# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2018

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2018-05-14
- Accepted by EDGAR: May 14, 2018, 16:41 ET
- Period: 2018-03-31
- Accession: 0001104659-18-032965
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000110465918032965/a18-11260_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000110465918032965/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $27.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $3.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $10.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 66,283,621 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $25.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $703.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $53.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-03-31 | $12.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-03-31 | $785.1m | us-gaap:Assets |
| Total liabilities | at 2018-03-31 | $386.3m | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $310.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2018-03-31 | $398.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,017 characters.

***The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Form 10-K. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.***

### Overview

We are an investment management firm operating a next generation, integrated multi-boutique model with $60.9 billion in AUM as of March 31, 2018. Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our select group of Franchises and Solutions Platform. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees.

Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated multi-boutique model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities.

Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions.

We sell our products through our centralized distribution model with 96 professionals across both our institutional and retail distribution channels and marketing organization. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as mutual fund complexes seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $60.9 billion at March 31, 2018. We attribute this growth to our success in sourcing and executing acquisitions, generating strong investment returns, and developing retail and institutional distribution channels with deep penetration.

### Initial Public Offering

On February 12, 2018, we issued 11,700,000 shares of Class A common stock in the IPO at a price of $13.00 per share. On March 13, 2018, the Company issued an additional 1,110,860 shares of Class A common stock pursuant to the underwriters’ exercise of their option. The net proceeds totaled $156.5 million: $143.0 million received at the closing of the IPO and $13.5 million received at the subsequent closing of the underwriters’ exercise of their option, after deducting in each case underwriting discounts.

Net proceeds received from the IPO and the Credit Agreement of $143.0 million and $355.9 million, respectively, were used concurrent with the closing of the IPO, together with $0.8 million of cash on hand, to repay the $499.7 million of outstanding term loans under the 2014 Credit Agreement. On February 21, 2018, the Company repaid $10.0 million of outstanding term loans under the Credit Agreement, and on March 19, 2018, the Company used the net proceeds from the underwriters’ exercise of their option and cash on hand to repay an additional $27.0 million of the outstanding term loans under the Credit Agreement. See Note 7 to the unaudited condensed consolidated financial statements for further discussion.

### Highlights for Three Months Ended March 31, 2018

- AUM was $60.9 billion at March 31, 2018 compared to $61.8 billion at December 31, 2017, down 1% driven by net outflows and market movement. Our Solutions Platform and the Global / Non-U.S. Equity asset class saw net inflows during the quarter while Fixed Income and U.S. Mid Cap Equity accounted for the majority of the net outflows. We generated $3.7 billion in gross flows and ($0.6) billion in negative net flows for the three months ended March 31, 2018 compared to $4.7 billion and ($0.4) billion, respectively, for the three months ended March 31, 2017.
- Our Franchises and Solutions Platform had strong investment performance. As of March 31, 2018, 23 of our mutual funds and ETFs have overall Morningstar ratings of four or five stars and 69% of our fund AUM was rated four or five stars by Morningstar. As of March 31, 2018, 87% of our strategies by AUM had returns in excess of their respective benchmarks over a one-year period, 71% over a three-year period, 83% over a five-year period and 79% over a ten-year period. On an equal-weighted basis, 75% of our strategies have outperformed their benchmarks over a one-year period, 70% over a three-year period, 76% over a five-year period and 72% over a ten-year period.
- The industry recognized us for our achievements. We were ranked #1 for Institutional Brand Awareness among asset managers with between $25 billion and $50 billion in AUM in 2015 and #4 for Institutional Brand Awareness among asset managers with between $50 billion and $100 billion in both 2016 and 2017 by eVestment. We ranked 10th in Barron’s Best Fund Families for 2017. This is the fourth consecutive year that we have been ranked among the top 25 fund families by Barron’s. The Victory INCORE Investment Grade Convertible Fund Class I received a 2018 Thomson Reuters Lipper Fund Award and ranked first over five years in the convertible securities category for the period ended November 30, 2017.
- Total revenue for the three months ended March 31, 2018 was $105.0 million compared to $100.7 million for the three months ended March 31, 2017.
- Net income was $10.5 million for the three months ended March 31, 2018 compared to net income of $4.4 million for the three months ended March 31, 2017.
- Adjusted EBITDA was $39.8 million for the three months ended March 31, 2018 compared to $33.6 million for the three months ended March 31, 2017. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
- Adjusted Net Income was $23.1 million for the three months ended March 31, 2018 compared to $13.0 million for the three months ended March 31, 2017. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net Income.

