What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 157 added, 111 removed, 302 unchanged (47% of the section changed)

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If there are any future public statements or disclosures by us that modify or impact any of the forward-looking statements contained in or accompanying this Quarterly Report on Form 10-Q, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as the following risks and uncertainties resulting from:

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, as well as the following risks and uncertainties resulting from:

(i) the on-going effects of the COVID-19 pandemic and associated global economic disruption;

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and other risks and uncertainties.

Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to above, in our 2019 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our other periodic reports filed with the Securities and Exchange Commission (the "SEC") could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.

Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to above, in our 2019 Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and our other periodic reports filed with the Securities and Exchange Commission (the "SEC") could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.

Certain other factors that may impact our continuing operations, prospects, financial results and liquidity, or that may cause actual results to differ from such forward-looking statements, are discussed or included in the Company’s periodic reports filed with the SEC and are available on our website at www.virtus.com under "Investor Relations." You are urged to carefully consider all such factors.

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Recent Market Developments

During the first half of 2020, the novel coronavirus global pandemic ("COVID-19") significantly impacted the global economy and financial markets, creating uncertainty, market volatility and dislocation.

Financial markets experienced significant declines during the first quarter of 2020 and in the second quarter, certain markets, including domestic equity securities, experienced recoveries erasing much of the first quarter decline.

During the first three quarters of 2020, the novel coronavirus global pandemic ("COVID-19") significantly impacted the global economy and financial markets, creating uncertainty, market volatility and dislocation.

Financial markets experienced significant declines during the first quarter of 2020 and in the second and third quarter, certain markets, including domestic equity securities, experienced recoveries that more than offset the first quarter decline.

In an effort to contain COVID-19 in the U.S., or slow its spread, the federal government and nearly every state enacted varying degrees of social containment measures, restricting business and related activities, closing borders, and restricting travel.

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These measures are intended to support businesses, employees and consumers until economic activities recover.

Although financial markets, particularly domestic equity securities, have largely recovered in the second quarter, the economy has been slower to recover.

The timing and magnitude of the economic recovery, as well as the sustainability of the financial markets second quarter recovery, is uncertain.

Although financial markets, particularly domestic equity securities, have recovered in the second and third quarters, the economy has been slower to recover.

The timing and magnitude of the economic recovery, as well as the sustainability of the financial markets recovery, is uncertain.

Impact of COVID-19 to our Business

As a result of the challenging and volatile capital, equity and credit markets our assets under management experienced significant market volatility during the first six months of 2020 with market depreciation of $16.6 billion and market appreciation of $15.2 billion during the first and second quarters of 2020, respectively.

In addition, the fair market value of our seed capital and other investments experienced similar volatility.

As a result of the challenging and volatile capital, equity and credit markets, our assets under management experienced significant market volatility during the first nine months of 2020 with market appreciation (depreciation) of $(16.6) billion, $15.2 and $7.1 billion during the first, second and third quarters of 2020, respectively.

In addition, the fair market value of our seed capital and other investments experienced similar relative volatility.

To the extent that financial markets continue to be impacted, we may experience further volatility in our assets under management and the fair market value of our seed capital and other investments.

Financial Highlights

Net income per diluted share was $1.43 in the second quarter of 2020 , as compared to net income per diluted share of $3.26 in the second quarter of 2019 .

Total sales were $9.1 billion in the second quarter of 2020 , an increase of $4.0 billion , or 77.5% , from $5.1 billion in the second quarter of 2019 .

Net flows were $2.5 billion in the second quarter of 2020 compared to $0.1 billion in the second quarter of 2019 .

Assets under management were $108.5 billion at June 30, 2020 , an increase of $3.5 billion , or 3.3% , from June 30, 2019 .

• Net income per diluted share was $3.71 in the third quarter of 2020, as compared to $2.95 in the third quarter of 2019.

• Total sales were $7.6 billion in the third quarter of 2020, an increase of $2.9 billion, or 60.3%, from $4.8 billion in the third quarter of 2019.

Net flows were $1.2 billion in the third quarter of 2020 compared to $(1.1) billion in the third quarter of 2019.

• Assets under management were $116.5 billion at September 30, 2020, an increase of $12.4 billion, or 11.9%, from September 30, 2019.

AllianzGI Strategic Partnership

On July 4, 2020, the Company entered into an agreement with Allianz Global Investors U.S.

LLC and Allianz Global Investors Distributors LLC (collectively, "AllianzGI") pursuant to which the Company is expected to become the investment adviser, distributor and/or administrator of certain AllianzGI's open-end, closed-end and retail separate account assets.

The agreement is expected to close in the first quarter of 2021.

