directors who are also our
employees.

Pursuant to the Pzena Investment Management, Inc. Nonemployee Director Deferred Compensation Plan,
described below, each non-employee director was given the option to defer either all or a portion of his 2012
annual retainer of $70,000 in the form of deferred stock units, or ‘‘Phantom Stock.’’ With respect to any
non-deferred portion of the annual retainer, each non-employee director was given the option to receive either
100% in cash, 100% in shares of our Class A common stock, or 50% payable in cash and 50% in shares of
our Class A common stock. In 2012, all non-employee directors elected to receive their 2012 annual retainers
in deferred stock units.

Name
Steven M. Galbraith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joel M. Greenblattot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard P. Meyerowich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald W. Tysoe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock
Awards ($)(1)
70,000
$
70,000
70,000
70,000

$

Total ($)

70,000
70,000
70,000
70,000

(1) On January 1, 2012, each non-employee director was awarded 16,166 deferred stock units, each of which is the economic

equivalent of one share of our Class A common stock. We valued these deferred stock units at $4.33 each, the closing price of our
Class A common stock on December 31, 2011. The shares of Phantom Stock become payable in a single distribution of shares of
our Class A common stock, at such time as elected by the non-employee director when the deferral was made.

62

Pzena Investment Management, Inc. Non-Employee Director Deferred Compensation Plan

On July 21, 2009, we adopted the Pzena Investment Management, Inc. Nonemployee Director Deferred

Compensation Plan, or the Director Plan. The Director Plan is an ‘‘unfunded’’ deferred compensation
arrangement designed to attract and retain individuals to serve as non-employee directors of the Company by
allowing such individuals to defer payment of all, or a portion, of their director fees into deferred stock units,
or Phantom Stock, the value of which is based on the value of shares of Class A common stock of the
Company.

Administration. The Director Plan is administered by the Administrator, as deﬁned in the Director Plan.
The Compensation Committee of the Board serves as the Administrator. The Administrator may delegate such
duties as it determines, in its discretion, to be necessary or desirable for the administration of the Director
Plan.

Participation. Any nonemployee director may elect to have all or part of the compensation otherwise
payable to the director deferred and paid at the time, and in the manner, prescribed in the Director Plan. A
nonemployee director wishing to participate in the Director Plan shall make deferrals of compensation no later
than December 31 of the Director Plan year immediately preceding the Director Plan year in respect of which
such compensation may be earned. Deferrals may be denominated in an aggregate dollar amount, or as a
percentage of compensation, and shall be allocated to an account. The Company shall establish a separate
account on its books in the name of each participant. Notwithstanding the foregoing, the Administrator may
allow a nonemployee director whose service on the Board begins during any Director Plan year to make a
deferral election prior to, or within, 30 days after the commencement of such nonemployee director’s service
on the Board with respect to compensation to be earned following the date on which such election is made.
Elections to defer compensation under the Director Plan shall be made on a year-to-year basis.

Distributions under the Director Plan shall be made in a single distribution of shares of our Class A
common stock at such time as elected by the participant when the deferral was made. At the time the deferral
election is made, a nonemployee director may elect to receive such participant’s account upon the earlier to
occur of: (i) the date of the participant’s death; (ii) the date the participant becomes disabled (as deﬁned in
Section 409A(a)(2)(C) of the Internal Revenue Code); (iii) the date of the participant’s separation from service
with the Company for any reason other than death; and (iv) a date speciﬁed by the participant, provided that
the date is not less than ﬁve years following the end of the calendar year to which the deferral relates.

Notwithstanding any other provision of the Director Plan to the contrary, in the event of a separation
from service during any Director Plan year, no compensation as yet unpaid with respect to such Director Plan
year (or any future Director Plan year) may be deferred under the Director Plan.

Method of Deferral of Compensation. Compensation deferred under the Director Plan shall be deferred

in the form of units equal to the number of shares of our Class A common stock hypothetically purchased
with deferred compensation. Compensation deferred under the Director Plan for any Director Plan year shall
be recorded on the ﬁrst day of the Director Plan year, subject to forfeiture as set forth in the Director Plan.
The number of units to be recorded with respect to each amount of deferred compensation allocated to the
account shall be equal to: (i) in the case of compensation that otherwise would have been paid in cash, the
quotient obtained by dividing the amount of deferred cash by the fair market value of one share of our Class
A common stock on the ﬁrst day of the Director Plan year with respect to which the deferred compensation
relates, and (ii) in the case of compensation that otherwise would have been paid in shares of stock, the
number of shares of our Class A common stock that would have been issued to the participant during such
Director Plan year absent deferral under the Director Plan. The Administrator’s determination of the value of a
unit shall be binding on the Company and its successors, the participants and their beneﬁciaries.

In the event of a separation from service, any amount deferred under the Director Plan with respect to
the calendar quarter in which occurs the effective date of such separation from service, and with respect to the
remainder of the applicable Director Plan year (including any dividend equivalents credited thereto), shall be
immediately cancelled and forfeited. On the last day of each calendar quarter, amounts deferred under the
Director Plan on the ﬁrst day of the applicable Director Plan year shall become nonforfeitable and shall be
distributed in accordance with the terms of the Director Plan.

63

Additional units shall be credited to a participant’s account as of each date on which cash dividends

and/or special dividends and distributions are paid with respect to our Class A common stock (a ‘‘Dividend
Date’’), provided that at least one unit is credited to such participant’s account as of the record date for such
dividend or distribution. The number of units to be credited to a participant’s account under the Director Plan
as of any dividend date shall equal the quotient obtained by dividing: (i) the product of (a) the number of the
units credited to such account on the record date for such dividend or distribution, and (b) the per share
dividend (or distribution value) payable on such dividend date by (ii) the fair market value of a share of our
Class A common stock as of such dividend date.

Once an election to defer compensation has become irrevocable, a participant may, with the prior consent

of the Administrator, modify the time and form of payment of an amount previously deferred under the
Director Plan, subject to the certain conditions set forth in the Director Plan.

Distribution of Deferred Compensation. The Company shall pay to the participant (or the participant’s

beneﬁciary or estate, as applicable) the non-forfeitable balance credited to such participant’s account in a
single distribution of shares on the ﬁrst date of the calendar month following the date or event speciﬁed for
such distribution by the participant. Distributions shall be made in the form of shares of our Class A
common stock.

Notwithstanding any other provision of the Director Plan to the contrary, the Administrator in its sole
discretion may at any time authorize the distribution of shares of our Class A common stock of part or all of
the participant’s account to such participant prior to the time such amount would otherwise be payable
pursuant to the provisions of the Director Plan, in any case where the Administrator determines that the
participant has proved an unforeseeable emergency, as deﬁned under Section 409A(a)(2)(B)(ii) of the Internal
Revenue Code.

Notwithstanding anything in the Director Plan to the contrary, each participant’s account shall be
distributed in shares of our Class A common stock, immediately prior to a change in control, subject to the
actual occurrence of the change in control, provided that the event constituting such change in control
constitutes a change in the ownership or effective control of a corporation, or a change in the ownership of a
substantial portion of the assets of a corporation, in either case, within the meaning of Section 409A of the
Internal Revenue Code.

Notwithstanding anything in the Director Plan to the contrary, to the extent necessary to avoid the

application of an accelerated or additional tax under Section 409A of the Internal Revenue Code, amounts that
would otherwise be payable pursuant to the Director Plan during the six-month period immediately following
the participant’s separation from service shall instead be paid on the ﬁrst business day after the date that is six
months following the participant’s separation from service (or upon the participant’s death, if earlier).

The Company intends the following with respect to this Director Plan: (i) that participants will not
recognize gross income as a result of participation in the Director Plan unless and until and then only to the
extent that distributions are received; (ii) that the Director Plan shall be an ‘‘unfunded’’ plan for purposes of
the Employee Retirement Income Security Act of 1974, as amended; and (iii) the design and administration of
the Director Plan should comply with the requirements of Section 409A of the Internal Revenue Code.
Notwithstanding the foregoing, no nonemployee director, participant, former participant, beneﬁciary or any
other person shall have any recourse against the Company, the Administrator or any of their affiliates,
employees, agents, successors, assigns or other representatives if any of those conditions are determined not to
be satisﬁed.

The number of units allocated to accounts shall be adjusted by the Administrator, as it deems appropriate,
in the event that the Administrator 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 units such that an adjustment is appropriate in order to prevent dilution or enlargement of
the rights of participants under the Director Plan.

The right of any participant to receive future distributions under the Director Plan shall be an unsecured

claim against the general assets of the Company

64

Termination and Amendment Of The Director Plan. The Director Plan shall remain in effect until such

time as it is terminated by the Company in accordance with the terms of the Director Plan and applicable law.
No participant nor the Administrator shall have the power to terminate the Director Plan except as provided in
Section 409A of the Internal Revenue Code. Upon termination of the Director Plan, all accounts shall be paid
in shares of our Class A common stock to each participant or, if applicable, such participant’s beneﬁciary or
estate. The Company shall use its commercially reasonable best efforts to comply with the provisions of
Section 409A of the Internal Revenue Code with respect to termination of the Director Plan in order to ensure
that amounts payable in connection with termination of the Director Plan shall not be subject to tax under
Section 409A of the Internal Revenue Code. The Director Plan may be amended from time to time by the
Administrator, provided that no amendment of the Director Plan shall have a material adverse effect on any
participant’s account under the Director Plan without the prior written consent of such participant.

65

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66

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Beneﬁcial Ownership

The following table sets forth information regarding the beneﬁcial ownership of our Class A common

stock and Class B common stock by the following persons as of March 1, 2013 (except as otherwise noted):

•

•

•

•

each of our named executive officers;

each of our directors;

all of our directors and executive officers as a group; and

each person or group of affiliated persons known to us to beneﬁcially own more than 5% of our
Class A common stock or Class B common stock.

Beneﬁcial ownership and percentage ownership are determined in accordance with the rules of the SEC.

This information does not necessarily indicate beneﬁcial ownership for any other purpose. In computing the
number of shares beneﬁcially owned by a person and the percentage ownership of that person, shares of
common stock underlying options and warrants held by that person that are exercisable within 60 days of
March 1, 2013 are considered to be outstanding. However, the numbers in the percent of combined voting
power column do not give effect to any options or warrants held by the persons listed in the table. To our
knowledge, except as indicated in the footnotes to this table and subject to community property laws, where
applicable, the persons named in the table have sole voting and investment power with respect to all shares of
our common stock shown as beneﬁcially owned by them.

The address for those individuals for which an address is not otherwise indicated is: c/o Pzena

Investment Management, Inc., 120 West 45th Street, New York, New York 10036.

Name of Beneﬁcial Owner

Richard S. Pzena . . . . . . . . . . . . . . . . .
Gary J. Bachman . . . . . . . . . . . . . . . . .
John P. Goetz. . . . . . . . . . . . . . . . . . . .

William L. Lipsey. . . . . . . . . . . . . . . . .
Antonio DeSpirito, III . . . . . . . . . . . . . .

Michael D. Peterson . . . . . . . . . . . . . . .
Steven M. Galbraith . . . . . . . . . . . . . . .

Joel M. Greenblatt . . . . . . . . . . . . . . . .

Richard P. Meyerowich . . . . . . . . . . . . .

Ronald W. Tysoe . . . . . . . . . . . . . . . . .
Gregory S. Martin(11)
All executive officers and directors as a

. . . . . . . . . . . . . .

Class A Shares
Beneﬁcially Owned(1)

Class B Shares
Beneﬁcially Owned(1)

Number of
Shares

Percent(2)

Number of
Shares

Percent(3)

106
7,414
—

—

735,447(6)
320,000
63,807(7)
62,576(8)
63,039(10)
56,935(7)
—

*
*

—

—

6.5
2.9
1.0

1.0
1.0

1.0

—

24,528,620(4)(5)

—

5,951,755(4)(5)
5,437,910(4)(5)
1,186,907(5)
2,305,207(4)(5)

—

247,708(9)

—

—
53,724(5)

45.5
—

11.1
10.1

2.2
4.3

—

—

—

*

*

Percent of
Combined
Voting
Power(1)

43.5
*

10.3
9.4

1.5
4.0

*

*
*

*

*

group (11 persons). . . . . . . . . . . . . . .

1,309,324(12)

11.4

39,711,831(13)

72.4

69.2(14)

A. Rama Krishna(15)

18 Sidney Lanier Lane
Greenwich, CT 06831 . . . . . . . . . . . .

Sobie Investments LLC(15)

4 East 66th Street
5th Floor
New York, NY 10065 . . . . . . . . . . . .

177,462

1.6

4,586,539(4)

8.5

8.3

868,991

7.9

—

—

*

67

Class A Shares
Beneﬁcially Owned(1)

Class B Shares
Beneﬁcially Owned(1)

Number of
Shares

Percent(2)

Number of
Shares

Percent(3)

Percent of
Combined
Voting
Power(1)

Name of Beneﬁcial Owner
Cacti Asset Management, LLC(16)
6355 Peachtree Road, Suite 101
Atlanta, GA 30319 . . . . . . . . . . . . . .

DePrince, Race & Zol1o, Inc.(17)

250 Park Avenue South, Suite 250
Winter Park, FL 32789 . . . . . . . . . . .

Penn Capital Management(18)

Navy Yard Corporate Center
Three Crescent Drive, Suite 400
Philadelphia, PA 19112 . . . . . . . . . . .

Punch & Associates Investment

Management, Inc.(19)
3601 West 76th Street, Suite 225
Edina, Minnesota 55435 . . . . . . . . . .

The Vanguard Group(20)

1,003,750

9.1

778,634

7.0

561,219

5.1

1,049,308

9.5

100 Vanguard Boulevard
Malvern, PA 1955 . . . . . . . . . . . . . .

646,288

5.8

—

—

—

—

—

—

—

—

—

—

*

*

*

*

*

*

(1)

(2)

(3)

(4)

Less than 1%

Each share of our Class A common stock is entitled to one vote per share and each share of our Class B common stock is entitled
to ﬁve votes per share, for so long as the number of shares of our Class B common stock outstanding constitutes at least 20% of
the total number of shares of our common stock outstanding.

Based on 11,066,070 shares of Class A common stock outstanding as of March 1, 2013.

Based on 53,676,316 shares of Class B common stock outstanding as of March 1, 2013.

Includes the number of shares of our Class B common stock listed below that are directly held by certain trusts established for
estate planning purposes by the named executive officers below. In the case of certain trusts established by Mr. Pzena, Mr. Pzena
may be deemed to beneﬁcially own the shares directly held by these trusts because he may be considered to share dispositive power
over securities held by these trusts, along with their respective trustees, pursuant to the terms of the applicable trust agreements.
With the exception of the trust for which Mr. Peterson is a trustee and which owns 210,000 shares of Class B common stock, each
of the named executive officers listed below disclaims beneﬁcial ownership of the number of shares of Class B common stock and
the corresponding Class B Units (including the shares of Class A common stock underlying these Class B Units) held by the
applicable trusts.

Named Executive Officer

Number of Shares of Class B Common Stock Held by Trust(s)

Richard S. Pzena
John P. Goetz
William L. Lipsey
Michael D. Peterson
A. Rama Krishna

6,258,600
708,970
1,271,420
420,000
625,500

(5)

Includes options to purchase the number of Class B units set forth below opposite the named executive officer:

Named Executive Officer

Options to Acquire Class B Units

Richard S. Pzena
John P. Goetz
William L. Lipsey
Antonio DeSpirito, III
Michael D. Peterson
Gregory S. Martin

200,000
200,000
200,000
418,301
159,869
10,000

(6)

Includes options to purchase 250,000 shares of Class A common stock which are currently exercisable.

68

(7)

(8)

(9)

(10)

Includes 40,347 shares of Phantom Stock (inclusive of additional Phantom Stock issued in connection with dividend payments
made thereon), each share of which is the economic equivalent of one share of our Class A common stock. The shares of Phantom
Stock become payable in a single distribution of an equal number of shares of Class A common stock at such time as elected by
each non-employee director at the time such deferral was elected pursuant to Section 3.4 of the Director Plan.