### Key Performance Indicators

When we review our performance we focus on the indicators described below:

*($ in millions)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| AUM at period end | $60,855 | $56,622 |
| Average AUM | 62,020 | 56,277 |
| Gross flows | 3,685 | 4,725 |
| Net flows (excluding Diversified)(1) | (633) | (54) |
| Total revenue | 105.0 | 100.7 |
| Revenue on average AUM | 69 bps | 73 bps |
| Net income | 10.5 | 4.4 |
| Adjusted EBITDA(2) | 39.8 | 33.6 |
| Adjusted EBITDA Margin(3) | 37.9% | 33.4% |
| Adjusted Net Income(2) | 23.1 | 13.0 |
| Tax benefit of goodwill and acquired intangibles(4) | 3.3 | 4.9 |

(1) Total net flows including Diversified were ($633) and ($386) for the three months ended March 31, 2018 and 2017.

(2) Our management uses Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one-time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “—Supplemental Non-GAAP Financial Information.”

(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

(4) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted. The Tax Act significantly revises the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

### Assets Under Management

Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including:

- investment performance, including fluctuations in the financial markets and the quality of our investment decisions;
- client flows into and out of our various strategies and investment vehicles;
- industry trends toward products or strategies that we either do or do not offer;
- our ability to attract and retain high quality investment, distribution, marketing and management personnel;
- our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re-open strategies in part or entirely; and
- general investor sentiment and confidence.

Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions Platform, asset class, distribution channel and vehicle. The chart below sets forth our AUM by Franchise and Solutions Platform as of March 31, 2018:

The following table presents our AUM by asset class as of the dates indicated:

*($ in millions)*

|  | As of March 31, 2018 | 2017 |
| --- | ---: | ---: |
| U.S. Mid Cap Equity | $24,205 | $21,555 |
| U.S. Small Cap Equity | 15,095 | 14,556 |
| Fixed Income | 7,311 | 7,756 |
| U.S. Large Cap Equity | 4,635 | 5,285 |
| Global / Non-U.S. Equity | 4,334 | 3,482 |
| Solutions | 3,563 | 1,970 |
| Commodity | 1,298 | 1,770 |
| Other | 414 | 248 |
| **Total** | **$60,855** | **$56,622** |

The following table summarizes our asset flows by asset class for the periods indicated:

*($ in millions)*

| Three Months Ended March 31, 2018 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Commodity | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $25,185 | $15,308 | $7,551 | $4,789 | $4,105 | $3,028 | $1,419 | $386 | $61,771 |
| Gross client cash inflows | 1,203 | 776 | 394 | 55 | 443 | 606 | 127 | 81 | 3,685 |
| Gross client cash outflows | (2,080) | (922) | (640) | (211) | (220) | (77) | (146) | (22) | (4,318) |
| Net client cash flows | (877) | (146) | (246) | (156) | 223 | 529 | (19) | 59 | (633) |
| Net transfers | — | — | — | (1) | (8) | 40 | — | (39) | (8) |
| Market appreciation / (depreciation) | (103) | (67) | 6 | 3 | 14 | (34) | (102) | 8 | (275) |
| Ending AUM | $24,205 | $15,095 | $7,311 | $4,635 | $4,334 | $3,563 | $1,298 | $414 | $60,855 |
| **Three Months Ended March 31, 2017** |  |  |  |  |  |  |  |  |  |
| Beginning AUM(1) | $20,083 | $14,090 | $7,726 | $5,921 | $3,460 | $1,602 | $1,882 | $202 | $54,965 |
| Gross client cash inflows | 2,209 | 1,249 | 503 | 68 | 208 | 347 | 108 | 33 | 4,725 |
| Gross client cash outflows | (1,873) | (1,201) | (588) | (711) | (472) | (47) | (205) | (14) | (5,111) |
| Net client cash flows | 336 | 48 | (85) | (643) | (264) | 300 | (97) | 19 | (386) |
| Net transfers | 1 | — | (2) | — | — | — | — | 1 | — |
| Market appreciation / (depreciation) | 1,135 | 418 | 117 | 7 | 286 | 68 | (15) | 26 | 2,042 |
| Ending AUM | $21,555 | $14,556 | $7,756 | $5,285 | $3,482 | $1,970 | $1,770 | $248 | $56,622 |

(1) Reflects transfer of $27.0 million in assets from Other to Solutions effective January 1, 2017.

We made the strategic decision to exit the Diversified Equity Franchise (“Diversified”) and move the remaining AUM into our Munder Franchise, which was completed as of May 15, 2017. The following table presents the impact of Diversified on net client cash flows for the periods indicated. Given this decision, we believe this presentation is a better representation of our business.

