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. Objective The objective of this section of the Quarterly Report on Form 10-Q is intended to provide a discussion and analysis, from management’s perspective, of the key performance indicators and material information necessary to assess our financial condition and results of operations for the three months ended March 31, 2022 and 2021 and cash flows for the three months ended March 31, 2022 and 2021. In addition, we also discuss the Company’s contractual and off-balance sheet arrangements. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes 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, 2021. 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, 2021. Overview Our Business – Victory is a diversified global asset management firm with $178.1 billion in AUM as of March 31, 2022. The Company operates a next-generation business model combining boutique investment qualities with the benefits of an integrated, centralized operating and distribution platform. The Company provides specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With 12 autonomous Investment Franchises and a Solutions Platform, Victory offers a wide array of investment products, including actively and passively managed mutual funds, rules-based and active ETFs, institutional separate accounts, VIPs, ESG and impact investment strategies, alternative investments, private closed end funds, and a 529 Education Savings Plan. Victory Capital’s strategies are also offered through third-party investment products, including mutual funds, third-party ETF model strategies, retail SMAs and UMAs through wrap account programs, CITs, and UCITs. As of March 31, 2022, our Franchises and our Solutions Platform collectively managed a diversified set of 129 investment strategies for a wide range of institutional and retail clients and direct investors. Franchises – Our Franchises are largely operationally integrated but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our largely 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-asset, multi-manager, quantitative, rules-based, factor-based, and customized portfolios. These strategies are designed to achieve specific return characteristics, with products that include values-based and thematic outcomes and exposures. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds, UMA accounts, rules-based and active ETFs under our VictoryShares ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Professionals within our institutional and retail distribution channels, direct 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 investor business serves the investment needs of clients including USAA members, the military community, and other individual clients. We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $178.1 billion at March 31, 2022. 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 investor channels with deep penetration. WestEnd Acquisition (the “WestEnd Acquisition”) – On December 31, 2021, the Company completed the acquisition of 100% of the equity interests of WestEnd pursuant to the WestEnd purchase agreement (as amended, the “WestEnd Purchase Agreement”), resulting in WestEnd becoming the Company’s twelfth investment franchise. Founded in 2004, and headquartered in Charlotte, NC, WestEnd provides financial advisors with a turnkey, core model allocation strategies serving as holistic solutions and complementary sources of alpha. The firm offers four primary ETF strategies and one large cap core strategy, all in tax efficient SMA structures. At December 31, 2021, the WestEnd acquired assets totaled $19.3 billion. The WestEnd acquired assets had no economic impact on operations in 2021 and no effect on asset flows, average assets, revenues or earnings in the full-year period ended December 31, 2021. 29 Table of Contents The aggregate purchase price (the “WestEnd Purchase Price”) for the WestEnd Acquisition is estimated at $716.1 million, net of cash acquired, which includes (i) $475.8 million in cash paid at closing (the “WestEnd Closing”) net of cash acquired plus the acquisition date value of contingent payments due to sellers of $239.7 million plus an estimated $0.6 million payable in cash in the first half of 2022 for net working capital adjustments. The contingent earn-out payments are based on net revenue of the WestEnd business during each of the first four years following the WestEnd Closing, subject to certain “catch-up” provisions over a five and one half year period following the WestEnd Closing. A maximum of $320.0 million ($80.0 million per year) in earn-out payments may be paid. The estimated fair value of contingent consideration payable to sellers was estimated at $239.0 million at March 