# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2021

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2021-11-08
- Accepted by EDGAR: Nov 8, 2021, 16:07 ET
- Period: 2021-09-30
- Accession: 0001564590-21-055243
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000156459021055243/vctr-10q_20210930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000156459021055243/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $226.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-01-01 to 2021-09-30 | $661.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2021-07-01 to 2021-09-30 | $99.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-01-01 to 2021-09-30 | $284.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $18.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-01-01 to 2021-09-30 | $56.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | $74.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | $208.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | $1.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.81 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-07-01 to 2021-09-30 | $1.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-01-01 to 2021-09-30 | $3.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-07-01 to 2021-09-30 | 74,053,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-01-01 to 2021-09-30 | 74,162,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | $264.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $8.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2021-01-01 to 2021-09-30 | $25.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2021-01-01 to 2021-09-30 | $25.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-09-30 | $64.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2021-09-30 | $1.79bn | us-gaap:Assets |
| Total liabilities | at 2021-09-30 | $923.4m | us-gaap:Liabilities |
| Long-term debt | at 2021-09-30 | $633.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2021-09-30 | $867.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,938 characters.

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our” shall mean Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries.

The following discussion is intended to assist in the understanding of our financial position at September 30, 2021 and December 31, 2020, results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2020. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2020.

### Overview

**Our Business –** We are a diversified global asset management firm with $159.9 billion in assets under management as of September 30, 2021. The Company operates a next-generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform.

We provide specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With 10 autonomous Investment Franchises and a Solutions Platform, Victory Capital offers a wide array of investment styles and investment vehicles including, actively managed mutual funds, institutional separate accounts, separately managed accounts, unified managed account products, collective trust funds, private funds, undertakings for the collective investment in transferrable securities, other pooled vehicles and ETFs. 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.

**Franchises –** 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 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. Victory Capital Management Inc. (“VCM”) employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities.

**Solutions –** 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. Our approach to rules‑based investing includes single and multi‑factor strategies designed to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum volatility, thematic and targeted factor exposure.

Professionals within our institutional and retail distribution channels, direct to investor business and marketing organization sell our products through our centralized distribution model. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators 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. Our direct to investor business serves the investment needs of individual clients including USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $159.9 billion at September 30, 2021. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct to investor channels with deep penetration.

**THB Asset Management Acquisition –** Effective March 1, 2021, the Company completed the acquisition of certain assets of THB Asset Management (“THB”). The acquisition expanded and diversified our investment platform, adding capacity constrained assets classes. The team manages strategies in U.S. micro-cap, small-cap and mid-cap assets classes as well as international small cap and global small cap portfolios; all of which are asset classes in which active management is an important part of a well-diversified portfolio. At March 1, 2021, the THB AUM that was acquired totaled $547 million.

In addition to servicing clients in the U.S., THB has a footprint in Australia and Europe which provides us with expanded distribution opportunities in regions in which we have a limited presence today. This will benefit all of our Franchises as we look to leverage THB’s distribution footprint to sell more of our investment strategies outside the U.S.

Aligning with the Company’s responsible investing initiatives, all of THB’s strategies have environmental, social and governance (“ESG”) considerations fully integrated into their investment processes. THB was an early adopter of responsible investment practices and has been managing responsible investment portfolios for decades.

Nominal consideration was paid for the assets of THB. The THB investment team will share in the revenue generated on their products and benefit from our centralized operational, marketing and distribution platforms. THB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support.

**USAA AMCO Acquisition –** Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company. The acquisition expanded and diversified the Company’s investment platform and increased the Company’s size and scale. The acquisition also provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel.

A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing date. In 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment. Subsequent to September 30, 2021, the Company paid $37.5 million in cash to sellers for the second annual contingent payment, resulting in a reduction of the liability to $65.6 million as of the date of filing.

The estimated fair value of contingent consideration payable to sellers was estimated at $103.1 million at September 30, 2021 as compared to $92.5 million at December 31, 2020 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The increase in the liability of $10.6 million in the first nine months of 2021 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

**COVID-19 Pandemic –** The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. While COVID-19 did not have a material adverse effect on our business, operations and financial results, the extent to which the pandemic impacts our business, operations and financial results going forward will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; and the effect on our ability to sell and provide our services.

### Business Highlights

Assets under management:

- AUM at September 30, 2021 decreased by $2.0 billion, or 1.3%, to $159.9 billion from $161.9 billion at June 30, 2021, driven by negative market action of $2.1 billion. Net flows for the quarter ended September 30, 2021 were comprised of $131 million of net long-term inflows and $113 million of net short-term outflows.
- AUM at September 30, 2021 and 2020 was $159.9 billion and $132.7 billion, respectively. We generated $5.8 billion in gross flows and $18 million in positive net flows for the three months ended September 30, 2021 compared to $5.4 billion in gross flows and $3.0 billion in negative net flows for the same period in 2020. Net flows for the three months ended September 30, 2021 were comprised of $131 million of long-term inflows and $113 million of short-term outflows.
- AUM at September 30, 2021 and 2020 was $159.9 billion and $132.7 billion, respectively. We generated $22.7 billion in gross flows and $1.0 billion in negative net flows for the nine months ended September 30, 2021 compared to $29.9 billion in gross flows and $17.8 billion in negative net flows for the same period in 2020. Net flows for the nine months ended September 30, 2021 were comprised of $0.6 billion of net long-term outflows and $0.4 billion of net short-term outflows.

Investment performance:

- 45 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 65% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 65% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 68% over a three-year period, 77% over a five-year period and 72% over a ten-year period. On an equal-weighted basis, 64% of our strategies have outperformed their benchmarks over a one-year period, 53% over a three-year period, 61% over a five-year period and 64% over a ten-year period.

