Victory Capital Holdings, Inc. annual report, FY2021

Victory Capital Holdings, Inc. — FY 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; filed March 14, 2022. This is an annual report, not a standalone fourth-quarter report. Victory Capital is a diversified asset manager with 12 investment franchises and a Solutions Platform.

Financial and operating highlights

MetricFY 2021FY 2020
Ending AUM$183.7 billion$147.2 billion
Average AUM$158.6 billion$136.4 billion
Revenue$890.3 million$775.4 million
Income from operations$373.8 million$314.7 million
Net income$278.4 million$212.5 million
Diluted EPS$3.75$2.88
Adjusted EBITDA$449.0 million; 50.4% margin$377.3 million; 48.7% margin
Adjusted net income$329.0 million$258.5 million
Cash from operating activities$376.2 million$250.6 million
  • GAAP operating margin was approximately 42.0%, up from 40.6%; net margin was approximately 31.3%, up from 27.4%.
  • Investment management fees rose 20.0% to $674.5 million, primarily on higher average AUM; fee realization declined as asset and product mix shifted. Revenue on average AUM fell to 56.1 basis points from 56.8 basis points.
  • AUM increased 24.7%. Acquired assets and market appreciation added approximately $20.3 billion and $20.6 billion, respectively, while net outflows were $4.5 billion. Long-term gross inflows were $27.9 billion; long-term net outflows were $4.0 billion.
  • Year-end cash and cash equivalents were $69.5 million; the $100 million revolving facility was undrawn. Accounts and other receivables were $104.3 million and accounts and other payables were $121.1 million.
  • Debt principal was $1.151 billion at year-end ($1.128 billion net of unamortized financing costs and discount), versus $788.2 million principal at year-end 2020. The company reported compliance with its financial covenant. It had repaid $142 million of term loans during 2021.

Material changes and transactions

  • Revenue increased 14.8%, operating income 18.8%, net income 31.0%, and diluted EPS 30.2% year over year. Operating expenses increased 12.1% to $516.4 million.
  • Net outflows improved from $19.4 billion in 2020 to $4.5 billion in 2021, but remained negative. Solutions had $1.9 billion of net inflows; fixed income, U.S. mid-cap and U.S. small-cap strategies had notable outflows.
  • Acquisitions added THB Asset Management, New Energy Capital and WestEnd Advisors. WestEnd closed on December 31, 2021 and its $19.3 billion of acquired assets had no effect on 2021 revenue, flows, average AUM or earnings. The estimated WestEnd purchase price was $716.1 million, including $239.7 million of acquisition-date contingent consideration; maximum earn-outs are $320 million.
  • NEC expanded the business into private clean-energy infrastructure investments. Its acquisition-date AUM was $795 million; contingent payments of up to $35 million are tied to revenue growth and treated as employee compensation.
  • The company eliminated its dual-class share structure in November 2021; common shareholders thereafter had one vote per share and identical economic rights. The 2021 dividend declared per share was $0.53, and the quarterly rate rose to $0.17 in Q4. A further $0.25 quarterly dividend was declared in February 2022.

Outlook, risks and unusual items

  • The filing provides no formal financial guidance. Management describes growth as dependent on organic flows and market performance, investment results, distribution, and strategic acquisitions; it expects to continue evaluating acquisition opportunities and developing alternative-investment capabilities.
  • Key business exposure is to market levels, investment performance, client redemptions and fee pressure because revenues are largely AUM-based. The filing also highlights passive-investment competition, dependence on key investment professionals and third-party distribution/service providers, regulation, cybersecurity, and acquisition integration risks.
  • Debt increased to finance WestEnd. A $450 million interest-rate swap fixed the rate on a portion of prior term debt through July 2026; remaining debt is exposed to floating rates. The company also identified LIBOR transition risk.
  • Contingent acquisition consideration totaled an estimated $308.5 million at year-end, principally USAA and WestEnd earn-outs. Changes in estimated earn-out fair value are recorded in earnings; 2021 included $13.8 million of expense for the USAA contingent consideration remeasurement.
  • Acquisition-related costs rose to $16.3 million from $1.1 million, mainly due to NEC and WestEnd. The effective tax rate declined to 20.6% from 23.7%, primarily due to higher excess tax benefits on share-based compensation.
  • Management said COVID-19 had not materially adversely affected 2021 results, while noting uncertainty about future effects. The filing also flags geopolitical and market uncertainty, including the Russia-Ukraine conflict. No material legal proceedings were reported.
  • Ernst & Young issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an ICFR attestation because of the company’s emerging-growth-company exemption.

Important facts for investors to verify

  • Whether net outflows persist or improve, and how market returns versus client flows drive AUM and fee revenue.
  • WestEnd client-consent and retention outcomes, realized revenue growth, earn-out payments, and integration benefits; also the final acquisition purchase-price allocation.
  • Debt repayment capacity, floating-rate exposure, covenant headroom and the LIBOR transition, alongside the company’s dividend and repurchase commitments.
  • Fee-rate and product-mix trends, particularly as lower-fee Solutions and ETF model strategies grow.
  • The assumptions underlying contingent consideration, including the $308.5 million year-end estimate and potential future cash payments.
  • Shareholder concentration and potential share sales: the filing notes a registration statement permitting certain holders to sell up to 44,973,804 shares.