31, 2022 as compared to $239.7 million at December 31, 2021 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The decrease in the liability of $0.7 million for the three months ended March 31, 2022 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. Refer to Note 4, Acquisitions, for further details on the WestEnd Acquisition. NEC Acquisition (the “NEC Acquisition”) – On November 1, 2021, the Company completed the acquisition of 100% of the equity interests in NEC, resulting in NEC becoming the Company’s eleventh investment franchise. Founded in 2004 and based in Hanover, NH, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies. At November 1, 2021, the NEC AUM that was acquired totaled $795.0 million. The estimated purchase price for the NEC Acquisition is $63.1 million, which includes $62.8 million in cash paid at closing, net of cash acquired, and $0.3 million paid in cash in March 2022 for net working capital adjustments. Under the terms of the purchase agreement, the Company will pay up to an additional $35.0 million in cash based on net revenue growth over a six year period following the closing date. Refer to Note 4, Acquisitions, for further details on the NEC Acquisition. THB Acquisition (the “THB Acquisition”) – On March 1, 2021, the Company completed the acquisition of certain assets of THB, resulting in THB becoming the Company’s tenth investment franchise. The acquisition expanded and diversified our investment platform, adding capacity constrained asset classes. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap assets classes, including U.S., global and international strategies. 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 ESG considerations 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. T HB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support. Refer to Note 4, Acquisitions, for further details on the THB Acquisition. USAA AMCO Acquisition – On July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management (“USAA Adviser”) and VCTA, formally known as the USAA Transfer Agency Company. The acquisition expanded and diversified the Company’s investment platform and increased 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 the fourth quarter of 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment. In the fourth quarter of 2021, we paid $37.5 million in cash to sellers for the second annual contingent payment. The estimated fair value of contingent consideration payable to sellers was estimated at $66.0 million at March 31, 2022 as compared to $68.8 million at December 31, 2021 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The decrease in the liability of $2.8 million for the three months ended March 31, 2022 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations. Refer to Note 4, Acquisitions, for further details on the USAA AMCO Acquisition. Alderwood - 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. 30 Table of Contents On January 31, 2022, the Company signed an amendment to the Alderwood members’ agreement (“Alderwood Amendment”) and made a $1.5 million capital contribution to Alderwood. The Alderwood Amendment reduced the Company’s commitment to contribute additional capital to Alderwood from $4.5 million to $3.0 million. The Company also has commitments to contribute additional capital of $50.0 million to a private fund to be launched by Alderwood, subject to certain terms and conditions, including obtaining an agreed amount of aggregate legally binding commitments from investors in the private fund. Refer to Note 15, Equity Method Investment, for further discussion regarding the investment. 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. We believe that doing our part to maintain the health and welfare of our employees is a critical element for achieving commercial success. As such, the Company has taken a proactive approach to addressing the ongoing COVID-19 pandemic’s impact on our employees in order to protect their health, encouraging and in some instances requiring working from home, and balancing these steps with a carefully considered return to office policy that complies with respective local guidelines for each of our offices. Business Highlights Assets under management : • AUM at March 31, 2022 decreased by $5.6 billion, or 3.0%, to $178.1 billion from $183.7 billion at December 31, 2021, driven by negative market action of $8.3 billion and $0.3 billon of net transfers partially offset by net inflows of $3.0 billion. Total gross flows for the first quarter were $11.1 billion, including long-term gross flows of $11.0 billion. • AUM at March 31, 2022 and 2021 was $178.1 billion and $154.3 billion, respectively. We generated $11.1 billion in gross sales including $11.0 billion in long-term