Includes 40,116 shares of Phantom Stock (inclusive of additional Phantom Stock issued in connection with dividend payments made
thereon), each share of which is the economic equivalent of one share of our Class A common stock. The shares of Phantom Stock
become payable in a single distribution of an equal number of shares of Class A common stock at such time as elected by each
non-employee director at the time such deferral was elected pursuant to Section 3.4 of the Director Plan.

Includes 82,200 shares of Class B common stock held directly by family members of Mr. Greenblatt. Mr. Greenblatt disclaims
beneﬁcial ownership of all shares of Class B common stock directly held by his family members.

Includes 40,579 shares of Phantom Stock (inclusive of additional Phantom Stock issued in connection with dividend payments
made thereon), each share of which is the economic equivalent of one share of our Class A common stock. The shares of Phantom
Stock become payable in a single distribution of an equal number of shares of Class A common stock at such time as elected by
each non-employee director at the time such deferral was elected pursuant to Section 3.4 of the Director Plan.

(11) Mr. Martin ceased to serve as our Chief Financial Officer in September of 2012.

(12)

(13)

Includes an aggregate of 161,389 shares of Phantom Stock, the terms of which are described in footnotes 7, 8 and 10 above. Also
includes 250,000 shares of Class A common stock underlying options which are currently exercisable.

Includes options to purchase an aggregate of 1,188,170 membership units in our operating company that are currently exercisable
and which, upon exercise, will entitled the holders to purchase the same number of shares of our Class B common stock. As
indicated in the foregoing footnotes, also includes shares of Class B common stock held by estate planning vehicles and family
members of the executive officers and directors as to which certain beneﬁcial ownership is disclaimed.

(14) Excludes an aggregate of 161,389 shares of Phantom Stock, the terms of which are described in footnotes 7, 8 and 10 above.

(15) The number of Class A common stock owned is based on information provided by the Company’s transfer agent, American Stock

Transfer & Trust Company, and is as of March 1, 2013.

(16) The number of shares owned is based on information included in the Form 13G/A ﬁled by Cacti Asset Management, LLC

(‘‘Cacti’’), and its related persons and entities, with the SEC on January 2, 2013. According to the Form 13G/A, Cacti has sole
dispositive power over 1,003,750 shares of our Class A common stock, shared dispositive power over zero shares of our Class A
common stock, sole voting power of over 1,003,750 shares of our Class A common stock and shared voting power over zero shares
of our Class A common stock.

(17) The number of shares owned is based on information included in the Form 13G/A.2 ﬁled by DePrince, Race & Zollo, Inc.

(‘‘DePrince’’), with the SEC on February 13, 2013. According to the Form 13G, DePrince has sole dispositive power over 778,634
shares of our Class A common stock, shared dispositive power over zero shares of our Class A common stock, sole voting power of
over 703,354 shares of our Class A common stock and shared voting power over zero shares of our Class A common stock.

(18) The number of shares owned is based on information included in the Form 13G ﬁled by Penn Capital Management (‘‘Penn’’), with

the SEC on February 15, 2013. According to the Form 13G, Penn has sole dispositive power over 561,219 shares of our Class A
common stock, shared dispositive power over zero shares of our Class A common stock, sole voting power of over 561,219 shares
of our Class A common stock and shared voting power over zero shares of our Class A common stock.

(19) The number of shares owned is based on information included in the Form 13G ﬁled by Punch & Associates Investment

Management, Inc. (‘‘Punch & Associates’’), with the SEC on February 19, 2013. According to the Form 13G, Punch & Associates
has sole dispositive power over 1,049,308 shares of our Class A common stock, shared dispositive power over zero shares of our
Class A common stock, sole voting power of over 887,076 shares of our Class A common stock and shared voting power over
166,232 shares of our Class A common stock.

(20) The number of shares owned is based on information included in the Form 13G/A ﬁled by The Vanguard Group (‘‘Vanguard’’),

with the SEC on February 11, 2013. According to the Form 13G/A, Vanguard has sole dispositive power over 617,933 shares of our
Class A common stock, shared dispositive power over 28,355 shares of our Class A common stock, sole voting power of over
28,355 shares of our Class A common stock and shared voting power over zero shares of our Class A common stock.

69

Equity Compensation Plan Information

The table below sets forth certain information as of December 31, 2012, the last day of the ﬁscal year,

for: (i) all equity compensation plans previously approved by our stockholders; and (ii) all equity
compensation plans not previously approved by our stockholders.

Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reﬂected In
Column (a))
(c)

Plan Category

Equity Compensation Plans Approved By

Security Holders
Pzena Investment Management, LLC

Number of Securities
To Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(a)

Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)

2006 Equity Incentive Plan . . . . . . . . .

3,563,057

$6.58

Pzena Investment Management, Inc.

2007 Equity Incentive Plan . . . . . . . . .

961,750

Pzena Investment Management, LLC

Amended and Restated Bonus Plan . . . .
Equity Compensation Plans Not Approved By
Security Holders(2) . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .

Total

—

—
4,524,807

8.00

—

—
6.88

740,643(1)

5,818,862

740,643(1)

—
6,559,505

(1)

Represents the total number of remaining securities, as of December 31, 2012, which may be granted under the PIM LLC 2006
Equity Incentive Plan and the Bonus Plan, collectively.

(2) All equity compensation plans have been approved by security holders.

Equity Incentive Plans

PIM LLC 2006 Equity Incentive Plan

The Pzena Investment Management, LLC 2006 Equity Incentive Plan, or the PIM LLC 2006 Equity
Incentive Plan, became effective on January 1, 2007, and was amended and restated as of October 30, 2007.
The following is a description of the material terms of the PIM LLC 2006 Equity Incentive Plan. The full text
of the PIM LLC 2006 Equity Incentive Plan has been ﬁled as an exhibit to our quarterly report on Form 10-Q
ﬁled with the SEC on December 5, 2007. The PIM LLC 2006 Equity Incentive Plan is a source of
equity-based awards to our employees, consultants and other service providers of incentive Class B unit
options (within the meaning of Section 422 of the Internal Revenue Code), non-qualiﬁed Class B unit options,
restricted Class B units and other grants of Class B units.

Administration. The Compensation Committee of our Board of Directors administers the PIM LLC
2006 Equity Incentive Plan. The Compensation Committee may delegate its authority to grant awards under
the PIM LLC 2006 Equity Incentive Plan in whole, or in part, as it determines, including to a subcommittee
consisting solely of at least two non-employee directors within the meaning of Rule 16b-3 of the Exchange
Act, and, to the extent required by Section 162(m) of the Internal Revenue Code, ‘‘outside directors’’ within
the meaning thereof. The Compensation Committee determines who will receive awards under the PIM LLC
2006 Equity Incentive Plan, as well as the form of the awards, the number of units underlying the awards, and
the terms and conditions of the awards, consistent with the terms of the PIM LLC 2006 Equity Incentive Plan.
The Compensation Committee has full authority to interpret and administer the PIM LLC 2006 Equity
Incentive Plan, which determinations will be ﬁnal and binding on all parties concerned.

Units Subject to the PIM LLC 2006 Equity Incentive Plan. The total number of Class B units that may

be issued under the PIM LLC 2006 Equity Incentive Plan is 10,113,996, with 740,643 remaining at
December 31, 2012, subject to adjustment upon the occurrence of certain events, as described below.

We will make available the number of shares of our Class A common stock necessary to satisfy the
maximum number of Class B units that may be issued under the PIM LLC 2006 Equity Incentive Plan. The

70

Class B units underlying any award granted under the PIM LLC 2006 Equity Incentive Plan may again
become available for awards under the PIM LLC 2006 Equity Incentive Plan, pursuant to the terms therein.

Unit Options. The Compensation Committee may award non-qualiﬁed or incentive unit options under
the PIM LLC 2006 Equity Incentive Plan. Options granted under the PIM LLC 2006 Equity Incentive Plan
will become vested and exercisable at such times and upon such terms and conditions as may be determined
by the Compensation Committee at the time of grant, but an option will generally not be exercisable for a
period of more than ten years after it is granted.

The exercise price per Class B unit for any options awarded will not be less than the fair market value of

the Class B unit on the day the option is granted. To the extent permitted by the Compensation Committee,
the exercise price of an option may be paid in cash or its equivalent, Class B units having a fair market value
equal to the aggregate option exercise price, partially in cash and partially in Class B units, or through the
delivery of irrevocable instructions to a broker to sell shares of our Class A common stock issuable upon the
exchange of the Class B unit acquired upon exercise of the option and to deliver promptly to us an amount
from the proceeds of the sale equal to the aggregate option exercise price.

Other Unit-Based Awards. The Compensation Committee, in its sole discretion, may grant Class B units

and awards that are valued in whole, or in part, by reference to, or are otherwise based on the fair market
value of, Class B units (such as the Phantom Class B Units discussed elsewhere in this Annual Report on
Form 10-K). Any of these other Class B unit-based awards may be in such form, and depend on the
conditions imposed by the Compensation Committee, including, without limitation, the right to receive, or vest
with respect to, one or more units (or the equivalent cash value of such units) upon the completion of a
speciﬁed period of service, the occurrence of an event and/or the attainment of performance objectives. The
Compensation Committee may, in its discretion, determine whether other Class B unit-based awards may be
payable in cash, Class B units, or a combination thereof.

LTIP Units.

In the future, we may choose to amend the operating agreement of Pzena Investment

Management, LLC to provide for a new class of membership interests that are designed to provide long term
incentives to their recipients, or LTIP units, and that may, upon the occurrence of certain events, or the
recipient’s achievement of certain goals, convert into Class B units. To the extent provided for, LTIP Units,
whether or not vested, would 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 our operating company, and may be structured as ‘‘proﬁts interests,’’
‘‘capital interests’’ or other types of interests for federal income tax purposes. If provided for in the operating
agreement of our operating company, the Compensation Committee may award LTIP units as free-standing
awards, or in tandem with other awards under the PIM LLC 2006 Equity Incentive Plan. LTIP units would be
subject to such conditions and restrictions as the Compensation Committee may determine, including, but not
limited to, the conversion ratio, if any, for LTIP units. In addition, the Compensation Committee may provide
that distributions in respect of LTIP units are deemed to be reinvested in additional Class B units or
LTIP units.

Adjustments Upon Certain Events.

In the event of any change in the outstanding number of membership

units of Pzena Investment Management, LLC, by reason of any unit dividend or split, any reorganization,
recapitalization, merger, consolidation, spin-off or combination, any distribution to holders of units other than
cash dividends, or any other transaction similar to any of the foregoing, the Compensation Committee, or its
appointed delegate, in its sole discretion, and without liability to any person, may make such substitution or
adjustment, if any, as it deems to be equitable, as to: (i) the number or kind of Class B units, or other
securities issued or reserved for issuance pursuant to the PIM LLC 2006 Equity Incentive Plan, or pursuant to
outstanding awards; (ii) the option price; and/or (iii) any other affected terms of such awards.

Transferability. Unless otherwise determined by the Compensation Committee, no award granted under

the plan will be transferable or assignable by the award recipient.

Amendment and Termination. We may amend or terminate the PIM LLC 2006 Equity Incentive Plan,
but no amendment or termination will be made: (i) without the approval of our stockholders, if such action
would, except as permitted in order to adjust the shares as described above under the section ‘‘— Adjustments

71

Upon Certain Events,’’ increase the total number of shares reserved for the purposes of the PIM LLC 2006
Equity Incentive Plan, or increase the maximum number of shares that may be issued hereunder, or change
the maximum number of shares for which awards may be granted to any participant; or (ii) without the
consent of a participant, if such action would diminish any of the rights of the participant under any award
theretofore granted to such participant under the PIM LLC 2006 Equity Incentive Plan; provided, however,
that the Compensation Committee may amend the PIM LLC 2006 Equity Incentive Plan, and/or any
outstanding awards, in such manner as it deems necessary to permit the PIM LLC 2006 Equity Incentive Plan,
and/or any outstanding awards, to satisfy requirements of the Internal Revenue Code, or other applicable laws.

2007 Equity Incentive Plan

On October 24, 2007, we adopted the Pzena Investment Management, Inc. 2007 Equity Incentive Plan, or
the 2007 Equity Incentive Plan, which was amended as of May 19, 2009, and which provides for the issuance
of awards relating to our Class A common stock to directors, officers and other employees, consultants and
advisers who are providing services to us and our subsidiaries.

Our 2007 Equity Incentive Plan is administered by our Compensation Committee, which has the

authority, among other things, to determine who will be granted awards, and all of the terms and conditions of
such awards. The Compensation Committee is authorized to determine the extent to which an award may be
settled, cancelled, forfeited or surrendered, to interpret our 2007 Equity Incentive Plan and any awards granted
under our 2007 Equity Incentive Plan, and to make all other determinations necessary or advisable for the
administration of our 2007 Equity Incentive Plan. Where the vesting or payment of an award under our 2007
Equity Incentive Plan is subject to the attainment of performance goals, the Compensation Committee will be
responsible for certifying that the performance goals have been attained. Neither the Compensation Committee
nor the Board of Directors has the authority under our 2007 Equity Incentive Plan to take any action that:
(i) would lower the exercise, base or purchase price of any award granted thereunder; (ii) amend the limits on
individual participation thereunder; (iii) amend the number of shares available for awards thereunder; or
(iv) amend the provisions with respect to the administration of our 2007 Equity Incentive Plan, without, in
any case, ﬁrst obtaining the approval of our stockholders.

At our 2009 Annual Meeting of Stockholders, our stockholders approved a proposal to increase the total

number of shares available under the 2007 Equity Incentive Plan to 7,059,658 shares, with 5,818,862
remaining at December 31, 2012. Shares issued under our 2007 Equity Incentive Plan may be authorized but
unissued shares, or treasury shares. Shares subject to an award granted under our 2007 Equity Incentive Plan
may again become available for awards under the plan, pursuant to the terms therein. In the event that the
Compensation Committee determines that any corporate event, such as a dividend or other distribution,
recapitalization, stock split, reorganization, merger, spin-off, or the like, affects our Class A common stock
such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of plan
participants, then the Compensation Committee will make those adjustments as it deems necessary or
appropriate to any or all of: (i) the number and kind of shares or other property that may thereafter be issued
in connection with future awards; (ii) the number and kind of shares or other property that may be issued
under outstanding awards; (iii) the exercise price or purchase price of any outstanding award; (iv) the
performance goals applicable to outstanding awards; and (v) the individual share limitations applicable to
awards granted under our 2007 Equity Incentive Plan.

The performance goals may be expressed in terms of attaining a speciﬁed level of the particular criterion,
or an increase or decrease in the particular criterion, and may be applied to us or one of our subsidiaries. The
Compensation Committee has the authority to make equitable adjustments to the performance goals in
recognition of unusual or non-recurring events, or in response to changes in laws or regulations. Where an
award under our 2007 Equity Incentive Plan is made subject to a performance goal, no compensation may be
paid under such award unless and until the Compensation Committee certiﬁes that the goal has been attained.

The terms and conditions of awards of restricted stock and restricted stock units granted under our 2007

Equity Incentive Plan will be determined by the Compensation Committee and set forth in an award
agreement. A restricted stock unit confers on the participant the right to receive a share of our Class A
common stock, or its equivalent value in cash, in the discretion of the Compensation Committee. These
awards will be subject to restrictions on transferability, which will lapse under those circumstances that the

72

Compensation Committee may determine, which may include the attainment of one or more performance
goals. The Compensation Committee may determine that the holder of restricted stock or restricted stock units
may receive dividends (or dividend equivalents, in the case of restricted stock units) that may be deferred
during the restricted period applicable to these awards.

Our 2007 Equity Incentive Plan also provides for other equity-based (such as the Phantom Stock
discussed elsewhere in this Annual Report on Form 10-K), and other cash-based awards, the form and terms
of which will be as determined by the Compensation Committee, consistent with the purposes of the plan. The
vesting, value or payment of one of these awards may be made subject to the attainment of one or more
performance goals. The types of awards that may be granted may include, without limitations, stock options
and stock bonuses.

