Victory Capital Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our” shall mean Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries. The following discussion is intended to assist in the understanding of our financial position at June 30, 2021 and December 31, 2020, results of operations for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes 23 Table of Contents included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 20 20 . This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 20 20 . Overview Our Business – We are a diversified global asset management firm with $161.9 billion in assets under management as of June 30, 2021. The Company operates a next-generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform. We provide specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With 10 autonomous Investment Franchises and a Solutions Platform, Victory Capital offers a wide array of investment styles and investment vehicles including, actively managed mutual funds, institutional separate accounts, separately managed accounts, unified managed account products, collective trust funds, private funds, undertakings for the collective investment in transferrable securities, other pooled vehicles and ETFs. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees. Franchises – Our Franchises are operationally integrated but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities. Solutions – Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Our approach to rules‑based investing includes single and multi‑factor strategies designed to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum volatility, thematic and targeted factor exposure. Professionals within our institutional and retail distribution channels, direct to investor business and marketing organization sell our products through our centralized distribution model. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs. Our direct to investor business serves the investment needs of individual clients including USAA members and the military community. We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $161.9 billion at June 30, 2021. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct to investor channels with deep penetration. THB Asset Management Acquisition – Effective March 1, 2021, the Company completed the acquisition of certain assets of THB Asset Management (“THB”). The acquisition expanded and diversified our investment platform, adding capacity constrained assets classes that we like and know well. The team manages strategies in U.S. micro-cap, small-cap and mid-cap assets classes as well as international small cap and global small cap portfolios; all of which are asset classes in which active management is an important part of a well-diversified portfolio. At March 1, 2021, the THB AUM that was acquired totaled $547 million. In addition to servicing clients in the U.S., THB has a footprint in Australia and Europe which provides us with expanded distribution opportunities in regions in which we have a limited presence today. This will benefit all of our Franchises as we look to leverage THB’s distribution footprint to sell more of our investment strategies outside the U.S. Aligning with the Company’s responsible investing initiatives, all of THB’s strategies have environmental, social and governance (“ESG”) considerations fully integrated into their investment processes. THB was an early adopter of responsible investment practices and has been managing responsible investment portfolios for decades. Nominal consideration was paid for the assets of THB. The THB investment team will share in the revenue generated on their products and benefit from our centralized operational, marketing and distribution platforms. THB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support. USAA AMCO Acquisition – Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company. The acquisition expanded and diversified the Company’s investment platform and increased 24 Table of Contents the Company’s size and scale. The acquisition also provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing date. In 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment. The estimated fair value of contingent consideration payable to sellers was estimated at $100.7 million at June 30, 2021 as compared to $92.5 million at December 31, 2020 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The increase in the liability of $8.2 million in the first six months of 2021 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. COVID-19 Pandemic – The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. While COVID-19 did not have a material adverse effect on our business, operations and financial results, the extent to which the pandemic impacts our business, operations and financial results going forward will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; and the effect on our ability to sell and provide our services. Business Highlights Assets under management : • AUM at June 30, 2021 increased by $7.6 billion, or 4.9%, to $161.9 billion from $154.3 billion at March 31, 2021, driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million. Net flows for the quarter ended June 30, 2021 were comprised of $302 million of net long-term inflows and $126 million of net short-term outflows. • AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively. We