*($ in millions)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net client cash flows—Total Company | $(633) | $(386) |
| Net client cash flows—Diversified | — | (332) |
| Net client cash flows—Total Company excluding Diversified | $(633) | $(54) |

27

The following table presents our AUM by distribution channel as of the dates indicated:

*($ in millions)*

|  | As of March 31, 2018 Amount | % of total | 2017 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Institutional | $35,116 | 58% | $31,756 | 56% |
| Retail | 25,739 | 42% | 24,866 | 44% |
| Total AUM(1) | $60,855 | 100% | $56,622 | 100% |

(1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.

The following table summarizes our asset flows by vehicle for the periods indicated:

*($ in millions)*

| Three Months Ended March 31, 2018 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $37,967 | $2,250 | $21,555 | $61,771 |
| Gross client cash inflows | 2,626 | 481 | 578 | 3,685 |
| Gross client cash outflows | (3,266) | (29) | (1,023) | (4,318) |
| Net client cash flows | (640) | 452 | (445) | (633) |
| Net transfers | (31) | — | 22 | (8) |
| Market appreciation / (depreciation) | (307) | (28) | 60 | (275) |
| Ending AUM | $36,989 | $2,674 | $21,192 | $60,855 |
| **Three Months Ended March 31, 2017** |  |  |  |  |
| Beginning AUM | $33,975 | $906 | $20,085 | $54,965 |
| Gross client cash inflows | 3,945 | 317 | 463 | 4,725 |
| Gross client cash outflows | (3,635) | (2) | (1,474) | (5,111) |
| Net client cash flows | 310 | 315 | (1,011) | (386) |
| Net transfers | (5) | — | 5 | — |
| Market appreciation/(depreciation) | 1,360 | 46 | 636 | 2,042 |
| Ending AUM | $35,640 | $1,267 | $19,715 | $56,622 |

(1) Includes institutional and retail share classes and Variable Insurance Products or VIP funds.

(2) Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.

At March 31, 2018, our total AUM was $60.9 billion, a decrease of ($0.9) billion, or 1% compared to $61.8 billion at December 31, 2017. The change in AUM reflects net market depreciation of ($0.3) billion and net outflows of ($0.6) billion. The net outflows were primarily a result of ($0.9) billion net outflows in our U.S. mid cap equity strategies, ($0.2) billion in our fixed income strategies, ($0.2) billion in our U.S. large cap equity strategies and ($0.1) billion in our U.S. small cap equity strategies partially offset by $0.5 billion of net inflows in our Solutions Platform and $0.2 billion in our global / non-U.S. equity strategies.

At March 31, 2017, our total AUM was $56.6 billion, an increase of $1.6 billion, or 3%, compared to $55.0 billion at December 31, 2016. The change in AUM reflects net market appreciation of $2.0 billion and net outflows of ($0.4) billion. The net outflows were primarily a result of ($0.6) billion net outflows in our U.S. large cap equity strategies, ($0.3) billion in our global / non-U.S. equity strategies, ($0.1) billion in our commodity strategies and ($0.1) billion in our fixed income strategies partially offset by $0.3 billion of net inflows in our U.S. mid cap equity strategies and $0.3 billion in our Solutions Platform. Excluding the impact of outflows from Diversified, net outflows would have been ($0.1) billion for the three months ended March 31, 2017.

### GAAP Results of Operations

Our GAAP results of operations were as follows for the three months ended March 31, 2018 and 2017.

*($ in thousands, other than per share amounts)*

| Revenue | Three Months Ended March 31, 2018 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $89,130 | $84,115 | $5,015 | 6% |
| Fund administration and distribution fees | 15,834 | 16,546 | (712) | -4% |
| Total revenue | 104,964 | 100,661 | 4,303 | 4% |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | $36,803 | $35,650 | $1,153 | 3% |
| Distribution and other asset-based expenses | 25,161 | 26,881 | (1,720) | -6% |
| General and administrative | 9,056 | 8,921 | 135 | 2% |
| Depreciation and amortization | 6,412 | 8,154 | (1,742) | -21% |
| Acquisition-related costs | — | 363 | (363) | n/m |
| Restructuring and integration costs | 264 | 1,130 | (866) | -77% |
| Total operating expenses | 77,696 | 81,099 | (3,403) | -4% |
| Income from operations | 27,268 | 19,562 | 7,706 | 39% |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income/(expense) | $(37) | $345 | $(382) | n/m |
| Interest expense and other financing costs | (7,092) | (12,628) | 5,536 | -44% |
| Loss on debt extinguishment | (6,058) | — | (6,058) | n/m |
| Total other income (expense), net | (13,187) | (12,283) | (904) | 7% |
| Income before income taxes | 14,081 | 7,279 | 6,802 | 93% |
| Income tax expense | (3,557) | (2,866) | (691) | 24% |
| Net income | **$10,524** | **$4,413** | **$6,111** | **138%** |
| Earnings per share—basic | $0.17 | $0.08 | $0.09 | 113% |
| Earnings per share—diluted | $0.16 | $0.08 | $0.08 | 100% |
| Weighted average shares outstanding—basic | 61,599,057 | 54,813,823 | 6,785,234 | 12% |
| Weighted average shares outstanding—diluted | 66,283,621 | 58,746,227 | 7,537,394 | 13% |
| Dividends declared per share | $— | $2.19 | $(2.19) | n/m |