The Compensation Committee has the authority under our 2007 Equity Incentive Plan to establish such
procedures and programs that it deems appropriate to provide participants with the ability to defer the receipt
of cash, common stock or other property payable with respect to awards granted under the plan.

Unless earlier terminated, our 2007 Equity Incentive Plan will expire on the tenth anniversary of its
effective date. Our Board of Directors or the Compensation Committee may, at any time, amend, suspend or
terminate our 2007 Equity Incentive Plan, in whole or in part. No amendment that requires stockholder
approval in order for our 2007 Equity Incentive Plan to continue to comply with Section 162(m) of the
Internal Revenue Code, or any other applicable law, will be effective unless the approval is obtained. The
Compensation Committee may amend, suspend or terminate an outstanding award, in whole or in part.
However, no amendment or termination of our 2007 Equity Incentive Plan, or amendment of any award, will
affect adversely the rights of any participant who has an outstanding award under the plan without the
participant’s consent.

On October 30, 2007, we ﬁled a Form S-8 with the SEC to register 640,379 shares of our Class A
common stock that may be issued under the 2007 Equity Incentive Plan. On November 25, 2009, we ﬁled a
Form S-8 with the SEC to register an additional 6,419,279 shares of our Class A common stock pursuant to
the amendment to the 2007 Equity Incentive Plan adopted by our shareholders on May 19, 2009.

Bonus Plan

The Pzena Investment Management, LLC Amended and Restated Bonus Plan, or the Bonus Plan, became

effective on January 1, 2007, was amended and restated as of October 30, 2007, and was further amended as
of October 21, 2008.

Purpose. The purpose of the Bonus Plan is to enable us to attract, retain, motivate and reward highly

qualiﬁed individuals to provide services to us by:

•

•

•

providing for grants of bonus compensation to eligible employees and members of our operating
company;
providing that a portion of the bonus awards made to certain highly compensated individuals will be
deferred on a mandatory basis under the Bonus Plan, and will vest, and become payable, over a
four-year period; and

permitting members of Pzena Investment Management, LLC to elect to receive a portion of their
bonus compensation that is mandatorily deferred in the form of restricted Phantom Class B units of
Pzena Investment Management, LLC, or to invest it in certain of our investment strategies.

Administration. The Bonus Plan is administered by the Compensation Committee of our Board of
Directors. The Compensation Committee may delegate its authority under the Bonus Plan to a subcommittee
of the Compensation Committee.

Eligibility; Awards. No later than the last day of a ﬁscal year, the Compensation Committee will
designate, from among our employees and the members of Pzena Investment Management, LLC who provide
personal services to us, those individuals eligible for a bonus award for such ﬁscal year, or an eligible
individual, and will determine and specify for each eligible individual the amount of the bonus award that will
be awarded to such eligible individual for such ﬁscal year. In designating the eligible individuals for a ﬁscal

73

year and in determining the amount of the bonus awards to be granted, the Compensation Committee will
generally take into account any subjective or objective factors that it may, in its sole discretion, deem relevant,
including, without limitation, the performance of the eligible individual, the business unit to which the eligible
individual provides services, or our ﬁrm as a whole. The Compensation Committee may designate as an
eligible individual an employee of us, or a member of Pzena Investment Management, LLC who terminates
his association with us during a ﬁscal year. Unless deferred under a provision of the Bonus Plan, a bonus
award under the Bonus Plan will be paid to the participant in one lump sum in cash in the calendar year
following the ﬁscal year in which it was earned, but no later than March 15th of such calendar year.

Mandatory Cash Deferral of Restricted Amounts. Each eligible individual who is allocated a bonus

award for a ﬁscal year, and whose cash compensation for such ﬁscal year (including such bonus award)
exceeds $600,000, must defer a portion of their compensation, which we refer to as the restricted amount. The
restricted amount is 25% of the amount of the eligible individual’s compensation for the ﬁscal year that
exceeds $600,000; plus an additional 15% of the amount of the eligible individual’s compensation for the
ﬁscal year that exceeds $1,200,000. Each eligible individual who is a member of Pzena Investment
Management, LLC, and who is entitled to receive a restricted amount in any ﬁscal year, may elect to have the
restricted amount credited to an account in his or her name, to receive the restricted amount in the form of
restricted Phantom Class B units, or a combination thereof. Each eligible individual who is not a member of
Pzena Investment Management, LLC, and who is entitled to receive a restricted amount in any ﬁscal year, will
have the entire restricted amount credited to an account in his name.

Payment of Awards. A participant will become vested in the portion of his account related to each

bonus earned according to the following schedule: (i) 25% on the ﬁrst anniversary; (ii) 50% on the second
anniversary; (iii) 75% on the third anniversary; and (iv) 100% on the fourth anniversary; provided the
participant continues in service with us. A participant will also become fully vested in his entire account, and
the restriction period applicable to his restricted Phantom Class B units will lapse, if he dies while in service,
his service is terminated by us without cause, or he voluntarily terminates his service with good reason.
Additionally, a participant who voluntarily terminates his service with us and who has, as of the time of such
termination, provided services to us for a continuous period of no less than ten years, will continue to vest in
his entire account, and in any restricted phantom units for which the restriction period has not lapsed,
provided that he does not, on or before an applicable vesting date, compete with us, solicit our employees or
clients, or disclose our conﬁdential information. A participant’s restricted Phantom Class B units will be
settled within 30 days of vesting. Except as provided in this paragraph, the unvested portion of his account
and any unvested restricted phantom membership units will be forfeited and/or cancelled upon termination of
the participant’s employment.

In addition, in the sole discretion of the Compensation Committee, a participant may be entitled to
distribution equivalents with respect to restricted Phantom Class B units, calculated as follows. On each date
that a cash distribution is paid while the restricted phantom Class B are outstanding, a participant’s account
will be credited with an amount of cash equal to the aggregate dollar amount of the cash distribution that
would have been paid had the restricted Phantom Class B units been issued as Class B units. The distribution
equivalents will be subject to the same terms and conditions applicable to the related restricted Phantom Class
B units, including, without limitation, provisions related to vesting and payment. Alternatively, in lieu of the
account credit described above, a participant’s account may, in the sole discretion of the Compensation
Committee and to the extent the participant is credited with distribution equivalents, be credited with an
additional number of restricted Phantom Class B units equal to the number of whole units (valued at fair
market value on such date) that could be purchased on such date with the aggregate dollar amount of the cash
distribution that would have been paid on the restricted Phantom Class B units had they been issued as Class
B units. The additional restricted Phantom Class B units credited to a participant’s account will be subject to
the same terms and conditions applicable to the restricted Phantom Class B units originally awarded to the
participant, including, without limitation, for purposes of vesting and crediting of additional
distribution equivalents.

Amendment and Termination of Plan. The Compensation Committee may at any time amend, suspend,

discontinue or terminate the Bonus Plan.

74

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

Amended and Restated Operating Agreement of Pzena Investment Management, LLC

The operations of Pzena Investment Management, LLC, and the rights and obligations of its members,

are set forth in the operating company’s amended and restated operating agreement, the material terms of
which are described below.

Governance

We serve as the sole managing member of the operating company. As such, we control its business and
affairs and are responsible for the management of its business. We also have the power to delegate certain of
our management responsibilities to an executive committee of our operating company, which currently
consists of our Chief Executive Officer, Mr. Pzena, each of our Presidents, Messrs. Goetz and Lipsey, and
each of our Executive Vice Presidents, Messrs. DeSpirito and Peterson.

Issuances and Transfers of Units; Voting and Economic Rights of Members

The operating company may issue Class A units and Class B units. Class A units may only be issued to

us, as the sole managing member, and are non-transferable. Class B units may only be issued to persons or
entities to which we agree to issue membership units in exchange for cash or other consideration, including
the services of the operating company’s employees. Class B units may only be transferred to permitted
transferees, subject to such conditions as we may specify. A holder of Class B units may not transfer any
Class B units to any person unless he or she transfers an equal number of shares of our Class B common
stock to the same transferee.

Holders of Class B units have no voting rights, except for the right to approve amendments to the
amended and restated operating agreement that adversely affect the rights of the holders of Class B units, and
to approve certain material corporate transactions. See ‘‘— Amendments’’ and ‘‘— Material Corporate
Transactions,’’ below.

Each Class A unit and Class B unit entitles holders to the same economic rights. Net proﬁts and net

losses of the operating company are allocated, and distributions by the operating company are made, to
members pro rata in accordance with the number of membership units they hold (whether or not vested). The
operating company makes distributions to members for the purpose of funding their tax obligations in respect
of the portion of the operating company’s taxable income that is allocated to them. Generally, these tax
distributions will be computed based on our estimate of the net taxable income of the operating company
allocable per membership unit multiplied by an assumed tax rate equal to the highest combined U.S. federal,
state and local tax rate applicable to any member (taking into account the deductibility of state and local taxes
for U.S. federal income tax purposes). However, our operating company may not make any distributions to its
members if doing so would violate any agreement to which it is then a party, or any law then applicable to it,
have the effect of rendering it insolvent, or result in it having net capital lower than that required by
applicable law.

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

Whenever we issue a share of our Class A common stock for cash, we will either contribute the net
proceeds to the operating company in exchange for one Class A unit or purchase one Class B unit from a
Class B member in exchange for such net proceeds (which Class B unit will be automatically converted into a
Class A unit). Whenever we issue a share of our Class A common stock pursuant to our 2007 Equity Incentive
Plan, we will contribute all of the proceeds from such issuance (if any) to the operating company, which will
issue us a Class A unit with the same restrictions, if any, attached to such Class A common stock. In the event
that we issue other classes or series of our equity securities, the operating company will issue, and Class B
units (if any) transferred to us by its members in exchange for our newly issued equity securities will be
automatically converted into, an equal amount of equity securities of the operating company with designations,
preferences and other rights and terms that are substantially the same as our newly issued equity securities.

75

Conversely, if we redeem any shares of our Class A common stock (or our equity securities of other classes or
series) for cash, the operating company will, immediately prior to our redemption, redeem an equal number of
Class A units (or its equity securities of the corresponding classes or series) held by us, upon the same terms
and for the same price, as the shares of our Class A common stock (or our equity securities of such other
classes or series) are redeemed.

The operating company may also, from time to time, issue such other classes or series of membership
units having such relative rights, powers and duties and interests in proﬁts, losses, allocations and distributions
of the operating company as may be designated by us.

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

Material Corporate Transactions

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

Exchange Rights

Pursuant to the amended and restated operating agreement, each vested Class B unit is exchangeable for

a share of our Class A common stock, subject to the exchange timing and volume limitations described below.
On February 17, 2009, the SEC declared effective our shelf registration statement on Form S-3, in which we
registered 57,937,910 shares of our Class A common stock for issuance upon the exchange of an equivalent
number of vested Class B units of the operating company. On January 27, 2012, the SEC declared effective a
subsequent registration statement on Form S-3 which registers the resale of 40,114,701 shares of our Class A
common stock by the selling stockholders named therein.

Initial Managing Principals. Each year, in the period beginning on the ﬁrst effective date of the Form
S-3 registration statement described below under ‘‘— Resale and Registration Rights Agreement,’’ which we
refer to as the shelf registration statement, and ending on the date of the termination of employment with us
of an Initial Managing Principal, an Initial Managing Principal (currently each of Richard S. Pzena, John P.
Goetz and William L. Lipsey), and his permitted transferees may collectively exchange up to the number of
vested Class B units that equals 15% of all Class B units they collectively hold as of the ﬁrst day of that year,
in accordance with the timing restrictions described below under ‘‘— Resale and Registration Rights
Agreement.’’ For the three-year period following the Initial Managing Principal’s termination, the Initial
Managing Principal and his permitted transferees may not exchange any of their Class B units. Thereafter,
they may exchange the remainder of their Class B units when they vest, subject to the same timing
restrictions.

Other Employee Members. Each year, in the period beginning on the ﬁrst effective date of the shelf
registration statement and ending on the date of termination of employment of an employee member other
than our Initial Managing Principals, he or she and his or her permitted transferees, may collectively exchange
up to the number of vested Class B units that equals 15% of all Class B units they collectively hold as of the
ﬁrst day of that year, in accordance with the timing restrictions described below under ‘‘— Resale and
Registration Rights Agreement.’’ For the one-year period following the employee’s termination, the employee
and his or her permitted transferees may not exchange any of their Class B units, except as may be agreed by

76

us. Within the following six months, they may exchange vested Class B units so long as the employee retains
a number of vested Class B units equal to at least 25% of the number of vested Class B units collectively
held by the employee and his or her permitted transferees on the date of the termination of employment with
us, subject to the same timing restrictions. Thereafter, they may exchange the remainder of their Class B units
when they vest, subject to the same timing restrictions.

Non-Employee Members. As of October 30, 2011, the fourth anniversary of our initial public offering,

the non-employee members of our operating company may exchange all of their vested Class B units, in
accordance with the timing restrictions described below under ‘‘— Resale and Registration Rights
Agreement.’’

Exceptions.

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

Restrictive Covenants

Non-Competition. All employees who are members of the operating company have agreed not to
compete with us during the term of their employment with us. In addition, each of the Initial Managing
Principals has agreed not to compete with us for a period of three years following the termination of his
employment. The other employee members, including our Executive Vice Presidents, have agreed not to
compete with us for a period of up to six months following the termination of his or her employment, if the
employee member and his or her permitted transferees collectively hold at that time more than 1% of all the
Class B units outstanding and if he or she continues to receive compensation during this non-competition
period.

Non-Solicitation. The Initial Managing Principals, including our CEO and two Presidents, have agreed
not to solicit our clients or any other employees of Pzena Investment Management, LLC during the term of
their employment and three years thereafter. Other employee members, including our Executive Vice
Presidents, will be subject to similar non-solicitation provisions during the term of their employment and 18
months thereafter.

Conﬁdential Information. All employee members have agreed to protect the conﬁdential information of

Pzena Investment Management, LLC. This covenant will survive the termination of their employment.

Forfeiture of Class B Units

Unless otherwise determined by our Board of Directors, in its sole discretion, or previously agreed to by

the employee member, his or her permitted transferees and us:

•

•

if an employee member is terminated for cause, the employee member and his or her permitted
transferees, if any, would forfeit all of his, her or their unvested Class B units, if any, and a number
of vested Class B units that is equal to 75% of the number of vested Class B units collectively held
by the employee member and his or her permitted transferees, in each case as of the date of the
termination of his or her employment;

if an Initial Managing Principal breaches any of the non-competition or non-solicitation covenants
described above, the Initial Managing Principal and his or her permitted transferees, if any, would
forfeit all of his, her or their unvested Class B units, if any, and an aggregate number of vested

77

Class B units that is equal to 50% of the number of vested Class B units collectively held by the
Initial Managing Principal and his or her permitted transferees, in each case as of the earlier of the
date of his or her breach or the termination of his or her employment; and

•

if an employee member (other than an Initial Managing Principal, but including our Executive Vice
Presidents and Chief Financial Officer) breaches any of the non-competition or non-solicitation
covenants described above, the employee member, and his or her permitted transferees, if any, would
forfeit all of his, her or their unvested Class B units, if any, and a number of vested Class B units
that is equal to 25% of the number of vested Class B units collectively held by the employee
member and his or her permitted transferees, in each case as of the earlier of the date of his or her
breach or the termination of his or her employment.

Indemniﬁcation and Exculpation

To the extent permitted by applicable law, Pzena Investment Management, LLC will indemnify us, as its

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

We, as the managing member, and the authorized officers and other employees and agents of Pzena

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

Amendments

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

Notwithstanding the foregoing, no amendment may

•

•

•

materially and adversely affect the rights of a Class B member in a manner that discriminates
against that Class B member vis-à-vis other Class B members, or increase the capital contributions
obligations of a Class B member, without the consent of the affected Class B member;

modify or amend the non-competition, non-solicitation, conﬁdentiality, or vesting and forfeiture
provisions in a manner that is adverse to an employee member without either the employee
member’s consent, or the approval of two-thirds in interest of the Class B members, so long as each
adversely affected employee member receives at least 60 days prior notice thereof; or

modify or amend any provision of the agreement requiring approval of any speciﬁed group or sub-
group of Class B members without obtaining the approval of that speciﬁed group or sub-group.