generated $10.1 billion in gross flows and $176 million in positive net flows for the three months ended June 30, 2021 compared to $9.6 billion in gross flows and $11.9 billion in negative net flows for the same period in 2020. Net flows for the three months ended June 30, 2021 were comprised of $0.3 billion of long-term inflows and $0.1 billion of short-term outflows. • AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively. We generated $16.9 billion in gross flows and $1.0 billion in negative net flows for the six months ended June 30, 2021 compared to $24.5 billion in gross flows and $14.8 billion in negative net flows for the same period in 2020. Net flows for the six months ended June 30, 2021 were comprised of $0.7 billion of net long-term outflows and $0.3 billion of net short-term outflows. Investment performance : • 44 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 62% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 64% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 71% over a three-year period, 72% over a five-year period and 71% over a ten-year period. On an equal-weighted basis, 60% of our strategies have outperformed their benchmarks over a one-year period, 54% over a three-year period, 60% over a five-year period and 65% over a ten-year period. Financial highlights : • Total revenue for the three months ended June 30, 2021 was $221.9 million compared to $181.9 million for the same period in 2020. For the six months ended June 30, 2021 and 2020, total revenue was $434.9 million and $386.3 million, respectively. • Net income was $69.3 million for the three months ended June 30, 2021 compared to $44.7 million for the same period in 2020. For the six months ended June 30, 2021 and 2020, net income was $134.5 million and $101.9 million, respectively. • Adjusted EBITDA was $112.2 million for the three months ended June 30, 2021, or 50.6% of revenue, compared to $86.3 million, or 47.5% of revenue, for the same period in 2020. For the six months ended June 30, 2021, Adjusted EBITDA was $219.1 million, or 50.4% of revenue, compared to $177.8 million, or 46.0% of revenue, for the same period in 2020. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted EBITDA calculation and reconciliation of generally accepted accounting principles (“GAAP”) net income to Adjusted EBITDA. • Adjusted Net Income with tax benefit was $87.2 million for the three months ended June 30, 2021 compared to $65.1 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, Adjusted Net Income with tax benefit was $170.8 million compared to $133.5 million for the same period in 2020. Refer to “Supplemental Non-GAAP Financial 25 Table of Contents Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income. Key Performance Indicators The following table is a summary of key performance indicators utilized by management to assess results of operations: Three Months Ended June 30, Six Months Ended June 30, ($ in millions, except for basis points and percentages) 2021 2020 2021 2020 AUM at period end $ 161,936 $ 129,070 $ 161,936 $ 129,070 Average AUM 158,471 128,927 154,781 136,519 Gross flows 10,074 9,577 16,908 24,502 Net short term flows (126 ) (8,416 ) (317 ) (8,214 ) Net long term flows 302 (3,466 ) (681 ) (6,568 ) Net flows 176 (11,882 ) (998 ) (14,782 ) Total revenue 221.9 181.9 434.9 386.3 Revenue on average AUM 56.2 bps 56.7 bps 56.7 bps 56.9 bps Net income 69.3 44.7 134.5 101.9 Adjusted EBITDA (1) 112.2 86.3 219.1 177.8 Adjusted EBITDA Margin (2) 50.6 % 47.5 % 50.4 % 46.0 % Adjusted Net Income (1) 80.3 58.3 157.0 120.0 Tax benefit of goodwill and acquired intangibles ( 3) 6.9 6.7 13.8 13.5 ( 1 ) Management utilizes Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one‑time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “Supplemental Non‑GAAP Financial Information.” ( 2 ) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue. ( 3 ) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. Assets Under Management Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including; (i) investment performance, including fluctuations in the financial markets and the quality of our investment decisions; (ii) client flows into and out of our various strategies and investment vehicles; (iii) industry trends toward products or strategies that we either do or do not offer; (iv) our ability to attract and retain high quality investment, distribution, marketing and management personnel; (v) our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re‑open strategies in part or entirely; and (vi) general investor sentiment and confidence. Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided. The following table presents our AUM by asset class as of the dates indicated: 26 Table of Contents As of June 30, (in millions) 2021 2020 Solutions $ 39,640 $ 29,305 Fixed Income 36,410 35,622 U.S. Mid Cap Equity 30,340 22,483 U.S. Small Cap Equity 20,617 14,083 Global / Non-U.S. Equity 15,931 11,130 U.S. Large Cap Equity 15,284 12,524 Other 460 195 Total Long-Term Assets 158,682 125,343 Money Market & Short-Term Assets 3,254 3,727 Total $ 161,936 $ 129,070 The following tables summarize our asset flows by asset class for the periods indicated: U.S. Mid U.S. Small U.S. Large Global / Money Cap Cap Fixed Cap Non-U.S. Total Market / (in millions) Equity Equity Income Equity Equity Solutions Other Long-term Short-term Total For the Three Months Ended