Virtus Investment Partners, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Virtus provides investment management and related services; revenue is primarily tied to assets under management (AUM) and related fees.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $210.3 million | $252.1 million | $688.0 million | $713.0 million |
| Operating income | $44.0 million | $93.3 million | $166.2 million | $241.8 million |
| Net income attributable to Virtus | $31.7 million | $58.7 million | $82.1 million | $158.3 million |
| Diluted EPS | $4.25 | $7.36 | $10.76 | $19.72 |
| Operating margin | 20.9% | 37.0% | 24.2% | 33.9% |
| Operating cash flow | — | — | $154.9 million | $423.7 million |
At September 30, 2022, cash and cash equivalents were $309.2 million and investments were $98.2 million. Debt on the balance sheet was $255.4 million, net of debt issuance costs; the term loan principal outstanding was $262.2 million, with no revolver borrowings and $175 million of revolving capacity. Cash and debt figures exclude separately consolidated investment products (CIP), whose assets and obligations are largely non-recourse to Virtus.
Total assets were $3.55 billion and total equity was $805.9 million. Virtus paid $35.2 million of common dividends and repurchased $80.0 million of shares during the first nine months. The quarterly dividend declared was $1.65 per share.
Material changes versus prior periods
- Q3 revenue fell 16.6%; operating income declined 52.8%, and diluted EPS fell 42.3%. For the first nine months, revenue decreased 3.5%, operating income 31.3%, and diluted EPS 45.4%.
- AUM was $145.0 billion, down 18.2% year over year. Q3 net outflows were $3.3 billion versus $0.5 billion a year earlier; nine-month net outflows were $10.0 billion versus net inflows of $3.5 billion. Negative market performance reduced AUM by $6.6 billion in Q3 and $45.9 billion year to date.
- Q3 investment management fees decreased 14.1%, mainly reflecting lower average AUM and a lower blended fee rate. Nine-month fees were down 0.6%, as acquired assets partly offset lower fee rates.
- Operating expenses increased 4.7% in Q3 and 10.7% year to date. Higher acquisition-related employment, other operating and amortization costs, plus $4.0 million of restructuring expense, outweighed lower distribution expenses.
- Market-related losses weighed on results: net realized and unrealized losses on Virtus investments were $16.0 million for the first nine months, while CIP recorded net losses of $43.4 million. The effective tax rate for the first nine months rose to 35.2% from 24.0%, primarily due to valuation allowances on unrealized investment losses.
- Operating cash flow was $154.9 million, down $268.8 million year over year, primarily reflecting lower net investment sales by CIP and a decrease in accrued compensation and other liabilities. Investing cash use was $25.7 million, including the Stone Harbor acquisition; financing cash use was $319.0 million.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management cited lower market values and net outflows as key pressures on AUM and fee revenue.
- On October 19, 2022, Virtus agreed to acquire AlphaSimplex for $130 million, including deferred management retention incentives. The target had $10.9 billion of AUM at September 30; closing was expected near the end of Q1 2023, subject to approvals and customary conditions.
- Stone Harbor was acquired January 1, 2022. Its reported revenue and operating income were not material for the periods presented. Acquisition-related amortization and operating costs contributed to higher expenses.
- Key stated risks include AUM declines, market and interest-rate volatility, client withdrawals or contract terminations, competition, personnel and distribution challenges, integration of strategic transactions, regulatory or legal matters, and debt covenant or liquidity pressures. Virtus said legal and regulatory matters were not expected, based on information then available, to have a material adverse effect, while noting outcomes remain uncertain.
- Consolidated CLO investments had fair value $110.4 million below unpaid principal at quarter-end; the filing reported no material collateral assets in default. Virtus stated its exposure to consolidated investment products is generally limited to its beneficial interests and fees.
- Disclosure controls were deemed effective, and the filing reported no material changes to risk factors or internal control over financial reporting.
Important facts for investors to verify
- Subsequent AUM, flows and market performance, particularly whether substantial outflows and equity-market declines continue.
- Execution and financing of the AlphaSimplex acquisition, including closing conditions, integration costs and retention arrangements.
- Cash generation and liquidity after dividends, repurchases, acquisition spending and contingent consideration payments; distinguish Virtus cash from CIP balances.
- Debt terms, interest-rate exposure and covenant headroom; the balance-sheet debt amount is net of issuance costs, unlike stated term-loan principal.
- Drivers and durability of the elevated expense base, including acquisition-related amortization, restructuring and compensation costs.
- Investment and CLO valuation exposure, contingent consideration estimates, and any developments in legal or regulatory matters.