Virtus Investment Partners, Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it does not provide a standalone fourth-quarter summary. Virtus is an investment manager serving retail and institutional clients through affiliated and unaffiliated managers. Revenue is primarily asset-based. Reported consolidated results include certain investment products (CIP), including CLOs; the company says its exposure to those products is generally limited to its beneficial interests and fees.
Financial and operating performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $886.4 million | $979.2 million | -9.5% |
| Operating income | $197.5 million | $325.5 million | -39.3% |
| Operating margin | 22.3% | 33.2% | -10.9 percentage points |
| Net income attributable to Virtus | $117.5 million | $208.1 million | -43.5% |
| Diluted earnings per share | $15.50 | $26.01 | -40.4% |
| Operating cash flow | $132.7 million | $665.7 million | -80.1% |
- Investment management fees fell 6.8% to $728.3 million, reflecting lower average assets and a lower average fee rate. Distribution and service fees declined 25.4%; administration and shareholder service fees declined 16.3%.
- Operating expenses rose 5.4% to $688.9 million. Increases included other operating costs, acquisition-related amortization and $4.0 million of restructuring expense; distribution and asset-based costs fell 20.2%.
- Other income (expense), net was a loss of $51.9 million versus income of $6.4 million in 2021, including investment losses and CIP-related losses. CIP results included $140.5 million of realized and unrealized loan losses, partly offset by $103.0 million of unrealized gains on notes payable.
- Assets under management (AUM) ended at $149.4 billion, down 20.2% from $187.2 billion. Average AUM declined 3.5% to $166.8 billion. Total sales were $30.3 billion, down 17.0%; net outflows were $13.4 billion versus $3.5 billion of net inflows in 2021. Market performance reduced AUM by $37.1 billion, partly offset by $14.7 billion added with Stone Harbor.
- Year-end cash and cash equivalents were $338.2 million, down from $378.9 million; investments were $100.3 million. The company reported $261.6 million of term-loan borrowings and no revolver borrowings against a $175.0 million facility. The balance sheet carries debt net of issuance costs at $255.0 million.
- Cash used in investing activities was $27.5 million, versus $175.0 million in 2021, primarily reflecting lower acquisition spending. Financing activities used $102.1 million. Operating cash flow declined largely due to lower net sales of CIP investments and changes in accrued compensation and other liabilities.
Material changes and capital allocation
- Equity markets declined substantially in 2022; the S&P 500 fell 19.4%. Virtus reported negative market performance across AUM, particularly in equity assets. Fixed-income AUM rose 7.7%, while equity AUM fell 29.7%.
- Stone Harbor, an emerging-markets debt manager, was acquired January 1, 2022. Its 2022 revenue and operating income were not material to Virtus’s results. Westchester, acquired in October 2021, and the 2021 NFJ/AllianzGI transaction also affected comparative expenses and AUM.
- Virtus repurchased 451,097 shares for $90.0 million during 2022 and declared $48.2 million of common dividends. The board declared a $1.65-per-share quarterly dividend in February 2023. The filing cautions that future dividends are not assured and may be restricted by the credit agreement.
Outlook, risks and unusual items
- No specific financial guidance or quantified earnings outlook is provided. Management emphasizes that results depend on market values, investment performance, client flows, fee rates and the ability to attract and retain investment personnel.
- On October 19, 2022, Virtus agreed to acquire AlphaSimplex for $130.0 million, including deferred retention incentives. Closing was expected near the end of first-quarter 2023, subject to customary conditions, regulatory approvals and client approvals.
- Key risks include market declines and redemptions reducing fee-bearing AUM; investment underperformance; fee and distribution-channel competition; loss of key personnel; cyber or service-provider disruptions; regulatory, litigation and tax exposure; and debt covenant and refinancing risks.
- Interest expense on company debt increased with higher rates. Management estimated that a 100-basis-point rate increase would raise annual interest expense on its floating-rate term loan by approximately $2.6 million. A similar rate change could alter the fair value of fixed-income investments by an estimated $2.7 million.
- The effective tax rate was 34.9%, versus 25.7% in 2021, primarily reflecting valuation allowances on tax effects of unrealized investment losses. The company recorded $4.0 million of restructuring costs tied primarily to office-space consolidation and reported no goodwill or indefinite-lived intangible impairment.
- Consolidated CLO assets and liabilities are substantial but largely relate to third-party-funded products. At year-end, CLO loan fair value was $146.7 million below unpaid principal; the filing reported no material collateral assets in default. Virtus’s stated CLO beneficial interests were $80.4 million, with maximum exposure described as ownership of subordinated notes and accrued management fees.
- Management and Deloitte & Touche concluded internal control over financial reporting was effective as of December 31, 2022. Deloitte issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether net outflows and weak open-end-fund flows continue, and how AUM recovery or further market declines affect fee revenue and margins.
- AlphaSimplex’s completed transaction terms, client approvals, retained assets and subsequent contribution to revenue and earnings.
- Cash available for corporate use versus cash and liabilities consolidated within CIP, and the company’s ability to service and repay term debt under the credit agreement.
- Performance and valuation of Virtus’s investments and CLO interests, including the impact of loan marks, contingent consideration and potential changes in market conditions.
- Whether dividends and repurchases remain sustainable given operating cash flow, debt covenants, acquisition commitments and future capital needs.