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

FORM 10-K

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

For the Fiscal Year Ended December 31, 2011

or

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

For the transition period from          to         

Commission file number 001-33761

PZENA INVESTMENT MANAGEMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		20-8999751
(State or Other Jurisdiction of Incorporation or Organization)		(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 o No x

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 o No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2011, the last business day of its most recently completed second fiscal quarter, was approximately $51,797,346 based on the closing sale price of $5.68 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 2, 2012, there were 10,575,089 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.

As of March 2, 2012, there were 54,222,542 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

		Page
Cautionary Statement Regarding Forward-Looking Statements			ii
PART I
Item 1. Business			1
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			28
Item 2. Properties			28
Item 3. Legal Proceedings			28
Item 4. Removed and Reserved			28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer   Purchases of Equity Securities			29
Item 6. Selected Financial Data			32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results    of Operations			34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			53
Item 8. Financial Statements and Supplementary Data			53
Item 9. Changes in and Disagreements with Accountants on Accounting and    Financial Disclosure			53
Item 9A. Controls and Procedures			53
Item 9B. Other Information			54
PART III
Item 10. Directors, Executive Officers and Corporate Governance			55
Item 11. Executive Compensation			61
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related    Stockholder Matters			73
Item 13. Certain Relationships and Related Transactions, and Director Independence			82
Item 14. Principal Accountant Fees and Services			89
PART IV
Item 15. Exhibits and Financial Statement Schedules			90
SIGNATURES			93

i

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:

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, except that, prior to the consummation of our initial public offering and the reorganization on October 30, 2007, these terms refer to Pzena Investment Management, LLC 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®. The Frank Russell Company® is the owner of all copyrights relating to these indices and is the source of the performance statistics of these indices that are referred to herein.

The Morgan Stanley Capital International EAFE® Index, which we refer to as the MSCI EAFE® Index, is a trademark of Morgan Stanley Capital International, a division of Morgan Stanley. The Morgan Stanley Capital International World^SM Index, which we refer to as the MSCI World^SM Index, is a service mark of Morgan Stanley Capital International, 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® 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.

PART I.

Overview

Pzena Investment Management, Inc. is the sole managing member of Pzena Investment Management, LLC, which is our operating company. Founded in late 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 sixteen 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, 2011.

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, 2011, we managed assets in twelve 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 $13.5 billion at December 31, 2011, 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.

2

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 similar to the approach of a private equity investor. 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:

As of December 31, 2011, we had 67 employees, including 32 employee members who collectively owned 65.2% 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:

With the exception of two client relationships, which represented 13.3% and 11.9% of our AUM as of December 31, 2011, no other single account represented more than 5% of our AUM as of December 31, 2011. For the year ended December 31, 2011, these relationships represented 7.7% and 7.4% of our total revenues. No other single account represented more than 5% of our revenues for the year ended December 31, 2011.

3

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.

4

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, 2011, 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 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. For each of our largest current investment strategies, these three senior members are identified under “— Our Investment Strategies.” 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 years.

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, and 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.

5

Our Investment Strategies

As of December 31, 2011, our approximately $13.5 billion in AUM was invested in a variety of value-oriented investment strategies, representing differing 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 $13.5 billion in AUM among them, as of December 31, 2011.

Strategy		AUM
		(in billions)
U.S. Strategies
Large Cap Value		$	5.0
Value Service			1.6
Small Cap Value			1.0
Other U.S. Strategies(1)			0.3
Non-U.S. Strategies
Global Value			3.6
EAFE Diversified Value			1.5
Other Non-U.S. Strategies(2)			0.5
Total		$	13.5

6

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 five largest investment strategies as of December 31, 2011 are further described below. We follow the same investment process for each of these strategies. Our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios, which we refer to as each strategy’s investment universe, as well as the regions in which we invest. 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.

U.S Strategies

Large Cap 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.

Value Service.  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 Value.  We screen a universe of U.S.-listed companies ranked from the 1,001^st to 3,000^th 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 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.

EAFE Diversified 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 100 stocks. We launched this strategy in November 2008.

Our Product Development Approach

Historically, a major component of our growth has been the development of new products. Prior to seeding 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, if 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.

7

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.

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 five largest investment strategies from their inception to December 31, 2011, and in the five-year, three-year, and one-year periods ended December 31, 2011, 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® Index, which is provided for the limited purpose of providing a comparison to the broader equity market.

		Period Ended December 31, 2011(1)
Investment Strategy (Inception Date)		Since Inception				5 Years				3 Years				1 Year
Large Cap Value (October 2000)
Annualized Gross Returns			3.7	%			(5.7	)%			15.1	%			(5.3	)%
Annualized Net Returns			3.2	%			(6.1	)%			14.6	%			(5.8	)%
Russell 1000® Value Index			3.2	%			(2.6	)%			11.6	%			0.4	%
S&P 500® Index			0.7	%			(0.3	)%			14.1	%			2.1	%
Global Value (January 2004)
Annualized Gross Returns			0.9	%			(8.7	)%			11.0	%			(12.8	)%
Annualized Net Returns			0.1	%			(9.4	)%			10.2	%			(13.3	)%
MSCI World(SM) Index – Net/U.S.$(2)			3.7	%			(2.4	)%			11.1	%			(5.5	)%
S&P 500® Index			3.6	%			(0.3	)%			14.1	%			2.1	%
Value Service (January 1996)
Annualized Gross Returns			9.3	%			(5.1	)%			16.0	%			(3.7	)%
Annualized Net Returns			8.5	%			(5.7	)%			15.2	%			(4.4	)%
Russell 1000® Value Index			7.2	%			(2.6	)%			11.6	%			0.4	%
S&P 500® Index			6.5	%			(0.3	)%			14.1	%			2.1	%
EAFE Diversified Value (November 2008)
Annualized Gross Returns			11.8	%			—				12.8	%			(13.5	)%
Annualized Net Returns			11.5	%			—				12.5	%			(13.7	)%
MSCI EAFE® Index – Net/U.S.$(2)			7.3	%			—				7.7	%			(12.1	)%
S&P 500® Index			11.1	%			—				14.1	%			2.1	%
Small Cap Value (January 1996)
Annualized Gross Returns			12.9	%			1.7	%			21.1	%			(8.7	)%
Annualized Net Returns			11.7	%			0.7	%			19.9	%			(9.6	)%
Russell 2000® Value Index			8.8	%			(1.9	)%			12.4	%			(5.5	)%
S&P 500® Index			6.5	%			(0.3	)%			14.1	%			2.1	%

8

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 incentive 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, 2011, we sub-advised thirteen 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, which we refer to as the Investment Company Act. Eight of these thirteen sub-investment advisory agreements, including our largest sub-advised relationship, are beyond their initial two-year terms as of December 31, 2011. In addition, we sub-advise ten 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, 2011, acted as sub-investment adviser for thirteen SEC-registered mutual funds and ten 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 seven person business development team, which is responsible for:

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 selected potential institutional clients outside of the United States.

9

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 consulting firms and believe that most of them rate our open 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 sub-advise a mutual fund that is advised by John Hancock Advisers, namely the John Hancock Classic Value Fund. As of December 31, 2011, this fund represented $1.6 billion, or 11.9%, of our AUM. For the years ended December 31, 2011, 2010 and 2009, approximately 7.7%, 9.8%, and 11.1%,respectively, of our total revenue was generated from our sub-investment advisory agreement with John Hancock Advisers. Our sub-investment advisory agreement with the John Hancock Classic Value Fund represented all, or substantially all, of this revenue during these periods.

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

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 sales 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 meetings 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.

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.

10

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:

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 — Risks Factors — Risks Related to Our Business — The investment management business is intensely competitive.”

Employees

At December 31, 2011, we had 67 full-time employees. This consists of 26 research department personnel; 3 traders; 14 client service and marketing personnel; 12 employees in operations; and 12 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.

11

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. All thirteen of the 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 registered as an exempt market dealer and portfolio manager (international adviser) in Ontario, Canada. As a portfolio manager, 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. A portfolio manager 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 is approved by the Irish Financial Services Regulatory Authority as a promoter and investment manager of Irish authorized collective schemes.

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.

12

We face a variety of significant and diverse risks, many of which are inherent in our business. Described below are the risks that we currently believe could materially affect us. The occurrence of any of the risks discussed below could materially and adversely affect our business, prospects, financial condition, results of operations or cash flow.

Risks Related to Our Business

If our investment strategies perform poorly, we could lose clients or suffer a decline in AUM which would impair our revenues and earnings.

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

In 2011, our investment strategies underperformed their respective benchmarks, and, although each of our investment strategies outperformed their respective benchmarks in 2009, and most of our investment strategies outperformed their respective benchmarks in 2010, there can be no assurance that some or all of our strategies will not underperform their respective benchmarks in the future. For example, the annualized gross returns (which represents annualized returns prior to payment of advisory fees) of our Large Cap Value strategy (which represented approximately 37.0% of our AUM as of December 31, 2011) for the 1-year, 3-year, 5-year and since inception (October 2000) periods ended December 31, 2010 were (5.3)%, 15.1%, (5.7)%, and 3.7%, respectively. This compares to the returns of the Russell 1000® Value Index, the market index most commonly used by our clients to compare the performance of our Large Cap Value strategy, during the same periods of 0.4%, 11.6%, (2.6)%, and 3.2%, respectively.