#### Investment Management Fees

Investment management fees are earned from managing clients’ assets and are based on our overall weighted average fee rate charged to our clients and our level of AUM. Investment management fees increased $5.0 million, or 6%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to an increase in AUM year over year partially offset by a decrease in the realized fee rate due to asset mix. AUM increased by $4.3 billion to $60.9 billion at March 31, 2018 from $56.6 billion at March 31, 2017, due to $6.1 billion of market appreciation partially offset by ($1.7) billion of net outflows and a ($0.1) billion reduction primarily related to mutual fund liquidations during the 12 months ended March 31, 2018.

#### Fund Administration and Distribution Fees

Fund administration and distribution fees are asset-based fees earned from open-end mutual funds and ETFs for administration and distribution services. Fund administration and distribution fees totaled $15.8 million for the three months ended March 31, 2018, a decrease of $0.7 million, or 4%, when compared to the three months ended March 31, 2017 due to a decrease in fund distribution fees partially offset by an increase in fund administration fees.

Fund distribution fees are asset-based fees earned from open-end mutual funds for distribution services. Fund distribution fees fluctuate based on the level of average open-end mutual fund AUM and the composition of those assets across share classes that pay varying levels of fund distribution fees. Fund distribution fees were $10.1 million for the three months ended March 31, 2018, compared to $11.2 million for the three months ended March 31, 2017. While mutual fund daily average AUM grew by $2.9 billion from $35.1 billion for the three months ended March 31, 2017 to $38.0 billion for the three months ended March 31, 2018, the mix of assets shifted to lower 12b-1 paying share classes.

Fund administration fees are asset-based fees earned from open-end funds for administration services. Fund administration fees fluctuate based on the level of average open-end fund AUM and the fee rates charged for these services. Fund administration fees were $5.7 million for the three months ended March 31, 2018, compared to $5.3 million for the three months ended March 31, 2017 due to the assumption of administration responsibilities for VictoryShares in March 2017 and higher mutual fund and ETF average daily assets.

#### Personnel Compensation and Benefits

Personnel compensation and benefits is our most significant category of expense. Personnel compensation and benefits consists of (i) salaries, payroll related taxes and employee benefits, (ii) incentive compensation, (iii) sales-based compensation, (iv) compensation expense related to equity awards granted to employees and (v) acquisition and transaction-related compensation. The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended March 31, 2018 and 2017:

*($ in thousands)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $12,923 | $13,745 |
| Incentive compensation | 17,165 | 14,461 |
| Sales-based compensation(1) | 3,393 | 5,002 |
| Equity awards granted to employees(2) | 3,322 | 2,301 |
| Acquisition and transaction-related compensation | — | 141 |
| **Total personnel compensation and benefits expense** | **$36,803** | **$35,650** |

(1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards are recognized as compensation expense over the vesting period.

Personnel compensation and benefits was $36.8 million for the three months ended March 31, 2018, an increase of $1.1 million, or 3%, from $35.7 million for the three months ended March 31, 2017. Salaries and benefits was $12.9 million for the three months ended March 31, 2018, a decrease of $0.8 million, or 6%, from $13.7 million for the three months ended March 31, 2017. This decrease reflects the reduction in headcount that resulted from the integration of RS Investments onto our operations and technology platform in the first quarter of 2017. Incentive compensation was $17.2 million for the three months ended March 31, 2018, an increase of $2.7 million, or 19%, from $14.5 million for the three months ended March 31, 2017, due to higher pre-incentive compensation earnings. Sales-based compensation was $3.4 million for the three months ended March 31, 2018, a decrease of $1.6 million, or 32%, from $5.0 million for the three months ended March 31, 2017, as a result of lower gross flows. Equity award expense was $3.3 million for the three months ended March 31, 2018, an increase of $1.0 million, or 43%, from $2.3 million for the three months ended March 31, 2017, due to the equity awards granted on January 1, 2018 and pre-existing awards that are still being expensed. There was no acquisition and transaction-related compensation during the three months ended March 31, 2018.

