Virtus Investment Partners(VRTS) - 2022 Q4 - Annual Report

Part I Business Virtus Investment Partners manages $149.4 billion in assets as of December 31, 2022, offering diverse investment strategies through a multi-manager model - The company utilizes a multi-manager, multi-style approach, offering investment strategies from distinct affiliated managers and select unaffiliated subadvisers[15] Top 3 Affiliated Managers by AUM (as of Dec 31, 2022) | Affiliated Manager | Investment Style | Assets (in billions) | | :--- | :--- | :--- | | Kayne Anderson Rudnick Investment Management | Quality-Oriented Equities | $47.4 | | Sustainable Growth Advisers | Global Growth Equities | $20.8 | | Seix Investment Advisors | Investment Grade and Leveraged Finance Fixed Income | $14.4 | Top Unaffiliated Subadviser by AUM (as of Dec 31, 2022) | Unaffiliated Subadviser | Investment Style | Assets (in billions) | | :--- | :--- | :--- | | Voya Investment Management | Income & Growth and Convertible | $9.8 | Our Investment Managers Virtus provides investment management services through distinct affiliated managers and select unaffiliated subadvisers, with Kayne Anderson Rudnick as the largest affiliated manager by AUM Our Investment Products Virtus offers diverse investment products, with open-end funds and institutional accounts being the largest categories by AUM as of year-end 2022 AUM by Product (as of Dec 31, 2022) | Products | AUM (in billions) | | :--- | :--- | | Open-end funds | $53.0 | | Institutional accounts | $50.7 | | Retail separate accounts | $35.4 | | Closed-end funds | $10.4 | | Total AUM | $149.4 | - The company managed 123 open-end funds totaling $53.0 billion and 14 closed-end funds totaling $10.4 billion as of December 31, 2022[25][26] - Retail separate accounts totaled $35.4 billion, split between intermediary-sold accounts ($29.2 billion) and private client accounts ($6.2 billion)[27][28] Our Investment Management, Administration and Shareholder Services The company's revenues are primarily derived from asset-based fees, with total investment management fees decreasing to $728.3 million in 2022 Fee Revenue Breakdown (in thousands) | Fee Type | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total investment management fees | $728,339 | $781,585 | $505,338 | | Administration fees | $61,344 | $73,113 | $41,582 | | Shareholder service fees | $24,518 | $29,418 | $17,881 | | Total | $814,201 | $884,116 | $564,801 | - Investment management fees for funds are based on average daily or weekly net assets, often with breakpoints for larger asset levels, while fees for separate and institutional accounts are negotiated[32][33][35] - The company's distribution channels include financial intermediaries for retail products and direct relationships with consultants and clients for institutional products[39][40] - As of December 31, 2022, the company employed 772 people and emphasized competitive compensation, career development, and a diverse, equitable, and inclusive environment to attract and retain talent[48][50][51] Risk Factors The company faces significant risks from AUM fluctuations, reliance on key personnel and technology, regulatory compliance, and debt covenants - A majority of revenues are from asset-based fees, making profitability highly sensitive to declines in AUM caused by market volatility, economic conditions, or poor investment performance[55][62] - The business is dependent on its ability to attract and retain key employees, such as portfolio managers and sales personnel, whose departure could lead to loss of client accounts and higher costs[68][71] - Operating in a highly regulated industry, failure to comply with laws from the SEC, FINRA, and other bodies could result in fines, penalties, and reputational harm[83][84] - Critical technology systems are vulnerable to business interruption, security breaches, or system failures, including those of third-party providers, potentially impacting operations and profitability[78][79] - The company's debt agreements contain covenants that could restrict cash flow available for other purposes, including capital returns to shareholders, with total debt at $261.6 million as of December 31, 2022[66] Unresolved Staff Comments The company reports no unresolved staff comments - None[103] Properties The company leases its principal executive offices in Hartford, CT, and additional offices across the U.S., Singapore, and the UK - The principal office is located at One Financial Plaza, Hartford, CT, with additional leased offices in various U.S. states, Singapore, and the UK[104] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 12, "Commitments and Contingencies" - Details on legal proceedings are incorporated by reference from Part II, Item 8, Note 12 of the Form 10-K[105] Mine Safety Disclosures This item is not applicable to the company - Not applicable[106] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "VRTS", with a $1.65 quarterly dividend declared and $90.0 million in share repurchases in 2022 - Common stock is traded on the NASDAQ Global Market under the symbol "VRTS", with 7,181,554 shares outstanding as of February 10, 2023[109] - On February 22, 2023, the Board of Directors declared a quarterly cash dividend of $1.65 per common share[111] 2022 Share Repurchase Summary | Metric | Value | | :--- | :--- | | Total Shares Repurchased | 451,097 | | Total Cost | $90.0 million | | Shares Remaining for Repurchase (as of Dec 31, 2022) | 828,352 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, AUM decreased 20.2% to $149.4 billion due to market depreciation and net outflows, leading to a 9.5% revenue decline and 40.4% diluted EPS decrease Financial Highlights 2022 vs. 2021 | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Sales | $30.3B | $36.5B | (17.0)% | | Net Flows | $(13.4)B | $3.5B | N/A | | AUM (Year-End) | $149.4B | $187.2B | (20.2)% | | Diluted EPS | $15.50 | $26.01 | (40.4)% | - The decrease in AUM was primarily due to $37.1 billion of negative market performance and $13.4 billion of net outflows, partially offset by $14.7 billion in AUM from the acquisition of Stone Harbor[134] - The company continued its acquisition strategy, acquiring Stone Harbor on January 1, 2022, and entering an agreement to acquire AlphaSimplex in October 2022[130][131] Assets Under Management Total AUM decreased 20.2% to $149.4 billion in 2022 due to market depreciation and net outflows, with the average fee rate declining to 41.6 basis points AUM by Product (in millions) | Product | Dec 31, 2022 | Dec 31, 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Open-End Funds | $53,000 | $78,706 | (32.7)% | | Closed-End Funds | $10,361 | $12,068 | (14.1)% | | Retail Separate Accounts | $35,352 | $44,538 | (20.6)% | | Institutional Accounts | $50,663 | $51,874 | (2.3)% | | Total AUM | $149,376 | $187,186 | (20.2)% | Total Asset Flows (in millions) | Flow Component | 2022 | 2021 | | :--- | :--- | :--- | | Inflows | $30,293 | $36,496 | | Outflows | $(43,736) | $(33,014) | | Net Flows | $(13,443) | $3,482 | | Market Performance | $(37,083) | $19,352 | - The average fee rate earned on all products decreased by 1.3 basis points to 41.6 basis points in 2022, primarily due to a lower proportion of AUM in higher-fee equity products[144] Results of Operations In 2022, total revenues decreased 9.5% to $886.4 million, operating expenses increased 5.4%, and net income attributable to Virtus fell 43.5% to $117.5 million Summary of Operations (in thousands) | Line Item | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenues | $886,379 | $979,234 | (9.5)% | | Total operating expenses | $688,919 | $653,746 | 5.4% | | Operating income | $197,460 | $325,488 | (39.3)% | | Net Income Attributable to Virtus | $117,541 | $208,131 | (43.5)% | - Investment management fees, the largest revenue component, decreased by 6.8% to $728.3 million due to lower average AUM and a lower average fee rate[150][151] - Operating expenses increased primarily due to a $36.0 million (40.0%) rise in other operating expenses from acquisitions and a $14.0 million (31.5%) increase in amortization expense[156][159][165] - Other income (expense), net, swung to a loss of $(51.9) million from a gain of $6.4 million in 2021, mainly due to net realized and unrealized losses on investments and consolidated investment products (CIP)[166] Liquidity and Capital Resources The company ended 2022 with $338.2 million in cash, with operating cash flow decreasing to $132.7 million, and $255.0 million in debt outstanding Key Balance Sheet and Cash Flow Data (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $338,234 | $378,921 | | Debt | $255,025 | $266,346 | | Total equity | $822,936 | $836,627 | | Cash from Operating activities (YTD) | $132,670 | $665,729 | | Cash from Investing activities (YTD) | $(27,467) | $(175,033) | | Cash from Financing activities (YTD) | $(102,057) | $(244,400) | - The decrease in operating cash flow was primarily due to a $396.2 million reduction in net sales of investments by consolidated investment products (CIP) and a decrease in accrued compensation balances[184] - At year-end, $261.6 million was outstanding under the Term Loan, and the $175.0 million revolving credit facility was undrawn[188] Critical Accounting Policies and Estimates Critical accounting policies involve consolidation of investment products, fair value measurement, goodwill and intangible asset valuation, revenue recognition, and income tax accounting - Consolidation policy requires evaluation of Variable Interest Entities (VIEs), such as CLOs, to determine if the company is the primary beneficiary, which involves significant judgment[191][192] - Fair value measurement (ASC 820) is used for financial instruments, with contingent consideration from acquisitions categorized as Level 3, requiring valuation via simulation models with unobservable inputs[196][202] - Goodwill ($348.8 million) and intangible assets ($442.5 million) are tested for impairment annually, requiring estimates of fair value and future cash flows, with no impairments identified in 2022[209][210][211] - Revenue from asset-based fees is considered constrained and is recognized at the end of the contractual measurement period when asset values are determinable[212][213] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk, with a 10% change in investment fair value impacting pre-tax earnings by $22.5 million, and interest rate risk affecting fixed income investments and floating-rate debt - A 10% change in the fair value of the company's $225.1 million in investment securities and net interests in CIP would result in a corresponding $22.5 million change in pre-tax earnings[232] - A hypothetical 100 basis point change in interest rates would change the fair value of fixed income investments by an estimated $2.7 million[234] - Given the $261.6 million outstanding floating-rate Term Loan, a 100 basis point change in the base rate would change annual interest expense by an estimated $2.6 million[235] Financial Statements and Supplementary Data Audited consolidated financial statements, the independent auditor's report, and supplementary data are presented under Item 15 - The required financial statements and related reports are located in Item 15, starting on page F-1[236] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[237] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes during Q4 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022[241] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO (2013) framework[243] - No material changes were made to the internal control over financial reporting during the fourth quarter of fiscal 2022[242] Other Information The company reports no other information - None[245] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[246] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Shareholders - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[249] Executive Compensation Information is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Shareholders - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[250] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2023 proxy statement, detailing equity compensation plan securities - Information required by Item 403 of Regulation S-K is incorporated by reference from the 2023 proxy statement[251] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Securities Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 377,087 | 655,343 | | Equity compensation plans not approved by security holders | — | — | | Total | 377,087 | 655,343 | Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Shareholders - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[254] Principal Accountant Fees and Services Information is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Shareholders - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[255] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, omitted schedules, and a comprehensive list of exhibits filed with the Form 10-K - The Report of Independent Registered Public Accounting Firm and the Consolidated Financial Statements of Virtus are included in this Annual Report[258] - A list of exhibits filed with the report is provided, including material contracts, subsidiary lists, consents, and certifications from the CEO and CFO[260][261] Form 10-K Summary The company reports no Form 10-K summary - None[264]