June 30, 2021 Beginning AUM $ 29,156 $ 20,230 $ 36,776 $ 14,448 $ 14,652 $ 35,356 $ 341 $ 150,958 $ 3,373 $ 154,331 Gross client cash inflows 1,412 1,238 1,750 91 1,072 4,370 40 9,973 102 10,074 Gross client cash outflows (1,940 ) (1,428 ) (2,949 ) (407 ) (541 ) (2,380 ) (27 ) (9,671 ) (228 ) (9,898 ) Net client cash flows (527 ) (190 ) (1,200 ) (316 ) 531 1,991 13 302 (126 ) 176 Market appreciation / (depreciation) 1,745 616 677 1,253 928 2,419 62 7,700 3 7,703 Net transfers ( 1) (33 ) (39 ) 156 (101 ) (180 ) (126 ) 44 (278 ) 3 (275 ) Ending AUM $ 30,340 $ 20,617 $ 36,410 $ 15,284 $ 15,931 $ 39,640 $ 460 $ 158,682 $ 3,254 $ 161,936 For the Three Months Ended June 30, 2020 Beginning AUM $ 18,622 $ 11,885 $ 35,402 $ 10,703 $ 9,372 $ 25,526 $ 140 $ 111,650 $ 12,129 $ 123,779 Gross client cash inflows 943 997 1,498 216 436 1,067 10 5,166 4,411 9,577 Gross client cash outflows (1,511 ) (1,393 ) (2,775 ) (599 ) (575 ) (1,767 ) (12 ) (8,632 ) (12,826 ) (21,459 ) Net client cash flows (568 ) (396 ) (1,278 ) (383 ) (138 ) (700 ) (3 ) (3,466 ) (8,416 ) (11,882 ) Market appreciation / (depreciation) 4,428 2,592 1,503 2,207 1,898 4,479 55 17,159 14 17,173 Net transfers 2 2 (4 ) (2 ) (1 ) — 3 — — — Ending AUM $ 22,483 $ 14,083 $ 35,622 $ 12,524 $ 11,130 $ 29,305 $ 195 $ 125,343 $ 3,727 $ 129,070 ( 1 ) The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF. 27 Table of Contents U.S. U.S. U.S. Mid Small Large Global / Money Cap Cap Fixed Cap Non-U.S. Total Market / (in millions) Equity Equity Income Equity Equity Solutions Other Long-term Short-term Total Six Months Ended June 30, 2021 Beginning AUM $ 26,230 $ 18,368 $ 36,599 $ 14,230 $ 13,982 $ 34,041 $ 257 $ 143,706 $ 3,534 $ 147,241 Gross client cash inflows 3,154 2,310 3,774 189 1,664 5,513 95 16,698 209 16,908 Gross client cash outflows (3,794 ) (3,124 ) (4,651 ) (839 ) (1,188 ) (3,729 ) (55 ) (17,379 ) (526 ) (17,906 ) Net client cash flows (640 ) (814 ) (877 ) (650 ) 476 1,784 40 (681 ) (317 ) (998 ) Market appreciation / (depreciation) 4,777 2,641 458 1,857 1,628 3,940 119 15,420 1 15,421 Net transfers ( 1) (27 ) 423 229 (152 ) (155 ) (125 ) 44 236 36 272 Ending AUM $ 30,340 $ 20,617 $ 36,410 $ 15,284 $ 15,931 $ 39,640 $ 460 $ 158,682 $ 3,254 $ 161,936 Six Months Ended June 30, 2020 Beginning AUM $ 26,347 $ 17,346 $ 37,973 $ 14,091 $ 12,603 $ 31,649 $ 236 $ 140,245 $ 11,587 $ 151,832 Gross client cash inflows 2,416 2,230 3,449 454 1,107 2,762 21 12,439 12,063 24,502 Gross client cash outflows (3,776 ) (2,703 ) (5,665 ) (1,406 ) (1,259 ) (4,161 ) (36 ) (19,007 ) (20,277 ) (39,284 ) Net client cash flows (1,360 ) (473 ) (2,217 ) (952 ) (152 ) (1,399 ) (15 ) (6,568 ) (8,214 ) (14,782 ) Market appreciation / (depreciation) (2,479 ) (2,733 ) 142 (621 ) (1,347 ) (956 ) (32 ) (8,027 ) 48 (7,979 ) Net transfers (25 ) (57 ) (276 ) 7 26 12 6 (307 ) 307 — Ending AUM $ 22,483 $ 14,083 $ 35,622 $ 12,524 $ 11,130 $ 29,305 $ 195 $ 125,343 $ 3,727 $ 129,070 ( 1 ) The six months ended June 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF. The following table presents our AUM by distribution channel as of the dates indicated: As of June 30, 2021 2020 (in millions) Amount % of total Amount % of total Investor $ 70,656 44 % $ 64,171 49 % Institutional 47,544 29 % 34,361 27 % Retail 43,736 27 % 30,538 24 % Total AUM ( 1) $ 161,936 100 % $ 129,070 100 % (1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment. 28 Table of Contents The following tables summarize our asset flows by vehicle for the periods indicated: Separate Accounts and Other Pooled (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Three Months Ended June 30, 2021 Beginning AUM $ 117,830 $ 4,441 $ 32,061 $ 154,331 Gross client cash inflows 5,060 239 4,775 10,074 Gross client cash outflows (5,376 ) (169 ) (4,353 ) (9,898 ) Net client cash flows (317 ) 70 423 176 Market appreciation (depreciation) 5,879 218 1,606 7,703 Net transfers (4) (229 ) (375 ) 329 (275 ) Ending AUM $ 123,164 $ 4,354 $ 34,418 $ 161,936 Three Months Ended June 30, 2020 Beginning AUM $ 98,305 $ 3,177 $ 22,296 $ 123,779 Gross client cash inflows 8,621 90 866 9,577 Gross client cash outflows (19,726 ) (214 ) (1,519 ) (21,459 ) Net client cash flows (11,104 ) (124 ) (653 ) (11,882 ) Market appreciation (depreciation) 13,229 409 3,535 17,173 Net transfers — — — — Ending AUM $ 100,430 $ 3,462 $ 25,179 $ 129,070 Separate Accounts and Other Pooled (in millions) Mutual Funds (1) ETFs (2) Vehicles (3) Total Six Months Ended June 30, 2021 Beginning AUM $ 112,998 $ 3,976 $ 30,267 $ 147,241 Gross client cash inflows 10,525 479 5,904 16,908 Gross client cash outflows (11,669 ) (286 ) (5,950 ) (17,906 ) Net client cash flows (1,145 ) 193 (46 ) (998 ) Market appreciation (depreciation) 11,454 561 3,406 15,421 Net transfers (5) (144 ) (375 ) 791 272 Ending AUM $ 123,164 $ 4,354 $ 34,418 $ 161,936 Six Months Ended June 30, 2020 Beginning AUM $ 118,605 $ 4,213 $ 29,014 $ 151,832 Gross client cash inflows 22,366 345 1,790 24,502 Gross client cash outflows (35,357 ) (675 ) (3,252 ) (39,284 ) Net client cash flows (12,990 ) (330 ) (1,462 ) (14,782 ) Market appreciation (depreciation) (5,185 ) (421 ) (2,374 ) (7,979 ) Net transfers — — — — Ending AUM $ 100,430 $ 3,462 $ 25,179 $ 129,070 (1) Includes institutional and retail share classe s, money market and Variable Insurance Products or VIP funds ( 2 ) Excludes assets managed for other proprietary product (i.e. funds of funds) in order to adjust for double counting. ( 3) Includes collective trust funds, wrap program accounts, UMAs, UCITS, private funds and non-U.S. domiciled pooled vehicles. ( 4) The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF. ( 5) The six months ended June 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF. June 30, 2021 AUM compared to March 31, 2021 AUM . At June 30, 2021, our total AUM was $161.9 billion, an increase of $7.6 billion, or 4.9%, from $154.3 billion at March 31, 2021, primarily driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million. 