Tax Receivable Agreement

On October 30, 2007, we entered into a tax receivable agreement with each holder of Class B units of
Pzena Investment Management, LLC outstanding on that date. The terms of this agreement also apply to Class
B units that have been or may be issued after such date to existing or new Class B members of the operating
company. If applicable, any such new Class B members will become parties to this agreement.

This agreement requires us to pay holders of Class B units 85% of the amount of cash savings, if any, in

U.S. federal, state and local income tax that we actually realize (or are deemed to realize in the case of an
early termination payment by us, or a change in control, as discussed below) as a result of the increases in tax

78

basis described above, and certain other tax beneﬁts related to entering into the tax receivable agreement,
including tax beneﬁts attributable to payments thereunder. Cash savings in income tax are computed by
comparing our actual income tax liability to the amount of such taxes that we would have been required to
pay had there been no increase in our share of the tax basis of the tangible and intangible assets of Pzena
Investment Management, LLC.

On November 12, 2012, we entered into an amendment to the tax receivable agreement, to clarify the tax

beneﬁt payment methodology.

In 2012, Mr. Greenblatt and his related entities, received an aggregate payment in the amount of
$1,065,245 pursuant to the terms of the Tax Receivable Agreement, relating to the years 2010 and 2011.

Resale and Registration Rights Agreement

On October 30, 2007, we entered into a resale and registration rights agreement with each holder of
Class B units of Pzena Investment Management, LLC outstanding on that date. The terms of this agreement
also apply to Class B units that have been or may be issued after such date to existing or new Class B
members of the operating company. If applicable, any such new Class B members will become parties to
this agreement.

Pursuant to this agreement, any shares of Class A common stock issued upon exchange of Class B units
will be eligible for resale pursuant to a registration statement on Form S-3, or the shelf registration statement,
subject to the resale timing and manner limitations described below.

On February 17, 2009, the SEC declared effective our shelf registration statement on Form S-3, in which

we registered 57,937,910 shares of our Class A common stock, issuable upon the exchange of an equivalent
number of Class B units of the operating company. On January 27, 2012, the SEC declared effective a
subsequent registration statement on Form S-3 which registers the resale of 40,114,701 shares of our Class A
common stock by the selling stockholders named therein.

As of October 30, 2011, the fourth anniversary of the consummation of our initial public offering, holders

of Class B units are able to exchange their Class B units for shares of our Class A common stock, subject to
the exchange timing and volume limitations described above, and will be permitted to sell their shares in any
manner, but only at times determined by us, in our sole discretion. We shall provide for at least one exchange
date in each twelve-month period, pursuant to which holders of Class A common stock issued upon exchange
of vested Class B units can resell such shares of Class A common stock.

In response to certain SEC recommendations regarding our shelf registration statements, we amended our
operating agreement during the ﬁrst quarter of 2012 to remove certain default and other exchange provisions,
as further described in the Amendment, dated as of March 5, 2012, to Amended and Restated Operating
Agreement of Pzena Investment Management, LLC, dated as of October 30, 2007, by and among Pzena
Investment Management, Inc. as the Managing Member of Pzena Investment Management, LLC and those
Class B members whose signatures are affixed thereto, previously ﬁled as an exhibit to the Company’s 2011
Annual Report on Form 10-K.

We have agreed to indemnify the holders of Class B units against any losses or damages resulting from

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

Stockholders’ Agreement Among Class B Stockholders

On October 30, 2007, we entered into a stockholders’ agreement with each holder of Class B common
stock outstanding on that date. The terms of this agreement also apply to shares of Class B common stock

79

that have been or may be issued after such date to existing or new Class B members of the operating
company. If applicable, any such new Class B common stockholders will become parties to this agreement.

Pursuant to this agreement, each of the Class B common stockholders agreed to vote all their shares of

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

•

•

the holder will not transfer any shares of Class B common stock to any person unless the holder
transfers an equal number of Class B units to the same person; and

in the event the holder transfers any Class B units to any person, the holder will transfer an equal
number of shares of Class B common stock to the same person.

This agreement may only be amended with the consent of the holders of a majority of the shares of Class

B common stock that are party to the agreement.

Related Person Transaction Policy

We have adopted a policy regarding the approval of any transaction, or series of transactions, in which

we or any of our subsidiaries is a participant, the amount involved exceeds $120,000, and a ‘‘related person’’
(as deﬁned under SEC rules) has a direct or indirect material interest. Under the policy, a related person must
promptly disclose to our General Counsel any ‘‘related person transaction’’ (deﬁned as any transaction that is
required to be disclosed under Item 404(a) of Regulation S-K in which we were, or are to be, a participant,
and the amount involved exceeds $120,000, and in which any related person had, or will have, a direct or
indirect material interest) and all material facts about the transaction. The General Counsel will then assess
and promptly communicate that information to the Audit Committee of our Board of Directors. Based on its
consideration of all of the relevant facts and circumstances, the Audit Committee will decide whether or not to
approve such transaction, and will generally approve only those transactions that do not create a conﬂict of
interest. If we become aware of an existing related person transaction that has not been pre-approved under
this policy, the transaction will be referred to the Audit Committee, which will evaluate all options available,
including ratiﬁcation, revision or termination of such transaction. Our policy requires any director who may be
interested in a related person transaction to recuse himself or herself from any consideration of such related
person transaction.

Other Related Party Transactions

Set forth below is a description of certain other transactions between Pzena Investment Management,
LLC and certain of our directors, executive officers and beneﬁcial owners of more than 5% of our voting
securities, or their respective family members.

Our operating company manages the personal funds of many of its employees, including certain of our

executive officers. In addition, it manages the personal funds of some of its employees’ and certain of its
executive officers’ 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. In 2012, the aggregate value of
the advisory fees that we either waived or reduced for executive officers and/or their family members was
approximately $362,075, which includes investments via a private fund in which certain of our executive
officers participate. Fees waived for Mr. Pzena and/or his family members, and related trusts, were

80

approximately $240,000 in 2012. The aggregate value of the custody and administrative fees paid related to
the Company’s executive offers was approximately $132,801.

Director Independence

Although we qualify for the ‘‘controlled company’’ exemption from certain of the corporate governance

rules of the NYSE, our corporate governance guidelines mandate that our Board shall be comprised of a
majority of directors who qualify as independent directors under the corporate governance rules of the NYSE.
In addition, pursuant to the charters of our Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee, each director of these committees must be an independent director, as such
term is deﬁned in the corporate governance rules of the NYSE.

Under the NYSE corporate governance rules, a director is deemed independent if the director has no

disqualifying relationship as deﬁned in the NYSE corporate governance rules, and if the Board of Directors
has affirmatively determined that the director has no material relationship with the Company, either directly or
as a partner, stockholder, officer or employee of an organization that has a relationship with the Company.

For the year ended December 31, 2012, the Board of Directors determined that Messrs. Galbraith,

Greenblatt, Meyerowich and Tysoe are each ‘‘independent’’ for purposes of NYSE corporate governance rules.

81

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Total fees billed for professional services rendered to us by KPMG LLP during the years ended

December 31, 2012 and 2011 were as follows:

For the Year Ended
December 31,

2012

2011

Audit Fees
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

(in thousands)
490
—
26
516

$

289
16
—
305

(1)

Total fees for KPMG LLP represent amounts billed during the periods listed above. Total KPMG fees accrued during the years
ended 2012 and 2011 were $0.6 million and $0.5 million, respectively. Fees accrued for 2012 include work performed by KPMG
on taxes.

Audit fees relate to professional services rendered for the audits of the consolidated ﬁnancial statements
of the Company and its subsidiaries, professional services rendered for quarterly reviews of the consolidated
ﬁnancial statements of the Company and its subsidiaries, and the audits of the Company’s affiliated funds.
Audit fees also include fees for the audit of special purpose ﬁnancial statements of the operating company.

Tax fees were for reviews of the Company’s tax returns.

All other fees relate to other attestation services over the Company’s investment performance and fees

associated with the review of registration statements.

Pre-Approval Policy

The charter of our Audit Committee provides that the Audit Committee shall appoint our independent

auditors and shall review and approve, in advance, our independent auditors’ annual engagement letter,
including the proposed fees contained therein, as well as all audit and all permitted non-audit engagements
and relationships between us and our independent auditors. The charter of the Audit Committee further
provides that audit and permitted non-audit services may be approved in advance: (i) by the Audit Committee,
or by one or more members of the Audit Committee designated by the Audit Committee; or (ii) based on
policies and procedures adopted by the Audit Committee, provided that (a) the policies and procedures are
detailed as to the particular service, (b) the Audit Committee is informed of each service on a timely basis,
(c) such policies and procedures do not include delegation of the Audit Committee’s responsibilities to
management, and (d) such policies and procedures are disclosed in our annual reports. To date, the Audit
Committee has not adopted any policies and procedures relating to the pre-approval of audit and permitted
non-audit services.

Notwithstanding the foregoing requirement of the charter of the Audit Committee that audit and permitted

non-audit services must be approved in advance, the charter of the Audit Committee provides that
pre-approval is not necessary for minor non-audit services if (i) the aggregate amount of all such non-audit
services provided to us constitutes not more than 5% of the total revenues paid by us to our auditors during
the ﬁscal year in which the non-audit services are provided; (ii) such services were not recognized by us at
the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the
attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee.
We refer to the foregoing as the ‘‘De Minimus Exception.’’ None of the services listed above for 2012 were
approved pursuant to the De Minimus Exception. For 2011, 1.0% of total fees billed were approved pursuant
to the De Minimus Exception.

82

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are ﬁled as part of this Annual Report on Form 10-K:

PART IV

1.

Financial Statements

Pzena Investment Management, Inc.

Reports of KPMG LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . .

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . .

Consolidated Statements of Financial Condition as of December 31, 2012 and 2011 . . . . . . . . . .

Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 . .

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2011

and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011

and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-4

F-5

F-6

F-7

F-8

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-9

2.

Financial Statement Schedules

There are no Financial Statement Schedules ﬁled as part of this Annual Report, since the required

information is included in our consolidated ﬁnancial statements and in the notes thereto.

3.

Exhibit List

The Company has incorporated by reference herein certain exhibits as speciﬁed below pursuant to Rule
12b-32 of the Exchange Act. If speciﬁc material facts exist which contradict the representations and warranties
contained in the documents ﬁled or incorporated by reference in this Annual Report, corrective disclosure has
been provided.

Additional information about the Company may be found elsewhere in this Annual Report on Form 10-
K, and the Company’s other public ﬁlings, which are available without charge through the SEC’s website at
http://www.sec.gov, as well as through the Company’s website at www.pzena.com.

Exhibit

Description of Exhibit

3.1

3.2

4.1

4.2

4.3

4.4

10.1

Amended and Restated Certiﬁcate of Incorporation of Pzena Investment Management, Inc., effective
as of October 30, 2007(1)

Amended and Restated Bylaws of Pzena Investment Management, Inc., effective as of
October 30, 2007(1)

Form of Pzena Investment Management, Inc. Class A Common Stock Certiﬁcate(2)

Form of Exchange Rights of Class B Members(2)

Resale and Registration Rights Agreement, dated as of October 30, 2007, by and among Pzena
Investment Management, Inc. and the Holders named on the signature pages thereto(1)

Class B Stockholders’ Agreement, dated as of October 30, 2007, by and among Pzena Investment
Management, Inc. and the Class B Stockholders named on the signature pages thereto(1)

Amended and Restated Operating Agreement of Pzena Investment Management, LLC, dated as of
October 30, 2007, by and among Pzena Investment Management, Inc. and the Class B Members
named on the signature pages thereto(1)

83

Exhibit

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

Description of Exhibit

Tax Receivable Agreement, dated as of October 30, 2007, by and among Pzena Investment
Management, Inc., Pzena Investment Management, LLC and the Continuing Members and Exiting
Members named on the signature pages thereto(1)

Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan(1)

Pzena Investment Management, LLC Amended and Restated Bonus Plan, as amended, dated as of
October 21, 2008(3)

Pzena Investment Management, Inc. 2007 Equity Incentive Plan, as amended, dated as of
May 19, 2009(4)

Lease, dated as of February 4, 2003, between Magnolia Associates, Ltd. and Pzena Investment
Management, LLC, and the amendments thereto dated as of March 31, 2005 and
October 31, 2006(5)

Agreement of Sublease, dated November 4, 2011, between Pzena Investment Management, LLC
together, as Sublessor and Perimeter Internetworking Corp, as Sublessee(6)

Executive Employment Agreement for Richard S. Pzena, dated as of October 30, 2007, by and
among Pzena Investment Management, Inc., Pzena Investment Management, LLC and
Richard S. Pzena(1)

Executive Employment Agreement for John P. Goetz, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc., Pzena Investment Management, LLC and John P. Goetz(1)

Amended and Restated Executive Employment Agreement for William L. Lipsey, dated as of
October 30, 2007, by and among Pzena Investment Management, Inc., Pzena Investment
Management, LLC and William L. Lipsey(1)

Amendment to Amended and Restated Executive Employment Agreement for A. Rama Krishna,
dated as of October 30, 2007, by and among Pzena Investment Management, Inc., Pzena Investment
Management, LLC and A. Rama Krishna, as amended, dated as of October 8, 2009(7)

Indemniﬁcation Agreement for Richard S. Pzena, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc. and Richard S. Pzena(1)

Indemniﬁcation Agreement for Steven M. Galbraith, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc. and Steven M. Galbraith(1)

Indemniﬁcation Agreement for Joel M. Greenblatt, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc. and Joel M. Greenblatt(1)

Indemniﬁcation Agreement for Richard P. Meyerowich, dated as of October 30, 2007, by and
among Pzena Investment Management, Inc. and Richard P. Meyerowich(1)

Indemniﬁcation Agreement for Myron E. Ullman, III, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc. and Myron E. Ullman, III(1)

Indemniﬁcation Agreement for Ronald W. Tysoe, dated as of December 11, 2008, by and among
Pzena Investment Management, Inc. and Ronald W. Tysoe(8)

Indemniﬁcation Agreement for John P. Goetz, dated as of May 17, 2011, by and among Pzena
Investment Management, Inc. and John P. Goetz(6)

Indemniﬁcation Agreement for William L. Lipsey, dated as of May 17, 2011, by and among Pzena
Investment Management, Inc. and William L. Lipsey(6)

Pzena Investment Management, Inc. Non-Employee Director Deferred Compensation Plan, dated as
of July 21, 2009(9)

84

Exhibit

10.21

10.22

10.23

10.24

10.25

10.26

Description of Exhibit

Amendment, effective March 24, 2010, to Amended and Restated Operating Agreement of Pzena
Investment Management, LLC, dated as of October 30, 2007, by and among Pzena Investment
Management, Inc. as the Managing Member of Pzena Investment Management, LLC and those
Class B members whose signatures are affixed thereto(10)

Amendment, dated as of March 5, 2012, to Amended and Restated Operating Agreement of Pzena
Investment Management, LLC, dated as of October 30, 2007, by and among Pzena Investment
Management, Inc. as the Managing Member of Pzena Investment Management, LLC and those
Class B members whose signatures are affixed thereto(6)

Amendment to Executive Employment Agreement for Richard S. Pzena, dated as of November 1,
2012, by and among Pzena Investment Management, Inc., Pzena Investment Management, LLC, and
Richard S. Pzena(11)

Amendment to Executive Employment Agreement for John P. Goetz, dated as of November 1, 2012,
by and among Pzena Investment Management, Inc., Pzena Investment Management, LLC, and
John P. Goetz(11)

Amendment to Amended and Restated Executive Employment Agreement for William L. Lipsey,
dated as of November 1, 2012, by and among Pzena Investment Management, Inc., Pzena
Investment Management, LLC, and William L. Lipsey(11)

Amendment, dated as of November 12, 2012, to Tax Receivable Agreement, dated as of October 30,
2007, by and among Pzena Investment Management, Inc., Pzena Investment Management, LLC and
the Continuing Members and Exiting Members named on the signature pages thereto
(ﬁled herewith)

14.1

14.2

21.1

23.1

23.2

31.1

31.2

32.1

32.2

101

(1)

(2)

Code of Business Conduct and Ethics, effective as of October 25, 2007, amended as of
January 16, 2009(12)

Code of Ethics for Senior Financial Officers(10)

List of Subsidiaries of Pzena Investment Management, Inc. (ﬁled herewith)

Consent of KPMG LLP, Independent Registered Public Accounting Firm (ﬁled herewith)

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (ﬁled herewith)

Certiﬁcation of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) (ﬁled herewith)

Certiﬁcation of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) (ﬁled herewith)

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)

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)

Materials from the Pzena Investment Management, Inc. Annual Report on Form 10-K for the year
ended December 31, 2012, 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)

Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission
on December 5, 2007 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to Amendment No. 4 of the Registration Statement on Form S-1 (No. 333-143660) of Pzena
Investment Management, Inc., which was ﬁled with the Securities and Exchange Commission on October 22, 2007.

