VIRTUS INVESTMENT PARTNERS, INC. quarterly report, Q3 FY2021

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Virtus Investment Partners, Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; financial statement amounts are in millions of dollars unless otherwise noted. Virtus provides investment management and related services, with revenue primarily linked to assets under management (AUM).

Financial performance

  • Q3 revenue: $252.1 million, up 62.8% from $154.8 million. Investment management fees rose 55.0% to $201.1 million.
  • Q3 operating income: $93.3 million, up 127.5%; operating margin was approximately 37.0%, versus 26.5% a year earlier.
  • Q3 net income attributable to Virtus: $58.7 million, up 98.1%. Diluted EPS was $7.36, versus $3.71.
  • Nine-month revenue: $713.0 million, up 64.9%; operating income was $241.8 million, up 162.2%, with an approximately 33.9% operating margin versus 21.3%.
  • Nine-month net income attributable to Virtus: $158.3 million, up 332.0%. Diluted EPS was $19.72, versus $4.60. The effective tax rate was 24.0%, compared with 33.9% in the prior-year period; the filing attributes the decrease primarily to prior-year valuation allowances that did not recur.
  • Cash flow: Net cash provided by operating activities was $423.7 million for the first nine months, compared with cash used of $380.3 million in 2020. Management says the change was driven primarily by higher net investment sales by consolidated investment products (CIP); it should not be read as operating cash generation solely from Virtus’s asset-management business. Investing activities used $16.5 million and financing activities used $153.5 million.
  • Liquidity and debt: At September 30, cash and cash equivalents were $437.2 million and investments were $105.6 million. Corporate debt was $266.7 million, net of debt issuance costs; the company had $275 million outstanding under its term loan and no revolver borrowings. CIP notes payable of $2.084 billion are reported separately and relate to consolidated investment products.
  • Capital returns: Virtus paid $20.0 million in common dividends and repurchased $32.5 million of shares during the first nine months. It declared a quarterly dividend of $1.50 per share, payable November 12, 2021.

Changes and business developments

  • AUM was $177.3 billion at September 30, up 52.2% from a year earlier and 34.1% from year-end 2020. The year-over-year increase included $29.5 billion from the AllianzGI strategic partnership, $26.5 billion of positive market performance, and $5.9 billion of positive net flows.
  • Q3 total sales were $7.6 billion, down 3.2% year over year; net flows were negative $0.6 billion, compared with positive $1.3 billion in Q3 2020. Open-end funds had $1.5 billion of Q3 net outflows, partly offset by positive flows in retail separate accounts and ETFs.
  • The February 2021 AllianzGI transaction added approximately $29.5 billion of assets and brought the Dallas-based Value Equity team into the company as NFJ Investment Group. Higher AUM drove revenue growth, while related compensation, distribution costs, and amortization also increased.
  • On September 28, Virtus refinanced its credit agreement with a $275 million seven-year term loan and a $175 million five-year revolving facility. The agreement includes covenants and mandatory prepayment provisions; its financial leverage covenant applies when more than 35% of the revolver is drawn.
  • On October 1, after quarter-end, Virtus completed its acquisition of Westchester Capital Management, with $5.1 billion in AUM. It paid $135 million at closing, with an additional $20 million due near year-end subject to revenue retention. Acquisition accounting was incomplete at the filing date.
  • Virtus had agreed to acquire Stone Harbor Investment Partners, with closing expected near year-end 2021 subject to customary conditions and approvals. The filing provides no financial guidance or quantified earnings outlook.

Commentary, risks, and unusual items

  • Management cited market performance and the AllianzGI transaction as the main drivers of higher average AUM and revenue. Average fee rates declined year over year, primarily because AllianzGI assets carried lower fee rates.
  • COVID-19 and the durability of the market recovery remained sources of uncertainty. Other disclosed risks include AUM declines and client withdrawals, competition, dependence on key personnel and distribution relationships, transaction integration and execution, technology disruptions, regulatory or legal matters, investment losses, and debt covenant compliance.
  • The $137.7 million AllianzGI contingent consideration liability reflects estimated future revenue-participation payments over seven years. The company also reported $34.4 million of increases in the estimated redemption value of certain affiliate noncontrolling interests during the first nine months.
  • Management said legal and regulatory proceedings were not expected, based on information then available, to have a material adverse effect overall; however, adverse developments could affect particular periods. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
  • The company’s consolidated CLOs held $2.1 billion of bank-loan investments; their fair value was $36.9 million below unpaid principal, with no material collateral assets in default. The filing states that Virtus’s exposure to these products is limited to its beneficial interests and accrued fees.

Important facts for investors to verify

  • Whether open-end fund outflows persist and how net flows, market performance, and AUM affect fee revenue.
  • The realized costs and benefits of the AllianzGI partnership, Westchester acquisition, and pending Stone Harbor transaction, including retention-related payments and integration effects.
  • Corporate debt repayment, variable-rate exposure, covenant headroom, and the distinction between Virtus debt and non-recourse CIP obligations.
  • Whether elevated earnings and cash-flow comparisons recur; assess CIP investment sales and related consolidation effects separately from core operating performance.
  • Changes in the contingent consideration estimate, redeemable noncontrolling interests, legal or regulatory contingencies, and CLO collateral valuations.