gross sales and $3.0 billion in total net inflows for the three months ended March 31, 2022 compared to $6.8 billion in gross flows inclusive of $6.7 billion in long-term gross sales and $1.2 billion in total net outflows for the same period in 2021. We experienced $8.3 billion in negative market action for the three months ended March 31, 2022 compared to $7.7 billion in market appreciation for the same period in 2021. Investment performance : • 44 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 65% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 68% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 78% over a three-year period, 83% over a five-year period and 79% over a ten-year period. On an equal-weighted basis, 69% of our strategies have outperformed their benchmarks over a one-year period, 64% over a three-year period, 69% over a five-year period and 72% over a ten-year period. Financial highlights : • Total revenue for the three months ended March 31, 2022 was $230.0 million compared to $212.9 million for the same period in 2021. • Net income was $71.3 million for the three months ended March 31, 2022 compared to $65.2 million for the same period in 2021. • Adjusted EBITDA was $114.4 million for the three months ended March 31, 2022, or 49.7% of revenue, compared to $106.8 million, or 50.2% of revenue, for the same period in 2021. 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 $90.4 million for the three months ended March 31, 2022 compared to $83.6 million for the three months ended March 31, 2021. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income. 31 Table of Contents Key Performance Indicators The following table is a summary of key performance indicators utilized by management to assess results of operations: Three Months Ended March 31, ($ in millions, except for basis points and percentages) 2022 2021 AUM at period end $ 178,098 $ 154,331 Average AUM 176,863 151,090 Gross flows 11,136 6,833 Net short term flows (53 ) (191 ) Net long term flows 3,043 (983 ) Net flows 2,990 (1,174 ) Total revenue 230.0 212.9 Revenue on average AUM 53 bps 57 bps Net income 71.3 65.2 Adjusted EBITDA (1) 114.4 106.8 Adjusted EBITDA Margin (2) 49.7 % 50.2 % Adjusted Net Income (1) 81.1 76.7 Tax benefit of goodwill and acquired intangibles (3) 9.3 6.9 ( 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: As of March 31, (in millions) 2022 2021 (1) Solutions $ 58,656 $ 34,709 Fixed Income 33,071 36,813 U.S. Mid Cap Equity 30,543 29,156 U.S. Small Cap Equity 18,489 20,230 Global / Non-U.S. Equity 15,654 14,894 U.S. Large Cap Equity 14,548 14,448 Alternative Investments 4,025 709 Total Long-Term Assets $ 174,985 $ 150,958 Money Market & Short-Term Assets 3,113 3,373 Total $ 178,098 $ 154,331 32 Table of Contents (1) Beginning in January 2022, the Company’s “Other” asset class has been categorized to Solutions, Fixed Income, Global / Non-U.S. Equity, and Alternative Investments based on the underlying investment strategy. Additionally, all assets managed using alternative investment strategies are now included in the Company’s Alternative Investments asset class. Prior-period figures have been adjusted accordingly. 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. Alternative Total Market / (in millions) Equity Equity Income Equity Equity Solutions Investments Long-term Short-term Total For the Three Months Ended March 31, 2022 Beginning AUM $ 30,578 $ 20,094 $ 35,154 $ 15,766 $ 16,050 $ 60,364 $ 2,548 $ 180,554 $ 3,100 $ 183,654 Gross client cash inflows 2,433 1,118 1,604 126 1,241 2,802 1,688 11,012 124 11,136 Gross client cash outflows (1,834 ) (1,352 ) (2,149 ) (383 ) (618 ) (1,475 ) (157 ) (7,969 ) (176 ) (8,145 ) Net client cash flows 599 (235 ) (545 ) (258 ) 624 1,327 1,531 3,043 (53 ) 2,990 Market appreciation / (depreciation) (655 ) (1,381 ) (1,541 ) (1,083 ) (1,096 ) (2,470 ) (28 ) (8,255 ) 5 (8,250 ) Realizations and distributions — — — — — — (30 ) (30 ) — (30 ) Net transfers 21 11 3 123 77 (565 ) 3 (327 ) 61 (266 ) Ending AUM $ 30,543 $ 18,489 $ 33,071 $ 14,548 $ 15,654 $ 58,656 $ 4,025 $ 174,985 $ 3,113 $ 178,098 For the Three Months Ended March 31, 2021 (1) Beginning AUM $ 26,230 $ 18,368 $ 36,639 $ 14,230 $ 14,141 $ 33,676 $ 422 $ 143,706 $ 3,534 $ 147,241 Gross client cash inflows 1,741 1,072 2,025 98 646 839 304 6,726 108 6,833 Gross client cash outflows (1,854 ) (1,696 ) (1,705 ) (432 ) (673 ) (1,323 ) (26 ) (7,709 ) (299 ) (8,007 ) Net client cash flows (112 ) (624 ) 320 (334 ) (26 ) (484 ) 278 (983 ) (191 ) (1,174 ) Market appreciation / (depreciation) 3,032 2,024 (219 ) 604 754 1,516 8 7,720 (2 ) 7,718 Net transfers 6 461 73 (52 ) 25 1 1 515 32 547 Ending AUM $ 29,156 $ 20,230 $ 36,813 $ 14,448 $ 14,894 $ 34,709 $ 709 $ 150,958 $ 3,373 $ 