During periods of declining AUM and revenues, such as we experienced during the first quarter of 2009, and the last three quarters of 2011, there can be no assurance that we will be able to reduce our expenses at a commensurate rate, potentially leading to accelerated profitability declines. Additionally, given the nature of our business, there is a minimum expense base necessary to retain our employees and maintain our operations, and it may be difficult to reduce expenses beyond certain levels.

The level of our AUM and revenue has fluctuated in the past and there can be no assurance that there will not be declines in our AUM, revenue and profitability in the future.

We depend on the executive committee of our operating company and the loss of the services of any of them could have a material adverse effect on us.

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 elements to executing our business strategy and attracting and retaining clients. Accordingly, the retention of these individuals is

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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 other 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. 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 these individuals. 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.

Our relationships with two clients represent a significant source of our AUM and revenues, and the termination of one or both of these relationships would impair our revenues and earnings.

As of December 31, 2011, two client relationships represented 13.3% and 11.9%, respectively, of our AUM. For the year ended December 31, 2011, these relationships represented 7.4% and 7.7%, respectively, of our total revenues. No other single account represented more than 5% of our AUM as of December 31, 2011, or more than 5% of our revenues for the year ended December 31, 2011.

There can be no assurance that our agreements with respect to these two client relationships will remain in place. The termination of either relationship would significantly reduce our revenues and earnings, and we may not be able to establish relationships with other accounts in order to replace the lost revenues and earnings.

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

Our investment advisory and sub-investment advisory agreements are generally terminable upon short notice. Our sub-investment advisory agreements with thirteen SEC-registered mutual funds 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. Eight of these thirteen sub-investment advisory agreements, including our largest sub-advised relationship, are beyond their initial two-year term, as of December 31, 2011. Institutional and individual clients, and the funds with which we have sub-investment advisory agreements, can terminate their relationships with us, or reduce the aggregate amount of AUM, for a number of reasons, including investment performance; changes in prevailing interest rates; changes in asset class preference; and financial market performance; or to shift their funds to competitors who may charge lower advisory fee rates; or for no stated reason. Poor performance relative to that of other investment management firms tends to result in decreased investments in our investment strategies, increased withdrawals from our investment strategies and the loss of institutional or individual accounts or sub-investment advisory relationships. In addition, the ability to terminate relationships may allow clients to renegotiate for lower fees paid for asset management services. If our investment advisory agreements are terminated, or our clients reduce the amount of AUM, either of which may occur on short notice, we may experience declines in revenue and profitability.

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

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

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Although we experienced growth in AUM and revenues from the quarter ended March 31, 2009 through the quarter ended March 31, 2011, we experienced declines in AUM during the first quarter of 2009 and the last three quarters of 2011, and there can be no assurance that there will not be declines in our AUM, revenue and profitability in the future.

Volatility and disruption of the capital and credit markets and adverse changes in the global economy may negatively impact our AUM, revenues and profitability.

As a company that operates 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 in general. Beginning in the second half of 2007, and particularly during the second half of 2008 through early 2009, the financial markets were characterized by unprecedented levels of volatility and limited liquidity. This materially and adversely affected the capital and credit markets and led to a widespread loss of investor confidence. While investor confidence showed some stabilization and improvement during the second half of 2009 through 2010, 2011 was met with continued uncertainty and instability of global markets driven by unemployment, housing and credit concerns, the European debt crisis and the downgrade of long-term sovereign debt of the United States. There has been hesitation among investors to increase allocations to public equity investments, and alternative asset classes have been more highly favored by many of investors. As a result, we have and could in the future be confronted with net outflows of AUM, and could experience difficulties attracting new clients, resulting in a material adverse effect on our AUM, revenue and profitability in the future.

As indicated above, we experienced declines in AUM during the first quarter of 2009 and for the last three quarters of 2011, largely due to the volatility and disruption in the capital and credit markets. During these periods, we experienced declines in revenue and profitability, and there can be no assurance that there will not be declines in our AUM, revenue and profitability should volatility and disruption in the capital and credit markets continue in the future.

Our ability to retain our senior investment professionals and attract additional qualified investment professionals is critical to our success. A decline in our revenues and profitability may have an adverse effect on our business and our ability to attract and retain employees.

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 operations.

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

Future growth of our business may be difficult to achieve, and may place significant demands on our infrastructure and our investment team and other employees, and may increase our expenses. In addition, we are required to continuously develop our infrastructure in response to the increasing sophistication of the investment management market, as well as due to legal and regulatory developments.

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Although most of our investment strategies outperformed their respective benchmarks in 2009 and 2010, they underperformed their respective benchmarks in 2011. Continued future growth may be challenging, as our underperformance in 2011 may impact our ability to attract inflows of AUM. Additionally, the current overall market environment may impact potential investors’ interest in committing new capital to equity strategies such as those offered by us, thereby making growth more difficult.

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

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

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

In recent years, in response to market pressures, there has been a trend towards lower fees in the asset management industry and no assurances can be given that we will be able to maintain our current fee structure. Additionally, a shift in the mix in our AUM from higher revenue-generating AUM to lower revenue-generating AUM may result in a decrease in revenues, even if our aggregate level of AUM remains unchanged or increases.

We may enter into more performance-based fee arrangements with our clients in the future, which could cause greater fluctuations in our revenues.

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 a certain agreed-upon benchmark, 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. 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 2011 and 2010, we earned $3.8 million and $0.5 million in performance fees, respectively. We did not earn performance

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fees during fiscal year 2009. Performance fees may become more common in our industry. An increase in performance fees, or in performance-based fee arrangements with clients, could create greater fluctuations in our revenues.

Reductions in business sourced through consultants, or their poor reviews of us or our products, could materially reduce our revenues and ability to attract new clients.

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 future inflows. 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. If we fail to successfully maintain these third-party distribution and sub-investment advisory relationships, our business could be materially adversely affected. In addition, many of these parties review and evaluate our products and our organization. Poor reviews or evaluations of either the particular product, or of us, may result in client withdrawals or may impact our ability to attract new assets through such intermediaries.

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

Pursuant to the Investment Company Act, each of the sub-investment advisory agreements for the SEC-registered mutual funds that we sub-advise automatically terminates upon its deemed “assignment” and a fund’s board and shareholders must approve a new agreement in order for us to continue to act as its sub-investment adviser. In addition, pursuant to the Investment Advisers Act, each of our investment advisory agreements for the separate accounts we manage may not be “assigned” without the consent of the client. A sale of a controlling block of our voting securities and certain other transactions would be deemed an “assignment” pursuant to both the Investment Company Act and the Investment Advisers Act. Such an assignment may be deemed to occur in the event that the holders of the Class B units of 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.

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

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

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

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

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also subject to regulation by the Department of Labor under ERISA. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and, in specific circumstances to cancel, permissions to carry on particular businesses. Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation, result in withdrawal by our clients from our investment strategies, and impede our ability to retain clients and develop new client relationships, which may reduce our revenues.

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

In addition, the regulatory environment in which we operate is subject to modifications and further regulation. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes.

Specific regulatory changes also may have a direct impact on our revenue. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. These regulatory changes and other proposed or potential changes may result in a reduction of revenue associated with these activities.

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 various 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. For example, proposals for fundamental U.S. corporate tax reform, if enacted, could change the amount of taxes we are required to pay and have a significant impact on our future results of operations, profitability and financial condition.

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. As we do so, we will continue to face challenges in the adequacy of our resources, procedures and controls to consistently and effectively operate our business. In order to remain competitive, we must be proactive and prepared to deploy necessary resources when growth opportunities present themselves. We face a heightened risk that the necessary resources and/or personnel will 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 may 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 cultural 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

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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 revenues and income from operating in the jurisdiction.

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, result in losses, or limit our growth.

We rely heavily on our financial, accounting, trading, compliance and other data processing systems. Any failure or interruption of these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war, 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. The potential inability of our systems to accommodate an increasing volume of transactions also could constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, our operations.

Furthermore, we depend on our headquarters in New York City for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, or directly affecting our headquarters, may have a material adverse impact on our ability to continue to operate our business without interruption. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses.

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

We depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, such dissatisfaction may be more damaging to our business than to other types of businesses. We make investment decisions on behalf of our clients which could result in substantial losses to them. In order for our classic value investment strategies to yield attractive returns, we expect to have to hold securities for multi-year periods and, therefore, our investment strategies may not perform well in the short-term. If our clients suffer significant losses, or are otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty, or breach of contract. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending against litigation. Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations, or cause significant reputational harm to us. For information on our legal proceedings, see “Item 3 — Legal Proceedings.”

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

As a public company, we are required to implement specific corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “SOX”), the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), and the related rules and regulations of the SEC, as well as the rules of the New York Stock Exchange (the “NYSE”). Compliance with these requirements has caused and will cause us to continue to incur significant legal and accounting compliance costs, and place significant demands on our accounting and finance staff, and on our accounting, financial and information systems. We have hired, and may need

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to further hire, additional accounting and finance staff with appropriate public company financial reporting experience and technical accounting knowledge, which has and may continue to increase our compensation expense.

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 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.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations is expected to result in additional operating costs, and to make certain activities more time consuming and costly, which could have a material adverse effect on our financial condition and results of operations.