Assets Under Management

At June 30, 2020 , total assets under management were $108.5 billion , representing an increase of $3.5 billion , or 3.3% , from June 30, 2019 , and a decrease of $0.4 billion , or 0.4% , from December 31, 2019 .

The change in total assets under management from June 30, 2019 included $4.6 billion of positive market performance and $0.5 billion of positive flows.

The change in total assets under management from December 31, 2019 was due to $1.3 billion of negative market performance partially offset by $1.3 billion of positive net flows.

Average long-term assets under management, which represent the majority of our fee-earning asset levels, were $100.8 billion for the six months ended June 30, 2020 , an increase of $3.2 billion , or 3.3% , from $97.6 billion for the six months ended June 30, 2019 .

At September 30, 2020, total assets under management were $116.5 billion, representing an increase of $12.4 billion, or 11.9%, from September 30, 2019, and an increase of $7.6 billion, or 7.0%, from December 31, 2019.

The increase in total assets under management from September 30, 2019 included $10.7 billion of positive market performance and $2.8 billion of positive net flows.

The change in total assets under management from December 31, 2019 included $5.8 billion of positive market performance and $2.4 billion of positive net flows.

Average long-term assets under management, which represent the majority of our fee-earning asset levels, were $104.4 billion for the nine months ended September 30, 2020, an increase of $5.0 billion, or 5.1%, from $99.3 billion for the nine months ended September 30, 2019.

The increase in average long-term assets under management compared to the prior year period was primarily due to market performance and positive net flows.

Operating Results

In the second quarter of 2020 , total revenues decreased 5.4% to $ 132.9 million from $140.5 million in the second quarter of 2019 , primarily as a result of lower average assets under management in our open-end funds.

Operating income decreased $3.5 million to $ 26.6 million in the second quarter of 2020 compared to $ 30.1 million in the second quarter of 2019 , primarily due to decreased revenue partially offset by lower operating expenses.

In the third quarter of 2020, total revenues increased 6.1% to $154.8 million from $146.0 million in the third quarter of 2019, primarily as a result of higher average assets under management in our open-end funds, retail separate and institutional accounts.

Operating income increased $5.2 million to $41.0 million in the third quarter of 2020 compared to $35.8 million in the third quarter of 2019, primarily due to increased revenue.

Assets Under Management by Product

The following table summarizes our assets under management by product:

As of June 30,

As of September 30, Change

(in millions) 2020 2019 $ %

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Liquidity (2) 1,460 1,221 239 19.6 %

Total $ 116,487 $ 104,067 $ 12,420 11.9 %

Average Assets Under Management (3) $ 105,651 $ 101,059 $ 4,592 4.5 %

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(2) Represents assets under management in liquidity strategies, including in certain open-end funds and institutional accounts.

Averages for the six-month period ended June 30 were calculated as follows:

(3) Averages for the nine-month period ended September 30 were calculated as follows:

– Funds - average daily or weekly balances

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The following table summarizes asset flows by product:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

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Beginning balance $ 40,053 $ 41,223 $ 42,870 $ 37,710

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

Inflows 3,755 2,982 12,017 8,492

Outflows (3,368) (3,164) (12,844) (10,245)

Net flows 387 (182) (827) (1,753)

Market performance 3,004 (69) 1,518 5,235

Other (2) (75) 218 (192) (2)

Ending balance $ 43,369 $ 41,190 $ 43,369 $ 41,190

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Beginning balance $ 5,639 $ 6,653 $ 6,748 $ 5,956

Inflows 15 14 20 34

Outflows — — — —

Net flows 15 14 20 34

Market performance 54 246 (751) 1,090

Other (2) (79) (97) (388) (264)

Ending balance $ 5,629 $ 6,816 $ 5,629 $ 6,816

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Beginning balance $ 541 $ 1,078 $ 1,156 $ 668

Inflows 60 94 220 620

Outflows (35) (54) (408) (217)

Net flows 25 40 (188) 403

Market performance (12) (36) (380) 67

Other (2) (11) (28) (45) (84)

Ending balance $ 543 $ 1,054 $ 543 $ 1,054

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Beginning balance $ 22,054 $ 18,260 $ 20,414 $ 14,998

Inflows 1,727 819 4,271 2,303

Outflows (617) (435) (2,046) (1,354)

Net flows 1,110 384 2,225 949

Market performance 1,591 297 2,111 3,069

Other (2) (28) (78) (23) (153)

Ending balance $ 24,727 $ 18,863 $ 24,727 $ 18,863

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Beginning balance $ 34,545 $ 32,056 $ 32,635 $ 27,445

Inflows 2,075 851 6,715 3,542

Outflows (2,381) (2,216) (5,824) (4,629)

