Virtus Investment Partners, Inc. — 2023 Form 10-K
Business and reporting period. Virtus is a multi-manager investment firm serving institutional and individual investors through open- and closed-end funds, retail separate accounts, institutional accounts and related services. This annual report covers the fiscal year ended December 31, 2023, compared primarily with 2022.
Financial and operating highlights
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $845.3 million | $886.4 million | Down 4.6% |
| Operating income | $151.5 million | $197.5 million | Down 23.3% |
| Operating margin | 17.9% | 22.3% | Down 4.4 percentage points |
| Net income attributable to Virtus | $130.6 million | $117.5 million | Up 11.1% |
| Diluted earnings per share | $17.71 | $15.50 | Up 14.3% |
| Operating cash flow | $237.2 million | $132.7 million | Up 78.8% |
- Investment management fees were $711.5 million, down 2.3%. Other revenue was $133.8 million, down 15.3%. Lower average AUM weighed on fees and operating income; higher employment expense, including AlphaSimplex-related retention costs, also pressured operating results.
- Net income attributable to Virtus increased despite lower operating income, supported by a $55.6 million year-over-year improvement in other income/expense, net, and a lower effective tax rate: 24.2% versus 34.9%. Results also include consolidated investment products (CIP), whose assets and liabilities are substantially attributable to outside investors.
- Ending AUM rose 15.3% to $172.3 billion, including $24.8 billion of positive market performance and $7.8 billion from AlphaSimplex, partly offset by $7.2 billion of net outflows. Total sales were $25.9 billion, down 14.6%; 2022 net outflows were $13.4 billion.
- Average AUM fell 3.2% to $161.5 billion. Equity AUM increased 18.1%, alternatives increased 59.3%, and fixed-income AUM was broadly flat. The average fee rate rose 0.6 basis points to 42.2, primarily reflecting higher-fee alternative strategies added through AlphaSimplex.
- Operating cash flow increased mainly because net purchases of CIP investments were lower. Investing cash outflow was $129.7 million, primarily reflecting the AlphaSimplex acquisition; financing cash outflow was $356.1 million, including CIP financing activity, dividends, share repurchases and contingent consideration payments.
- Cash and cash equivalents were $239.6 million, down from $338.2 million. Investments were $132.7 million. The company had $258.8 million of term-loan borrowings before $5.4 million of unamortized debt issuance costs; the balance sheet reports debt net at $253.4 million. The $175 million revolver was undrawn at year-end. The term loan matures in 2028 and bears floating-rate interest.
Material changes, outlook and risks
- Virtus acquired AlphaSimplex on April 1, 2023 for $113.4 million in cash. The acquisition added $7.8 billion to year-end AUM; reported 2023 revenue and operating income from AlphaSimplex were not material. The purchase-price allocation included $48.3 million of goodwill and $55.4 million of intangible assets.
- Management provided no specific financial guidance or quantified forward outlook in the supplied filing text. It noted that results depend substantially on market values, investment performance and client flows; equity markets rose in 2023, while net flows remained negative.
- Key risks include AUM declines from market volatility or redemptions; investment underperformance; competition and fee pressure; dependence on key investment personnel and distribution partners; regulatory, litigation and reputational risks; cyber and third-party technology disruptions; and potential losses or valuation volatility in company investments.
- Debt covenants and required principal payments may constrain cash use, dividends or other capital returns. A hypothetical 100-basis-point increase in borrowing rates would increase annual interest expense by an estimated $2.6 million. The company declared a $1.90-per-share quarterly dividend in February 2024; future dividends are not assured.
- Virtus reported no cybersecurity incident that had materially affected, or was reasonably likely to materially affect, its business, results or financial condition. It reported no goodwill or indefinite-lived intangible impairment in its 2023 annual assessment. Legal and regulatory matters were not considered likely to have a material adverse effect based on information then available, though outcomes remain uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included valuation of acquired AlphaSimplex assets, contingent consideration and consolidation assessments for investment products.
Important facts for investors to verify
- Whether net outflows persist, particularly in open-end funds, and how flows affect average AUM and fee revenue.
- How much of AUM growth and future earnings reflects market appreciation and AlphaSimplex versus durable organic growth.
- The sustainability of operating margins given lower revenue, higher employment costs and ongoing amortization of acquired intangibles.
- Floating-rate debt exposure, covenant headroom, mandatory cash-flow repayments and the distinction between corporate debt and CIP notes payable.
- The effect of investment performance on client retention, including the filing’s benchmark-beating AUM statistics across three-, five- and ten-year periods.
- Capital allocation capacity, including the $1.90 quarterly dividend, repurchases and remaining share-repurchase authorization.
- Valuation assumptions and potential payments for Level 3 contingent consideration, as well as risks tied to CLO investments and consolidated investment products.