#### Distribution and Other Asset-based Expenses

Distribution and other asset-based expenses consists of (i) broker-dealer distribution fees and platform distribution fees, (ii) fund expense reimbursements to affiliates and (iii) sub-administration, sub-advisory and middle-office expenses. The following table presents the components of distribution and other asset-based expenses for the three months ended March 31, 2018 and 2017:

*($ in thousands)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Broker-dealer distribution fees | $9,338 | $10,445 |
| Platform distribution fees | 7,723 | 7,015 |
| Fund expense reimbursements | 2,933 | 4,013 |
| Sub-administration | 1,534 | 1,313 |
| Sub-advisory | 1,838 | 2,280 |
| Middle-office | 1,795 | 1,815 |
| **Total distribution and other asset-based expenses** | **$25,161** | **$26,881** |

30

Distribution and other asset-based expenses are primarily based on AUM. Distribution and other asset-based expenses were $25.2 million for the three months ended March 31, 2018, a decrease of $1.7 million, or 6%, from $26.9 million for the three months ended March 31, 2017. Asset-based expenses associated with platform distribution and sub-administration have increased year over year due to the increase in fund AUM. Broker-dealer distribution fees decreased due to the mix of mutual fund assets shifting to lower 12b-1 paying share classes. Fund expense reimbursements and middle-office expense have decreased year over year due to operational efficiencies. The decrease in sub-advisory expense is a result of a decline in the assets included under our two sub-advisory relationships.

#### General and Administrative Expenses

General and administrative expenses primarily consist of investment research and technology costs, professional and marketing fees, travel, rent, insurance and other general operating expenses. General and administrative expenses increased by $0.2 million, or 2%, to $9.1 million for the three months ended March 31, 2018, from $8.9 million for the three months ended March 31, 2017. Included in general and administrative expenses for the three months ended March 31, 2018 was $1.9 million of one-time costs related to the Credit Agreement that were not eligible to be capitalized. This largely was offset by decreases in occupancy, technology and other business expenses due to operational efficiencies.

#### Depreciation and Amortization

Depreciation and amortization expense consists primarily of the depreciation of property and equipment as well as the amortization of acquired intangibles that have a definite life. Depreciation and amortization decreased by $1.8 million, or 28%, to $6.4 million for the three months ended March 31, 2018, from $8.2 million for the three months ended March 31, 2017, primarily due to lower amortization as certain intangible assets acquired in connection with the management-led buyout with Crestview GP reached the end of their useful lives.

#### Acquisition-Related Costs

Acquisition-related costs include legal fees, advisory services, mutual fund proxy voting costs and other one-time expenses related to acquisitions. There were no acquisition-related costs in the three months ended March 31, 2018.

#### Restructuring and Integration Costs

Restructuring and integration costs include costs incurred in connection with business combinations, asset purchases and changes in business strategy. Restructuring and integration costs decreased by $0.8 million to $0.3 million for the three months ended March 31, 2018, from $1.1 million for the three months ended March 31, 2017, due to costs incurred for contract breakage associated with the integration of RS Investments onto our operations and technology platform that occurred in the first quarter of 2017.

#### Interest Expense and Other Financing Costs

Interest expense and other financing costs consists primarily of interest expense attributable to long-term debt. Interest expense and other financing costs decreased by $5.5 million, or 44%, to $7.1 million for the three months ended March 31, 2018, from $12.6 million for the three months ended March 31, 2017 as a result of refinancing activities. See Note 7 to the unaudited condensed consolidated financial statements for further discussion.

#### Loss on Debt Extinguishment

Loss on debt extinguishment consists of the write-off of previously capitalized debt-related costs upon the termination of the debt. During the three months ended March 31, 2018, the Company recognized a $6.1 million loss on debt extinguishment consisting of $4.2 million of debt issuance costs and $1.9 million of debt discount upon the termination of the 2014 Credit Agreement. See Note 7 to the unaudited condensed consolidated financial statements for further discussion.

#### Income Tax Expense

The provision for income taxes for the three months ended March 31, 2018 and 2017 comprises U.S. federal, state and local taxes and foreign income taxes payable by certain of our subsidiaries. The difference between our effective tax rate and the statutory federal rate of 21% are state, local and foreign income taxes and non-deductible expenses.

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

### Supplemental Non-GAAP Financial Information

We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income.

The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

*($ in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| **Net income** | **$10,524** | **$4,413** |
| GAAP income tax expense | 3,557 | 2,866 |
| **Income before taxes** | **$14,081** | **$7,279** |
| Interest expense(1) | 8,094 | 11,596 |
| Depreciation(2) | 736 | 915 |
| Other business taxes(3) | 375 | 450 |
| GAAP amortization of acquisition-related intangibles(4) | 5,676 | 7,238 |
| Stock-based compensation(5) | 3,322 | 2,301 |
| Acquisition, restructuring and exit costs(6) | 518 | 2,603 |
| Debt issuance costs(7) | 6,702 | 914 |
| Pre-IPO governance expenses(8) | 141 | 288 |
| Losses on equity method investments(9) | 137 | — |
| **Adjusted EBITDA** | **$39,782** | **$33,584** |