29 Table of Contents Net inflows into our Solutions platform and global / non-U.S. equity strategies of $2.0 billion and $0.5 billion, respectively, were partially offset by outflows from our fixed income and domestic equity strategies of $1.2 billion and $1.0 billion, respectively. June 30, 2021 AUM compared to December 31, 2020 AUM . Total AUM increased by $14.7 billion, or 10.0%, to $161.9 billion at June 30, 2021 compared to $147.2 billion at December 31, 2020. The increase in AUM was primarily due to positive market action of $15.4 billion and acquired assets of $547 million partially offset by net outflows of $1.0 billion and seed capital liquidation and fund closures of $275 million. Net inflows into our Solutions platform and global / non-U.S. equity strategies of $1.8 billion and $0.5 billion, respectively, were offset by outflows from our domestic equity strategies, fixed income strategies and money market and short-term assets of $2.1 billion, $0.9 billion and $0.3 million, respectively. GAAP Results of Operations The following table presents our GAAP results of operations for the three and six months ended June 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2021 2020 2021 2020 Revenue Investment management fees $ 168,033 $ 130,032 $ 328,317 $ 276,913 Fund administration and distribution fees 53,871 51,854 106,536 109,394 Total revenue 221,904 181,886 434,853 386,307 Expenses Personnel compensation and benefits 57,462 49,105 116,468 96,676 Distribution and other asset-based expenses 44,223 41,630 86,326 96,490 General and administrative 13,713 13,289 27,023 25,177 Depreciation and amortization 4,694 4,166 9,079 8,216 Change in value of consideration payable for acquisition of business 5,700 5,300 8,200 (200 ) Acquisition-related costs 422 (23 ) 258 (92 ) Restructuring and integration costs 422 2,605 2,475 3,603 Total operating expenses 126,636 116,072 249,829 229,870 Income from operations 95,268 65,814 185,024 156,437 Other income (expense) Interest income and other income (expense) 1,932 2,966 4,666 (1,206 ) Interest expense and other financing costs (6,155 ) (9,710 ) (13,000 ) (21,118 ) Gain (loss) on debt extinguishment (1,146 ) 137 (3,927 ) (917 ) Total other expense, net (5,369 ) (6,607 ) (12,261 ) (23,241 ) Income before income taxes 89,899 59,207 172,763 133,196 Income tax expense (20,629 ) (14,487 ) (38,291 ) (31,310 ) Net income $ 69,270 $ 44,720 $ 134,472 $ 101,886 Earnings per share of common stock Basic $ 1.02 $ 0.66 $ 1.98 $ 1.50 Diluted $ 0.93 $ 0.61 $ 1.81 $ 1.38 Weighted average number of shares outstanding Basic 67,776 67,821 67,769 67,806 Diluted 74,166 73,204 74,155 73,818 Dividends declared per share of common stock $ 0.12 $ 0.05 $ 0.21 $ 0.10 30 Table of Contents Investment Management Fees Three months ended June 30, 2021 compared to June 30, 2020 . Investment management fees increased by $38.0 million, or 29.2%, to $168.0 million for the three months ended June 30, 2021 from $130.0 million for the same period in 2020 due to an increase in average AUM over the comparable period. Average AUM was $158.5 billion for the three months ended June 30, 2021 compared to $128.9 billion for the same period in 2020. Six months ended June 30, 2021 compared to June 30, 2020 . Investment management fees increased by $51.4 million, or 18.6%, to $328.3 million for the six months ended June 30, 2021 from $276.9 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Average AUM was $154.8 billion and $136.5 billion, respectively, for the six months ended June 30, 2021 and 2020. Fund Administration and Distribution Fees Three months ended June 30, 2021 compared to June 30, 2020 . Fund administration and distribution fees increased by $2.0 million, or 3.9%, to $53.9 million for the three months ended June 30, 2021 from $51.9 million for the same period in 2020 due to an increase fund administration fees, partially offset by a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes. Six months ended June 30, 2021 compared to June 30, 2020 . Fund administration and distribution fees decreased by $2.9 million, or 2.6%, to $106.5 million for the six months ended June 30, 2021 from $109.4 million for the same period in 2020 due to the combination of a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes. Personnel Compensation and Benefits The following table presents the components of GAAP personnel compensation and benefits expense for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Salaries, payroll related taxes and employee benefits $ 22,770 $ 20,425 $ 47,971 $ 36,987 Incentive compensation 25,606 20,829 48,774 41,333 Sales-based compensation (1) 4,742 3,369 9,832 7,288 Equity awards granted to employees and directors (2) 4,344 3,887 9,891 9,880 Acquisition and transaction-related compensation — 595 — 1,188 Total personnel