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 2010, the SEC published a statement of continued support for a single set of high-quality global accounting standards and acknowledged that the International Financial Reporting Standards (“IFRS”) was best positioned to serve that role. In 2011, the SEC staff released a paper discussing a potential transition method to incorporate IFRS into the financial reporting system for U.S. public companies. While timelines remain uncertain regarding the near-term use of IFRS in the United States, it is possible that future reporting standards issued by the proposed implementation of IFRS could change our current application of GAAP, resulting in a material impact on our financial position or results of operations.

The historical consolidated financial information included in this Annual Report and our previously filed public company reports may not necessarily be indicative of our future financial results.

The historical consolidated financial information included in this Annual Report and our previously filed public company reports may not necessarily be indicative of our future financial results. There can be no assurance that our AUM and revenue will grow at the same rate as they grew from the quarter ended June 30, 2009 through the quarter ended March 31, 2011. As mentioned above, we experienced declines in AUM, revenue, and profitability during the first quarter of 2009 and for the last three quarters of 2011, and there can be no assurance that there will not be similar, or more severe, declines in our AUM, revenue and profitability in the future. Although all of our strategies are currently open and available to new investments, we may close certain or all of our strategies in the future at any time.

See “Part 2, Item 6 — Selected Financial Data” and the historical financial statements included elsewhere in this report.

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Risks Related to Our Investment Strategies

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

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 a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. While very few investors are willing to invest when companies lack earnings visibility, our classic value investment approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. However, our investment approach entails the risk that the companies included in our portfolios are not able to execute the turnaround that we had expected when we originally invested in them, thereby reducing the performance of our strategies. 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. Most of our strategies construct concentrated portfolios, generally ranging from 30 to 60 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 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 strategies may not obtain attractive returns in certain periods or 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 over three years. Our investment strategies may not perform well during certain periods of time. In addition, our strategies may not perform well during points in the economic cycle when value-oriented stocks are relatively less attractive. For instance, during the late stages of an economic cycle, investors may purchase relatively expensive stocks in order to obtain access to above average growth, as was the case in the late 1990s. Value-oriented strategies may also experience weakness during periods when the markets are focused on one investment thesis or sector. In 2011, our investment strategies underperformed their respective benchmarks, and there can be no assurance that such underperformance will not occur in future periods.

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

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

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Market environments may negatively affect the companies in which we invest.

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. Although global market conditions showed some stabilization and improvement during 2010, capital and credit markets continued to experience uncertainty and instability throughout 2011, driven by unemployment, housing and credit concerns, the European debt crisis and the downgrade of long-term US sovereign debt. The environment that the United States and the world faced as a result of these factors had the effect of pushing the prices of equity securities in which we invest lower than their historical levels. In addition, the market environment had the effect of reducing the funds available to our clients to invest. There can be no assurance that both of these trends will not continue to impact our AUM, which is the main driver of our revenues and profitability.

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

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

Our Global Value, EAFE Value, Global Diversified Value, EAFE Diversified Value, European Value and Emerging Markets 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 Value, EAFE Value, Global Diversified Value, EAFE Diversified Value, European Value and Emerging Markets Value strategies, which together represented $5.6 billion, $5.5 billion, and $4.7 billion of our AUM as of December 31, 2011, 2010 and 2009, respectively, and may comprise a larger portion of our AUM in the future, are primarily invested in securities of companies located outside the United States. Fluctuations in foreign currency exchange rates could negatively impact the portfolios of our clients who are invested in these strategies. In addition, foreign currency fluctuations may affect the levels of our AUM from one reporting period to another. An increase in the value of the U.S. dollar relative to non-U.S. currencies may result in a decrease in the dollar value of our AUM, which, in turn, would result in lower U.S. dollar denominated revenue. We do not currently engage in any hedging activities for these portfolios and continue to market these products as unhedged.

Investments in non-U.S. issuers may also be affected by political, social and economic uncertainty affecting a country or region in which we are invested, such as the European debt crisis in 2011. Many non-U.S. financial markets are not as developed, or as efficient, as the U.S. financial market, and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information in respect of such companies. These risks could adversely impact the performance of our strategies that are invested in securities of non-U.S. issuers.

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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 cause our operating company to distribute cash to its members in an amount at least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of our operating company. To the extent that 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 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.

We used the net proceeds of our October 2007 initial public offering to purchase membership units of our operating company from three of its members, or the selling members. These purchases 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. Subsequent and future exchanges of Class B units of our operating company for shares of our Class A common stock 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, or 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 initial public offering 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 membership units in October 2007 and the subsequent and future exchanges of Class B units for shares of our Class A common stock. 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 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. In October 2008, each of the selling members agreed with us to waive any payments that we were required to make to them with respect to the 2008 and 2009 tax years, as a result of their sale to us of an aggregate of 6.1 million membership units in October 2007. See “Notes to Consolidated Financial Statements — Note 9 — Income Taxes.”

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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 (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 us under the tax receivable agreement. If certain change of control events were to occur, we would 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.

If we are deemed an investment company under the Investment Company Act, our business would be subject to applicable restrictions under that Act, which could make it impracticable for us to continue our business as contemplated.

We believe our company is not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily engaged in a non-investment company business. We conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated.

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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. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of our Class A common stock, include:

The market price of our Class A common stock could decline due to the large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B units 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, (i) 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 March 28, 2011, September 15, 2011 and March 31, 2010 as the 2011and 2010 exchange dates, respectively. Certain executive officers and employees elected to exchange an aggregate of 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

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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.

Control by our Class B stockholders of 96.2% of the combined voting power of our common stock may give rise to conflicts of interest.

Our Class B stockholders collectively hold approximately 96.2% of the combined voting power of our common stock. These stockholders consist of our six named executive officers, 26 of our other employees, certain other members of our operating company, including one of our directors and his related entities, and five 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.

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.

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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.”

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

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None.

Our corporate headquarters and principal offices are located at 120 West 45^th 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. We believe the space we occupy is adequate for our current needs.

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.

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PART II.

Our Class A common stock is listed for trading on the NYSE under the symbol “PZN”. As of March 2, 2012, there were approximately 30 record holders of our Class A common stock and 68 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.

		2011												2010
Quarter		High				Low				Dividends Declared Per Share				High				Low				Dividends Declared Per Share
Quarter Ended March 31		$	8.00			$	6.47			$	0.03			$	8.85			$	5.78			$	0.00
Quarter Ended June 30		$	8.03			$	5.00			$	0.03			$	7.80			$	6.06			$	0.03
Quarter Ended September 30		$	6.53			$	3.20			$	0.03			$	7.35			$	6.04			$	0.03
Quarter Ended December 31		$	5.06			$	3.18			$	0.03			$	7.88			$	6.36			$	0.18

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 — 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

In connection with 2011 year-end compensation, we issued an aggregate of 199,353 Class B units of our operating company and the related 199,353 shares of Class B common stock to employee members. We also awarded an aggregate of 458,194 options to acquire Class B units of our operating company to certain employee members, at an exercise price of $4.77 per unit.

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

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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 from October 25, 2007 (the date our Class A common stock first began trading on the NYSE) through December 31, 2011, with the cumulative total return of the S&P 500® 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 October 25, 2007 and the reinvestment of all dividends, if any.

Total Return Performance

		Period Ended
Index		10/25/07				12/31/07				12/31/08				12/31/09				12/31/10				12/31/11
Pzena Investment Management, Inc		$	100.00			$	57.27			$	21.67			$	41.80			$	38.95			$	23.43
SNL Asset Manager Index*		$	100.00			$	96.53			$	45.87			$	74.42			$	85.66			$	74.10
S&P 500® Index		$	100.00			$	97.37			$	61.35			$	77.58			$	89.27			$	91.16

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.

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Issuer Purchases of Equity Securities

During the fiscal year ended December 31, 2011, we did not repurchase any of our equity securities.

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.”

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The following tables set forth selected historical consolidated financial data of Pzena Investment Management, Inc. Reported results for the periods prior to October 30, 2007 reflect solely the operations of Pzena Investment Management, LLC. The selected consolidated statements of operations data for the years ended December 31, 2011, 2010, and 2009 and the consolidated statements of financial condition data as of December 31, 2011 and 2010 have been derived from Pzena Investment Management, Inc.’s audited consolidated financial statements included elsewhere in this Annual Report.

The selected consolidated statement of operations data for the years ended December 31, 2007 and 2008, and the selected consolidated statements of financial condition as of December 31, 2009, 2008 and 2007, 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.