85

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission
on November 13, 2008 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission
on August 10, 2009 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to Amendment No. 1 of the Registration Statement on Form S-1 (No. 333-143660) of Pzena
Investment Management, Inc., which was ﬁled with the Securities and Exchange Commission on July 10, 2007.

Previously ﬁled as an exhibit to the Company’s annual report on Form 10-K ﬁled with the Securities and Exchange Commission on
March 14, 2012 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to the Company’s annual report on Form 10-K ﬁled with the Securities and Exchange Commission on
March 12, 2010 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to the Company’s current report on Form 8-K ﬁled with the Securities and Exchange Commission on
December 12, 2008 (SEC File No. 001-33761).

Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission
on November 9, 2009 (SEC File No. 001-33761).

(10) Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission

on May 7, 2010 (SEC File No. 001-33761).

(11) Previously ﬁled as an exhibit to the Company’s current report on Form 8-K ﬁled with the Securities and Exchange Commission on

November 2, 2012 (SEC File No. 001-33761).

(12) Previously ﬁled as an exhibit to the Company’s quarterly report on Form 10-Q ﬁled with the Securities and Exchange Commission

on May 11, 2009 (SEC File No. 001-33761).

86

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Pzena
Investment Management, Inc. has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

SIGNATURES

Dated: March 12, 2013

Pzena Investment Management, Inc.

By: /s/ RICHARD S. PZENA

Name: Richard S. Pzena
Title: Chief Executive Officer

Each person whose signature appears below constitutes and appoints Gary J. Bachman and Joan F.

Berger, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report, and to ﬁle the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done to effectuate the intent and purpose of this paragraph,
as fully as he or she might or could do in person, hereby ratifying and conﬁrming all that said attorneys-in-
fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below

by the following persons on behalf of Pzena Investment Management, Inc. and in the capacities and on the
dates indicated.

SIGNATURE

TITLE

DATE

/s/ RICHARD S. PZENA
Richard S. Pzena

/s/ GARY J. BACHMAN
Gary J. Bachman

/s/ JOHN P. GOETZ
John P. Goetz

/s/ WILLIAM L. LIPSEY
William L. Lipsey

/s/ STEVEN M. GALBRAITH
Steven M. Galbraith

/s/ JOEL M. GREENBLATT
Joel M. Greenblatt

/s/ RICHARD P. MEYEROWICH
Richard P. Meyerowich

/s/ RONALD W. TYSOE
Ronald W. Tysoe

Chairman of the Board and Chief Executive
Officer (principal executive officer)

March 12, 2013

Chief Financial Officer
(principal ﬁnancial and accounting officer)

March 12, 2013

March 12, 2013

March 12, 2013

March 12, 2013

March 12, 2013

March 12, 2013

March 12, 2013

Director

Director

Director

Director

Director

Director

87

INDEX TO FINANCIAL STATEMENTS OF
PZENA INVESTMENT MANAGEMENT, INC.

Pzena Investment Management, Inc.

Reports of KPMG LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . .

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . .

Consolidated Statements of Financial Condition as of December 31, 2012 and 2011 . . . . . . . . .

Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011

and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2011

and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011

and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-4

F-5

F-6

F-7

F-8

F-9

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Pzena Investment Management, Inc.:

We have audited the accompanying consolidated statements of ﬁnancial condition of Pzena Investment

Management, Inc. (the ‘‘Company’’) as of December 31, 2012 and 2011, and the related consolidated
statements of operations, changes in equity, and cash ﬂows for each of the years in the two-year period ended
December 31, 2012. These consolidated ﬁnancial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An
audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as
well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material
respects, the consolidated ﬁnancial position of Pzena Investment Management, Inc. as of December 31, 2012
and 2011, and the results of their operations and their cash ﬂows for each of the years in the two-year period
ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over ﬁnancial reporting as of December 31, 2012, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 12, 2013 expressed an
unqualiﬁed opinion on the effectiveness of the Company’s internal control over ﬁnancial reporting.

/s/ KPMG LLP

New York, New York
March 12, 2013

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Pzena Investment Management, Inc.:

We have audited Pzena Investment Management, Inc.’s (the Company) internal control over ﬁnancial
reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over ﬁnancial reporting and for its
assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over ﬁnancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over ﬁnancial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company’s internal control over ﬁnancial reporting is a process designed 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. A company’s internal control over
ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
ﬁnancial statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, Pzena Investment Management, Inc. maintained, in all material respects, effective internal

control over ﬁnancial reporting as of December 31, 2012, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of ﬁnancial condition of Pzena Investment Management,
Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in
equity, and cash ﬂows for each of the years in the two-year period ended December 31, 2012, and our report
dated March 12, 2013 expressed an unqualiﬁed opinion on those consolidated ﬁnancial statements.

New York, New York
March 12, 2013

/s/ KPMG LLP

F-3

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
of Pzena Investment Management, Inc.

We have audited the accompanying consolidated statements of operations, changes in equity, and cash
ﬂows of Pzena Investment Management, Inc. (the ‘‘Company’’) for the year ended December 31, 2010. These
ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these ﬁnancial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An
audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as
well as evaluating the overall ﬁnancial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated results of operations and cash ﬂows of Pzena Investment Management, Inc. for the year ended
December 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

March 15, 2011

F-4

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

ASSETS

Cash and Cash Equivalents
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from Broker
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advisory Fees Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments, at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable from Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Receivables
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Expenses and Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Asset, Net of Valuation Allowance of $59,917 and $61,050,

As of

December 31,
2012

December 31,
2011

$ 32,645
1,030
22
14,626
5,170
83
51
585

$ 35,083
1,030
457
14,717
4,919
66
54
688

respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,688

8,835

Property and Equipment, Net of Accumulated Depreciation of $2,695 and

$2,516, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

779
$ 64,679

829
$ 66,678

LIABILITIES AND EQUITY

Liabilities:

Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . .
Due to Broker
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to Selling and Converting Shareholders . . . . . . . . . . . . . . . . . .
Lease Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,305
23
9,656
1,203
1,327
199
16,713

$

6,062
—
11,218
1,795
1,173
206
20,454

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; 11,149,941 and 10,575,089 Shares Issued and
Outstanding in 2012 and 2011, respectively)

. . . . . . . . . . . . . . . . . . .

Class B Common Stock (Par Value $0.000001; 750,000,000 Shares

Authorized; 53,482,324 and 53,967,555 Shares Issued and Outstanding
in 2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Paid-In Capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Pzena Investment Mangement, Inc.’s Equity . . . . . . . . . . . . . . .
Non-Controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND EQUITY . . . . . . . . . . . . . . . . . . . . . . .

—

111

—

105

—
11,765
2,693
14,569
33,397
47,966
$ 64,679

—
12,000
1,832
13,937
32,287
46,224
$ 66,678

See accompanying notes to consolidated ﬁnancial statements.
F-5

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

For the Years Ended December 31,
2011

2010

2012

REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

76,280

$

83,045

$

77,525

EXPENSES
Compensation and Beneﬁts Expense . . . . . . . . . . . . . . . . .
General and Administrative Expense . . . . . . . . . . . . . . . . .
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER INCOME/(EXPENSE)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Realized and Unrealized Gain/(Loss)

31,755
7,346
39,101
37,179

200
(30)
148

34,565
10,626
45,191
37,854

244
—
161

from Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,520

(355)

Change in Liability to Selling and

Total Other Income/(Expense)

Converting Shareholders . . . . . . . . . . . . . . . . . . . . . . .
Other Income/(Expense) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Income Before Income Taxes
. . . . . . . . . . . . . . . . . . . . .
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net Income Attributable to

(2,647)
(54)
(863)
36,316
1,911
34,405

(1,581)
65
(1,466)
36,388
3,145
33,243

29,548
8,007
37,555
39,970

208
(232)
128

395

(3,312)
69
(2,744)
37,226
741
36,485

Non-Controlling Interests . . . . . . . . . . . . . . . . . . . . . . .

30,565

29,861

32,674

Net Income Attributable to Pzena

Investment Management, Inc. . . . . . . . . . . . . . . . . . . . .

$

3,840

Net Income for Basic Earnings per Share . . . . . . . . . . . . .
Basic Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . .
Basic Weighted Average Shares Outstanding . . . . . . . . . . .

Net Income for Diluted Earnings per Share . . . . . . . . . . . .
Diluted Earnings per Share . . . . . . . . . . . . . . . . . . . . . . .
Diluted Weighted Average Shares Outstanding(1) . . . . . . . . .

$
$

3,840
0.36
10,787,540

$
$

20,821
0.32
65,491,273

$

$
$

3,382

3,382
0.34
9,972,978

$
$

20,631
0.32
65,095,797

$

$
$

3,811

3,811
0.41
9,186,520

$
$

22,419
0.34
64,985,753

Cash Dividends per Share of Class A Common Stock . . . . .

$

0.28

$

0.12

$

0.24

(1)

The Company issues restricted Class B units that have non-forfeitable dividend rights. Under the ‘‘two-class method,’’ these units
are considered participating securities are required to be included in the computation of diluted earnings per share.

See accompanying notes to consolidated ﬁnancial statements.
F-6

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S

PZENA INVESTMENT MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

OPERATING ACTIVITIES

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 34,405

$ 33,243

$ 36,485

For the Years Ended December 31,
2010
2011
2012

Adjustments to Reconcile Net Income to Cash Provided by

Operating Activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Cash Compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Share Grant
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Realized and Unrealized (Gain)/Loss from Investments . .
Lease Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in Liability to Selling and Converting Shareholders . .
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in Operating Assets and Liabilities:

Advisory Fees Receivable . . . . . . . . . . . . . . . . . . . . . . . . .
Due from Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Expenses and Other Assets
. . . . . . . . . . . . . . . . . .
Due to Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable, Accrued Expenses, and Other Liabilities . .
Tax Receivable Agreement Payments . . . . . . . . . . . . . . . . .
Change in Lease Liability . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of Investments(1)
. . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Sale of Investments . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . .

INVESTING ACTIVITIES

Purchases of Investments in Deferred Compensation Plan(1)
Proceeds from Investments in Deferred Compensation Plan(1)
Payments (to)/from Related Parties
Purchase of Property and Equipment

. . .
. .
. . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Net Cash (Used in) Investing Activities . . . . . . . . . . . . . . . . . .

FINANCING ACTIVITIES

Repurchase and Retirement of Class A Common Stock . . . . . . .
Repurchase and Retirement of Class B Units . . . . . . . . . . . . . .
. . . . . . . .
Repurchase and Retirement of Class B Unit Options
Distributions to Non-Controlling Interests . . . . . . . . . . . . . . . .
Contributions from Non-Controlling Interests
. . . . . . . . . . . . .
Term Loan and Senior Subordinated Notes Repayment . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends
. . . . . . . . . . . . . . . . . .
NET CHANGE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS — Beginning of Period . . . .
Effect of Consolidation/(Deconsolidation) of Affiliates . . . . . . . . .
Net Change in Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS — End of Period . . . . . . . .
Supplementary Cash Flow Information:

Net Cash Used in Financing Activities

In-Kind Distribution to Non-Controlling Interests of Equity

179
(55)
2,990
337
(1,520)
—
2,647
(529)

63
435
—
134
23
(2,981)
(4,451)
(592)
(74,140)
75,013
31,958

(521)
544
(16)
(74)
(67)

406
874
5,047
280
355
1,863
1,581
472

558
(25)
390
389
(6)
606
(84)
(68)
(40,688)
40,945
46,138

(1,471)
1,229
(3)
(157)
(402)

432
—
3,653
280
(395)
—
3,312
(1,914)

(1,897)
86
(13)
(554)
(731)
(118)
—
—
(3,895)
7,360
42,091

(2,042)
—
44
(70)
(2,068)

(746)
—
(190)
(95)
(313)
—
(30,170)
(26,244)
69
450
—
—
(2,979)
(1,193)
(27,082)
(34,329)
(2,438) $ 18,654
$ 16,381
48
18,654
$ 35,083

$
$ 35,083
—
(2,438)
$ 32,645

—
(2)
—
(31,525)
4,321
(10,000)
(2,248)
(39,454)
$
569
$ 15,908
(96)
569
$ 16,381

Securities, at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

370
30
2,310

$
$
$

— $
— $
$

2,877

—
232
2,596

(1)

2010 numbers were changed to conform with 2011 presentation

See accompanying notes to consolidated ﬁnancial statements.
F-8

Pzena Investment Management, Inc.
Notes to Consolidated Financial Statements

Note 1 — Organization

Pzena Investment Management, Inc. (the ‘‘Company’’) functions as 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
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 which is registered under the Investment Advisers Act of

1940 and is headquartered in New York, New York. As of December 31, 2012, 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, through its investment in its operating company, has consolidated the results of operations

and ﬁnancial condition of the following entities as of December 31, 2012:

Legal Entity

Type of Entity (Date of Formation)

Operating
Company’s
Ownership at
December 31,
2012

Pzena Investment Management, Pty .

Pzena Investment Management Special
.

Situations, LLC .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

Pzena Investment Funds Trust, Pzena Large Cap
.
.
.

Value Fund .

.

.

.

.

.

.

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.

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.

.

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.

.

.

. . .

Delaware Limited Liability Company (12/01/2010)

. . . Massachusetts Trust (11/01/2002)

. . .

Australian Proprietary Limited Company (12/16/2009)

100.0%

Pzena International Value Service, a series of the Pzena

Investment Management International, LLC .

.

.

. . . .

Delaware Limited Liability Company (12/22/2003)

99.9%

0.0%

0.0%

Note 2 — Signiﬁcant Accounting Policies

Basis of Presentation:

The consolidated ﬁnancial statements are prepared in conformity with U.S. generally accepted accounting

principles (‘‘GAAP’’) and related Securities and Exchange Commission (‘‘SEC’’) rules and regulations. The
Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling ﬁnancial
interest, which includes Pzena Investment Management, Pty, and Pzena Investment Management Special
Situations, LLC. The Company also consolidates variable-interest entities (‘‘VIEs’’) where the Company is
deemed to be the primary beneﬁciary, which includes Pzena Investment Funds Trust, Pzena Large Cap Value
Fund (‘‘Pzena Large Cap Value Fund’’) and Pzena International Value Service, a series of Pzena Investment
Management International, LLC (‘‘Pzena International Value Fund’’). These majority-owned subsidiaries in
which the Company has a controlling ﬁnancial interest and the VIEs where the Company is deemed to be the
primary beneﬁciary are collectively referred to as ‘‘consolidated subsidiaries.’’ As required by the
Consolidation Topic of the Financial Accounting Standards Board Accounting Standards Codiﬁcation (‘‘FASB
ASC’’), the Company also consolidates or consolidated non-variable-interest entities in which it acts or acted
as the general partner or managing member. All of these entities represent or represented private investment
partnerships over which the Company exercises or exercised control. 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.