compensation and benefits expense $ 57,462 $ 49,105 $ 116,468 $ 96,676 (1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales. (2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards is recognized as compensation expense over the vesting period. Three months ended June 30, 2021 compared to June 30, 2020 . Personnel compensation and benefits were $57.5 million for the three months ended June 30, 2021, an increase of $8.4 million, or 17.0%, from $49.1 million for the same period in 2020 due to the combination of an increase in the headcount due to the launch of the new direct to investor digital platform and an increase in incentive compensation as a result of an increase in earnings over the comparable period. Incentive compensation and equity awards granted to employees and directors were $25.6 million and $4.3 million, respectively, for the three months ended June 30, 2021, compared to $20.8 million and $3.9 million, respectively, for the same period in 2020. Salaries, payroll related taxes and employee benefits were $22.8 million and $20.4 million, respectively, for the three months ended June 30, 2021 and 2020. Six months ended June 30, 2021 compared to June 30, 2020 . Personnel compensation and benefits increased by $19.8 million, or 20.5%, to $116.5 million for the six months ended June 30, 2021 from $96.7 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Salaries, payroll related taxes and employee benefits were $48.0 million and $37.0 million, respectively, for the six months ended June 30, 2021 and 2020. Incentive compensation and equity awards granted to employees and directors were $48.8 million and $9.9 million, respectively, for the six months ended June 30, 2021 compared to $41.3 million and $9.9 million, respectively, for the same period in 2020. 31 Table of Contents Distribution and Other Asset ‑Based Expenses The following table presents the components of distribution and other asset-based expenses for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Broker-dealer distribution fees $ 6,581 $ 5,343 $ 12,782 $ 11,451 Platform distribution fees 27,440 27,897 53,272 66,889 Sub-administration 4,293 3,206 8,384 7,288 Sub-advisory 3,102 2,822 6,432 6,059 Middle-office 2,807 2,362 5,456 4,803 Total distribution and other asset-based expenses $ 44,223 $ 41,630 $ 86,326 $ 96,490 Three months ended June 30, 2021 compared to June 30, 2020 . Distribution and other asset-based expenses are primarily based on AUM. For the three months ended June 30, 2021, distribution and other asset-based expenses were $44.2 million, an increase of $2.6 million, or 6.2%, from $41.6 million for the same period in 2020. The increase is primarily due to an increase in sub-administration, broker dealer distribution, and middle-office fees as a result of an increase in average AUM over the comparable period, partially offset by a beneficial change in asset mix of our underlying retail distribution platforms. Six months ended June 30, 2021 compared to June 30, 2020 . Distribution and other asset-based expenses were $86.3 million for the six months ended June 30, 2021, a decrease of $10.2 million, or 10.5%, from $96.5 million for the same period in 2020 primarily due to a change in asset mix of our underlying retail distribution platforms . General and Administrative Three months ended June 30, 2021 compared to June 30, 2020 . General and administrative expenses were $13.7 million for the three months ended June 30, 2021 compared to $13.3 million for the same period in 2020. The increase of $0.4 million, or 3.2%, was primarily due to increases in facility, technology and professional fees partially offset by a reduction in transition service agreement costs related to the USAA AMCO Acquisition, which ended in the fourth quarter of 2020. Six months ended June 30, 2021 compared to June 30, 2020 . For the six months ended June 30, 2020 and 2019, general and administrative expenses were $27.0 million and $25.2 million, respectively, for a year over year increase of $1.8 million, or 7.3%. The increase was due to the same factors as discussed above in the quarterly section . Depreciation and Amortization Three months ended June 30, 2021 compared to June 30, 2020 . Depreciation and amortization increased by $0.5 million, or 12.7%, to $4.7 million for the three months ended June 30, 2021 from $4.2 million for the same period in 2020, due to the addition of depreciation expense related to the launch of the Company’s new direct to investor digital platform, which went live in November 2020 . Six months ended June 30, 2021 compared to June 30, 2020 . Depreciation and amortization increased by $0.9 million, or 10.5%, to $9.1 million for the six months ended June 30, 2021 from $8.2 million for the same period in 2020, due to the same factors as discussed above in the quarterly section. Change in Value of Consideration Payable for Acquisition of Business Three months ended June 30, 2021 compared to June 30, 2020 . The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $5.7 million, resulting in a change in the estimated fair value of consideration payable of $5.7 million for the three months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable. Six months ended June 30, 2021 compared to June 30, 2020 . The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $8.2 million, resulting in a change in the estimated fair value of consideration