		For the Year Ended December 31,
		2011				2010				2009				2008				2007
		(in thousands, except share and per share amounts)
Statements of Operations Data:
REVENUE
Management Fees		$	79,230			$	77,025			$	63,039			$	101,404			$	146,776
Performance Fees			3,815				500				—				—				373
Total Revenue			83,045				77,525				63,039				101,404				147,149
EXPENSES
Cash Compensation and Benefits			29,518				25,895				22,057				20,703				33,924
Distributions on Compensatory Units			—				—				—				—				12,087
Change in Redemption Value of Compensatory Units			—				—				—				—				15,969
Acceleration of Vesting of Compensatory Units			—				—				—				—				64,968
Other Non-Cash Compensation			5,047				3,653				2,934				4,952				2,753
Total Compensation and Benefits Expense			34,565				29,548				24,991				25,655				129,701
General and Administrative Expenses			10,626				8,007				8,261				11,356				13,038
TOTAL OPERATING EXPENSES			45,191				37,555				33,252				37,011				142,739
Operating Income/(Loss)			37,854				39,970				29,787				64,393				4,410
Other Income/(Expense)			(1,466	)			(2,744	)			1,601				35,685				(2,136	)
INCOME/(LOSS) BEFORE INCOME TAXES AND INTEREST ON MANDATORILY REDEEMABLE UNITS			36,388				37,226				31,388				100,078				2,274
Income Tax Provision/(Benefit)			3,145				741				(1,307	)			67,680				5,610
Interest on Mandatorily Redeemable Units			—				—				—				—				16,575
Consolidated Net Income/(Loss)			33,243				36,485				32,695				32,398				(19,911	)
Less: Net Income/(Loss) Attributable to Non-Controlling Interests			29,861				32,674				29,326				36,095				(20,644	)
NET INCOME/(LOSS) Attributable to Pzena Investment Management, Inc.		$	3,382			$	3,811			$	3,369			$	(3,697	)		$	733
Per Share Data(1):
Net Income/(Loss) for Basic Earnings per Share(2)		$	3,382			$	3,811			$	3,369			$	(3,697	)		$	733
Basic Earnings/(Loss) per Share(2)		$	0.34			$	0.41			$	0.41			$	(0.60	)		$	0.12
Basic Weighted Average Shares Outstanding(2)			9,972,978				9,186,520				8,217,561				6,122,569				6,111,118
Net Income/(Loss) for Diluted Earnings per Share(2)		$	20,631			$	22,419			$	18,106			$	(3,697	)		$	7,765
Diluted Earnings/(Loss) per Share(2)		$	0.32			$	0.34			$	0.28			$	(0.60	)		$	0.12
Diluted Weighted Average Shares Outstanding(2)			65,095,797				64,985,753				64,853,824				6,122,569				64,056,778
Cash Dividends Declared Per Share		$	0.12			$	0.24				—			$	0.27			$	0.11

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		As of December 31,
		2011				2010				2009				2008				2007
		(in thousands)
Statements of Financial Condition Data:
Cash and Cash Equivalents		$	35,083			$	16,381			$	15,908			$	27,421			$	27,184
TOTAL ASSETS			66,678				48,402				48,518				62,519				154,646
Term Loan			—				—				—				22,000				60,000
Senior Subordinated Debt			—				—				10,000				16,000				—
Capital Units Subject to Mandatory Redemption			—				—				—				—				—
TOTAL LIABILITIES			20,454				14,606				21,160				46,179				140,212
Non-Controlling Interests			32,287				23,224				19,088				11,819				16,355
EQUITY (EXCESS OF LIABILITIES OVER ASSETS)		$	13,937			$	10,572			$	8,270			$	4,521			$	(1,921	)

Prior to the consummation of our initial public offering on October 30, 2007, Pzena Investment Management, LLC operated as a partnership and was not subject to U.S. federal and certain state income taxes. After that date, Pzena Investment Management, LLC became subject to U.S. federal and certain state and local income taxes applicable to C-corporations.

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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, 2011, our assets under management, or AUM, was $13.5 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 offshore 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, 2011, the holders of Class A common stock (through the Company) and the holders of Class B units of our operating company held approximately 16.3% and 83.7%, respectively, of the economic interests in the operations of our business.

Non-GAAP Net Income

Our results for the years ended December 31, 2011, 2010, and 2009 included adjustments related to certain one-time charges recognized in operating expense in the fourth quarter of 2011, in addition to the recurring adjustments related to the Company’s tax receivable agreement and the associated liability to its selling and converting shareholders. 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 net income per share were $23.2 million and $0.36, respectively, for the year ended December 31, 2011, $21.7 million and $0.33, respectively, for the year ended December 31, 2010, and $17.0 million and $0.26, respectively, for the year ended December 31, 2009. 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 effective tax rate, exclusive of these adjustments. Our effective tax rate, exclusive of the adjustments related to certain one-time charges recognized in operating expense in the fourth quarter of 2011 and the adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders, was 42.4%, 42.7%, and 42.7% for the years ended December 31, 2011, 2010 and 2009, respectively, as noted in the section “Income Tax Expense/(Benefit)” 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.

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

		For the Year Ended December 31,
		2011				2010				2009
		(in thousands, except share and per share amounts)
GAAP Net Income		$	3,382			$	3,811			$	3,369
Net Effect of One-time Adjustments			443				—				—
Net Effect of Tax Receivable Agreement			(214	)			(695	)			(1,111	)
Non-GAAP Net Income		$	3,611			$	3,116			$	2,258
GAAP Non-Controlling Interest of Pzena Investment Management, LLC		$	30,188			$	32,445			$	25,786
Effect of One-time Adjustments			4,017				—				—
Non-GAAP Non-Controlling Interest of Pzena Investment Management, LLC			34,205				32,445				25,786
Less: Assumed Corporate Income Taxes			14,660				13,837				11,049
Assumed After-Tax Non-GAAP Income of Pzena Investment Management, LLC		$	19,545			$	18,608			$	14,737
Non-GAAP Net Income of Pzena Investment Management, Inc.			3,611				3,116				2,258
Diluted Non-GAAP Net Income		$	23,156			$	21,724			$	16,995
Diluted Non-GAAP Earnings Per Share Attributable to Pzena Investment Management, Inc. Common Stockholders:
Non-GAAP Net Income for Diluted Earnings per Share		$	23,156			$	21,724			$	16,995
Diluted Non-GAAP Earnings per Share		$	0.36			$	0.33			$	0.26
Diluted Weighted Average Shares Outstanding			65,095,797				64,985,753				64,853,824

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:

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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:

Expenses

Our expenses consist primarily of compensation and benefits expense, as well as general and administrative expense. These expenses may fluctuate due to a number of factors, including the following:

Compensation and Benefits 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 members and employees. Compensation and benefits packages are benchmarked against relevant industry and geographic peer groups in order to attract and retain qualified personnel.

Pursuant to the Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), we have issued restricted units and options to purchase units in our operating company. We use a fair-value method in recording the compensation expense associated with the granting of these restricted units, and options to purchase units, to new and existing members under the 2006 Equity Incentive Plan. Under this method, compensation expense is measured at the grant-date based on the

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estimated fair value of the award and is recognized over the award’s vesting period. The fair value of the units is determined by reference to the market price of our Class A common stock on the date of grant, since these units are exchangeable for shares of our Class A common stock on a one-for-one basis. We determined that the total grant-date fair values of the units granted in 2011, 2010, and 2009 were $0.6 million, $1.4 million, and $0.1 million, respectively. For each of the years ended 2011, 2010, and 2009, we recognized approximately $0.8 million, $0.3 million and $0.1 million, respectively, in compensation and benefits expense associated with the amortization of all restricted operating company Class B units. Under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (“the 2007 Equity Incentive Plan”), we have issued options to acquire shares of our Class A common stock. The fair value of the options to purchase Class B units and Class A common stock is determined by using an appropriate option pricing model on the grant-date. We determined that the total grant-date fair values of all options awarded in 2011, 2010, and 2009, were $0.5 million, $0.1 million, and $5.4 million, respectively, using the Black-Scholes option pricing model. For each of the years ended December 31, 2011, 2010, and 2009, we recognized approximately $2.1 million in compensation and benefits expense associated with the amortization of all unvested options to acquire operating company Class B units and unvested options to acquire Class A common stock issued under the 2006 and 2007 Equity Incentive Plans.

Pursuant to 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, restricted phantom units of our operating company, or money market funds. Amounts deferred in any calendar year reduce that year’s cash compensation expense and are amortized ratably over a four-year period commencing the following year. For the years ended December 31, 2011, 2010, and 2009 approximately $2.2 million, $2.2 million, and $1.6 million, respectively, in such compensation was deferred. At December 31, 2011 and 2010, the liability associated with deferred compensation investment accounts was approximately $1.2 million and $0.9 million, respectively, and is recorded as deferred compensation liability on the consolidated statements of financial condition. For the years ended December 31, 2011, 2010 and 2009, we recognized approximately $2.1 million, $1.3 million and $0.7 million, respectively, in compensation and benefits expense associated with the amortization of all deferred compensation awards. Should additional amounts be deferred in future years, we would expect the non-cash portion of our compensation expense to increase as the previously and subsequently deferred amounts are amortized through the statement of operations.

As of December 31, 2011, we had approximately $2.1 million in total unrecorded compensation expense related to unvested operating company phantom units issued pursuant to our Bonus Plan, operating company unit and option grants issued under the 2006 Equity Incentive Plan, and option grants issued under our 2007 Equity Incentive Plan. We expect that the amortization of these amounts will be approximately $1.3 million in 2012, $0.7 million in 2013, and $0.1 million in 2014.

For the year ended December 31, 2011, we awarded $1.0 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 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 during 2011, with the remaining $0.2 million to be paid in 2012.

In 2011, we recognized approximately $2.2 million in charges related to certain employee departures.

General and Administrative Expense

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

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compliance), professional fees, transfer agent fees, and other similar expenses. These additional expenses have and will continue to reduce our net income.

Other Income/(Expense)

Other income/(expense) is derived primarily from investment income or loss arising from our consolidated subsidiaries, our investments in various private investment vehicles that we employ to incubate new strategies, income or loss generated by our investments in third-party mutual funds, interest expense on our outstanding debt prior to its repayment, mark-to-market movements on our swap agreement prior to its termination, 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 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. Amounts waived by our selling and converting shareholders, if any, reduce this liability. 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, 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.

