Pzena Investment Management, Inc.

The Company functions as the sole managing member of the operating company.  As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.  Class A and Class B units of the operating company have the same economic rights per unit. Class B-1 membership units, first issued on December 31, 2019, are entitled to receive distributions for the duration of the holder’s employment with the operating company, will participate in additional value to the extent there has been appreciation subsequent to the issuance of the Class B-1 membership unit.  As of March 31, 2020 the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 24.1% and 75.9%, respectively, of the economic interest in the March 31, 2020 value of the operating company. As of March 31, 2020, the holders of Class A common stock (through the Company), the holders of Class B units of the operating company, and the holders of Class B-1 units of the operating company held 22.2%, 70.1%, and 7.7%, respectively, of the right to the future income and distributions. As of December 31, 2019, the holders of Class A common stock of the Company and the holders of Class B units of the operating company held approximately 25.4% and 74.6%, respectively, of the December 31, 2019 economic interests in the value of the operating committee. As of December 31, 2019 the holders of Class A common stock (through the Company), the holders of Class B units of the operating company, and the holders of Class B-1 units of the operating company held 24.1%, 71.0%, and 4.9%, respectively, of the right to the future income and distributions.

During the three months ended March 31, 2020, lease expenses were $0.7 million are included in general and administrative expense.  During the three months ended March 31, 2019, lease expenses were $0.7 million.  This lease expense includes short-term lease expenses associated with the Company's office spaces in the U.K. and Australia. Short-term lease expense was $0.1 million for the three months ended March 31, 2020.  Lease expenses for the three months ended March 31, 2020 were net of $0.1 million of sublease income.  Lease expenses for the three months ended March 31, 2019 were net of $0.1 million of sublease income.

The dramatic securities market declines experienced during the latter part of the first quarter of 2020, which resulted from the global effects of COVID-19, caused a significant reduction in our AUM.  Because the revenue we earn is based on our AUM, we expect this and any further decline in our AUM to result in a corresponding decline in our revenues and earnings. The future impact of the COVID-19 pandemic and governmental responses to the pandemic remain uncertain.  Therefore, although we expect the effects of COVID-19 to continue to have an impact on our results of operations, the magnitude of such impact cannot be determined and are subject to a number of uncertainties. We continue to plan for and assess our ability to respond to these uncertainties, including the duration and severity of the pandemic, the impact of the pandemic and government stimulus actions on the economy and the financial markets and the continued ability of us and our clients to maintain current operations without disruption while working remotely.

Average assets in sub-advised accounts decreased $6.4 billion to $19.1 billion for the three months ended March 31, 2020, from $20.4 billion for the three months ended March 31, 2019, and had weighted average fees of 0.266% and 0.295% for the three months ended March 31, 2020 and 2019, respectively. Certain accounts related to one retail client relationship have fulcrum fee arrangements. These fee arrangements require a reduction in the base fee or allow for a performance fee if the relevant investment strategy underperforms or outperforms, respectively, the agreed-upon benchmark over the contract's measurement period, which extends to three years.  During the first quarter of 2020 and first quarter of 2019 we recognized a $1.0 million and $0.3 million reduction in base fees, respectively, related to one client relationship. To the extent the three-year performance record of this account fluctuates relative to its relevant benchmark, the amount of base fees recognized may vary. The impact of these fulcrum fee arrangements is reflected in the decrease of the weighted average fee rate from the first quarter of 2019.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act provides economic relief to eligible individuals and businesses impacted by the COVID-19 pandemic, including changes to tax policy.  We are currently assessing what impact, if any, the CARES Act’s provisions will have on our financial position, but we do not believe the impact will be material.