Financial highlights:

- Total revenue for the three months ended September 30, 2021 was $226.3 million compared to $188.7 million for the same period in 2020. For the nine months ended September 30, 2021 and 2020, total revenue was $661.1 million and $575.0 million, respectively.
- Net income was $74.2 million for the three months ended September 30, 2021 compared to $55.7 million for the same period in 2020. For the nine months ended September 30, 2021 and 2020, net income was $208.6 million and $157.6 million, respectively.
- Adjusted EBITDA was $115.0 million for the three months ended September 30, 2021, or 50.8% of revenue, compared to $95.6 million, or 50.7% of revenue, for the same period in 2020. For the nine months ended September 30, 2021, Adjusted EBITDA was $334.1 million, or 50.5% of revenue, compared to $273.5 million, or 47.6% of revenue, for the same period in 2020. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted EBITDA calculation and reconciliation of generally accepted accounting principles (“GAAP”) net income to Adjusted EBITDA.
- Adjusted Net Income with tax benefit was $92.6 million for the three months ended September 30, 2021 compared to $73.4 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, Adjusted Net Income with tax benefit was $263.4 million compared to $206.9 million for the same period in 2020. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income.

Other:

- On September 13, 2021, the Company announced that VCM had reached a definitive agreement to acquire 100% of New Energy Capital Partners (“NEC”). Founded in 2004 and based in Hanover, New Hampshire, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies. On November 1, 2021, the acquisition of NEC was completed, resulting in NEC becoming the Company’s eleventh investment franchise.
- On September 24, 2021, the Company filed a Registration Statement on Form S-3 on behalf of Crestview Victory, Crestview, Reverence Capital Partners Opportunities Fund I, L.P., Reverence Capital Partners Opportunities Fund I (Cayman), L.P., and Reverence Capital Partners Opportunities Fund I (AI), L.P. (collectively, the “Reverence Capital Funds”) and RCP Lake Co-Invest, L.P. (the “Selling Shareholders”) to permit the Selling Shareholders to sell up to 44,973,804 shares of the Company’s Class A common stock from time to time. On October 13, 2021, the Form S-3 was declared effective.
- On September 27, 2021, the Company issued a press release announcing that its Board of Directors approved amendments to its corporate charter and bylaws to eliminate the Company’s dual-class share structure. The charter amendment is subject to shareholder approval at a Special Meeting of Stockholders scheduled for November 19, 2021.
- On October 28, 2021, the Company announced it was named in the Top 10 of Fortune’s 100 Fastest-Growing Companies for 2021.
- On November 4, 2021, the Company entered into the WestEnd Purchase Agreement, pursuant to which the Company has agreed to purchase 100% of the equity interests of WestEnd, on the terms and subject to the conditions set forth therein. The WestEnd Acquisition is expected to close by the end of 2021, and is subject to the satisfaction of certain closing conditions. Founded in 2004, and headquartered in Charlotte, North Carolina, WestEnd provides financial advisors with a turnkey, core model allocation strategy for either a holistic solution or complementary source of alpha. The firm offers four primary ETF strategies and one large cap core strategy, all in tax efficient Separately Managed Account (SMA) structures. See Item 5, Other Information, for further details on the WestEnd Acquisition.
- In connection with entering into the WestEnd Purchase Agreement, the Company secured commitments for a $505.0 million senior secured incremental first lien term loan B facility letter. The availability of the incremental facility is subject to the satisfaction of certain customary conditions precedent. Neither the closing of the incremental facility, nor the receipt of any other financing, is a condition to the WestEnd Closing.

### Key Performance Indicators

The following table is a summary of key performance indicators utilized by management to assess results of operations:

*($ in millions, except for basis points and percentages)*

|  | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| AUM at period end | $159,889 | $132,662 | $159,889 | $132,662 |
| Average AUM | 162,469 | 133,096 | 157,344 | 135,378 |
| Gross flows | 5,781 | 5,433 | 22,689 | 29,935 |
| Net short term flows | (113) | (96) | (430) | (8,311) |
| Net long term flows | 131 | (2,878) | (550) | (9,445) |
| Net flows | 18 | (2,974) | (980) | (17,756) |
| Total revenue | 226.3 | 188.7 | 661.1 | 575.0 |
| Revenue on average AUM | 55.3 bps | 56.4 bps | 56.2 bps | 56.7 bps |
| Net income | 74.2 | 55.7 | 208.6 | 157.6 |
| Adjusted EBITDA(1) | 115.0 | 95.6 | 334.1 | 273.5 |
| Adjusted EBITDA Margin(2) | 50.8% | 50.7% | 50.5% | 47.6% |
| Adjusted Net Income(1) | 85.6 | 66.7 | 242.6 | 186.7 |
| Tax benefit of goodwill and acquired intangibles(3) | 6.9 | 6.7 | 20.8 | 20.2 |

(1) Management utilizes 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.”

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

(3) 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.

### 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; (i) investment performance, including fluctuations in the financial markets and the quality of our investment decisions; (ii) client flows into and out of our various strategies and investment vehicles; (iii) industry trends toward products or strategies that we either do or do not offer; (iv) our ability to attract and retain high quality investment, distribution, marketing and management personnel; (v) 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 (vi) general investor sentiment and confidence. Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided.

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

*(in millions)*

|  | As of September 30, 2021 | 2020 |
| --- | ---: | ---: |
| Solutions | $39,376 | $30,767 |
| Fixed Income | 36,897 | 35,848 |
| U.S. Mid Cap Equity | 29,798 | 22,540 |
| U.S. Small Cap Equity | 19,863 | 14,453 |
| Global / Non-U.S. Equity | 15,570 | 11,974 |
| U.S. Large Cap Equity | 14,803 | 13,242 |
| Other | 416 | 207 |
| **Total Long-Term Assets** | **156,722** | **129,031** |
| Money Market & Short-Term Assets | 3,166 | 3,631 |
| **Total** | **$159,889** | **$132,662** |

The following tables summarize our asset flows by asset class for the periods indicated:

*(in millions)*

| For the Three Months Ended September 30, 2021 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Other | Total Long-term | Money Market / Short-term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $30,340 | $20,617 | $36,410 | $15,284 | $15,931 | $39,640 | $460 | $158,682 | $3,254 | $161,936 |
| Gross client cash inflows | 1,217 | 1,491 | 1,588 | 79 | 514 | 774 | 26 | 5,689 | 92 | 5,781 |
| Gross client cash outflows | (1,332) | (1,315) | (1,262) | (359) | (481) | (734) | (75) | (5,558) | (205) | (5,763) |
| Net client cash flows | (114) | 175 | 326 | (281) | 34 | 41 | (49) | 131 | (113) | 18 |
| Market appreciation / (depreciation) | (449) | (898) | 57 | (115) | (374) | (289) | 6 | (2,061) | (1) | (2,062) |
| Net transfers | 21 | (32) | 103 | (85) | (21) | (15) | (1) | (30) | 27 | (3) |
| Ending AUM | $29,798 | $19,863 | $36,897 | $14,803 | $15,570 | $39,376 | $416 | $156,722 | $3,166 | $159,889 |
| **For the Three Months Ended September 30, 2020** |  |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $22,483 | $14,083 | $35,622 | $12,524 | $11,130 | $29,305 | $195 | $125,343 | $3,727 | $129,070 |
| Gross client cash inflows | 760 | 1,061 | 1,470 | 147 | 463 | 1,155 | 11 | 5,067 | 367 | 5,433 |
| Gross client cash outflows | (1,890) | (1,175) | (1,850) | (753) | (568) | (1,694) | (16) | (7,944) | (463) | (8,408) |
| Net client cash flows | (1,129) | (114) | (380) | (606) | (105) | (539) | (5) | (2,878) | (96) | (2,974) |
| Market appreciation / (depreciation) | 1,259 | 591 | 607 | 1,141 | 948 | 2,001 | 19 | 6,566 | 1 | 6,566 |
| Net transfers | (73) | (107) | (2) | 182 | 1 | — | (1) | — | — | — |
| Ending AUM | $22,540 | $14,453 | $35,848 | $13,242 | $11,974 | $30,767 | $207 | $129,031 | $3,631 | $132,662 |

29

*(in millions)*

| Nine Months Ended September 30, 2021 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Other | Total Long-term | Money Market / Short-term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $26,230 | $18,368 | $36,599 | $14,230 | $13,982 | $34,041 | $257 | $143,706 | $3,534 | $147,241 |
| Gross client cash inflows | 4,371 | 3,800 | 5,362 | 268 | 2,179 | 6,288 | 120 | 22,388 | 301 | 22,689 |
| Gross client cash outflows | (5,125) | (4,439) | (5,913) | (1,199) | (1,669) | (4,463) | (130) | (22,937) | (732) | (23,669) |
| Net client cash flows | (754) | (639) | (551) | (931) | 510 | 1,825 | (9) | (550) | (430) | (980) |
| Market appreciation / (depreciation) | 4,328 | 1,743 | 516 | 1,741 | 1,255 | 3,651 | 125 | 13,359 | — | 13,359 |
| Net transfers(1) | (6) | 391 | 333 | (237) | (177) | (140) | 43 | 207 | 62 | 269 |
| Ending AUM | $29,798 | $19,863 | $36,897 | $14,803 | $15,570 | $39,376 | $416 | $156,722 | $3,166 | $159,889 |
| **Nine Months Ended September 30, 2020** |  |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $26,347 | $17,346 | $37,973 | $14,091 | $12,603 | $31,649 | $236 | $140,245 | $11,587 | $151,832 |
| Gross client cash inflows | 3,177 | 3,291 | 4,918 | 600 | 1,570 | 3,917 | 32 | 17,506 | 12,429 | 29,935 |
| Gross client cash outflows | (5,666) | (3,878) | (7,515) | (2,159) | (1,827) | (5,855) | (52) | (26,951) | (20,740) | (47,691) |
| Net client cash flows | (2,489) | (587) | (2,597) | (1,558) | (256) | (1,938) | (20) | (9,445) | (8,311) | (17,756) |
| Market appreciation / (depreciation) | (1,220) | (2,142) | 749 | 520 | (399) | 1,045 | (13) | (1,461) | 48 | (1,413) |
| Net transfers | (99) | (164) | (278) | 190 | 27 | 11 | 5 | (307) | 307 | — |
| Ending AUM | $22,540 | $14,453 | $35,848 | $13,242 | $11,974 | $30,767 | $207 | $129,031 | $3,631 | $132,662 |

(1) The nine months ended September 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

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

*(in millions)*

|  | As of September 30, 2021 Amount | % of total | 2020 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Investor | $69,189 | 43% | $65,261 | 49% |
| Institutional | 47,210 | 30% | 34,814 | 26% |
| Retail | 43,489 | 27% | 32,587 | 25% |
| Total AUM(1) | $159,889 | 100% | $132,662 | 100% |

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

The following tables summarize our asset flows by vehicle for the periods indicated:

*(in millions)*

| Three Months Ended September 30, 2021 | Mutual Funds (1) | ETFs (2) | Separate Accounts and Other Pooled Vehicles (3) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $123,164 | $4,354 | $34,418 | $161,936 |
| Gross client cash inflows | 4,256 | 109 | 1,416 | 5,781 |
| Gross client cash outflows | (4,751) | (23) | (989) | (5,763) |
| Net client cash flows | (495) | 86 | 427 | 18 |
| Market appreciation (depreciation) | (1,242) | (41) | (779) | (2,062) |
| Net transfers | (60) | (28) | 85 | (3) |
| Ending AUM | $121,367 | $4,371 | $34,151 | $159,889 |
| **Three Months Ended September 30, 2020** |  |  |  |  |
| Beginning AUM | $100,430 | $3,462 | $25,179 | $129,070 |
| Gross client cash inflows | 4,251 | 18 | 1,164 | 5,433 |
| Gross client cash outflows | (6,847) | (139) | (1,421) | (8,408) |
| Net client cash flows | (2,596) | (121) | (257) | (2,974) |
| Market appreciation (depreciation) | 5,151 | 147 | 1,269 | 6,566 |
| Net transfers | (63) | — | 63 | — |
| Ending AUM | $102,921 | $3,488 | $26,254 | $132,662 |