Income Tax Expense/(Benefit)

As a “C” corporation under the Internal Revenue Code, we are liable for federal, state and local taxes on the income derived from our economic interest in the operating company, which is net of its provision for New York City Unincorporated Business Taxes, or UBT. Correspondingly, in our consolidated financial statements, we report both the operating company’s provision for UBT, as well as our provision for federal, state and local corporate taxes.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized. As of December 31, 2011 and 2010, our valuation allowance against the deferred tax asset associated with our acquisition of operating company units in conjunction with the offering and subsequent exchanges was $61.1 million and $59.4 million, respectively.

Operating Results

Assets Under Management and Flows

As of December 31, 2011, our approximately $13.5 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 five largest investment strategies as of December 31, 2011 is further described below. We follow the same investment process for each of these strategies. Our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios, which we refer to as each strategy’s investment universe, as well as the regions in which we invest. 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

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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.

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 five largest investment strategies from their inception to December 31, 2011, and in the five-year, three-year, and one-year periods ended December 31, 2011, 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® Index, which is provided for the limited purpose of providing a comparison to the broader equity market.

		Period Ended December 31, 2011(1)
Investment Strategy (Inception Date)		Since Inception				5 Years				3 Years				1 Year
Large Cap Value (October 2000)
Annualized Gross Returns			3.7	%			(5.7	)%			15.1	%			(5.3	)%
Annualized Net Returns			3.2	%			(6.1	)%			14.6	%			(5.8	)%
Russell 1000® Value Index			3.2	%			(2.6	)%			11.6	%			0.4	%
S&P 500® Index			0.7	%			(0.3	)%			14.1	%			2.1	%
Global Value (January 2004)
Annualized Gross Returns			0.9	%			(8.7	)%			11.0	%			(12.8	)%
Annualized Net Returns			0.1	%			(9.4	)%			10.2	%			(13.3	)%
MSCI World(SM) Index – Net/U.S.$(2)			3.7	%			(2.4	)%			11.1	%			(5.5	)%
S&P 500® Index			3.6	%			(0.3	)%			14.1	%			2.1	%
Value Service (January 1996)
Annualized Gross Returns			9.3	%			(5.1	)%			16.0	%			(3.7	)%
Annualized Net Returns			8.5	%			(5.7	)%			15.2	%			(4.4	)%
Russell 1000® Value Index			7.2	%			(2.6	)%			11.6	%			0.4	%
S&P 500® Index			6.5	%			(0.3	)%			14.1	%			2.1	%
EAFE Diversified Value (November 2008)
Annualized Gross Returns			11.8	%			—				12.8	%			(13.5	)%
Annualized Net Returns			11.5	%			—				12.5	%			(13.7	)%
MSCI EAFE® Index – Net/U.S.$(2)			7.3	%			—				7.7	%			(12.1	)%
S&P 500® Index			11.1	%			—				14.1	%			2.1	%
Small Cap Value (January 1996)
Annualized Gross Returns			12.9	%			1.7	%			21.1	%			(8.7	)%
Annualized Net Returns			11.7	%			0.7	%			19.9	%			(9.6	)%
Russell 2000® Value Index			8.8	%			(1.9	)%			12.4	%			(5.5	)%
S&P 500® Index			6.5	%			(0.3	)%			14.1	%			2.1	%

Large Cap 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, 2011, the Large Cap Value strategy generated a one-year annualized gross return of -5.3%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the financial services and technology sectors, partially offset by our stock selection within the energy sector.

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Global 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, 2011, the Global Value strategy generated a one-year annualized gross return of -12.8%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the financial services and technology sectors, and our underweight exposure to the consumer staples sector.

Value Service.  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, 2011, the Value strategy generated a one-year annualized gross return of -3.7%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the technology and financial services sectors and our underweight exposure to the utilities sector, partially offset by an overweight exposure to the consumer discretionary sector and our stock selection within the energy sector.

EAFE Diversified 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 100 stocks. We launched this strategy in November 2008. At December 31, 2011, the EAFE Diversified Value strategy generated a one-year annualized gross return of -13.5%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the financial services and information technology sectors, partially offset by an underweight exposure to the basic materials sector.

Small Cap Value.  We screen a universe of U.S.-listed companies ranked from the 1,001^st to 3,000^th 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, 2011, the Small Cap Value strategy generated a one-year annualized gross return of -8.7%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the consumer discretionary sector, partially offset by our stock selection within the health care 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.

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The change in AUM in our institutional accounts and our retail accounts for the years ended December 31, 2011, 2010, and 2009 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.

		For the Year Ended December 31,
Assets Under Management		2011				2010				2009
		(in billions)
Institutional Accounts
Beginning of Period Assets		$	12.5			$	10.7			$	7.4
Inflows			2.1				1.8				2.6
Outflows			(2.2)				(1.7)				(2.0)
Net Flows			(0.1	)			0.1				0.6
Market Appreciation/(Depreciation)			(1.1	)			1.7				2.7
End of Period Assets		$	11.3			$	12.5			$	10.7
Retail Accounts
Beginning of Period Assets		$	3.1			$	3.6			$	3.3
Inflows			0.9				1.3				1.4
Outflows			(1.6)				(2.2)				(2.1)
Net Flows			(0.7	)			(0.9	)			(0.7	)
Market Appreciation/(Depreciation)			(0.2	)			0.4				1.0
End of Period Assets		$	2.2			$	3.1			$	3.6
Total
Beginning of Period Assets		$	15.6			$	14.3			$	10.7
Inflows			3.0				3.1				4.0
Outflows			(3.8)				(3.9)				(4.1)
Net Flows			(0.8	)			(0.8	)			(0.1	)
Market Appreciation/(Depreciation)			(1.3	)			2.1				3.7
End of Period Assets		$	13.5			$	15.6			$	14.3

The following table describes the allocation of our AUM among our investment strategies, as of December 31, 2011, 2010, and 2009:

		AUM at December 31,
Investment Strategy		2011				2010				2009
		(in billions)
U.S. Value Strategies		$	7.9			$	10.1			$	9.6
Global Value Strategies			3.7				3.4				2.8
Non-U.S. Value Strategies			1.9				2.1				1.9
Total		$	13.5			$	15.6			$	14.3

The performance of our investment strategies has been impacted by the volatility in the equity markets. Beginning in the second quarter of 2009 and continuing through 2010, the performance of our investment strategies improved alongside the significant improvement in the equity markets. In 2011, our investment strategies underperformed relative to their respective benchmarks. Our AUM declined $2.1 billion, or 13.5%, from $15.6 billion at December 31, 2010, to $13.5 billion at December 31, 2011. Our AUM increased by $1.3 billion, or 9.1%, from $14.3 billion at December 31, 2009, to $15.6 billion at December 31, 2010, and increased by $3.6 billion, or 33.6%, from $10.7 billion at December 31, 2008, to $14.3 billion at December 31, 2009.

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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 $1.1 billion in market depreciation and $2.2 billion in gross outflows, partially offset by $2.1 billion in gross inflows. Assets in retail accounts decreased by $0.9 billion, or 29.0%, 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 $1.7 billion in market appreciation and $1.8 billion in gross inflows, 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.

At December 31, 2009, we managed $10.7 billion in institutional accounts and $3.6 billion in retail accounts, for a total of $14.3 billion in assets. For the year ended December 31, 2009, we experienced gross outflows of $4.1 billion, which were partially offset by gross inflows of $4.0 billion. Assets in institutional accounts increased by $3.3 billion, or 44.6%, from $7.4 billion at December 31, 2008, due to $2.7 billion in market appreciation and $2.6 billion in gross inflows, partially offset by $2.0 billion in gross outflows. Assets in retail accounts increased by $0.3 billion, or 9.1%, from $3.3 billion at December 31, 2008, as a result of $1.0 billion in market appreciation and $1.4 billion in gross inflows, offset by $2.1 billion in gross outflows. At December 31, 2011, institutional accounts represented 83.7% of our total AUM, compared to 80.1% at December 31, 2010, and 74.8% at December 31, 2009.

At December 31, 2011, our non-U.S. Value and Global Value investment strategies accounted for 41.5% of our AUM, compared to 35.3% at December 31, 2010, and 32.9% at December 31, 2009.

Our revenues are 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, and hinder new client acquisition.

Given the increase in our performance fees and higher weighted average AUM in 2011 compared to 2010, our revenues for the year ended December 31, 2011 increased from our revenues for the year ended December 31, 2010. Our revenues similarly increased from the year ended December 31, 2009 to the year ended December 31, 2010. An increase in weighted average AUM and in revenues typically results in higher operating income and net income. On the contrary, 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 margins in the future if average AUM and revenues were to decline. For the year ended December 31, 2011, our operating expense increased from its comparable 2010 period, due to one-time charges associated with the sublease of excess real estate, one-time charges associated with certain employee departures, and increases in discretionary bonus accruals. For the year ended December 31, 2010, our operating expense increased from its comparable 2009 period, due to an increase in compensation and benefits expense, resulting from increases in employee headcount and discretionary bonus accruals.