154,331 (1) Beginning in January 2022, the Company’s “Other” asset class has been categorized to Solutions, Fixed Income, Global / Non-U.S. Equity, and Alternative Investments based on the underlying investment strategy. Additionally, all assets managed using alternative investment strategies are now included in the Company’s Alternative Investments asset class. Prior-period figures have been adjusted accordingly. The following table presents our AUM by distribution channel as of the dates indicated: As of March 31, 2022 2021 (in millions) Amount % of total Amount % of total Retail $ 64,297 36 % $ 41,385 27 % Investor 63,304 36 % 68,477 44 % Institutional 50,498 28 % 44,469 29 % Total AUM (1) $ 178,098 100 % $ 154,331 100 % (1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment. 33 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 March 31, 2022 Beginning AUM $ 124,142 $ 4,871 $ 54,641 $ 183,654 Gross client cash inflows 6,590 543 4,003 11,136 Gross client cash outflows (6,383 ) (69 ) (1,694 ) (8,145 ) Net client cash flows 207 474 2,308 2,990 Market appreciation (depreciation) (5,964 ) (99 ) (2,187 ) (8,250 ) Realizations and distributions — — (30 ) (30 ) Net transfers (266 ) — — (266 ) Ending AUM $ 118,119 $ 5,246 $ 54,733 $ 178,098 Three Months Ended March 31, 2021 Beginning AUM $ 112,998 $ 3,976 $ 30,267 $ 147,241 Gross client cash inflows 5,465 240 1,128 6,833 Gross client cash outflows (6,293 ) (117 ) (1,598 ) (8,007 ) Net client cash flows (828 ) 123 (469 ) (1,174 ) Market appreciation (depreciation) 5,575 343 1,801 7,718 Net transfers 85 — 462 547 Ending AUM $ 117,830 $ 4,441 $ 32,061 $ 154,331 (1) Includes institutional and retail share classe s, money market and Variable Insurance Products or VIP funds. (2) Represents only ETF assets held by third parties. Excludes ETF assets held by other Victory Capital products. (3) Includes collective trust funds, wrap program accounts, UMAs, UCITS, private funds and non-U.S. domiciled pooled vehicles. March 31, 2022 AUM compared to December 31, 2021 AUM. At March 31, 2022, our total AUM was $178.1 billion, a decrease of $5.6 billion, or 3.0%, from $183.7 billion at December 31, 2021, primarily due to negative market action of $8.3 billion partially offset by net inflows of $3.0 billion. Net inflows were driven by $1.5 billion into our Alternative investments platform, $1.3 billion in our Solutions platform, $0.6 billion in our global/non-U.S. equity strategies and $0.6 billion in our U.S. mid cap equity strategies partially offset by net outflows in our fixed income and U.S. large cap equity strategies of $0.5 billion and $0.3 billion, respectively. 34 Table of Contents GAAP Results of Operations The following table presents our GAAP results of operations for the three months ended March 31, 2022 and 2021. Three Months Ended March 31, (in thousands, except per share data) 2022 2021 Revenue Investment management fees $ 179,465 $ 160,284 Fund administration and distribution fees 50,554 52,665 Total revenue 230,019 212,949 Expenses Personnel compensation and benefits 64,901 59,006 Distribution and other asset-based expenses 43,584 42,103 General and administrative 12,762 13,310 Depreciation and amortization 10,607 4,385 Change in value of consideration payable for acquisition of business (3,500 ) 2,500 Acquisition-related costs 117 (164 ) Restructuring and integration costs 9 2,053 Total operating expenses 128,480 123,193 Income from operations 101,539 89,756 Other income (expense) Interest income and other income (expense) (207 ) 2,734 Interest expense and other financing costs (9,233 ) (6,845 ) Loss on debt extinguishment (1,555 ) (2,781 ) Total other income (expense), net (10,995 ) (6,892 ) Income before income taxes 90,544 82,864 Income tax expense (19,271 ) (17,662 ) Net income $ 71,273 $ 65,202 Earnings per share of common stock Basic $ 1.04 $ 0.96 Diluted $ 0.97 $ 0.88 Weighted average number of shares outstanding Basic 68,747 67,761 Diluted 73,652 74,108 Dividends declared per share of common stock $ 0.25 $ 0.09 Investment Management Fees Three months ended March 31, 2022 compared to March 31, 2021 . Investment management fees increased by $19.2 million, or 12.0%, to $179.5 million for the three months ended March 31, 2022 from $160.3 million for the same period in 2021 due to an increase in average AUM year over year. Average AUM was $176.9 billion for the three months ended March 31, 2022 compared to $151.1 billion for the same period in 2021. Fund Administration and Distribution Fees Three months ended March 31, 2022 compared to March 31, 2021 . Fund administration and distribution fees decreased by $2.1 million, or 4.0%, to $50.6 million for the three months ended March 31, 2022 from $52.7 million for the same period in 2021 mostly due to a decrease in fund administration fee as well as decrease in transfer agent fees . 