| ($ in thousands) Reconciliation of non-GAAP financial measures: | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| **Net income** | **$10,524** | **$4,413** |
| Adjustments to reflect the operating performance of the Company: |  |  |
| i. Other business taxes(3) | 375 | 450 |
| ii. GAAP amortization of acquisition-related intangibles(4) | 5,676 | 7,238 |
| iii. Stock-based compensation(5) | 3,322 | 2,301 |
| iv. Acquisition, restructuring and exit costs(6) | 518 | 2,603 |
| v. Debt issuance costs(7) | 6,702 | 914 |
| vi. Pre-IPO governance expenses(8) | 141 | 288 |
| Tax effect of above adjustments(10) | (4,183) | (5,242) |
| **Adjusted Net Income** | **$23,075** | **$12,965** |
| Tax benefit of goodwill and acquired intangibles(11) | $3,320 | $4,891 |

(1) We add back interest paid on debt and other financing costs, net of interest income; interest expense is included in “Interest expense and other financing costs” and the write-off of debt discount is shown in “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements, while interest income is shown in “Interest income and other income” in our unaudited condensed consolidated financial statements.

(2) We add back depreciation on property and equipment; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(3) We add back other business taxes; other business taxes are included in “General and administrative” in our unaudited condensed consolidated financial statements.

(4) We add back amortization of acquisition-related intangibles; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(5) We add back the expense associated with stock-based compensation associated with equity issued from pools that were created in connection with the management-led buyout with Crestview GP from KeyCorp, the Munder Acquisition and the RS Acquisition and as a result of IPO-related equity grants; included in “Personnel compensation and benefits” in our unaudited condensed consolidated financial statements.

(6) We add back direct incremental costs of acquisitions and the IPO, including expenses associated with third-party advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early termination costs, impairment of receivables recorded in connection with an acquisition, and severance, retention and transaction incentive compensation. Severance, retention and transaction incentive compensation is included in “Personnel compensation and benefits” in our unaudited condensed consolidated financial statements, impairment of receivables recorded in connection with an acquisition is included in “Interest income and other income/(expense),” costs associated with professional services incurred in connection with IPO readiness are included in “General and administrative”; all other incremental costs are included in “Restructuring and integration costs” or “Acquisition-related costs.”

| ($ in thousands) | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Restructuring and integration costs | $264 | $1,130 |
| General and administrative | 254 | — |
| Acquisition-related costs | — | 1,333 |
| Personnel compensation and benefits | — | 140 |

(7) We add back debt issuance costs; included in “Interest expense and other financing costs”, “General and administrative” and “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements. See “—Liquidity and Capital Resources” for more information.

(8) We add back pre-IPO governance expenses paid to Crestview and Reverence Capital, included in “General and administrative” in our unaudited condensed consolidated financial statements. These payments terminated as of the completion of the IPO.

(9) We adjust for earnings/losses on equity method investments, included in “Interest income and other income/(expenses)” in our unaudited condensed consolidated financial statements.

(10) For the three months ended March 31, 2018, reflects income taxes of 25% applied to the sum of line items i. to vi.; 25% represents statutory federal income tax rate of 21% plus an estimate for state, local and foreign income taxes. For the three months ended March 31, 2017, reflects income taxes of 38% applied to the sum of line items i. to vi.; 38% represents statutory federal income tax rate of 35% plus an estimate for state, local and foreign income taxes.

(11) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures.

### Liquidity and Capital Resources

Our primary uses of cash relate to repayment of our debt obligations and funding working capital needs and are expected to be met primarily through cash generated from our operations. The following table shows our liquidity position as of March 31, 2018 and December 31, 2017.

*($ in thousands)*

|  | March 31, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Cash and cash equivalents | $12,296 | $12,921 |
| Accounts and other receivables | 54,763 | 55,917 |
| Undrawn commitment on revolving credit facility | 50,000 | 25,000 |
| Accounts and other payables | (46,408) | (51,301) |

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consist primarily of investment management fees that have been earned but not yet received from clients. Included in other receivables are amounts due under a contract with a third party acquired in connection with the RS Acquisition, income and other taxes receivable and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to access collectability.

We maintained a $50.0 million revolving credit facility at March 31, 2018, which had $50.0 million undrawn as of March 31, 2018. We maintained a $25.0 million revolving credit facility at December 31, 2017 which had $25.0 million undrawn as of December 31, 2017. On May 3, 2018, the Company signed an amendment to the Credit Agreement increasing the revolving credit facility from $50.0 million to $100.0 million. See Note 13 to the unaudited condensed consolidated financial statements for further discussion.