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Revenues

Our revenue from advisory fees earned on our institutional accounts and our retail accounts for the three years ended December 31, 2011, 2010, and 2009 is described below:

		For the Year Ended December 31,
Revenue		2011				2010				2009
		(in thousands)
Institutional Accounts		$	72,002			$	65,254			$	51,647
Retail Accounts			11,043				12,271				11,392
Total		$	83,045			$	77,525			$	63,039

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. To the extent that we experience reductions in weighted average AUM, either through negative market performance or net client outflows, our revenue will be adversely affected.

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 the John Hancock Classic Value Fund voluntary partial fee waiver, as noted below, and a higher mix of assets in our retail Emerging Markets 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.

Year Ended December 31, 2010 versus December 31, 2009

Our total revenue increased $14.5 million, or 23.0%, to $77.5 million for the year ended December 31, 2010, from $63.0 million for the year ended December 31, 2009. This change was driven primarily by increases in weighted average AUM, which increased $2.9 billion, or 25.4%, to $14.3 billion for the year ended December 31, 2010, from $11.4 billion for the year ended December 31, 2009. Our weighted average fees were 0.541% and 0.552% for the years ended December 31, 2010 and 2009, respectively. This decrease was due in part to the full-year effect of the large institutional inflows in our EAFE Diversified Value and Global Diversified Value strategies that were launched in late-2009. We typically offer reduced fee rates to initial clients in our new product offerings. Weighted average fees also decreased in part due to an increase in the average size of our institutional accounts. Weighted average assets in institutional accounts increased $2.8 billion, or 34.2%, to $11.0 billion for the year ended December 31, 2010, from $8.2 billion for the year ended December 31, 2009, and had weighted average fees of 0.591% and 0.628% for the years ended December 31, 2010 and 2009, respectively. The decline in institutional weighted average fees arose due to the full-year effect of the large institutional inflows in our EAFE Diversified Value and Global Diversified Value strategies and a higher institutional average account size, as discussed above. Weighted average assets in retail accounts increased $0.1 billion, or 3.1%, to $3.3 billion for the year ended December 31, 2010, from $3.2 billion for the year ended December 31, 2009, and had weighted average fees of 0.372% and 0.356% for the years ended December 31, 2010 and 2009, respectively. The increase in weighted average fees in retail accounts was due in part to the expiration of the voluntary partial fee waiver in May 2010 on the John

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Hancock Classic Value Fund, partially offset by the timing of asset flows. For the year ended December 31, 2010, our share of this fee waiver was $0.3 million, compared to $0.6 million for the year ended December 31, 2009.

Expenses

Our operating expense is driven primarily by our compensation costs. The table below describes the components of our compensation expense for the three years ended December 31, 2011, 2010, and 2009.

		For the Year Ended December 31,
		2011				2010				2009
		(in thousands)
Cash Compensation and Other Benefits		$	29,518			$	25,895			$	22,057
Other Non-Cash Compensation			5,047				3,653				2,934
Total Compensation and Benefits Expense		$	34,565			$	29,548			$	24,991

Year Ended December 31, 2011 versus December 31, 2010

Total operating expense increased by $7.6 million, or 20.2%, 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 changes in the Company’s discretionary bonus accruals.

Compensation and benefits expense increased by $5.1 million, or 17.3%, 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 of $1.2 million 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. 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 increased by $2.6 million, or 32.5%, 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. During 2011, a $1.6 million loss was recognized in general and administrative expense for the aggregate excess of the costs expected to be incurred over the anticipated sublease income 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 included in general and administrative expense.

Year Ended December 31, 2010 versus December 31, 2009

Total operating expense increased by $4.3 million, or 12.9%, to $37.6 million for the year ended December 31, 2010, from $33.3 million for the year ended December 31, 2009. This increase was primarily attributable to an increase in compensation and benefits expense as discussed below.

Compensation and benefits expense increased by $4.5 million, or 18.0%, to $29.5 million for the year ended December 31, 2010, from $25.0 million for the year ended December 31, 2009. This increase was primarily attributable to discretionary bonus accruals, which increased $2.0 million for the year ended December 31, 2010 compared to the year ended December 31, 2009, and increases in employee headcount, which increased to 70 at December 31, 2010, from 67 at December 31, 2009. The $0.8 million increase in other non-cash compensation related to annual equity awards to our members, and arose in part as a result of a shift in compensation mix and expense timing.

General and administrative expense decreased by $0.3 million, or 3.6%, to $8.0 million for the year ended December 31, 2010, from $8.3 million for the year ended December 31, 2009. This decrease was mainly attributable to a $0.4 million decrease in professional fees and a $0.2 million decrease in insurance costs, offset by a $0.3 million increase in business travel expenses.

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Other Income/(Expense)

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. These expenses were partially offset by $0.4 million in interest and dividend income and $0.1 million in other 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. These expenses were partially offset by $0.4 million of net realized and unrealized gains from investments, and $0.3 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 $0.8 million change in net realized and unrealized gains/(losses) was due to investment performance. The decline in interest expense was the result of the full repayment of our outstanding debt in 2010.

Year Ended December 31, 2010 versus December 31, 2009

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, offset by $0.4 million of net realized and unrealized gains from investments, and $0.3 million in interest and dividend income. Other income/(expense) was income of $1.6 million for the year ended December 31, 2009, and consisted primarily of $6.2 million of income associated with the positive performance of our investments in our own products, and $0.5 million in interest and dividend income. This income was partially offset by $1.5 million in interest charges associated with the operating company’s term loan and subordinated note agreements, and $3.6 million in other expense, primarily consisting of adjustments to our liability to our selling and converting shareholders. The change in income associated with our investments in our own products was driven primarily by the deconsolidation of several investment partnerships at December 31, 2009 and during the year ended December 31, 2010. The decline in interest expense was a result of the full repayment of our outstanding debt in 2010.

Income Tax Expense/(Benefit)

Our results for the years ended December 31, 2011, 2010, and 2009 included the effects of certain one-time charges discussed in “Expenses,” above, and adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders. Our effective corporate tax rate, exclusive of adjustments related to certain one-time charges recognized in operating expense in the fourth quarter of 2011 and adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders, was 42.4%, 42.7%, and 42.7% for the years ended December 31, 2011, 2010, and 2009, respectively.

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Non-GAAP income before corporate income taxes used to calculate our income before income taxes for the years ended December 31, 2011, 2010, and 2009 are as follows:

		For the Year Ended December 31,
		2011				2010				2009
		(in thousands)
Income Before Income Taxes		$	36,388			$	37,226			$	31,388
One-time adjustments			4,798				—				—
Change in Liability to Selling and Converting Shareholders			1,581				3,312				3,725
Non-GAAP Unincorporated Business Taxes			(2,622	)			(2,431	)			(1,849	)
Non-GAAP Net Income Attributable to Non-Controlling Interests			(33,878	)			(32,674	)			(29,326	)
Non-GAAP Income Before Corporate Taxes		$	6,267			$	5,433			$	3,938
Unincorporated Business Taxes		$	2,617			$	2,431			$	1,849
Add back: Effect of One-Time Adjustments			5				—				—
Non-GAAP Unincorporated Business Taxes		$	2,622			$	2,431			$	1,849
Net Income Attributable to Non-Controlling Interests		$	29,861			$	32,674			$	29,326
Add back: Effect of One-Time Adjustments			4,017				—				—
Non-GAAP Net Income Attributable to Non-Controlling Interests		$	33,878			$	32,674			$	29,326

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,
		2011								2010								2009
		Tax				% of Non-GAAP Pre-tax Income				Tax				% of Non-GAAP Pre-tax Income				Tax				% of Non-GAAP Pre-tax Income
		(in thousands)								(in thousands)								(in thousands)
Federal Rate Applied to Non-GAAP Pre-tax Income		$	2,131				34.0	%		$	1,847				34.0	%		$	1,339				34.0	%
State and Local Taxes, Net of Federal Benefit			556				8.9	%			470				8.7	%			341				8.7	%
Other			(31	)			-0.5	%			—				0.0	%			—				0.0	%
Non-GAAP Effective Tax Rate		$	2,656				42.4	%		$	2,317				42.7	%		$	1,680				42.7	%

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

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tax rate was attributable to the effect of prior period adjustments. A comparison of the GAAP effective tax rates for the years ended December 31, 2011 and 2010 is not meaningful due to the valuation allowance adjustments.

Year Ended December 31, 2010 versus December 31, 2009

We recognized $0.7 million in income tax expense for the year ended December 31, 2010, and a $1.3 million income tax benefit for the year ended December 31, 2009. The 2010 and 2009 income tax expense/(benefit) included $4.0 million and $4.8 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/(benefit) for the year ended December 31, 2010 consisted of $2.4 million in operating company unincorporated business taxes and $2.3 million of corporate income taxes. For the year ended December 31, 2009, the remaining income tax expense/(benefit) consisted of $1.8 million of operating company unincorporated business taxes and $1.7 million of corporate income taxes. The increase in these taxes is attributable primarily to an increase in taxable income. There was no change in the non-GAAP effective tax rate for the year ended December 31, 2010 compared to the year ended December 31, 2009. A comparison of the GAAP effective tax rate for the year ended December 31, 2010 to the effective tax rate for the year ended December 31, 2009 is not meaningful due to the valuation allowance adjustments.

Non-Controlling Interests

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. 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.

