Virtus Investment Partners, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. Virtus is an investment manager whose revenues are primarily asset-based fees. Consolidated results include certain investment products (CIP), whose assets and liabilities are generally nonrecourse to the Company beyond its own interests.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $219.3 (+4.3%) | $210.3 | $630.7 (-8.3%) | $688.0 |
| Operating income | $44.9 (+2.0%) | $44.0 | $112.5 (-32.3%) | $166.2 |
| Operating margin | 20.5% | 20.9% | 17.8% | 24.2% |
| Net income attributable to Virtus | $30.9 (-2.4%) | $31.7 | $99.8 (+21.5%) | $82.1 |
| Diluted EPS | $4.19 (-1.4%) | $4.25 | $13.50 (+25.5%) | $10.76 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $229.8 | $154.9 |
Q3 revenue growth reflected the AlphaSimplex acquisition. Investment management fees rose 7.0% to $184.9 million, while other revenue fell 8.0%. Nine-month revenue declined mainly because average AUM was lower; investment management fees fell 6.3%. Higher employment expense, including AlphaSimplex-related retention payments, contributed to Q3 expense growth. Nine-month operating income also reflects comparisons with prior-year investment losses and a $6.8 million gain from contingent-consideration remeasurement in 2023.
Q3 net income increased 39.2% to $38.2 million, but income attributable to Virtus declined because of the period’s noncontrolling-interest allocation. For the nine-month period, lower tax expense and less severe investment/CIP losses contributed to higher attributable income. The effective tax rate was 23.6%, versus 35.2% in the prior-year period.
AUM, flows and capital
- AUM was $162.5 billion at September 30, up 12.1% year over year and 8.8% from year-end 2022. The year-over-year increase included $19.3 billion of positive market performance and $7.8 billion from AlphaSimplex, partly offset by $6.8 billion of net outflows.
- Q3 net flows were negative $1.5 billion, versus negative $3.3 billion a year earlier. Nine-month net flows were negative $3.4 billion, versus negative $10.0 billion. Open-end funds remained the largest source of outflows.
- Average AUM for the first nine months was $161.1 billion, down 6.8% year over year; the average fee rate increased to 42.1 basis points from 41.5 basis points, partly reflecting AlphaSimplex’s higher-fee alternative strategies.
- Cash and cash equivalents were $195.4 million, down from $338.2 million at December 31, 2022. Investments were $152.3 million. These figures are separate from CIP cash and investments.
- Company debt was $273.8 million on the balance sheet. At quarter-end, $259.5 million was outstanding under the term loan and $20.0 million under the revolver; the term-loan balance is presented net of $5.7 million of issuance costs. The $175 million revolver had approximately $155 million undrawn. The term loan matures in 2028 and the revolver in 2026.
- Nine-month operating cash flow of $229.8 million included CIP activity; management attributed much of the year-over-year increase to higher net sales of CIP investments. Investing cash use was $127.3 million, including $109.0 million for acquisitions. Financing cash use was $285.8 million.
- Virtus paid $38.4 million in common dividends and repurchased $25.0 million of shares during the first nine months. It declared a Q3 dividend of $1.90 per share, payable November 15, 2023. About 702,497 shares remained available under the repurchase program.
Material developments, outlook and risks
- Virtus acquired AlphaSimplex on April 1, 2023, for $113.4 million. The acquisition added $48.3 million of goodwill and $55.4 million of intangible assets; its reported revenue and operating income were not material for the period. The purchase-price allocation remained preliminary.
- No quantitative earnings or AUM guidance is provided in the filing. Management cautions that results depend on AUM, market performance, client flows and other assumptions, and that forward-looking statements are not guarantees.
- Key stated risks include AUM declines and investment outflows, market and interest-rate movements, debt covenant/payment capacity, competition, retention of key personnel, distribution relationships, technology and cybersecurity disruptions, regulatory or legal matters, and impairment of goodwill or intangibles.
- Virtus reported no material changes to previously disclosed risk factors and no material changes to internal control over financial reporting. Management concluded disclosure controls were effective at a reasonable-assurance level.
- The Company is subject to litigation, arbitration and regulatory examinations in the ordinary course. It believes current matters are not likely to have a material adverse effect, but notes that outcomes are inherently uncertain and could affect particular periods.
- Eight CLOs were consolidated at quarter-end. Their $1.9 billion of notes payable are obligations of the CLOs, generally recourse only to the related CLO assets; Virtus states its exposure is limited to its beneficial interests and accrued fees. CLO loan fair value was $107.0 million below par, with no material collateral assets in default.
Investor verification points
- Track AUM and net flows by product, particularly persistent open-end fund outflows, and distinguish market performance and acquisitions from organic flows.
- Assess whether AlphaSimplex contributes durable fee revenue and earnings relative to its acquisition cost, retention expense, debt funding and added amortization.
- Reconcile reported consolidated operating cash flow with cash available to the parent, given significant CIP activity and the separate CIP balances and obligations.
- Monitor debt repayment, interest costs, revolver availability and covenant headroom; the filing does not provide a forward interest-rate or earnings forecast.
- Review the valuation assumptions for contingent consideration, goodwill and acquired intangibles, as well as CLO collateral valuations and the gap between loan fair value and par.
- Consider the impact of dividends and buybacks on liquidity and capital allocation, alongside the possibility of continued market volatility and net outflows.