*(in millions)*

| Nine Months Ended September 30, 2021 | Mutual Funds (1) | ETFs (2) | Separate Accounts and Other Pooled Vehicles (3) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $112,998 | $3,976 | $30,267 | $147,241 |
| Gross client cash inflows | 14,781 | 589 | 7,320 | 22,689 |
| Gross client cash outflows | (16,420) | (310) | (6,939) | (23,669) |
| Net client cash flows | (1,640) | 279 | 381 | (980) |
| Market appreciation (depreciation) | 10,212 | 520 | 2,627 | 13,359 |
| Net transfers(4) | (204) | (404) | 876 | 269 |
| Ending AUM | $121,367 | $4,371 | $34,151 | $159,889 |
| **Nine Months Ended September 30, 2020** |  |  |  |  |
| Beginning AUM | $118,605 | $4,213 | $29,014 | $151,832 |
| Gross client cash inflows | 26,617 | 363 | 2,954 | 29,935 |
| Gross client cash outflows | (42,204) | (814) | (4,673) | (47,691) |
| Net client cash flows | (15,587) | (451) | (1,718) | (17,756) |
| Market appreciation (depreciation) | (33) | (274) | (1,105) | (1,413) |
| Net transfers | (63) | — | 63 | — |
| Ending AUM | $102,921 | $3,488 | $26,254 | $132,662 |

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

(2) Excludes assets managed for other proprietary product (i.e. funds of funds) in order to adjust for double counting.

(3) Includes collective trust funds, wrap program accounts, UMAs, UCITS, private funds and non-U.S. domiciled pooled vehicles.

(4) The nine months ended September 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

*September 30, 2021 AUM compared to June 30, 2021 AUM*. At September 30, 2021, our total AUM was $159.9 billion, a decrease of $2.0 billion, or 1.3%, from $161.9 billion at June 30, 2021, primarily driven by negative market action of $2.1 billion.

Net inflows into our fixed income and U.S small cap equity strategies of $0.3 billion and $0.2 billion, respectively, were partially offset by outflows from our U.S. large cap and U.S. mid cap equity strategies of $0.3 billion and $0.1 billion, respectively.

*September 30, 2021 AUM compared to December 31, 2020 AUM.* Total AUM increased by $12.6 billion, or 8.6%, to $159.9 billion at September 30, 2021 compared to $147.2 billion at December 31, 2020. The increase in AUM was primarily due to positive market action of $13.4 billion and acquired assets of $547 million partially offset by net outflows of $1.0 billion and seed capital liquidation and fund closures of $275 million.

Net inflows into our Solutions platform and global / non-U.S. equity strategies of $1.8 billion and $0.5 billion, respectively, were offset by outflows from our domestic equity strategies, fixed income strategies and money market and short-term assets of $2.3 billion, $0.6 billion and $0.4 million, respectively.

### GAAP Results of Operations

The following table presents our GAAP results of operations for the three and nine months ended September 30, 2021 and 2020.

*(in thousands, except per share data)*

| Revenue | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $171,355 | $137,240 | $499,672 | $414,153 |
| Fund administration and distribution fees | 54,935 | 51,416 | 161,471 | 160,810 |
| **Total revenue** | **226,290** | **188,656** | **661,143** | **574,963** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | 55,837 | 47,375 | 172,305 | 144,051 |
| Distribution and other asset-based expenses | 44,859 | 39,123 | 131,185 | 135,613 |
| General and administrative | 13,795 | 13,196 | 40,818 | 38,373 |
| Depreciation and amortization | 4,377 | 3,936 | 13,456 | 12,152 |
| Change in value of consideration payable for acquisition of business | 2,400 | 2,000 | 10,600 | 1,800 |
| Acquisition-related costs | 6,007 | 1,148 | 6,265 | 1,056 |
| Restructuring and integration costs | 18 | 1,285 | 2,493 | 4,888 |
| **Total operating expenses** | **127,293** | **108,063** | **377,122** | **337,933** |
| **Income from operations** | **98,997** | **80,593** | **284,021** | **237,030** |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income (expense) | (119) | 1,120 | 4,547 | (86) |
| Interest expense and other financing costs | (5,853) | (8,187) | (18,853) | (29,305) |
| Loss on debt extinguishment | (669) | (758) | (4,596) | (1,675) |
| **Total other expense, net** | **(6,641)** | **(7,825)** | **(18,902)** | **(31,066)** |
| **Income before income taxes** | **92,356** | **72,768** | **265,119** | **205,964** |
| **Income tax expense** | **(18,181)** | **(17,027)** | **(56,472)** | **(48,337)** |
| **Net income** | **$74,175** | **$55,741** | **$208,647** | **$157,627** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $1.09 | $0.82 | $3.08 | $2.33 |
| Diluted | $1.00 | $0.76 | $2.81 | $2.14 |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 67,980 | 67,743 | 67,840 | 67,785 |
| Diluted | 74,053 | 73,437 | 74,162 | 73,703 |
| **Dividends declared per share of common stock** | $0.15 | $0.06 | $0.36 | $0.16 |

### Investment Management Fees

*Three months ended September 30, 2021 compared to September 30, 2020.* Investment management fees increased by $34.1 million, or 24.9%, to $171.4 million for the three months ended September 30, 2021 from $137.2 million for the same period in 2020 due to an increase in average AUM over the comparable period, partially offset by a decline in revenue realization. Average AUM was $162.5 billion for the three months ended September 30, 2021 compared to $133.1 billion for the same period in 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Investment management fees increased by $85.5 million, or 20.6%, to $499.7 million for the nine months ended September 30, 2021 from $414.2 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Average AUM was $157.3 billion and $135.4 billion, respectively, for the nine months ended September 30, 2021 and 2020.