The operating company is the managing member of Pzena International Value Service. As of February 1,

2011, as a result of a shift in the equity ownership of that entity on that date, the operating company was
considered the primary beneﬁciary of this entity. As a result, the entity was consolidated as of February 1,
2011. At December 31, 2012, Pzena International Value Service’s $1.3 million in net assets were included in
the Company’s consolidated statements of ﬁnancial condition.

F-9

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

Note 2 — Signiﬁcant Accounting Policies (Continued)

Pzena Large Cap Value Fund is a Massachusetts Trust in which a majority of the trustees are members of

the executive committee of the operating company. A majority of the trustees do not hold equity investments
in this trust. Since the holders of the equity investments in this partnership lack a controlling ﬁnancial interest
in it, this entity is deemed to be a VIE. The Company is considered the primary beneﬁciary of this VIE. At
December 31, 2012, the Pzena Large Cap Value Fund’s $0.9 million in net assets were included in the
Company’s consolidated statements of ﬁnancial condition.

The Pzena Global Value Service was a limited liability company in which the Company held investments

to satisfy its obligations under its deferred compensation program and certain of the operating company’s
executive committee members held personal investments. In 2010, the Company determined that, because of
the deﬁnitions of related party transactions in the Related Party Disclosures Topic of the FASB ASC, the
operating company was the primary beneﬁciary of the Pzena Global Value Service during the year ended
December 31, 2010. During the year ended December 31, 2010, the assets of the Pzena Global Value Service
were redeemed and the entity was liquidated.

During 2010, the Company redeemed its investments in the Pzena Emerging Markets Focused Value
Service, and the Pzena Emerging Market Countries Value Service. The operating company maintained its
controlling ﬁnancial interest in these entities, since it continued to serve as the managing member of each of
these entities. Correspondingly, these entities were deemed VIEs. After the Company redeemed its interests in
these entities, certain members of the operating company’s executive committee became majority holders of
the equity interests in the partnerships, and, therefore, the Company continued to be considered the primary
beneﬁciary of these entities. As such, the results of operations and ﬁnancial position of these entities continued
to be consolidated by the Company at June 30, 2010, in accordance with the Consolidation Topic of the
FASB ASC.

In August 2010, the holder of the equity investments in the Pzena Emerging Markets Focused Value
Service and the Pzena Emerging Market Countries Value Service became the managing member of these
entities. This appointment gave the holder of the equity investments a controlling ﬁnancial interest in these
entities. Correspondingly, the Company was no longer deemed to control these entities. As a result, the Pzena
Emerging Markets Focused Value Service and the Pzena Emerging Market Countries Value Service were
deconsolidated at August 31, 2010.

All of the consolidated investment partnerships are, or were, investment companies under the American

Institute of Certiﬁed Public Accountants Audit and Accounting Guide for Investment Companies. The
Company has retained the specialized accounting for these partnerships pursuant to the Consolidation of
Partnerships and Similar Entities Subtopic of the FASB ASC. Thus, the Company reports these investment
partnerships’ investments in Investments at Fair Value, with net realized and unrealized gains and losses
reported in earnings in the consolidated statements of operations.

VIEs that are not consolidated continue to receive investment management services from the Company,

and are vehicles through which the Company offers its Global Value and/or International (ex-U.S.) Value
strategies. The total net assets of these VIEs was approximately $150.9 million and $219.2 million at
December 31, 2012 and December 31, 2011, respectively. Neither the Company nor the operating company
were exposed to losses as a result of its involvement with these entities because they had no direct investment
in them.

The Company 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 adjustments to additional paid-in capital or non-
controlling interests, as applicable, on the consolidated statements of ﬁnancial position.

F-10

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

Note 2 — Signiﬁcant Accounting Policies (Continued)

Management’s Use of Estimates:

The preparation of ﬁnancial statements in conformity with 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 ﬁnancial statements, and the reported amounts of revenues and expenses
for the period. Actual results could differ from those estimates.

Fair Values of Financial Instruments:

The carrying amounts of all ﬁnancial instruments in the consolidated statements of ﬁnancial condition are

presented at their fair value.

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 their
contractual terms. Advisory fee income also includes performance fees that may be earned by the Company
depending on the investment return of the assets under management. 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. Following the preferred method identiﬁed in the Revenue Recognition Topic of the FASB
ASC, such performance fee income is recorded at the conclusion of the contractual performance period, when
all contingencies are resolved. For the years ended December 31, 2012, 2011, and 2010, the Company
recognized approximately $0.3 million, $3.8 million and $0.5 million, respectively, in performance
fee income.

Cash and Cash Equivalents:

At December 31, 2012 and 2011, cash and cash equivalents was $32.6 million and $35.1 million,

respectively. The Company considers all money market funds and 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 deposit and other accounts whose balances often exceed federally insured limits.

Interest on cash and cash equivalents is recorded as interest income on an accrual basis in the

consolidated statements of operations.

Restricted Cash:

The Company maintained compensating balances of $1.0 million at December 31, 2012 and 2011,

respectively, as collateral for a letter of credit issued by a third party in lieu of a cash security deposit, as
required by the Company’s lease for its New York office space. Such amounts are recorded in Restricted Cash
in the consolidated statements of ﬁnancial condition.

Due to/from Broker:

Due to/from Broker consists primarily of and amounts payable/receivable for unsettled securities

transactions held/initiated at the clearing brokers of the Company’s consolidated subsidiaries.

F-11

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

Note 2 — Signiﬁcant Accounting Policies (Continued)

Investments, at Fair Value:

Investments at Fair Value represents the securities held by the Company and its consolidated subsidiaries,

as well as investments in mutual funds. The Company’s investments in third-party mutual funds are held to
satisfy the Company’s obligations under its deferred compensation program. Dividends associated with the
investments of the Company’s consolidated subsidiaries are recorded as dividend income on an ex-dividend
basis in the consolidated statement of operations.

All such investments are recorded at fair value, with net realized and unrealized gains and losses reported

in earnings in the consolidated statements of operations.

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).

The Company’s fair value measurements relate to its consolidated investments in equity securities, which
are exchange-traded securities with quoted prices in active markets, and its investments in mutual funds. The
fair value measurements of the equity securities and mutual funds have been classiﬁed as Level 1.

The following table presents these instruments’ fair value at December 31, 2012:

Assets:

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Investments in Mutual Funds
Total Fair Value . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2,225
2,945
5,170

$

$

— $
—
— $

Level 1

Level 2
(in thousands)

Level 3

The following table presents these instruments’ fair value at December 31, 2011:

Assets:

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Investments in Mutual Funds
Total Fair Value . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2,285
2,634
4,919

$

$

— $
—
— $

Level 1

Level 2
(in thousands)

Level 3

—
—
—

—
—
—

Securities Valuation:

Investments in equity securities 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. Investments in mutual funds are
valued at the closing net asset value per share of the fund on the day of valuation. Transactions are recorded
on a trade date basis.

F-12

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

Note 2 — Signiﬁcant Accounting Policies (Continued)

The net realized gain or loss on sales of securities and mutual funds is determined on a speciﬁc
identiﬁcation basis and is included in net realized and unrealized gain/(loss) 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 and collections and current credit conditions. At December 31, 2012 and 2011, no allowance
for doubtful accounts has been deemed necessary.

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, 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. Similarly, the income of the Company’s consolidated subsidiaries
is not subject to income taxes, since it is allocated to each partnership’s individual partners. The operating
company has made a provision for New York City Unincorporated Business Tax (‘‘UBT’’).

The Company and its consolidated subsidiaries account for all federal, state, and local 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
December 31, 2012, the Company had a $59.9 million valuation allowance against deferred tax assets
recorded as part of the Company’s initial public offering and the subsequent exchanges of Class B units for
shares of its Class A common stock. At December 31, 2011, the Company had a $61.1 million valuation
allowance against these 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.

F-13

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

Note 2 — Signiﬁcant Accounting Policies (Continued)

Foreign Currency:

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 gain/(loss) on 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, and foreign withholding taxes recorded on the Company’s books
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.

The functional currency of the Company is the United States Dollar. The functional currency of the

Company’s representative office in Australia is the Australian Dollar. Assets and liabilities of this office are
translated at the spot 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. For the years
ended December 31, 2012, 2011, and 2010, the Company did not record any accumulated other
comprehensive income.

Note 3 — Compensation and Beneﬁts

Compensation and beneﬁts expense to employees and members is comprised of the following:

Cash Compensation and Other Beneﬁts . . . . . . . .
Non-Cash Compensation . . . . . . . . . . . . . . . . . .
Total Compensation and Beneﬁts Expense(1). . . .

$

$

2012

For the Year Ended December 31,
2011
(in thousands)
29,518
$
5,047
34,565

28,690
3,065
31,755

$

$

$

2010

25,895
3,653
29,548

(1)

In 2011, the Company recognized approximately $2.2 million in charges related to certain employee departures.

F-14

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

Note 3 — Compensation and Beneﬁts (Continued)

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. Details of restricted Class B
units, options to purchase operating company Class B units, restricted shares of Class A common stock, and
phantom operating company Class B units awarded in the three years ended December 31, are as follows:

2012

For the Year Ended December 31,
2011

2010

Amount

Fair
Value(1)

Amount

Fair
Value(1)

Amount

Fair
Value(1)

Phantom Operating Company

Class B Units(2)

. . . . . . . . .
Restricted Class B Units . . . . .
Deferred Compensation

Phantom Operating Company
. . . . . . . . . .
Class B Units

Options to Purchase Operating

4,103,896
124,718

80,831

Company Units . . . . . . . . .

51,625

Restricted Shares of Class A

Common Stock . . . . . . . . .

44,484

$
$

$

$

$

3.85
4.85

—
120,212

4.33

71,428

1.32

458,194

5.24

—

$
$

$

$

$

—
4.90

—
183,920

7.35

40,000

1.12

42,411

—

—

$
$

$

$

$

—
7.60

8.00

2.22

—

(1)

(2)

Represents the weighted average grant date estimated fair value per share, unit, or option.

Represents phantom operating company Class B units issued under the 2006 Equity Incentive Plan. These phantom units vest
ratably over ten years and are not entitled to receive dividend or dividend equivalents until vested.

Pursuant to the Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan
(‘‘the 2006 Equity Incentive Plan’’), the operating company issues restricted units, phantom Class B units and
options to purchase units in our operating company. Under the Pzena Investment Management, Inc. 2007
Equity Incentive Plan (‘‘the 2007 Equity Incentive Plan’’), the Company issued shares of restricted Class A
common stock and options to acquire shares of Class A common stock.

Under the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the ‘‘Bonus Plan’’),

eligible employees whose cash compensation is in excess of certain thresholds have a portion of that excess
mandatorily deferred. These deferred amounts may be invested, at the employee’s discretion, in certain
third-party mutual funds, phantom operating company Class B units, or money market funds. Amounts
deferred in any calendar year reduce that year’s cash compensation expense and are both amortized and vest
ratably over a four-year period commencing the following year. As of December 31, 2012 and 2011, the
liability associated with deferred compensation investment accounts was $1.3 million and $1.2 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 the compensation otherwise
payable to the director in cash, deferred in the form of phantom shares of Class A common stock of the
company. Elections to defer compensation under the Director Plan are made on a year-to-year basis. Elections
of deferred stock units result in the issuance of phantom shares of Class A common stock. Distributions under
the Director Plan shall be made in a single distribution of shares of our 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 and are not referenced above. During the years ended December 31,
2012, 2011 and 2010, the directors received 72,228, 39,756, and 35,516 phantom shares of Class A common
stock, respectively, reﬂecting the annual deferral of compensation and additional phantom shares issued as of

F-15

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

Note 3 — Compensation and Beneﬁts (Continued)

each date and in the amount of dividends and/or special dividends and distributions that are paid with respect
to Class A common stock of the Company. As of December 31, 2012 and 2011, there were 147,500 and
75,272 phantom shares of Class A common stock outstanding, respectively. There have been no distributions
made under the Director Plan to date.

The Company uses a fair value method in recording the expense associated with the granting of restricted

operating company Class B units, restricted shares of Class A common stock, phantom operating company
Class B units, and options to purchase Class B units and shares of Class A common stock under the 2006 and
2007 Equity Incentive Plans, phantom operating company Class B units under the Bonus Plan, and phantom
shares of Class A common stock under the Director Plan.

The fair value of awarded restricted shares of Class A common stock under the 2007 Equity Incentive
Plan and phantom shares of Class A common stock under the Director Plan is determined based on the closing
market price of our Class A common stock on the date of grant. The fair value of awarded restricted Class B
units and phantom operating company Class B units under the 2006 Equity Incentive Plan, and phantom
operating company Class B units under the Bonus Plan is determined by reference to the market price of our
Class A common stock on the date of grant since Class B units are exchangeable for shares of our Class A
common stock on a one-for-one basis. Certain of the phantom operating company Class B units and restricted
shares of Class A common stock are not entitled to dividends or dividend equivalents while unvested. The fair
value of these awards is determined based on the closing market price of our Class A common stock on the
date of grant, net of the present value of the dividends using the applicable risk-free interest rate.

The fair value of options to purchase operating company Class B units is determined by using an

appropriate option pricing model on the grant date. For each of the three years ended December 31, the
Company recognized compensation expense using the Black-Scholes option pricing model with the following
weighted average assumptions:

Weighted Average Time Until Exercise . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-Free Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Year Ended December 31,
2011
7 years
43%
1.44%
5.66%

2012
7 years
43%
1.24%
4.96%

2010
7 years
39%
2.69%
3.56%

Weighted Average Time Until Exercise — The expected term is based on the Company’s historical

experience and the particular terms of its option awards.

Expected Volatility — Due to the lack of sufficient historical data for the Company’s own shares, the

Company based its expected volatility on a representative peer group.

Risk-Free Rate — The risk-free rate for periods within the expected term of the options is based on the
interest rate of a traded zero-coupon U.S. Treasury bond with a term equal to the options’ expected term on
the date of grant.

Dividend Yield — The dividend yield is based on the Company’s anticipated dividend payout over the

expected term of the option awards.

F-16

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

Note 3 — Compensation and Beneﬁts (Continued)

The following is a summary of the option activity for the three years ended December 31, 2012

2012

For the Year Ended December 31,
2011

2010

Options
Outstanding
Beginning Balance . . . . . . 5,071,227
51,625
(2,167)
(180,878)

Options Granted . . . . . .
Options Cancelled . . . . .
Options Exercised . . . . .
Options Repurchased by

(415,000)
the Company . . . . . .
—
. . . . . . . . . . . . .
Ending Balance . . . . . . . . 4,524,807

Other

Weighted
Average
Exercise Price
7.19
$
5.24
8.00
4.22

Options
Outstanding
4,612,033
458,194
(7,500)
—

Weighted
Average
Exercise Price
7.45
$
4.77
11.40
—

Options
Outstanding
4,580,622
42,411
(11,000)
—

Weighted
Average
Exercise Price
7.44
$
7.58
6.20
—

11.61
—
6.88

—
8,500
5,071,227

$

$

—
4.66
7.19

—
—
4,612,033

$

—
—
7.45

The weighted average grant-date fair values of the options issued in 2012, 2011, and 2010 were $1.32,

$1.12, and $2.22, respectively, per option. The 180,878 options to purchase operating company Class B units
that were exercised in 2012 resulted in 74,271 net Class B units issued, as a result of the redemption of
106,607 Class B units for the cashless exercise of the options. The 415,000 options repurchased by the
Company in 2012 were repurchased at fair value for an aggregate amount of $0.3 million.

Exercise prices for stock options outstanding and exercisable as of December 31, 2012 are as follows:

Options Outstanding

Options Exercisable

Number
Outstanding as of
December 31,
2012

Weighted-
Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Number
Exercisable as of
December 31,
2012

Weighted-
Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

$4.22 − $5.00 . .
$5.00 − $10.00 .
$10.00 − $15.00
$4.22 − $15.00 .