35 Table of Contents Personnel Compensation and Benefits The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, (in thousands) 2022 2021 Salaries, payroll related taxes and employee benefits $ 23,712 $ 25,201 Incentive compensation 26,143 23,168 Sales-based compensation (1) 8,571 5,090 Equity awards granted to employees and directors (2) 3,945 5,547 Acquisition and transaction-related compensation 2,530 — Total personnel compensation and benefits expense $ 64,901 $ 59,006 (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 March 31, 2022 compared to March 31, 2021 . Personnel compensation and benefits were $64.9 million for the first quarter of 2022, an increase of $5.9 million, or 10.0%, from $59.0 million for the same period in 2021 attributable to an increase in headcount and acquisition and transaction-related compensation as a result of the WestEnd and NEC acquisitions in the fourth quarter of 2021. Also contributing was an increase in variable costs such as sales commissions and the incentive compensation pool for employees. Distribution and Other Asset‑Based Expenses The following table presents the components of distribution and other asset-based expenses for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, (in thousands) 2022 2021 Broker-dealer distribution fees $ 6,165 $ 6,201 Platform distribution fees 26,617 25,832 Sub-administration 4,226 4,091 Sub-advisory 3,885 3,330 Middle-office 2,691 2,649 Total distribution and other asset-based expenses $ 43,584 $ 42,103 Three months ended March 31, 2022 compared to March 31, 2021 . Distribution and other asset-based expenses were $43.6 million for the three months ended March 31, 2022, compared to $42.1 million for the same period in 2021. The increase of $1.5 million, or 3.5% was primarily due to an increase in AUM partially offset by a change in vehicle mix and our underlying distribution platforms. General and Administrative Three months ended March 31, 2022 compared to March 31, 2021 . General and administrative expenses were $12.8 million for the three months ended March 31, 2022 compared to $13.3 million for the same period in 2021. The decrease of $0.5 million, or 4.1%, was primarily due to integration-related expenses in the first quarter of 2021 and no such expenses in 2022. Depreciation and Amortization Three months ended March 31, 2022 compared to March 31, 2021 . Depreciation and amortization increased by $6.2 million, or 141.9%, to $10.6 million for the three months ended March 31, 2022 from $4.4 million for the same period in 2021, primarily due to the increase in amortization expense related to definite-lived intangible assets in connection with the WestEnd and NEC acquisitions . Change in Value of Consideration Payable for Acquisition of Business Three months ended March 31, 2022 compared to March 31, 2021 . The change in value of consideration payable for acquisition of business decreased $6.0 million as a result of decreases of $2.8 million and $0.7 million in the fair value of the contingent consideration associated with the USAA AMCO and WestEnd Acquisitions, respectively, for the three months ended March 31, 2022 compared to an increase of $2.5 million associated with the USAA AMCO Acquisition for the three months ended March 31, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable . 36 Table of Contents Acquisition ‑Related Costs Three months ended March 31, 2022 compared to March 31, 2021 . Acquisition-related costs were relatively flat at $0.1 million and ($0.2) million for the three months ended March 31, 2022 and 2021, respectively. Restructuring and Integration Costs Three months ended March 31, 2022 compared to March 31, 2021 . Restructuring and integration costs for the three months ended March 31, 2022 and 2021 were $9 thousand and $2.1 million, respectively. The decrease was due to personnel restructuring within the direct to investor business during the first quarter of 2021. Interest Income and Other Income/(Expense) Three months ended March 31, 2022 compared to March 31, 2021 . Interest income and other income/(expense) was expense of $0.2 million for the three months ended March 31, 2022 compared to income of $2.7 million for the same period in 2021. The expense for the three months ended March 31, 2022 was due to a $0.3 million reduction in the net unrealized fair value of deferred compensation plan investments compared to a $2.6 million increase in the net unrealized fair value of deferred compensation plan investments for the same period in 2021. Interest Expense and Other Financing Costs Three months ended March 31, 2022 compared to March 31, 2021 . Interest expense and other