payable of $8.2 million for the six months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable. 32 Table of Contents Acquisition ‑Related Costs Three months ended June 30, 2021 compared to June 30, 2020 . Acquisition-related costs for the three months ended June 30, 2021 were $422 thousand and ($23) thousand for the three months ended June 30, 2020. The June 30, 2021 acquisition related costs were related to legal fees and advisory services for potential acquisitions. Six months ended June 30, 2021 compared to June 30, 2020 . Acquisition-related costs for the six months ended June 30, 2021 and 2020 were $0.3 million and ($0.1) million, respectively. The increase for the six months ended June 30, 2021 was due to the same factors as discussed above in the quarterly section. Restructuring and Integration Costs Three months ended June 30, 2021 compared to June 30, 2012 . Restructuring and integration costs for the three months ended June 30, 2021 was $0.4 million and $2.6 million for the three months ended June 30, 2020. The decrease is primarily due to integration and conversion costs related to the USAA AMCO Acquisition in 2020. Six months ended June 30, 2021 compared to June 30, 2020 . Restructuring and integration costs were $2.5 million and $3.6 million, respectively, for the six months ended June 30, 2021 and 2020. The six months ended June 30, 2021 restructuring and integration costs were related to personnel restructuring within the direct to investor business compared to integration and conversion costs associated with the USAA AMCO Acquisition in 2020. Interest Income and Other Income (Expense) Three months ended June 30, 2021 compared to June 30, 2020 . Interest income and other income/(expense) was income of $1.9 million for the three months ended June 30, 2021 compared to income of $3.0 million for the same period in 2020. The income for the three months ended June 30, 2021 was primarily due to a $1.5 million increase in the net unrealized fair value of deferred compensation plan investments. The income for the three months ended June 30, 2020 was primarily due to a $2.6 million increase in the net unrealized fair value of deferred compensation plan investments. Six months ended June 30, 2021 compared to June 30, 2020 . For the six months ended June 30, 2021 and 2020, interest income and other income/(expense) was income of $4.7 million and expense of $1.2 million, respectively. The higher income for the six months ended June 30, 2021 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents. The expense for the six months ended June 30, 2020 was primarily due to a decrease in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents. Interest Expense and Other Financing Costs Three months ended June 30, 2021 compared to June 30, 2020 . Interest expense and other financing costs decreased $3.6 million to $6.2 million for the three months ended June 30, 2021, compared to $9.7 million for the same period in 2020 d ue to a decrease in interest payments as a result of a lower debt principal balance and lower average interest rate over the comparable period. Six months ended June 30, 2021 compared to June 30, 2020 . For the six months ended June 30, 2021 and 2020, interest expense and other financing costs were $13.0 million and $21.1 million, respectively. The year-over-year decrease is primarily due to the same factors as discussed above in the quarterly section. (Loss) Gain on Debt Extinguishment Three months ended June 30, 2021 compared to June 30, 2020 . (Loss) gain on debt extinguishment was a loss of $1.1 million for the three months ended June 30, 2021 compared to a gain of $0.1 million for the same period in 2020. During the quarter ended June 30, 2021, the Company paid down $57.0 million of debt through prepayments and wrote off $1.1 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. During the quarter ended June 30, 2020, the Company repurchased and retired outstanding debt below par in the open market and recognized a $1.0 million gain partially offset by $0.9 million in the write-off of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement. Six months ended June 30, 2021 compared to June 30, 2020 . Loss on debt extinguishment was $3.9 million for the six months ended June 30, 2021, due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal under the 2019 Credit Agreement. The expense for the six months ended June 30, 2020 was due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal partially offset by gains recognized on open market debt repurchases and retirements below par . 33 Table of Contents Income Tax Expense Three months ended June 30, 2021 compared to June 30, 2020 . The effective tax rate for the three months ended June 30, 2021 and 2020 was 22.9% and 24.5%, respectively. The decrease in the effective tax rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020. Six months ended June 30, 2021 compared to June 30, 2020 . For the six months ended June 30, 2021 and 2020, the effective tax rate was 22.2% and 23.5%, respectively. The decrease in the effective rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020. Refer to Note 8, Income Taxes, for further details on our income taxes. Supplemental Non‑GAAP Financial Information We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income. The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 69,270 $ 44,720 $ 134,472 $ 101,886 