2,276,128
1,454,369
794,310
4,524,807

6.6
7.1
4.6
6.4

$

$

4.33
7.89
12.36
6.88

2,062,540
1,402,744
685,310
4,150,594

6.4
7.0
4.5
6.3

$

$

4.29
7.99
12.51
6.89

Based on the closing market price of the Company’s Class A common stock on December 31, 2012, the

aggregate intrinsic value of the Company’s stock options was as follows:

Aggregate Intrinsic Value

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,442

$2,299

Phantom operating company Class B units issued pursuant to the Bonus Plan, which generally vest

ratably over four years, are summarized as follows:

Options
Outstanding

Options
Exercisable

(in thousands)

Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Phantom Class B Units Issued . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Vesting of Phantom Class B Units
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-17

For the Year Ended December 31,
2011
81,283
71,428
(79,141)
73,570

2012
73,570
80,831
(48,061)
106,340

2010
102,555
40,000
(61,272)
81,283

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

Note 3 — Compensation and Beneﬁts (Continued)

During December of 2012, the operating company granted 4,103,896 phantom Class B units pursuant to
the 2006 Equity Incentive Plan. These phantom units vest ratably over 10 years and are not eligible to receive
dividends or dividend equivalents until vested. No such phantom units were granted during the years ended
December 31, 2011 and 2010. As of December 31, 2012, the Company had approximately $15.8 million in
unrecorded compensation cost related to these unvested phantom units. The Company anticipates that this
unrecorded cost will amortize ratably over the vesting period of the award.

For the year ended December 31, 2012, we awarded $1.1 million in delayed-vesting cash awards issued
to certain members. These delayed-vesting cash awards have varying vesting schedules, with $0.6 million to
be paid in 2013 and the remaining $0.5 million to be paid in 2014. For the year ended December 31, 2011,
we awarded $1.0 million in delayed-vesting cash awards, of which $0.6 million was paid during 2012 and the
remaining $0.4 million to be paid in 2013. For the year ended December 31, 2010, we awarded $0.5 million
in delayed-vesting cash awards, of which $0.3 million was paid in 2011, with the remaining $0.2 million paid
during 2012.

As of both December 31, 2012 and 2011, the Company had approximately $2.1 million in unrecorded
compensation expense related to unvested operating company phantom Class B units issued pursuant to its
Bonus Plan, operating company Class B unit, option grants issued under the 2006 Equity Incentive Plan, and
restricted Class A common stock issued under the 2007 Equity Incentive Plan. The Company anticipates that
the amortization of these amounts will be approximately $1.2 million in 2013, $0.6 million in 2014, $0.2
million in 2015, and $0.1 million in 2016.

Note 4 — Employee Beneﬁt Plans

During 2011, the operating company implemented 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. During the year ended December 31, 2012,
the expense recognized in connection with this plan was $0.6 million. No such expenses were incurred in the
years ended December 31, 2011 and 2010.

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. For the years
ended December 31, 2012, 2011, and 2010, the Company’s basic earnings per share was determined
as follows:

For the Year Ended December 31,
2011
(in thousands, except share and per share amounts)

2010

2012

Net Income for Basic Earnings per Share . . . .

Basic Weighted-Average Shares Outstanding . .
Basic Earnings per Share . . . . . . . . . . . . . . .

$

$

3,840

10,787,540
0.36

$

$

3,382

9,972,978
0.34

$

$

3,811

9,186,520
0.41

Diluted earnings per share adjusts this calculation to reﬂect the impact of all outstanding operating

company membership units, phantom operating company Class B units, phantom Class A common stock,
outstanding operating company 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 generally assumes all outstanding operating

F-18

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

Note 5 — Earnings per Share (Continued)

company membership units are converted into Company stock at the beginning of the reporting period and the
resulting change to Company 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.

For the years ended December 31, 2012, 2011, and 2010, the Company’s diluted net income was

determined as follows:

2012

For the Year Ended December 31,
2011
(in thousands)

2010

Net Income Attributable to Non-Controlling Interests of
Pzena Investment Management, LLC . . . . . . . . . . .
Less: Assumed Corporate Income Taxes . . . . . . . . .

Assumed After-Tax Income of Pzena Investment

Management, LLC . . . . . . . . . . . . . . . . . . . . . . .
Net Income of Pzena Investment Management, Inc . . .
Diluted Net Income . . . . . . . . . . . . . . . . . . . . . . .

$

$

29,711
12,730

16,981
3,840
20,821

$

$

30,188
12,939

17,249
3,382
20,631

$

$

32,445
13,837

18,608
3,811
22,419

Under the two-class method, 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. Dividends 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.

F-19

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

Note 5 — Earnings per Share (Continued)

For the years ended December 31, 2012, 2011, and 2010, the Company’s diluted earnings per share were

determined as follows:

For the Year Ended December 31,
2011
(In thousands, except share and per share amounts)

2010

2012

Diluted Net Income Allocated to:

Class A Common Stock . . . . . . . . . . . . . . . . .
. . . . . . .
Participating Class B Restricted Units
Total Diluted Net Income Attributable to

Shareholders

. . . . . . . . . . . . . . . . . . . . . . . .

$

$

20,742
79

20,821

$

$

20,597
34

22,419
—

20,631 $

22,419

Basic Weighted-Average Shares Outstanding . . . . .
Dilutive Effect of Operating Company B Units . . .
Dilutive Effect of Options(1) . . . . . . . . . . . . . . . .
Dilutive Effect of Phantom Units
. . . . . . . . . . . .
Dilutive Effect of Restricted Shares of Class A

Common Stock(2)
. . . . . . . . . . . . . . . . . . . . .
Dilutive Weighted-Average Shares Outstanding .

Add: Participating Restricted Operating

Company Class B Units(3)
Total Dilutive Weighted-Average Shares

. . . . . . . . . . . .

10,787,540
53,783,093
535,629
140,397

9,972,978
54,418,301
571,439
25,564

9,186,520
55,113,358
658,407
27,468

1,099
65,247,758

—
64,988,282

—
64,985,753

243,515

107,515

—

Outstanding . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share . . . . . . . . . . . . . . . .

65,491,273
0.32

$

65,095,797

$

0.32 $

64,985,753
0.34

(1)

(2)

(3)

Represents the dilutive effect of options to purchase operating company Class B units and Company Class A common stock.

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.

Restricted Class B Units granted to employees have nonforfeitable rights to dividends 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.

For the years ended December 31, 2012, 2011, and 2010, the following options to purchase operating
company Class B units, options to purchase shares of Class A common stock, phantom operating company
Class B units, phantom shares of Class A common stock, restricted shares of Class A common stock and Class
B Unit Based Awards were excluded from the calculation of diluted net income per share, as their inclusion
would have had an antidilutive effect for the respective periods:

For the Year Ended December 31,
2011

2010

2012

Options to Purchase Operating Company

Class B Units . . . . . . . . . . . . . . . . . . . . . . . .
Options to Purchase Class A Common Stock . . . .
Phantom Operating Company Class B Units &

Class A Common Stock . . . . . . . . . . . . . . . . .
Restricted Class A Common Stock . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,443,878
961,750

278,944
11,541
4,696,113

2,079,646
961,750

—
—
3,041,396

1,655,226
961,750

—
—
2,616,976

F-20

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

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 December 31, 2012,
the holders of Class A common stock (through the Company) and the holders of Class B units of the
operating company held approximately 17.2% and 82.8%, respectively, of the economic interests in the
operations of the business. As of December 31, 2011, the holders of Class A common stock (through the
Company) and the holders of Class B units of the operating company held approximately 16.3% and 83.7%,
respectively, of the economic interests in the operations of the business.

Each Class B unit of the operating company has a corresponding share of the Company’s Class B
common stock, par value $0.000001 per share. 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 this
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 cancelled. 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, and acquired in
the future, together on all matters submitted to a vote of the 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.

On August 31, 2012, September 15, 2011, March 28, 2011, and March 31, 2010, certain of the operating
company’s members exchanged an aggregate of 722,521, 670,902, 536,528, and 734,618, respectively, of their
Class B units for an equivalent number of shares of Company Class A common stock. These acquisitions of
additional operating company membership interests were treated as reorganizations of entities under common
control as required by the Business Combinations Topic of the FASB ASC.

F-21

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

Note 6 — Shareholders’ Equity (Continued)

The incremental assets and liabilities assumed in the exchanges were recorded on August 31, 2012,

September 15, 2011, March 28, 2011, and March 31, 2010 as follows:

August 31,
2012

September 15,
2011

March 28,
2011

March 31,
2010

(in thousands)

Pzena Investment Management, LLC

Members’ Capital

. . . . . . . . . . . .

$

10,006

$

9,274

$

7,425

$

10,140

Pzena Investment Management, LLC

Accumulated Deﬁcit

Realizable Deferred Tax Asset
Net Tax Receivable Liability to

. . . . . . . . . .
. . . . .

(9,651)
278

(8,870)
205

(7,167)
306

(9,824)
391

Converting Unitholders
. . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .

Common Stock, at Par
Additional Paid-in Capital

. . . . . . . . . .
. . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .

$

$

$

(242)
391

7
384
391

$

$

$

(174)
435

7
428
435

$

$

$

(260)
304

5
299
304

$

$

$

(332)
375

7
368
375

The Company’s current share repurchase program was announced on April 24, 2012. The Board of
Directors authorized the Company to repurchase 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. 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 year ended December 31, 2012, the Company purchased and retired 147,669 shares of Class
A common stock and 36,158 Class B units under the current repurchase authorization at an average price per
share of $5.05 and $5.25, respectively. The Company records the repurchase of shares and units at cost based
on the trade date of the transaction.

Note 7 — Non-Controlling Interests

Non-Controlling Interests in the operations of the Company’s operating company and consolidated

subsidiaries are comprised of the following:

2012

For the Year Ended December 31,
2011
(in thousands)

2010

Non-Controlling Interests of Pzena Investment

Management, LLC . . . . . . . . . . . . . . . . . . . . . . .

$

29,711

$

30,188

$

32,445

Non-Controlling Interests of

Consolidated Subsidiaries . . . . . . . . . . . . . . . . . . .
Non-Controlling Interests . . . . . . . . . . . . . . . . . . .

854
30,565

$

(327)
29,861

$

229
32,674

$

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

F-22

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

Note 8 — Investments, at Fair Value

Investments in equity securities consisted of the following at December 31, 2012:

Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in Mutual Funds . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

1,988
2,561
4,549

Cost

Unrealized
Gain/(Loss)
(in thousands)
237
$
384
621

$

Fair Value

$

$

2,225
2,945
5,170

Investments in equity securities consisted of the following at December 31, 2011:

Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in Mutual Funds . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2,382
2,542
4,924

Cost

Note 9 — Property and Equipment

Property and equipment, net, is comprised of the following:

Unrealized
Gain/(Loss)
(in thousands)
(97)
$
92
(5)

$

Fair Value

$

$

2,285
2,634
4,919

As of

December 31,
2012

December 31,
2011

(in thousands)

Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer Hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office Equipment
Computer Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated Depreciation and Amortization . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,219
982
788
271
214
3,474
(2,695)
779

$

$ 1,100
972
788
271
214
3,345
(2,516)
829

$

Depreciation is included in general and administrative expense and totaled $0.2 million, $0.4 million, and

$0.4 million, for the years ended December 31, 2012, 2011, and 2010, respectively. During the year ended
December 31, 2011, the Company entered into a noncancelable sublease agreement for certain excess office
space associated with its operating lease agreement, discussed further in Note 11, Commitments and
Contingencies. For the year ended December 31, 2011, the Company recognized a $0.9 million loss on
disposal of ﬁxed assets associated with this sublease, which is included in general and administrative expense.
No such losses were recognized for the years ended December 31, 2012 and 2010.

Note 10 — Related Party Transactions

For the years ended December 31, 2012, 2011, and 2010, the Company earned $1.5 million, $2.6 million,

and $4.2 million, respectively, in investment advisory fees from unconsolidated VIEs which receive
investment management services from the Company. The Company is not the primary beneﬁciary of
these VIEs.

At both December 31, 2012 and 2011, the Company had approximately $0.1 million remaining of
advances to an international investment company for organization and start-up costs, which are included in

F-23

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

Note 10 — Related Party Transactions (Continued)

Receivable from Related Parties on the consolidated statements of ﬁnancial condition. The Company is the
sponsor and investment manager of this entity.

At December 31, 2012, other liabilities included less than $0.1 million of payables to employee members.

There were no such payables at December 31, 2011.

At December 31, 2012 and 2011, receivables from related parties included less than $0.1 million of loans

to employees.

The operating company manages the personal funds of certain of the Company’s employees, including

the CEO, its two Presidents, and its two Executive Vice Presidents. 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 the 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
$0.4 million, $0.4 million, and $0.3 million in 2012, 2011, and 2010, respectively. The aggregate value of the
custody and administrative fees paid related to the Company’s executive offers, other employees, and family
members was approximately $0.1 million in 2012 and less than $0.1 million in 2011 and 2010.

Note 11 — 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 advisors 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, and, 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
October 31, 2015. The Company reﬂects minimum lease expense for its headquarters on a straight-line basis
over the lease term. During the year ended December 31, 2011, the Company entered into a noncancelable
sublease agreement for certain excess office space associated with its operating lease agreement. The sublease
agreement also expires on October 31, 2015. During the year ended December 31, 2011, a $1.6 million loss
was recognized in general and administrative expense for the aggregate excess of the future costs expected to
be incurred over the anticipated sublease income associated with this operating sublease. No such losses were
recognized for the years ended December 31, 2012 and 2010.

F-24

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

Note 11 — Commitments and Contingencies (Continued)

Lease expense for the year ended December 31, 2012 was $1.4 million and is included in general and

administrative expense. Such expenses were $2.0 million, respectively, for each of the years ended
December 31, 2011 and 2010. Sublease income for the years ended December 31, 2012 and 2011 was $0.2
million $0.1 million. No sublease income was recognized for the year ended December 31, 2010. Future
minimum lease payments are as follows:

Year Ending December 31,

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Minimum
Payments(1)
(in thousands)
2,099
$
2,099
1,748
—
—
5,946

$

(1) Amounts have not been reduced by future minimum sublease payments of $1.1 million due under

noncancelable sublease agreements.

Note 12 — Income Taxes

The operating company is a limited liability company that has elected to be treated as a partnership for
tax purposes. Neither it nor the Company’s other consolidated subsidiaries have made a provision for federal
or state income taxes because it is the individual responsibility of each of these entities’ members (including
the Company) to separately report their proportionate share of the respective entity’s taxable income or loss.
The operating company has made a provision for New York City UBT. The Company, as a ‘‘C’’ corporation
under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its
economic interest in its operating company, which is net of UBT. Correspondingly, in its consolidated
ﬁnancial statements, the Company reports both the operating company’s provision for UBT, as well as its
provision for federal, state and local corporate taxes.

The components of the income tax expense are as follows:

2012

For the Year Ended December 31,
2011
(in thousands)

2010

Current Provision:

Unincorporated Business Taxes . . . . . . . . . . . . . . .
Local Corporate Tax . . . . . . . . . . . . . . . . . . . . . .
State Corporate Tax . . . . . . . . . . . . . . . . . . . . . . .
Federal Corporate Tax . . . . . . . . . . . . . . . . . . . . .
Total Current Provision . . . . . . . . . . . . . . . . . . . . . .

Deferred Provision:

Unincorporated Business Taxes . . . . . . . . . . . . . . .
Local Corporate Tax . . . . . . . . . . . . . . . . . . . . . .
State Corporate Tax . . . . . . . . . . . . . . . . . . . . . . .
Federal Corporate Tax . . . . . . . . . . . . . . . . . . . . .
Total Deferred Provision . . . . . . . . . . . . . . . . . . . . .
Change in Valuation Allowance . . . . . . . . . . . . . . . .
Total Income Tax Expense . . . . . . . . . . . . . . . . . . . .