#### Debt Refinancing

On February 12, 2018, concurrently with the closing of the IPO, we entered into the Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto, administrative agent and collateral agent, and the other parties thereto, under which we received seven-year term loans in an aggregate principal amount of $360.0 million and established a five-year revolving credit facility (which was unfunded as of closing) with aggregate commitments of $50.0 million. Subject to certain terms and conditions set forth in the Credit Agreement, we may incur additional loans or commitments under the Credit Agreement in an aggregate principal amount of up to $154.0 million or, if greater, 100% of Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the most recently ended period of four fiscal quarters, plus certain additional amounts set forth in the Credit Agreement.

Amounts outstanding under the Credit Agreement bear interest at an annual rate equal to, at our option, either LIBOR (adjusted for reserves) plus a margin of 2.75% or an alternate base rate plus a margin of 1.75%. We are also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the revolving credit facility.

Term loans under the Credit Agreement will amortize at a rate of 1.00% per annum. In addition, the Credit Agreement requires that the term loans be mandatorily prepaid with (a) a percentage (ranging from 0% to 50%, depending on our first lien leverage ratio) of our annual excess cash flow on an annual basis (commencing with the fiscal year ending December 31, 2019), (b) all or a portion of the net cash proceeds of certain asset sales, casualty or condemnation events, subject to customary reinvestment rights, and (c) the proceeds of certain incurrences of indebtedness.

Our obligations under the Credit Agreement are guaranteed by all of our domestic subsidiaries (other than Victory Capital Advisers, Inc., our broker-dealer subsidiary), or the Guarantors, and secured by substantially all of the assets of the Company and the Guarantors, subject in each case to certain customary exceptions.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of us and our subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify our fiscal year and modify our organizational documents, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains a financial performance covenant, requiring a maximum first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0% of the commitments thereunder (excluding certain letters of credit), of no greater than 4.00 to 1.00.

On February 21, 2018, the Company repaid $10.0 million of the outstanding term loans under the Credit Agreement, and on March 19, 2018, the Company used the net proceeds from the underwriters’ exercise of their option and cash on hand to repay an additional $27.0 million of the outstanding term loans under the Credit Agreement. The aggregate principal amount of loans outstanding under the Credit Agreement on March 31, 2018 was $323.0 million. See Note 7 to the unaudited condensed consolidated financial statements for further discussion.

On April 11, 2018 and May 3, 2018, the Company repaid $15.0 million and $3.0 million respectively of outstanding term loans under the Credit Agreement decreasing the aggregate principal amount of loans outstanding under the Credit Agreement to $305.0 million resulting in an annualized interest expense savings of $900k at our current interest rate. See Note 13 to the unaudited condensed consolidated financial statements for further discussion.

On May 3, 2018, the Company signed an amendment to the Credit Agreement increasing the revolving credit facility from $50.0 million to $100.0 million. See Note 13 to the unaudited condensed consolidated financial statements for further discussion.

#### Capital Requirements

VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents.

#### Cash Flows for the Three Months Ended March 31, 2018 and 2017

*($ in thousands)*

|  | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash from operating activities | $25,872 | $9,674 |
| Net cash used in investing activities | (2,719) | (1,562) |
| Net cash used by financing activities | (23,817) | (12,467) |

Operating activities provided net cash of $25.9 million and $9.7 million for the three months ended March 31, 2018 and 2017, respectively. The $16.2 million increase in net cash provided by operating activities was primarily due to growth in the business and lower interest expense as a result of refinancing activities.

Investing activities consist primarily of acquisitions and sales of property and equipment, as well as the purchase and sales of trading securities related to our deferred compensation plan and other investing activities related to our business operations. Investing activities used net cash of $2.7 million and $1.6 million for the three months ended March 31, 2018 and 2017, respectively. The $1.1 million increase in the net cash used in investing activities was primarily due to a $1.0 million equity investment in Cerebellum Capital on February 1, 2018.

Financing activities consist primarily of proceeds received or paid from the issuance or repurchase of equity, debt-related activity and dividend payments to our stockholders. For the three months ended March 31, 2018, financing activities included, but were not limited to, the generation of net IPO proceeds of $156.5 million: $143.0 million received at the closing of the IPO and $13.5 million received at the subsequent closing of the underwriters’ exercise of their option, the incurrence of $360.0 million of term loans under the Credit Agreement, the repayment of $499.7 million of term loans under the 2014 Credit Agreement and the repayment of long-term debt under the Credit Agreement of $37.0 million. For the three months ended March 31, 2017, financing activities included, but were not limited to, the incurrence of $125.0 million of incremental term loans under the 2014 Credit Agreement, the payment of a dividend to stockholders in the amount of $119.9 million and the repayment of long-term debt in the amount of $7.9 million. Financing activities used net cash of $23.8 million and $12.5 million for the three months ended March 31, 2018 and 2017, respectively.