Income tax expense (20,629 ) (14,487 ) (38,291 ) (31,310 ) Income before income taxes 89,899 59,207 172,763 133,196 Interest expense (1) 6,086 8,267 13,396 18,795 Depreciation (2) 1,524 746 2,770 1,630 Other business taxes (3) 524 219 898 (3,077 ) Amortization of acquisition-related intangible assets (4) 3,171 3,420 6,309 6,586 Stock-based compensation (5) 3,124 3,068 7,760 8,440 Acquisition, restructuring and exit costs (6) 6,544 10,105 10,933 8,563 Debt issuance costs (7) 1,304 1,312 4,097 3,701 Losses from equity method investments (8) 65 — 157 — Adjusted EBITDA $ 112,241 $ 86,344 $ 219,083 $ 177,834 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 69,270 $ 44,720 $ 134,472 $ 101,886 Adjustments to reflect the operating performance of the Company: i. Other business taxes (3) 524 219 898 (3,077 ) ii. Amortization of acquisition-related intangible assets (4) 3,171 3,420 6,309 6,586 iii. Stock-based compensation (5) 3,124 3,068 7,760 8,440 iv. Acquisition, restructuring and exit costs (6) 6,544 10,105 10,933 8,563 v. Debt issuance costs (7) 1,304 1,312 4,097 3,701 Tax effect of above adjustments (9) (3,667 ) (4,531 ) (7,499 ) (6,053 ) Adjusted Net Income $ 80,270 $ 58,313 $ 156,970 $ 120,046 Tax benefit of goodwill and acquired intangibles ( 10) $ 6,918 $ 6,745 $ 13,836 $ 13,473 Adjustments made to GAAP Net Income to calculate Adjusted EBITDA and Adjusted Net Income, as applicable, are: (1) Adding back interest paid on debt and other financing costs, net of interest income. (2) Adding back depreciation on property and equipment. (3) Adding back other business taxes. (4) Adding back amortization expense on acquisition‑related intangible assets. 34 Table of Contents (5) Adding back stock‑based compensation associated with equity awards issued from pools created in connection with the management‑led buyout and various acquisitions and as a result of equity grants related to the IPO. (6) Adding back direct incremental costs of acquisitions, including restructuring costs. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Acquisition-related costs $ 422 $ (23 ) $ 258 $ (92 ) Restructuring and integration costs 422 2,605 2,475 3,603 Change in value of consideration payable for acquisition of business 5,700 5,300 8,200 (200 ) General and administrative — 1,628 — 4,064 Personnel compensation and benefits — 595 — 1,188 Total acquisition, restructuring and exit costs $ 6,544 $ 10,105 $ 10,933 $ 8,563 (7) Adding back debt issuance costs. ( 8 ) We adjust for earnings/losses on equity method investments. ( 9 ) Subtracting an estimate of income tax expense applied to the sum of the adjustments above. ( 10 ) Represents the tax benefits associated with deductions allowed for intangible assets and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangible assets with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures. Liquidity and Capital Resources Our primary uses of cash relate to repayment of our debt obligations, funding of acquisitions and working capital needs, repurchasing of shares and payment of dividends, which are all expected to be met through cash generated from our operations and available capital resources. We cannot predict the duration or scope of the COVID-19 pandemic, its impact on our business, and the potential negative financial impact to our results, but the Company has actively positioned itself so that our cash flows from operations and financing sources will be sufficient to meet our needs. During the period of uncertainty related to the COVID-19 pandemic, we will continue to monitor our liquidity. The following table shows our liquidity position as of June 30, 2021 and December 31, 2020. June 30, December 31, (in thousands) 2021 2020 Cash and cash equivalents $ 31,622 $ 22,744 Accounts and other receivables 98,684 88,182 Undrawn commitment on revolving credit facility (1) 100,000 100,000 Accounts and other payables (90,038 ) (89,422 ) ( 1 ) The balance at June 30, 2021 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location. We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consists primarily of investment management fees that have been earned but not yet received from clients, income and other taxes receivable, and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to assess collectability. We continue to actively monitor the impact of the COVID-19 pandemic on the collectability of certain receivables. We maintained a $100.0 million revolving credit facility at June 30, 2021 and December 31, 2020 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of June 30, 2021 and December 31, 2020. 2019 Credit Agreement and 2020 and 2021 Debt Repricing 35 Table of Contents In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. For the three and six months ended June 30, 2021, the Company reduced outstanding debt by $57.0 million and $ 107 .0 million , respectively . Subsequent to June 30 , 2021, the Company reduced outstanding debt by $3 5 .0 million, for a total debt reduction of $4 53 .8 million since July 1, 2019. As of June 30 , 2021, we were in compliance with our financial performance covenant. Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement. On January 17, 2020, the Company entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. The Company refinanced the 2019 term loans for a reduced applicable margin on LIBOR of 75 basis points. After the January 2020 repricing, the applicable margin on LIBOR was 2.50%, compared to 3.25% under the 2019 term loans. On February 18, 2021, the Company entered into the Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement, as amended, with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $755.7 million (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 1, 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the First Amendment. Refer to Note 9, Debt, for further information on the repricing. 2020 Swap Transaction On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction (“Swap”) to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. At June 30, 2021, the $450 million notional value Swap had a fair value of $0.3 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2021, the Company recognized a loss, net of tax, of $3.0 million and income of $7.8 million, respectively, in accumulated other comprehensive income (loss). For the three and six months ended June 30, 2021, the Company reclassified a loss of $0.9 million and $1.7 million, respectively, from accumulated other comprehensive income (loss) to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 14, Derivatives, for further information on the Swap. Capital Requirements Victory Capital Services is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents. Cash Flows The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows: Six Months Ended June 30, (in thousands) 2021 2020 Net cash provided by operating activities $ 164,172 $ 120,911 Net cash used in investing activities (7,317 ) (6,931 ) Net cash used in financing activities (147,970 ) (95,831 ) Operating Activities – Cash provided by operating activities during the six months ended June 30, 2021 was $164.2 million, compared to $120.9 million of cash provided by operating activities for the same period in 2020. The $43.3 million increase in cash provided by operating activities was primarily due to a $32.6 million and $10.9 million increase in net income and non-cash items. Cash provided by operating activities during the six months ended June 30, 2020 was $120.9 million and comprised of $101.9 million and $34.9 million of cash provided by net income and non-cash items, partially offset by $15.8 million in working capital source of cash. Investing Activities – Cash used in investing activities during the six months ended June 30, 2021 was $7.3 million and consisted of property and equipment purchases of $5.6 million and $1.5 million of net trading activity. 36 Table of Contents Cash used in investing activities during the six months ended June 30, 2020 was $6.9 million and consisted of property and equipment purchases of $5.3 million and $1.6 million of net trading activity. Financing Activities – Cash used in financing activities during the six months ended June 30, 2021 was $148.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $107.0 million, $17.7 million, $14.6 million, and $8.6 million, respectively. Cash used in financing activities during the six months ended June 30, 2020 was $95.8 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $70.3 million, $13.1 million, $7.0 million, and $6.1 million, respectively. Contractual Obligations On February 18, 2021, the Company entered into the Second Amendment to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company repriced its Term Loan, lowering the interest rate spread by 25 basis points, from 2.50% over LIBOR, to 2.25% over LIBOR. For the three and six months ended June 30, 2021, the Company recorded an increase of $5.7 million and $8.2 million, respectively, in the USAA AMCO Acquisition contingent payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing. During the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period. A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers at June 30, 2021. There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2020. Off‑Balance Sheet Arrangements In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest. The Company announced the initiation of quarterly cash dividends in August 2019. Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests. As of June 30, 2021 and December 31, 2020, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million, which was not recorded as a liability as of the balance sheet date. A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest. On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood and made a capital contribution of $1.5 million in cash. Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company has commitments to contribute additional capital of $4.5 million to Alderwood and $50 million to a private fund to be launched by Alderwood, upon the satisfaction of certain conditions. Until these conditions are satisfied, the Company does not have an obligation to contribute the additional capital and has not met the recognition criteria for a liability. On March 8, 2021, the Company announced that one of the conditions had been met. Alderwood Capital had received authorization from the Financial Conduct Authority of the United Kingdom and Alderwood’s private fund had been formally launched to investors. Refer to Note 15, Equity Method Investment, for further discussion regarding the investment . Critical Accounting Policies and Estimates Our consolidated financial statements and the notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our Annual Report on Form 10-K. 37 Table of Contents