$

$

$

$

$

F-25

2,440
—
—
—
2,440

$

$

2,736
—
—
(63)
2,673

$

$

(21) $
289
510
1,761
2,539
(3,068)
1,911

$

$

(119) $
264
464
1,658
2,267
(1,795)
3,145

$

$

2,655
—
—
—
2,655

(224)
245
467
1,605
2,093
(4,007)
741

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

Note 12 — Income Taxes (Continued)

Differences between the provision for income taxes reported for ﬁnancial reporting purposes, and that
computed based upon the application of the statutory U.S. Federal, state, and local tax rates to the reported
income/(loss) before income taxes for the years ended December 31, 2012, 2011, and 2010, were as follows
(2010 ﬁgures have been reclassiﬁed to conform with 2012 presentation):

2012

For the Year Ended December 31,
2011

2010

Amount
(in thousands)
12,347
$

% of
Pretax
Income

Amount
(in thousands)
12,372

34.0% $

% of
Pretax
Income

Amount
(in thousands)
34.0% $ 12,657

3,214
1,382
(13,097)

8.9%
3.8%
(36.1)%

3,220
1,496
(12,795)

8.9%
4.1%
(35.2)%

3,295
1,389
(14,001)

% of
Pretax
Income

34.0%

8.9%
3.7%
(37.6)%

900

2.5%

538

1.5%

1,126

3.0%

net of Federal Beneﬁt

Federal Corporate Tax . . . . . .
State and Local Corporate Tax,
. . . . .
Unincorporated Business Tax . .
Non-Controlling Interests . . . .
Increase/(Decrease) in Liability
to Selling and Converting
Shareholders . . . . . . . . . . .

Deferred Income Tax

Valuation Allowance . . . . . .
Other . . . . . . . . . . . . . . . . . .
Income Tax Expense . . . . . . .

$

(3,068)
233
1,911

(8.4)%
0.6%
5.3% $

(1,795)
109
3,145

(4.9)%
0.2%
8.6% $

(4,007)
282
741

(10.8)%
0.8%
2.0%

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. It is the Company’s policy to
recognize accrued interest, and penalties associated with uncertain tax positions in Income Tax
Expense/(Beneﬁt) on the consolidated statement of operations. For the years ended December 31, 2012, 2011,
and 2010, no such expenses were recognized. As of December 31, 2012 and 2011, no such accruals
were recorded.

The Company and the operating company are generally no longer subject to U.S. Federal or state and

local income tax examinations by tax authorities for any year prior to 2009. All tax years subsequent to, and
including, 2009 are considered open and subject to examination by tax authorities.

The acquisition of the operating company Class B units, noted below, has allowed the Company to make
an election under Section 754 of the Internal Revenue Code (‘‘Section 754’’) to step up its tax basis in the net
assets acquired. This step up is deductible for tax purposes over a 15-year period. Based on the net proceeds
of the initial public offering and tax basis of the operating company, this election gave rise to an initial
deferred tax asset of approximately $68.7 million.

Pursuant to a tax receivable agreement signed between the members of the operating company and the

Company, 85% of the cash savings generated by this election will be distributed to the selling and converting
shareholders upon the realization of this beneﬁt.

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.

F-26

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

Note 12 — Income Taxes (Continued)

As discussed in Note 6, Shareholders’ Equity, on August 31, 2012, September 15, 2011, March 28, 2011,

and March 31, 2010, certain of the operating company’s members exchanged an aggregate of 722,521,
670,902, 536,528 and 734,618, respectively, of their Class B units for an equivalent number of shares of
Company Class A common stock. The Company elected to step up its tax basis in the incremental assets
acquired in accordance with Section 754. Based on the exchange-date fair values of the Company’s common
stock and the tax basis of the operating company, this election gave rise to a $2.2 million deferred tax asset
and a corresponding $1.9 million liability on August 31, 2012, a $1.5 million deferred tax asset and a
corresponding $1.3 million liability to converting shareholders on September 15, 2011, a $2.4 million deferred
tax asset and a corresponding $2.0 million liability to converting shareholders on March 28, 2011, and a
$3.6 million deferred tax asset and a corresponding $3.0 million liability to converting shareholders on
March 31, 2010. The Company assessed the realizability of the deferred tax asset associated with each of
these exchanges and determined that a portion of each of their beneﬁts would go unutilized. Consequently, the
Company established a $1.9 million, a $1.3 million, a $2.1 million, and a $3.2 million valuation allowance on
August 31, 2012, September 15, 2011, March 28, 2011, and March 31, 2010, respectively, to reduce the
deferred tax asset to an amount more likely than not to be realized. These deferred tax assets remain available
to the Company and can be used to reduce taxable income in future years. The Company similarly reduced
the associated liability to selling and converting shareholders by $1.6 million, $1.1 million, $1.8 million, and
$2.7 million at August 31, 2012, September 15, 2011, March 28, 2011, and March 31, 2010, respectively, to
reﬂect this change in the estimated realization of these assets. As required by the Income Taxes Topic of the
FASB ASC, the Company recorded the effects of these transactions in equity.

During the years ended December 31, 2012 and 2011, after giving effect to the exchanges discussed
earlier, the Company’s valuation allowance was reduced by approximately $3.1 million and $1.8 million,
respectively, due to revised estimates of future taxable income. To reﬂect this change in the estimated
realization of the asset and its liability for future payments, the Company increased its liability to selling and
converting shareholders by $2.6 million and $1.6 million, respectively, for the years ended December 31, 2012
and 2011. The effects of these changes to the deferred tax asset and liability to selling and converting
shareholders were recorded as a component of the income tax expense and other expense, respectively, on the
consolidated statements of operations. As of December 31, 2012 and 2011, the net values of all deferred tax
assets were approximately $9.7 million and $8.8 million, respectively.

The change in the Company’s deferred tax assets, net of valuation allowance, for the year ended

December 31, 2012 is summarized as follows:

Section 754

Other

Valuation
Allowance

Total

Balance at December 31, 2011 . . . . . . .
Deferred Tax (Expense)/Beneﬁt . . . . .
Unit Exchange . . . . . . . . . . . . . . . .
Change in Valuation Allowance . . . . .
Balance at December 31, 2012 . . . . . . .

$

$

66,224
(3,368)
2,213
—
65,069

$

$

(in thousands)
3,661
875
—
—
4,536

$ (61,050)
—
(1,935)
3,068
$ (59,917)

$

$

8,835
(2,493)
278
3,068
9,688

F-27

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

Note 12 — Income Taxes (Continued)

The change in the Company’s deferred tax liabilities, which is included in other liabilities on the

Company’s consolidated statements of ﬁnancial condition, for the year ended December 31, 2012, is
summarized as follows:

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total
(in thousands)
$

(13)
(46)
(59)

The change in the Company’s deferred tax assets, net of valuation allowance, for the year ended

December 31, 2011 is summarized as follows:

Section 754

Other

Valuation
Allowance

Total

Balance at December 31, 2010 . . . . . . .
Deferred Tax (Expense)/Beneﬁt . . . . .
Unit Exchange . . . . . . . . . . . . . . . .
Change in Valuation Allowance . . . . .
Balance at December 31, 2011 . . . . . . .

$

$

65,468
(3,169)
3,925
—
66,224

$

$

(in thousands)
2,797
864
—
—
3,661

$ (59,431)
—
(3,414)
1,795
$ (61,050)

$

$

8,834
(2,305)
511
1,795
8,835

The change in the Company’s deferred tax liabilities for the year ended December 31, 2011 is

summarized as follows:

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total
(in thousands)
$

(51)
38
(13)

As of December 31, 2012 and 2011, the net values of the liability to selling and converting shareholders

were approximately $9.7 million and $11.2 million, respectively. The change in the Company’s liability to
selling and converting shareholders for the years ended December 31, 2012 and 2011 is summarized
as follows:

For the Year Ended
December 31,

2012

2011

(in thousands)

Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Receivable Agreement Payments . . . . . . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

11,218
2,647
242
(4,451)
9,656

$

$

9,287
1,581
434
(84)
11,218

F-28

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

Note 13 — Quarterly Results of Operations (unaudited)

Unaudited quarterly results of operations for the years ended December 31, 2012 and 2011 are

summarized below:

For the Quarter Ended 2012

Dec. 31

Sept. 30

June 30

March 31

(in thousands, except per share amounts)
(unaudited)

Total Revenue . . . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . .

Basic Earnings Per Share . . . . . . . . . . .
Diluted Earnings Per Share . . . . . . . . .

$19,312
9,468
956

$

$
$

0.09
0.08

$18,861
9,408
$ 1,263

$
$

0.12
0.09

$18,339
8,411
614

$

$
$

0.06
0.06

$19,768
9,892
$ 1,007

$
$

0.10
0.09

For the Quarter Ended 2011

Dec. 31

Sept. 30

June 30

March 31

(in thousands, except per share amounts)
(unaudited)

Total Revenue . . . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . .
Basic Earnings Per Share . . . . . . . . . . .
Diluted Earnings Per Share . . . . . . . . .

$18,936
4,092
369
0.03
0.03

$
$
$

$19,950
10,254
497
0.05
0.05

$
$
$

$22,371
12,055
859
0.09
0.09

$
$
$

$21,788
11,453
$ 1,657
0.18
$
0.11
$

Note 14 — Subsequent Events

The Company evaluated the need for disclosures and/or adjustments resulting from subsequent events
through the date the ﬁnancial statements were issued. This evaluation did not result in any subsequent events
that necessitated disclosures and/or adjustments.

F-29

SHAREHOLDER INFORMATION

Board of Directors

Richard S. Pzena, Chairman, Chief Executive Offıcer and Co-Chief Investment Offıcer of Pzena Investment
Management, Inc.

John P. Goetz, President, Co-Chief Investment Offıcer of Pzena Investment Management, Inc.

William L. Lipsey, President, Head of Marketing and Client Service of Pzena Investment Management, Inc.

Steven M. Galbraith, Managing Member, Herring Creek Capital

Joel M. Greenblatt, Managing Partner of Gotham Capital and Gotham Asset Management

Richard P. Meyerowich, Former external consultant and former Senior Partner of Deloitte & Touche LLP

Ronald W. Tysoe, Former Vice Chairman of Federated Department Stores, Inc. (now Macy’s, Inc.)

Executive Officers

Richard S. Pzena, Chief Executive Offıcer and Co-Chief Investment Offıcer

John P. Goetz, President, Co-Chief Investment Offıcer

William L. Lipsey, President, Head of Marketing and Client Service

Gary J. Bachman, Chief Financial Offıcer

Antonio DeSpirito, III, Executive Vice President

Michael D. Peterson, Executive Vice President

Corporate Headquarters

120 West 45th Street, 20th Floor
New York, N.Y. 10036
(212) 355-1600

Investor Relations

Inquiries should be directed to:

Gary J. Bachman
Pzena Investment Management, Inc.
120 West 45th Street, 20th Floor
New York, N.Y. 10036
(212) 355-1600

Stock Exchange Listing

Pzena Investment Management, Inc. Class A common stock is listed on the New York Stock Exchange under
the symbol PZN.

Transfer Agent

American Stock Transfer & Trust Company
Operations Center
6201 15th Avenue
Brooklyn, N.Y. 11230
(800) 937-5449
www.amstock.com

Independent Registered Public Accounting Firm

KPMG LLP
345 Park Avenue
New York, N.Y. 10154

Website Access to the Company’s Reports

The Company’s website can be found at www.pzena.com. Our annual reports on Form 10-K, including

ﬁnancial statements and ﬁnancial statement schedules, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports ﬁled or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through our website under ‘‘Investor Relations
— SEC Filings’’ as soon as reasonably practicable after they are electronically ﬁled with, or furnished to,
the SEC.

Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior
Financial Officers and Board of Directors committee charters (including the charters of the Audit Committee,
Compensation Committee, and Nominating and Corporate Governance Committee) are available free of
charge through our website under ‘‘Investor Relations — Corporate Governance’’.

The information on the Company’s website is not part of, or incorporated by reference into, this report,

or any other report we ﬁle with, or furnish to, the SEC.

You may report any concerns regarding violations of the Company’s policies to an objective third party

by calling (888) 475-8376 and you have the option of remaining anonymous.

Exhibit 21.1

Pzena Investment Management, LLC, a Delaware limited liability company

Subsidiaries of Pzena Investment Management, Inc.

Pzena Investment Management, Pty

Pzena Investment Management Special Situations, LLC

Pzena Investment Funds Trust, Pzena Large Cap Value Fund

Pzena International Value Service, a series of the Pzena Investment Management International, LLC

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Pzena Investment Management, Inc.:

We consent to the incorporation by reference in the Registration Statements (No. 333-172257, and No.

333-155354) on Form S-3 of Pzena Investment Management, Inc. and Registration Statements
(No. 333-163370 and No. 333-147027) on Form S-8 pertaining to the Pzena Investment Management, Inc.
2007 Equity Incentive Plan, of our reports dated March 12, 2013, with respect to the consolidated statements
of ﬁnancial condition of Pzena Investment Management, Inc. as of December 31, 2012 and 2011, and the
related consolidated statements of operations, changes in equity, and cash ﬂows for each of the years in the
two-year period ended December 31, 2012, and the effectiveness of internal control over ﬁnancial reporting as
of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10 K of Pzena
Investment Management, Inc.

/s/ KPMG LLP

New York, New York
March 12, 2013

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the inclusion in this Annual Report (Form 10-K) of Pzena Investment Management, Inc. of our
report dated March 15, 2011, with respect to the consolidated ﬁnancial statements of Pzena Investment
Management, Inc., included in the Annual Report (Form 10-K) of Pzena Investment Management, Inc. for the
year ended December 31, 2012.

We also consent to the incorporation by reference in the following Registration Statements:

1) Registration Statement (Form S-3 No. 333-172257) of Pzena Investment Management, Inc.,

2) Registration Statement (Form S-3 No. 333-155354) of Pzena Investment Management, Inc.,

3) Registration Statement (Form S-8 No. 333-163370) pertaining to the Pzena Investment Management,

Inc. 2007 Equity Incentive Plan, and

4) Registration Statement (Form S-8 No. 333-147027) pertaining to the Pzena Investment Management,

Inc. 2007 Equity Incentive Plan;

of our report dated March 15, 2011, with respect to the consolidated ﬁnancial statements of Pzena Investment
Management, Inc. included in this Annual Report (Form 10-K) of Pzena Investment Management, Inc. for the
year ended December 31, 2012.

/s/ Ernst & Young LLP

New York, New York
March 12, 2013

I, Richard S. Pzena, certify that:

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Exhibit 31.1

1.

I have reviewed this annual report on Form 10-K 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.

Date: March 12, 2013

/s/ RICHARD S. PZENA
Richard S. Pzena
Chief Executive Officer
(principal executive officer)

I, Gary J. Bachman, certify that:

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Exhibit 31.2

1.

I have reviewed this annual report on Form 10-K 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.

Date: March 12, 2013

/s/ GARY J. BACHMAN
Gary J. Bachman
Chief Financial Officer
(principal ﬁnancial and accounting officer)

Exhibit 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

In connection with the Annual Report on Form 10-K of Pzena Investment Management, Inc. (the
‘‘Company’’) for the ﬁscal year ended December 31, 2012, as ﬁled with the Securities and Exchange
Commission (the ‘‘Report’’), I, Richard S. Pzena, as Chief Executive Officer of the Company, certify, 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.

A signed original of this written statement required by section 906 has been provided to Pzena

Investment Management, Inc. and will be retained by Pzena Investment Management, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.

Date: March 12, 2013

/s/ RICHARD S. PZENA
Richard S. Pzena
Chief Executive Officer
(principal executive officer)

Exhibit 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

In connection with the Annual Report on Form 10-K of Pzena Investment Management, Inc. (the
‘‘Company’’) for the ﬁscal year ended December 31, 2012, as ﬁled with the Securities and Exchange
Commission (the ‘‘Report’’), I, Gary J. Bachman, as Chief Financial Officer of the Company, certify, 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.

A signed original of this written statement required by section 906 has been provided to Pzena

Investment Management, Inc. and will be retained by Pzena Investment Management, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.

Date: March 12, 2013

/s/ GARY J. BACHMAN
Gary J. Bachman
Chief Financial Officer
(principal ﬁnancial and accounting officer)