Year Ended December 31, 2010 versus December 31, 2009

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. For the year ended December 31, 2009, non-controlling interest was income of $29.3 million, and consisted of $25.8 million associated with our employees’ and outside investors’ approximately 87.2% weighted-average interest in the income of the operating company, and approximately $3.5 million associated with the income of our consolidated investment partnerships. The change in net income attributable to non-controlling interests reflects primarily the increase in our weighted average AUM, which had a corresponding positive impact on operating company revenues and income. This increase was offset by the deconsolidation of several investment partnerships at December 31, 2009 and during the year ended December 31, 2010, and a decline in our employees’ and outside investors’ ownership interests in the operating company.

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Liquidity and Capital Resources

Historically, the working capital needs of our business have primarily been met through the cash generated by our operations. Distributions to members of our operating company and loan amortization payments have been 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, 2011, our cash and cash equivalents was $35.1 million, inclusive of $2.4 million in cash held by our consolidated subsidiaries. Advisory fees receivable was $14.7 million. We also had approximately $2.6 million in investments 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, 2011, our weighted average AUM and revenues increased by 4.9% and 7.1%, respectively, compared to our weighted average AUM and revenues for the year ended December 31, 2010.

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 32 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.

As further discussed below, our operating company was a party to a credit agreement (the “Credit Agreement”) associated with our bank term loan. Among other things, certain amendments to the Credit Agreement precluded us from paying dividends to shareholders, as did one of the provisions of the Senior Subordinated Notes, further discussed below. During the year ended December 31, 2009, we terminated our Credit Agreement. On December 31, 2009, the restriction on the payment of dividends contained in the Notes was waived, and during the year ended December 31, 2010, we repaid the full principal amount of the Senior Subordinated Notes. We do not anticipate that the termination of the revolving credit facility, originally obtained in conjunction with the Credit Agreement, will have a material effect on our liquidity position, as no amounts were drawn against it over the course of its existence. We currently do not have any material need for cash in excess of that derived from our operations. Although we are comfortable with our current capital structure, in the current economic environment, it is uncertain whether additional or alternative sources of debt or equity financing would be available on acceptable terms, if required.

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

Credit Agreement and Senior Subordinated Notes

During the year ended December 31, 2009, we repaid the remaining principal amount outstanding under our bank term loan and terminated the related Credit Agreement. Concurrent with the termination of this bank term loan and the Credit Agreement, the security interest previously granted in our accounts receivable was released. During the year ended December 31, 2010, we repaid the remaining principal amount outstanding of the Senior Subordinated Notes.

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 at the time of our acquisition and these subsequent and future exchanges, 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.

In October 2008, the selling shareholders agreed to a two-year waiver of any payments that we were required to make to them for the 2008 and 2009 tax years pursuant to the tax receivable agreement.

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Cash Flows

Operating activities provided $46.1 million and $42.1 million in cash flows for the years ended December 31, 2011 and 2010, respectively. The year-over-year increase in cash flows from operating activities was driven primarily by changes in working capital, in addition to an increase in net income, exclusive of the effects of the one-time charges in operating expense in 2011 and adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders.

Operating activities provided $42.1 million and $30.0 million in cash flows for the years ended December 31, 2010 and 2009, respectively. The year-over-year increase in cash flows from operating activities was driven primarily by an increase in weighted average AUM, from $11.4 billion for the year ended December 31, 2009, to $14.3 billion for the year ended December 31, 2010, which had a corresponding positive impact on total revenues and profits.

Investing activities consist primarily of capital expenditures, mutual fund contributions to, and redemptions from, our deferred compensation program, and related party activity. For the years ended December 31, 2011, 2010, and 2009, investing activities used $0.4 million, $2.1 million, and less than $0.1 million, respectively. The decrease of $1.7 million in cash used in investing activities from $2.1 million for the year ended December 31, 2010 to $0.4 million for the year ended December 31, 2011, was primarily attributable 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, offset by an increase of $0.1 million in purchases of property and equipment. The increase of $2.0 million in cash used in investing activities from less than $0.1 million for the year ended December 31, 2009 to $2.1 million for the year ended December 31, 2010, was primarily attributable to an increase of $2.0 in investments in our deferred compensation plan.

Financing activities consist primarily of borrowing arrangements and contributions from, and distributions to, non-controlling interests, which represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals made by our consolidated investment partnerships. Financing activities used $27.1 million for the year ended December 31, 2011, and used $39.5 million for the year ended December 31, 2010. The $12.4 million decrease in cash used in financing activities is primarily due to the $10.0 million repayment of our senior subordinated notes in 2010 that was not replicated in 2011, a decrease of $5.3 million in distributions to non-controlling interests, and a decrease of $1.0 million in dividend payments, offset by a decrease of $3.8 million in contributions from non-controlling interests. The decrease in distributions to non-controlling interests and dividend payments was primarily attributable to the timing of dividend declarations.

Financing activities used $39.5 million for the year ended December 31, 2010, and used $41.2 million for the year ended December 31, 2009. The $1.7 million decrease in cash used in financing activities is primarily due to an $18.0 million reduction in principal repayment associated with our debt obligations, and a $4.0 million increase in contributions from non-controlling interests, offset by an increase of $18.0 million in distributions to non-controlling interests, and an increase of $2.2 million in dividend payments.

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Contractual Obligations

The following table sets forth information regarding our consolidated contractual obligations as of December 31, 2011.

		Payments Due by Period
		Total				Less Than 1 Year				1 – 3 Years				3 – 5 Years				More Than 5 Years
		(in thousands)
Operating Lease Expenses, Net of Sublease Rental Income		$	6,770			$	1,890			$	3,445			$	1,435			$	—
Total		$	6,770			$	1,890			$	3,445			$	1,435			$	—

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2011.

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.

Investments in private investment partnerships in which we have a minority interest and exercise significant influence are accounted for using the equity method. Such investments, if any, are reflected on the consolidated statements of financial condition as investments in affiliates and are recorded at the amount of capital reported by the respective private investment partnerships. Such capital accounts reflect the contributions paid to, distributions received from, and the equity earnings of, the private investment partnerships.

Income Taxes

We are a “C” corporation under the Internal Revenue Code, and thus liable for federal, state and local taxes on the income derived from our economic interest in our operating company. The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. Our operating company has not made a provision for federal or state income taxes because it is the responsibility of each of the operating company’s members (including us) to separately report their proportionate share of the operating company’s taxable income or loss. Similarly, the income of our consolidated 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).

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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 $61.1 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.

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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 experienced declines in AUM during the first quarter of 2009 and the last three quarters of 2011, largely due to the volatility and disruption in the capital and credit markets. During those periods, we experienced declines in revenue and profitability, and there can be no assurance that there will not be declines in our AUM, revenue and profitability should volatility and disruption in the capital and credit markets occur 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, 2011 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, 2011, the fair value of these assets was $2.3 million and $2.6 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, 2011.

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, 2011.

Our consolidated financial statements and notes thereto begin on page F-1 of this Annual Report and are incorporated herein by reference.

As previously disclosed in reports we filed with the SEC, in 2011 we changed our independent public accounting firm. During the periods in respect of which disclosure is required to be made by the rules and regulations of the SEC: (1) there were no disagreements with our former independent public accounting firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of our former independent public accounting firm, would have caused it to make reference to the subject matter of the disagreements in its reports on our consolidated financial statements; and (2) there were no “reportable events” (as such term is defined in the rules of the SEC) involving our former independent public accounting firm.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

During the course of their review of our consolidated financial statements as of December 31, 2011, 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, 2011, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were

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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.

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, 2011. 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, 2011, 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-2 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, 2011 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 2011 that was not so disclosed.

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PART III.

The following table provides certain information relating to our directors and executive officers. Mr. Pzena was appointed an executive officer in May 2007, while Messrs. Goetz and Lipsey were appointed effective June 2007, Mr. Martin was appointed in May 2009, and Messrs. DeSpirito and Peterson were appointed in February 2011. Our executive officers are subject to re-appointment by our Board of Directors on an annual basis. Mr. Pzena was appointed director in May 2007, while Messrs. Galbraith, Greenblatt and Meyerowich were first appointed effective October 2007, Mr. Tysoe was appointed in December 2008, and Messrs. Goetz and Lipsey were appointed in May 2011.

Name		Age				Position
Richard S. Pzena			53				Chairman, Chief Executive Officer, Co-Chief Investment Officer
John P. Goetz			54				President, Co-Chief Investment Officer, Director
William L. Lipsey			53				President, Marketing and Client Service, Director
Gregory S. Martin			40				Chief Financial Officer
Antonio DeSpirito, III			43				Executive Vice President
Michael D. Peterson			47				Executive Vice President
Steven M. Galbraith			49				Director
Joel M. Greenblatt			54				Director
Richard P. Meyerowich			69				Director
Ronald W. Tysoe			58				Director

Richard S. Pzena is our Chairman, Chief Executive Officer and Co-Chief Investment Officer. 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 and was named to the Institutional Investor All America Research Team from 1988 to 1990. 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 is our President, Co-Chief Investment Officer and a member of our Board of Directors. 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 is our President, Marketing and Client Service and a member of our Board of Directors. 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.

Gregory S. Martin is our Chief Financial Officer. Mr. Martin was appointed our Chief Financial Officer in May 2009. He previously served as Director of Finance and Accounting. Prior to joining Pzena Investment Management in 2005, Mr. Martin served as Director of Finance at DoubleClick Inc. from 2000 to 2005. Prior to this, Mr. Martin worked as a manager in the Global Capital Markets practice of PricewaterhouseCoopers,

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LLP. Mr. Martin received his B.A. from Bucknell University in 1993 and an M.B.A. from Cornell University in 1997. Mr. Martin is a Certified Public Accountant.