### Fund Administration and Distribution Fees

*Three months ended September 30, 2021 compared to September 30, 2020.* Fund administration and distribution fees increased by $3.5 million, or 6.8%, to $54.9 million for the three months ended September 30, 2021 from $51.4 million for the same period in 2020 due to an increase fund administration fees, partially offset by a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Fund administration and distribution fees were relatively flat, increasing $0.7 million, or 0.4%, to $161.5 million for the nine months ended September 30, 2021 from $160.8 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

### Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the three and nine months ended September 30, 2021 and 2020:

*(in thousands)*

|  | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $19,633 | $18,360 | $67,604 | $55,347 |
| Incentive compensation | 27,690 | 22,306 | 76,464 | 63,639 |
| Sales-based compensation(1) | 4,493 | 3,086 | 14,325 | 10,374 |
| Equity awards granted to employees and directors(2) | 4,021 | 3,623 | 13,912 | 13,503 |
| Acquisition and transaction-related compensation | — | — | — | 1,188 |
| **Total personnel compensation and benefits expense** | **$55,837** | **$47,375** | **$172,305** | **$144,051** |

(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 is recognized as compensation expense over the vesting period.

*Three months ended September 30, 2021 compared to September 30, 2020.* Personnel compensation and benefits were $55.8 million for the three months ended September 30, 2021, an increase of $8.5 million, or 17.9%, from $47.4 million for the same period in 2020 due to the combination of an increase in the headcount due to the launch of the new direct to investor digital platform and an increase in incentive compensation as a result of an increase in earnings over the comparable period. Incentive compensation and equity awards granted to employees and directors were $27.7 million and $4.0 million, respectively, for the three months ended September 30, 2021, compared to $22.3 million and $3.6 million, respectively, for the same period in 2020. Salaries, payroll related taxes and employee benefits were $19.6 million and $18.4 million, respectively, for the three months ended September 30, 2021 and 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Personnel compensation and benefits increased by $28.3 million, or 19.6%, to $172.3 million for the nine months ended September 30, 2021 from $144.1 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Salaries, payroll related taxes and employee benefits were $67.6 million and $55.3 million, respectively, for the nine months ended September 30, 2021 and 2020. Incentive compensation and equity awards granted to employees and directors were $76.5 million and $13.9 million, respectively, for the nine months ended September 30, 2021 compared to $63.6 million and $13.5 million, respectively, for the same period in 2020.

### Distribution and Other Asset‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three and nine months ended September 30, 2021 and 2020:

*(in thousands)*

|  | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Broker-dealer distribution fees | $6,611 | $5,594 | $19,393 | $17,045 |
| Platform distribution fees | 27,529 | 24,082 | 80,801 | 90,971 |
| Sub-administration | 4,366 | 3,894 | 12,750 | 11,182 |
| Sub-advisory | 3,627 | 3,057 | 10,059 | 9,116 |
| Middle-office | 2,726 | 2,496 | 8,182 | 7,299 |
| **Total distribution and other asset-based expenses** | **$44,859** | **$39,123** | **$131,185** | **$135,613** |

*Three months ended September 30, 2021 compared to September 30, 2020.* Distribution and other asset-based expenses are primarily based on AUM. For the three months ended September 30, 2021, distribution and other asset-based expenses were $44.9 million, an increase of $5.7 million, or 14.7%, from $39.1 million for the same period in 2020. The increase is primarily due to an increase in platform and broker dealer distribution fees as a result of higher average AUM over the comparable period.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Distribution and other asset-based expenses were $131.2 million for the nine months ended September 30, 2021, a decrease of $4.4 million, or 3.3%, from $135.6 million for the same period in 2020 primarily due to a change in asset mix of our underlying retail distribution platforms.

### General and Administrative

*Three months ended September 30, 2021 compared to September 30, 2020*. General and administrative expenses were $13.8 million for the three months ended September 30, 2021 compared to $13.2 million for the same period in 2020. The increase of $0.6 million, or 4.5%, was primarily due to increases in technology and professional fees partially offset by a reduction in transition service agreement costs related to the USAA AMCO Acquisition, which ended in the fourth quarter of 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* For the nine months ended September 30, 2021 and 2020, general and administrative expenses were $40.8 million and $38.4 million, respectively, for a year over year increase of $2.4 million, or 6.4%. The increase was due to the same factors as discussed above in the quarterly section.

### Depreciation and Amortization

*Three months ended September 30, 2021 compared to September 30, 2020.* Depreciation and amortization increased by $0.4 million, or 11.2%, to $4.4 million for the three months ended September 30, 2021 from $3.9 million for the same period in 2020, due to the addition of depreciation expense related to the launch of the Company’s new direct to investor digital platform, which went live in November 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Depreciation and amortization increased by $1.3 million, or 10.7%, to $13.5 million for the nine months ended September 30, 2021 from $12.2 million for the same period in 2020, due to the same factors as discussed above in the quarterly section.

### Change in Value of Consideration Payable for Acquisition of Business

*Three months ended September 30, 2021 compared to September 30, 2020.* The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $2.4 million, resulting in a change in the estimated fair value of consideration payable of $2.4 million for the three months ended September 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

*Nine months ended September 30, 2021 compared to September 30, 2020.* The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $10.6 million, resulting in a change in the estimated fair value of consideration payable of $10.6 million for the nine months ended September 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

### Acquisition‑Related Costs

*Three months ended September 30, 2021 compared to September 30, 2020.* Acquisition-related costs for the three months ended September 30, 2021 were $6.0 million and $1.1 million for the three months ended September 30, 2020. The September 30, 2021 acquisition related costs were primarily related to an estimated liability for potential one-time payments related to a prior acquisition.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Acquisition-related costs for the nine months ended September 30, 2021 and 2020 were $6.3 million and $1.1 million, respectively. The increase for the nine months ended September 30, 2021 was due to the same factors as discussed above in the quarterly section.