financing costs increased $2.4 million to $9.2 million for the three months ended March 31, 2022, compared to $6.8 million for the same period in 2021 due to an increase in interest payments as a result of a higher debt principal balance over the comparable period. Loss on Debt Extinguishment Three months ended March 31, 2022 compared to March 31, 2021 . Loss on debt extinguishment was $1.6 million and $2.8 million, respectively, for the three months ended March 31, 2022 and 2021. The decrease of $1.2 million is due to the one-time write-off of debt issuance and debt discount costs associated with the 2021 term loan repricing in February 2021 compared to no such write-off for the three months ended March 31, 2022. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement. Income Tax Expense Three months ended March 31, 2022 compared to March 31, 2021 . The effective tax rate for the three months ended March 31, 2022 and 2021 was flat at 21.3% and 21.3%, respectively. 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 March 31, (in thousands) 2022 2021 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 71,273 $ 65,202 Income tax expense (19,271 ) (17,662 ) Income before income taxes $ 90,544 $ 82,864 Interest expense (1) 8,724 7,310 Depreciation (2) 1,954 1,246 Other business taxes (3) 590 374 Amortization of acquisition-related intangible assets (4) 8,656 3,138 Stock-based compensation (5) 2,633 4,636 Acquisition, restructuring and exit costs (6) (844 ) 4,389 Debt issuance costs (7) 2,061 2,793 Earnings/losses from equity method investments (8) 57 92 Adjusted EBITDA $ 114,375 $ 106,842 37 Table of Contents Three Months Ended March 31, (in thousands) 2022 2021 Reconciliation of non-GAAP financial measures: Net income (GAAP) $ 71,273 $ 65,202 Adjustments to reflect the operating performance of the Company: i. Other business taxes (3) 590 374 ii. Amortization of acquisition-related intangible assets (4) 8,656 3,138 iii. Stock-based compensation (5) 2,633 4,636 iv. Acquisition, restructuring and exit costs (6) (844 ) 4,389 v. Debt issuance costs (7) 2,061 2,793 Tax effect of above adjustments (9) (3,274 ) (3,832 ) Adjusted Net Income $ 81,095 $ 76,700 Tax benefit of goodwill and acquired intangibles (10) $ 9,322 $ 6,918 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. (5) A dding back share-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 acquisition s, including restructuring costs. Three Months Ended March 31, (in thousands) 2022 2021 Acquisition-related costs $ 117 $ (164 ) Restructuring and integration costs 9 2,053 Change in value of consideration payable for acquisition of business (3,500 ) 2,500 General and administrative — — Personnel compensation and benefits 2,530 — Total acquisition, restructuring and exit costs $ (844 ) $ 4,389 (7) Adding back debt issuance costs. ( 8 ) We adjust for losses (earnings) 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 continue to monitor our liquidity. 38 Table of Contents The following table shows our liquidity position as of March 31 , 20 2 2 and December 31, 20 2 1 . March 31, December 31, (in thousands) 2022 2021 Cash and cash equivalents $ 38,550 $ 69,533 Accounts and other receivables 93,713 104,305 Undrawn commitment on credit facility (1) 100,000 100,000 Accounts and other payables (90,975 ) (121,057 ) (1) The balance at March 31, 2022 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 March 31, 2022 and December 31, 2021 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of March 31, 2022 and December 31, 2021. 2021 Debt Repricing and 2021 Incremental Term Loans On February 18, 2021, the Company entered into the Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement, dated as of July 1, 2019 (as amended by the First Amendment to Credit Agreement, dated as of January 17, 2020) , 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 term loans with replacement term loans in an aggregate principal amount of $755.7 (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the 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. On December 31, 2021, the Company entered into the Third Amendment to the Credit Agreement (the “Third Amendment”), dated as of July 1, 2019 (as amended by the First Amendment to Credit Agreement, dated as of January 17, 2020, and the Second Amendment to Credit Agreement, dated as of February 18, 2021) with the guarantors party thereto, Barclays Bank PLC, as administrative agent, and the lenders party thereto from time to time. Pursuant to the Third Amendment, the Company obtained incremental term loans (the “2021 Incremental Term Loans”) in an aggregate principal amount of $505.0 million and used the proceeds to fund the WestEnd Acquisition of 100% of the equity interests of WestEnd and to pay