Antonio DeSpirito, III is our Executive Vice President. Mr. DeSpirito was appointed Executive Vice President in February 2011. He is also a Portfolio Manager of our Large Cap Value, Value Service, and All Cap Value strategies. Prior to joining Pzena Investment Management in 1996, Mr. DeSpirito was an Associate in the Corporate 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 is our Executive Vice President. Mr. Peterson was appointed Executive Vice President in February 2011. He is also a Portfolio Manager of our Global Value, EAFE Diversified Value, EAFE Value, Global Diversified Value, and European 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 serves as a member of our Board of Directors. Mr. Galbraith is a partner of Maverick Capital, a registered investment advisor managing private investment funds exclusively for qualified investors. 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 serves as a member of our Board of Directors. 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 twelve 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 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 serves as a member of our Board of Directors. 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 Chartis, Inc., a global property and casualty insurance subsidiary of American International Group, Inc. Mr. Meyerowich is also a member of Chartis’ audit committee. Mr. Meyerowich earned a B.S. in Economics from Wagner College in 1965.

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Ronald W. Tysoe serves as a member of our Board of Directors. 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, 2011, 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. In 2011, based upon further consideration and examination of the applicable rules, our Board of Directors determined that Mr. Greenblatt was an “independent” director.

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. In connection with the election of Messrs. Goetz and Lipsey to our board of Directors in May 2011, our Board of Directors increased our board size to seven members. Our 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 and director nominees 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 with regard to 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.

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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.

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 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 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 to preside at all executive sessions of the non-management directors, but rather, has chosen to alternate directors to 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 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:

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 commenced activities during the second quarter of 2010 and met twice during 2011.

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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 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 45^th Street, 20^th 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:

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.

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Our Compensation Committee’s responsibilities include:

Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe currently serve on the Compensation Committee and Mr. Galbraith serves as its chair.

Nominating and Corporate Governance Committee

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

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, 2011, except that the issuance, on December 21, 2011, of 16,049 restricted Class B units, pursuant to the PIM LLC 2006 Equity Incentive Plan to Mr. Martin, was reported late on January 4, 2012.

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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.

None of our executive officers serves as a member of the Board of Directors or compensation committee, or other committee serving an equivalent function, of any entity that has 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. Each of Messrs. Galbraith, Greenblatt, Meyerowich and Tysoe approved such inclusion in this report.

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

In the fourth quarter 2010, the Compensation Committee adopted the following compensation philosophy to reflect the current core objectives for executive officer evaluations.

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.

It is intended that the magnitude of the bonus reflect the industry standards for executive responsibilities, and reflect the actual achievements 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.

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Consistent with this philosophy, 2011 compensation was established to reflect executive officer contributions to the following:

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.

For Co-chief Investment Officers and Executive Vice Presidents:

For President-Marketing:

For Chief Financial Officer:

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, 2011, our employees held approximately 65.2% 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:

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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.

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.

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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 and options to purchase membership units, which are both subject to vesting provisions. In 2011, 16,049 membership units, which are subject to vesting provisions, were granted to Mr. Martin (as further described below under “2011 Grants of Plan-Based Awards”). All membership units granted under the PIM LLC 2006 Equity Incentive Plan were granted at the fair market value of the Company’s Class A common stock on the date of grant, as determined by the Compensation Committee administering the plan.

As conditions allow, we intend to continue to award equity-based incentives under the PIM LLC 2006 Equity Incentive Plan as an incentive to encourage ownership in our operating company.

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 in fiscal year 2011 specifically in response to the executive compensation advisory vote.

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, Marketing and Client Service. Under the terms of the employment agreements, each of Messrs. Pzena, Goetz and Lipsey served for an initial term of 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 two successive one-year extensions through October 30, 2012. Each agreement provides for: (i) an annual base salary of $300,000, and (ii) an annual bonus, the amount of which will be determined by our Compensation Committee, subject to a maximum annual bonus for each executive of $2,700,000. This compensation is subject to the provisions of our Bonus Plan. We have not entered into an employment agreement with Messrs. Martin, 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

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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:

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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, 2011, 2010 and 2009 to our Chief Executive Officer, our Chief Financial Officer, our two Presidents and our two Executive Vice Presidents, whom we refer to collectively as the named executive officers. The amounts set forth under the Unit Awards and Option Awards 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)				Unit Awards($)(3)				Option Awards($)(4)				All Other Compensation($)(5)				Total($)
Richard S. Pzena,			2011			$	300,000			$	999,731				—				—			$	316,487			$	1,616,218
Chief Executive Officer,			2010				300,000				865,642				—				—				227,095				1,392,737
Co-Chief Investment Officer			2009				253,837				1,136,085				—				—				376,614				1,766,536
Gregory S. Martin			2011			$	300,000			$	235,002	(6)		$	76,554				—				—			$	611,556
Chief Financial Officer			2010				300,000				206,673	(7)			39,227				—				—				545,900
			2009				260,623				150,000				—			$	98,700				—				509,323
John P. Goetz,			2011			$	300,000			$	1,050,000				—				—			$	350,000			$	1,700,000
President, Co-Chief			2010				300,000				930,000				—				—				270,000				1,500,000
Investment Officer			2009				260,623				1,149,377				—				—				390,000				1,800,000
William L. Lipsey,			2011			$	300,000			$	695,250				—				—			$	131,750			$	1,127,000
President, Marketing			2010				300,000				600,000				—				—				100,000				1,000,000
and Client Service			2009				260,623				1,149,377				—				—				390,000				1,800,000
Antonio DeSpirito, III			2011			$	300,000			$	1,050,000				—				—			$	350,000			$	1,700,000
Executive Vice President(8)
Michael D. Peterson			2011			$	300,000			$	1,050,000				—				—			$	350,000	(9)		$	1,700,000
Executive Vice President(8)

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.

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2011 Grants of Plan-Based Awards

The following table sets forth information concerning unit grants made in 2011 to our named executive officers.

Name

Grant Date

All Other Stock Awards: Number of Shares of Stock or Units (#)

Grant Date Fair Value of Stock or Unit Awards ($)(1)

Gregory S. Martin

December 21, 2011

16,049(2)

$

76,554

We do not include in this table Phantom Class B units issued to Mr. Peterson in connection with his 2011 mandatory deferral of a portion of his compensation, as required 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.

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Outstanding Equity Awards at 2011 Fiscal Year-End

The following table sets forth information relating to unexercised options and unvested units held by any named executive officer as of December 31, 2011.

						Option Awards																Stock Awards
Name		Grant Date				Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Option Exercise Price ($)				Option Expiration Date				Number of Shares or Units of Stock That Have Not Vested (#)				Market Value of Shares or Units of Stock That Have Not Vested($)(1)
Richard S. Pzena			December 31, 2008				200,000	(2)			—			$	4.22	(3)			December 31, 2018				—				—
Gregory S. Martin			December 31, 2008				10,000	(2)			—				4.22	(3)			December 31, 2018				—				—
			December 21, 2009				30,000	(2)			—				8.00	(3)			December 21, 2019				—				—
			December 20, 2010				—				—				—				—				2,587	(4)		$	11,202
			December 21, 2011				—				—				—				—				10,699	(5)			46,327
John P. Goetz			December 31, 2008				200,000	(2)			—				4.22	(3)			December 31, 2018				—				—
William L. Lipsey			December 31, 2008				200,000	(2)			—				4.22	(3)			December 31, 2018				—				—
Antonio DeSpirito, III			January 1, 2007				175,000	(2)			—				13.53	(3)			January 1, 2017				—				—
			January 1, 2008				71,250	(2)			23,750				11.40	(3)			January 1, 2018				—				—
			December 31, 2008				148,301	(2)			—				4.22	(3)			December 31, 2018				—				—
			December 21, 2009				250,000	(6)			—				8.00	(7)			December 21, 2019				—				—
			December 31, 2010				—				—				—				—				17,857	(8)(9)			77,321
Michael D. Peterson			December 31, 2008				159,869	(2)			—				4.22	(3)			December 31, 2018				—				—
			December 31, 2009				—				—				—				—				20,000	(8)(10)			86,600
			December 31, 2010				—				—				—				—				35,715	(8)(11)			154,646

68

2011 Units Vested

Name		Number of Units Acquired on Vesting (#)(1)				Value Realized on Vesting ($)(2)
Antonio DeSpirito, III			22,730			$	98,421
Michael D. Peterson			35,281				152,767

2011 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, 2011.

Name		Executive Contributions for Year Ended December 31, 2011 ($)(1)(2)				Aggregate Earnings for Year Ended December 31, 2011 ($)(3)				Aggregate Withdrawals/ Distributions ($)				Aggregate Balance at Year Ended December 31, 2011($)(4)
Richard S. Pzena		$	316,487			$	14,200			$	373,898			$	736,613
John P. Goetz			350,000				(71,925	)			322,384				775,345
William L. Lipsey			131,750				12,837				243,652				442,429
Antonio DeSpirito, III.			350,000				126,549				158,368				583,185
Michael D. Peterson			350,000				(274,808	)			152,767				591,246