### Restructuring and Integration Costs

*Three months ended September 30, 2021 compared to September 30, 2020.* Restructuring and integration costs for the three months ended September 30, 2021 was $18 thousand and $1.3 million for the three months ended September 30, 2020. The decrease is primarily due to integration and conversion costs related to the USAA AMCO Acquisition in 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Restructuring and integration costs were $2.5 million and $4.9 million, respectively, for the nine months ended September 30, 2021 and 2020. The nine months ended September 30, 2021 restructuring and integration costs were related to personnel restructuring within the direct to investor business compared to integration and conversion costs associated with the USAA AMCO Acquisition in 2020.

### Interest Income and Other Income (Expense)

*Three months ended September 30, 2021 compared to September 30, 2020.* Interest income and other income/(expense) was expense of $0.1 million for the three months ended September 30, 2021 compared to income of $1.1 million for the same period in 2020. The expense for the three months ended September 30, 2021 was primarily due to a $0.7 million decrease in the net unrealized fair value of deferred compensation plan investments. The income for the three months ended September 30, 2020 was primarily due to a $0.9 million increase in the net unrealized fair value of deferred compensation plan investments.

*Nine months ended September 30, 2021 compared to September 30, 2020.* For the nine months ended September 30, 2021 and 2020, interest income and other income/(expense) was income of $4.5 million and expense of $0.1 million, respectively. The higher income for the nine months ended September 30, 2021 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents. The expense for the nine months ended September 30, 2020 was primarily due to a decrease in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

### Interest Expense and Other Financing Costs

*Three months ended September 30, 2021 compared to September 30, 2020.* Interest expense and other financing costs decreased $2.3 million to $5.9 million for the three months ended September 30, 2021, compared to $8.2 million for the same period in 2020 due to a decrease in interest payments as a result of a lower debt principal balance and lower average interest rate over the comparable period.

*Nine months ended September 30, 2021 compared to September 30, 2020.* For the nine months ended September 30, 2021 and 2020, interest expense and other financing costs were $18.9 million and $29.3 million, respectively. The year-over-year decrease is primarily due to the same factors as discussed above in the quarterly section.

### Loss on Debt Extinguishment

*Three months ended September 30, 2021 compared to September 30, 2020.* Loss on debt extinguishment was $0.7 million for the three months ended September 30, 2021 compared to $0.8 million for the same period in 2020. During the quarter ended September 30, 2021, the Company paid down $35.0 million of debt through prepayments and wrote off $0.7 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. During the quarter ended September 30, 2020, the Company repaid or repurchased and retired $43.5 million of outstanding term loans and recorded a $0.8 million loss on debt extinguishment. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

*Nine months ended September 30, 2021 compared to September 30, 2020.* Loss on debt extinguishment was $4.6 million for the nine months ended September 30, 2021, due to repayments of term loan principal and entering into the Second Amendment. Loss on debt extinguishment was $1.7 million for the nine months ended September 30, 2020, due to term loan repurchases and repayments and entering into the First Amendment.

### Income Tax Expense

*Three months ended September 30, 2021 compared to September 30, 2020.* The effective tax rate for the three months ended September 30, 2021 and 2020 was 19.7% and 23.4%, respectively. The decrease in the effective tax rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020.

*Nine months ended September 30, 2021 compared to September 30, 2020.* For the nine months ended September 30, 2021 and 2020, the effective tax rate was 21.3% and 23.5%, respectively. The decrease in the effective rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020. Refer to Note 8, Income Taxes, for further details on our income taxes.

### 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 September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$74,175** | **$55,741** | **$208,647** | **$157,627** |
| Income tax expense | (18,181) | (17,027) | (56,472) | (48,337) |
| **Income before income taxes** | **92,356** | **72,768** | **265,119** | **205,964** |
| Interest expense(1) | 5,561 | 7,497 | 18,957 | 26,292 |
| Depreciation(2) | 1,693 | 814 | 4,463 | 2,444 |
| Other business taxes(3) | 376 | 256 | 1,274 | (2,821) |
| Amortization of acquisition-related intangible assets(4) | 2,684 | 3,122 | 8,993 | 9,708 |
| Stock-based compensation(5) | 2,851 | 2,806 | 10,611 | 11,246 |
| Acquisition, restructuring and exit costs(6) | 8,425 | 6,996 | 19,358 | 15,559 |
| Debt issuance costs(7) | 960 | 1,386 | 5,057 | 5,087 |
| Losses from equity method investments(8) | 70 | — | 227 | — |
| **Adjusted EBITDA** | **$114,976** | **$95,645** | **$334,059** | **$273,479** |

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$74,175** | **$55,741** | **$208,647** | **$157,627** |
| Adjustments to reflect the operating performance of the Company: |  |  |  |  |
| i. Other business taxes(3) | 376 | 256 | 1,274 | (2,821) |
| ii. Amortization of acquisition-related intangible assets(4) | 2,684 | 3,122 | 8,993 | 9,708 |
| iii. Stock-based compensation(5) | 2,851 | 2,806 | 10,611 | 11,246 |
| iv. Acquisition, restructuring and exit costs(6) | 8,425 | 6,996 | 19,358 | 15,559 |
| v. Debt issuance costs(7) | 960 | 1,386 | 5,057 | 5,087 |
| Tax effect of above adjustments(9) | (3,824) | (3,642) | (11,323) | (9,695) |
| **Adjusted Net Income** | **$85,647** | **$66,665** | **$242,617** | **$186,711** |
| Tax benefit of goodwill and acquired intangibles(10) | $6,918 | $6,745 | $20,754 | $20,218 |

Adjustments made to GAAP Net Income to calculate Adjusted EBITDA and Adjusted Net Income, as applicable, are:

(1) Adding back interest paid on debt and other financing costs, net of interest income.

(2) Adding back depreciation on property and equipment.

(3) Adding back other business taxes.

(4) Adding back amortization expense on acquisition‑related intangible assets.

(5) Adding back stock‑based compensation associated with equity awards issued from pools created in connection with the management‑led buyout and various acquisitions and as a result of equity grants related to the IPO.

(6) Adding back direct incremental costs of acquisitions, including restructuring costs.