### Contractual Obligations

Except for principal payments on borrowings, interest payable and the Cerebellum Capital commitment, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2017 as disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7 of our Form 10-K for the year ended December 31, 2017.

The table below sets forth these changes as of March 31, 2018, but does not update the other line items in the contractual obligations table that appear in the section of the Form 10-K described above:

*($ in thousands)*

|  | Payments Due Total | Remainder of 2018 | One to Three Years | Three to Five Years | More Than Five Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Principal payments on borrowings(1) | $323,000 | $— | $— | $— | $323,000 |
| Interest payable(1)(2) | 113,636 | 12,465 | 33,089 | 33,089 | 34,993 |
| Cerebellum Capital commitment(3) | 3,000 | 3,000 | — | — | — |
| **Total** | $439,636 | $15,465 | $33,089 | $33,089 | $357,993 |

(1) The total principal payments on borrowings reflects the gross amount of principal outstanding on the term loans under the Credit Agreement as of March 31, 2018. On April 11, 2018 and May 3, 2018, the Company repaid $15.0 million and $3.0 million respectively of outstanding term loans under the Credit Agreement. After giving effect to such repayments, the current principal amount of term loans outstanding under the Credit Agreement is $305.0 million.

(2) The total interest payable reflects the interest due on the principal amount of the term loans outstanding under the Credit Agreement as of March 31, 2018 using the 5.05% interest rate in effect on that date.

(3) On March 2, 2018, the Company agreed to purchase an additional $3.0 million of participating preferred units in Cerebellum Capital in three installments of $1.0 million each on April 1, 2018, July 1, 2018 and October 1, 2018.

### Off-Balance Sheet Arrangements

In connection with dividends declared in May 2015, November 2015, February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the November 2015 dividend and the December 2017 dividend were declared are entitled to receive a cash bonus equivalent of the November 2015 dividend and the December 2017 dividend as and when their stock options vest. These amounts are not recorded as a liability until and unless the awards vest in accordance with their respective agreements. As of March 31, 2018, the cash bonuses and distributions related to the May 2015, November 2015, February 2017 and December 2017 dividends on unvested and outstanding restricted shares and options totaled $2.1 million.

On March 2, 2018, the Company agreed to purchase an additional $3.0 million of participating preferred units in Cerebellum in three installments of $1.0 million each on April 1, 2018, July 1, 2018 and October 1, 2018. The Company made the first $1.0 million investment in additional participating preferred units on April 1, 2018. The investments are recorded when cash is paid to Cerebellum Capital and the corresponding participating preferred units are issued.

### Critical Accounting Policies and Estimates

Our financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K. A complete description of our significant accounting policies is included in our 2017 audited consolidated financial statements and accompanying notes included in our 2017 Form 10-K. See Note 2 to the unaudited condensed consolidated financial statements for new accounting policies adopted in the quarter ended March 31, 2018.

## Market risk

As filed, 5,473 characters.

#### Market Risk

Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower risk, which could cause our revenues and net income to decline further.

The value of our AUM was $60.9 billion at March 31, 2018. A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately $42.0 million at our weighted-average fee rate of 69 basis points for the quarter ended March 31, 2018. Because of declining fee rates from larger relationships and differences in our fee rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds, to which we provide a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or decrease in our revenues of approximately $54.2 million at the Victory Funds’ aggregate weighted-average fee rate of 89 basis points for the quarter ended March 31, 2018. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease in our revenues of approximately $28.0 million at the weighted-average fee rate across all of our institutional separate accounts of 46 basis points for the quarter ended March 31, 2018.

As is customary in the investment management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures. We have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result in a reduction in our revenues.

#### Exchange Rate Risk

A portion of the accounts that we advise hold investments that are denominated in currencies other than the U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of that AUM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non-U.S. currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s exposure to non-U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 7% of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by $426.3 million, which would cause an annualized increase or decrease in revenues of approximately $2.9 million at our weighted-average fee rate for the business of 69 basis points for the quarter ended March 31, 2018.

We operate in several foreign countries and incur operating expenses associated with these operations. In addition, we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe foreign currency fluctuations materially affect our results of operations.

#### Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. At March 31, 2018, we were exposed to interest rate risk as a result of the amounts outstanding under the Credit

Agreement. See “—Liquidity and Capital Resources” for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,431 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) at March 31, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

### Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the quarter ended March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 329 characters.

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our latest annual report on Form 10-K, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of our 2017 Form 10-K.

Filed May 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001104659-18-032965. Last ingested by Listed: Nov 6, 2026, 17:29 ET. No prices; not investment advice.