fees and expenses incurred in connection therewith. The 2021 Incremental Term Loans will mature in 2028 and will bear interest at an annual rate equal to, at the option of the Company, either LIBOR (adjusted for reserves and subject to a 50 basis point floor) plus a margin of 2.25% or an alternate base rate plus a margin of 1.25%. The 2021 Incremental Term Loans will amortize at a rate of 1.00% per annum. Repayments of outstanding term loans under the 2019 Credit Agreement totaled $70.0 million for the three months ended March 31, 2022. Subsequent to March 31 2022, the Company reduced outstanding debt on the 2021 Incremental Term Loans by $20.0 million through prepayments. Refer to Note 4, Acquisitions, for further details on the WestEnd Acquisition, as well as Note 11, Debt, for further information on the 2019 Credit Agreement. 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. Pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25% resulting in a new fixed rate of 3.215% on the $450 million of Term Loan subject to the Swap. At March 31, 2022, the $450 million notional value Swap had a fair value of $29.2 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three months ended March 31, 2022 and 2021, the Company reclassified losses of $0.9 million and $0.8 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. Contingent Consideration At March 31, 2022, the Company had $305.0 million in contingent consideration that is estimated to be payable over the next two and four years resulting from the USAA AMCO and WestEnd Acquisitions, respectively. For the three months ended March 31, 2022, the Company recorded decreases of $2.8 million and $0.7 million in contingent payment liabilities associated with the USAA AMCO Acquisition and WestEnd Acquisitions, respectively, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. 39 Table of Contents At March 31, 2022, the estimated fair value of the USAA AMCO Acquisition payments was $66.0 million, and a maximum of $75.0 million in contingent consideration ($37.5 million per year for the remaining 2 years of the earn out period) is potentially payable to sellers. At March 31, 2022, the estimated fair value of the WestEnd Acquisition contingent payments was $239.0 million, and a maximum of $320.0 million in contingent consideration ($80.0 million per year for the remaining four years of the earn out period) is potentially payable to sellers. 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, 2021. 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: Three Months Ended March 31, (in thousands) 2022 2021 Net cash provided by operating activities $ 74,813 $ 79,634 Net cash used in investing activities (4,119 ) (1,140 ) Net cash used in financing activities (101,645 ) (70,834 ) Operating Activities – Cash provided by operating activities during the three months ended March 31, 2022 was $74.8 million, compared to $79.6 million of cash provided by operating activities for the same period in 2021. The $4.8 million decrease in cash provided by operating activities was primarily due to an $10.3 million increase in net working capital items partially offset by a $6.1 million increase in net income. Cash provided by operating activities during the three months ended March 31, 2021 was $79.6 million and consisted of $65.2 million of net income and $23.8 million of non-cash items, partially offset by $9.3 million in working capital items. Investing Activities – Cash used in investing activities during the three months ended March 31, 2022 was $4.1 million and consisted of net trading activity of $1.1 million, $1.2 million of property and equipment purchases and $1.5 million in the purchase of equity method investment in Alderwood. The nature of our trading activities is further described in Note 2, Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Cash used in investing activities during the three months ended March 31, 2021 was $1.1 million and consisted of net trading activity of $0.7 million and $0.4 million of property and equipment purchases. Financing Activities – Cash used in financing activities during the three months ended March 31, 2022 was $101.6 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, payment of dividends, repurchases of common stock, and payment of taxes related to net share settlements of $70.0 million, $17.4 million, $10.2 million and $5.4 million, respectively. Cash used in financing activities during the three months ended March 31, 2021 was $70.8 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of taxes related to net share settlements, and payment of dividends of $50.0 million, $7.7 million, $7.7 million and $6.4 million, respectively. 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. 40 Table of Contents