*(in thousands)*

|  | Three Months Ended September 30, 2021 | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition-related costs | $6,007 | $1,148 | $6,265 | $1,056 |
| Restructuring and integration costs | 18 | 1,285 | 2,493 | 4,888 |
| Change in value of consideration payable for acquisition of business | 2,400 | 2,000 | 10,600 | 1,800 |
| General and administrative | — | 2,563 | — | 6,627 |
| Personnel compensation and benefits | — | — | — | 1,188 |
| **Total acquisition, restructuring and exit costs** | **$8,425** | **$6,996** | **$19,358** | **$15,559** |

(7) Adding back debt issuance costs.

(8) We adjust for earnings/losses on equity method investments.

(9) Subtracting an estimate of income tax expense applied to the sum of the adjustments above.

(10) Represents the tax benefits associated with deductions allowed for intangible assets 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 intangible assets 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.

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, funding of acquisitions and working capital needs, repurchasing of shares and payment of dividends, which are all expected to be met through cash generated from our operations and available capital resources.

We cannot predict the duration or scope of the COVID-19 pandemic, its impact on our business, and the potential negative financial impact to our results, but the Company has actively positioned itself so that our cash flows from operations and financing sources will be sufficient to meet our needs. During the period of uncertainty related to the COVID-19 pandemic, we will continue to monitor our liquidity.

The following table shows our liquidity position as of September 30, 2021 and December 31, 2020.

*(in thousands)*

|  | September 30, 2021 | December 31, 2020 |
| --- | ---: | ---: |
| Cash and cash equivalents | $64,740 | $22,744 |
| Accounts and other receivables | 103,180 | 88,182 |
| Undrawn commitment on revolving credit facility (1) | 100,000 | 100,000 |
| Accounts and other payables | (98,594) | (89,422) |

(1) The balance at September 30, 2021 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location.

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consists primarily of investment management fees that have been earned but not yet received from clients, income and other taxes receivable, and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to assess collectability. We continue to actively monitor the impact of the COVID-19 pandemic on the collectability of certain receivables. We maintained a $100.0 million revolving credit facility at September 30, 2021 and December 31, 2020 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of September 30, 2021 and December 31, 2020.

### 2019 Credit Agreement and 2020 and 2021 Debt Repricing

In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. For the three and nine months ended September 30, 2021, the Company reduced outstanding debt by $35.0 million and $142.0 million, respectively, for a total debt reduction of $453.8 million since July 1, 2019. As of September 30, 2021, we were in compliance with our financial performance covenant. Refer to Note 4,

Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement.

On January 17, 2020, the Company entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. The Company refinanced the 2019 term loans for a reduced applicable margin on LIBOR of 75 basis points. After the January 2020 repricing, the applicable margin on LIBOR was 2.50%, compared to 3.25% under the 2019 term loans.

On February 18, 2021, the Company entered into the Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement, as amended, with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $755.7 million (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 1, 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the First Amendment. Refer to Note 9, Debt, for further information on the repricing.

### WestEnd Credit Facilities Commitments

On November 4, 2021, the Company entered into the WestEnd Purchase Agreement, pursuant to which the Company has agreed to purchase 100% of the equity interests of WestEnd on the terms and subject to the conditions therein. In connection with entering into the WestEnd Purchase Agreement, on November 4, 2021 the Company secured commitments for a $505.0 million senior secured incremental first lien term loan B facility. The availability of the incremental facility is subject to the satisfaction of certain customary conditions precedent.

Proceeds from the incremental facility are expected to be used to finance the WestEnd Acquisition and the payment of certain fees, commissions and expenses in connection therewith.

### 2020 Swap Transaction

On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction (“Swap”) to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. On February 18, 2021, pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25% resulting in a new fixed rate of 3.215% on the $450 million of Term Loan subject to the Swap. At September 30, 2021, the $450 million notional value Swap had a fair value of $2.0 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2021, the Company recognized income, net of tax, of $1.3 million and $9.1 million, respectively, in accumulated other comprehensive income (loss). For the three and nine months ended September 30, 2021, the Company reclassified a loss of $0.9 million and $2.6 million, respectively, from accumulated other comprehensive income (loss) to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 14, Derivatives, for further information on the Swap.

### Capital Requirements

Victory Capital Services 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

The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows:

*(in thousands)*

|  | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $264,061 | $182,720 |
| Net cash used in investing activities | (11,032) | (10,520) |
| Net cash used in financing activities | (210,985) | (153,007) |

***Operating Activities –*** Cash provided by operating activities during the nine months ended September 30, 2021 was $264.1 million, compared to $182.7 million of cash provided by operating activities for the same period in 2020. The $81.3 million increase in cash provided by operating activities was primarily due to a $51.0 million increase in net income and $26.1 million increase in working capital source of cash.

Cash provided by operating activities during the nine months ended September 30, 2020 was $182.7 million and comprised of $157.6 million and $60.1 million of cash provided by net income and non-cash items, partially offset by $35.0 million in working capital source of cash.

***Investing Activities –*** Cash used in investing activities during the nine months ended September 30, 2021 was $11.0 million and consisted of primarily of property and equipment purchases of $8.3 million and $2.1 million of net trading activity.

Cash used in investing activities during the nine months ended September 30, 2020 was $10.5 million and consisted of property and equipment purchases of $7.0 million, $1.6 million of net trading activity and $1.5 million for an equity investment in Alderwood Partners LLP (“Alderwood”).

***Financing Activities –*** Cash used in financing activities during the nine months ended September 30, 2021 was $211.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $142.0 million, $25.9 million, $25.4 million, and $17.7 million, respectively.

Cash used in financing activities during the nine months ended September 30, 2020 was $153.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $113.4 million, $22.8 million, $11.5 million, and $5.9 million, respectively.

### Contractual Obligations

On February 18, 2021, the Company entered into the Second Amendment to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company repriced its Term Loan, lowering the interest rate spread by 25 basis points, from 2.50% over LIBOR, to 2.25% over LIBOR.

For the three and nine months ended September 30, 2021, the Company recorded an increase of $2.4 million and $10.6 million, respectively, in the USAA AMCO Acquisition contingent payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing. In the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period. A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers at September 30, 2021. Subsequent to September 30, 2021, the Company paid $37.5 million in cash to sellers for the second annual earn out period.

There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

### Off‑Balance Sheet Arrangements

In connection with dividends declared in 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 December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest.

The Company announced the initiation of quarterly cash dividends in August 2019. Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.

As of September 30, 2021 and December 31, 2020, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $0.8 million and $1.2 million, respectively, which was not recorded as a liability as of the balance sheet date. A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood and made a capital contribution of $1.5 million in cash. Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company has commitments to contribute additional capital of $4.5 million to Alderwood and $50 million to a private fund to be launched by Alderwood, upon the satisfaction of certain conditions. Until these conditions are satisfied, the Company does not have an obligation to contribute the additional capital and has not met the recognition criteria for a liability. On March 8, 2021, the Company announced that one of the conditions had been met. Alderwood Capital had received authorization from the Financial Conduct Authority of the United Kingdom and Alderwood’s private fund had been formally launched to investors. Refer to Note 15, Equity Method Investment, for further discussion regarding the investment.

### Critical Accounting Policies and Estimates

Our consolidated financial statements and the 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 the Company’s Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our Annual Report on Form 10-K.

## Market risk

As filed, 6,077 characters.

### Market Risk

Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are primarily 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 approximately $160 billion at September 30, 2021. 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 $88.0 million at our weighted-average fee rate of 55 basis points for the quarter ended September 30, 2021. 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 and USAA 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 $99.2 million at the Victory Funds’ and USAA Funds’ aggregate weighted-average fee rate of 62 basis points for the quarter ended September 30, 2021. 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 $49.6 million at the weighted-average fee rate across all of our institutional separate accounts of 31 basis points for the quarter ended September 30, 2021.

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 10% 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 approximately $1.6 billion, which would cause an annualized increase or decrease in revenues of approximately $8.8 million at our weighted-average fee rate for the business of 55 basis points for the quarter ended September 30, 2021.

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. On March 27, 2020, the Company executed the Swap, a floating-to-fixed interest rate swap transaction, to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. On February 18, 2021, pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25% resulting in a new fixed rate of 3.215% on the $450 million of Term Loan subject to the Swap. Refer to Note 14, Derivatives, for further information on the Swap. At September 30, 2021, we were exposed to interest rate risk as a result of the unhedged amounts outstanding under the 2019 Credit Agreement. Refer to Note 9, Debt, for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,445 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(f) and 15d-15(f) 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(f) and 15d-15(f) under the Exchange Act) at September 30, 2021. 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(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 4,936 characters.

For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC and the information contained in this report. The declaration, payment and determination of the amount of our quarterly dividends may change at any time. In making decisions regarding our quarterly dividends, we consider general economic and business conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions (including under the terms of our 2019 Credit Agreement as amended) and legal, tax, regulatory and such other factors as we may deem relevant.

On November 4, 2021, the Company entered into the WestEnd Advisors Purchase Agreement. Risk factors related to the WestEnd Acquisition are discussed below, and should be read together with, the risk factors disclosed in our latest annual report on Form 10-K.

***The WestEnd Acquisition is subject to closing conditions, including certain conditions that may not be satisfied on a timely basis or may not be satisfied at all. Failure to complete the WestEnd Acquisition could have material and adverse effects on the Company.***

The completion of the WestEnd Acquisition is subject to a number of closing conditions, including (1) the receipt of client consents representing revenues of at least 80% of a baseline revenue amount, (2) the expiration of the applicable waiting period under the HSR Act, (3) the absence of any material adverse effect (as defined in the WestEnd Purchase Agreement) on the business of WestEnd, (4) certain WestEnd principals not having been terminated and not having resigned (or given notice of resignation) and employment documentation with such principals remaining in full force and effect and (5) other customary closing conditions. In addition, the WestEnd Purchase Agreement contains customary termination rights for WestEnd and the Company, including in the event the WestEnd Acquisition is not consummated on or before May 4, 2022.

If the WestEnd Acquisition is not completed on a timely basis or at all, our ongoing business may be adversely affected. Additionally, in the event that the WestEnd Acquisition is not completed, the Company will be subject to a number of risks without realizing any of the benefits of having completed the WestEnd Acquisition, including the following:

- We will be required to pay our costs relating to the WestEnd Acquisition, such as legal, accounting and financial advisory fees;
- Time and resources committed by our management to matters relating to the WestEnd Acquisition could otherwise have been devoted to pursuing other beneficial opportunities; and
- The market price of our securities could decline to the extent that the current market price reflects a market assumption that the WestEnd Acquisition will not be completed, or to the extent that the WestEnd Acquisition is fundamental to our business strategy.

***We may not realize the benefits we expect from the WestEnd Acquisition because of integration difficulties and other challenges.***

The success of the WestEnd Acquisition will depend in large part on the success of integrating the personnel, operations, strategies, technologies and other components of the businesses following the completion of the WestEnd Acquisition. The Company may fail to realize some or all of the anticipated benefits of the WestEnd Acquisition if the integration process takes longer than expected or is more costly than expected. The failure of the Company to meet the challenges involved in successfully integrating the operations of WestEnd or to otherwise realize any of the anticipated benefits of the WestEnd Acquisition could impair the operations of the Company.

***The increase in indebtedness in connection with the WestEnd Acquisition may expose us to material risks.***

As of September 30, 2021, we had $646.2 million of outstanding term loans under the Existing Credit Agreement. In connection with the WestEnd Acquisition, we expect to incur a substantial amount of additional indebtedness. On November 4, 2021, the Company secured commitments for a $505.0 million senior secured incremental first lien term loan B facility. Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. Subsequent to the closing of the WestEnd Acquisition, any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations.

Filed Nov 8, 2021.
Source: SEC EDGAR, the filing index for accession 0001564590-21-055243. Last ingested by Listed: Nov 6, 2026, 17:29 ET. No prices; not investment advice.