Net flows (306) (1,365) 891 (1,087)

Market performance 2,472 527 3,199 4,824

Other (2) (115) (267) (129) (231)

Ending balance $ 36,596 $ 30,951 $ 36,596 $ 30,951

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Beginning balance $ 4,264 $ 3,984 $ 3,903 $ 3,640

Inflows — — 491 389

Outflows (69) (16) (184) (53)

Net flows (69) (16) 307 336

Market performance 10 54 82 137

(42) (50) (129) (141)

Ending balance $ 4,163 $ 3,972 $ 4,163 $ 3,972

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

Total Long-Term

Beginning balance $ 107,096 $ 103,254 $ 107,726 $ 90,417

Inflows 7,632 4,760 23,734 15,380

Outflows (6,470) (5,885) (21,306) (16,498)

Net flows 1,162 (1,125) 2,428 (1,118)

Market performance 7,119 1,019 5,779 14,422

Other (2) (350) (302) (906) (875)

Ending balance $ 115,027 $ 102,846 $ 115,027 $ 102,846

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

Liquidity (3)

Beginning balance $ 1,365 $ 1,752 $ 1,178 $ 1,613

Other (2) 95 (531) 282 (392)

Ending balance $ 1,460 $ 1,221 $ 1,460 $ 1,221

Beginning balance $ 108,461 $ 105,006 $ 108,904 $ 92,030

Inflows 7,632 4,760 23,734 15,380

Outflows (6,470) (5,885) (21,306) (16,498)

Net flows 1,162 (1,125) 2,428 (1,118)

Market performance 7,119 1,019 5,779 14,422

Other (2) (255) (833) (624) (1,267)

Ending balance $ 116,487 $ 104,067 $ 116,487 $ 104,067

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The following table summarizes our assets under management by asset class:

As of June 30,

As of September 30, Change % of Total

(in millions) 2020 2019 $ % 2020 2019

Equity $ 81,032 $ 65,544 $ 15,488 23.6 % 69.6 % 63.0 %

Fixed income 29,603 31,704 (2,101) (6.6) % 25.4 % 30.4 %

Alternatives (1) 4,392 5,598 (1,206) (21.5) % 3.8 % 5.4 %

Liquidity (2) 1,460 1,221 239 19.6 % 1.2 % 1.2 %

Total $ 116,487 $ 104,067 $ 12,420 11.9 % 100.0 % 100.0 %

(1) Consists of real estate securities, mid-stream energy securities and master limited partnerships, options strategies and other.

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The following table summarizes the average management fees earned in basis points and average assets under management:

Three Months Ended June 30,

Three Months Ended September 30,

Average Fee Earned

(expressed in basis points)

Average Assets Under

(expressed in basis points) Average Assets Under

(in millions) (2)

2020 2019 2020 2019

Open-End Funds (1) 59.5 56.6 $ 42,475 $ 41,457

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Liquidity (3) 12.3 10.7 1,393 1,710

Six Months Ended June 30,

All Products 46.6 46.3 $ 112,890 $ 104,543

Nine Months Ended September 30,

Average Fee Earned

(expressed in basis points)

Average Assets Under

(expressed in basis points) Average Assets Under

(in millions) (2)

2020 2019 2020 2019

Open-End Funds (1) 58.6 55.4 $ 40,244 $ 40,650

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Liquidity (3) 11.4 10.4 1,293 1,735

All Products 46.4 45.5 $ 105,651 $ 101,059

(1) Represents assets under management of U.S.

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Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to funds.

The average fee rate earned on long-term products for the three and six months ended June 30, 2020 increased by 0.5 and 0.7 basis points, respectively, compared to the same periods in the prior year.

The primary reason for the increase during the three and six months ended June 30, 2020 was due to changes in the underlying asset mix to higher fee earning strategies in open-end funds and retail separate accounts during the current year.

The average fee rate earned on long-term products for the three and nine months ended September 30, 2020 increased by 0.1 and 0.8 basis points, respectively, compared to the same periods in the prior year.

The primary reason for the increase during the three and nine months ended September 30, 2020 was due to changes in the underlying asset mix to higher fee earning strategies in open-end funds and retail separate accounts during the current year periods.

Results of Operations

Summary Financial Data

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 vs.

2019 % 2020 2019 2020 vs.

Investment management fees $ 129,785 $ 120,023 $ 9,762 8.1 % $ 360,623 $ 340,532 $ 20,091 5.9 %

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Revenues by source were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 vs.

2019 % 2020 2019 2020 vs.

Investment management fees

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Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments.

Investment management fees decreased by $4.0 million , or 3.5% , and increased $10.3 million , or 4.7% , for the three and six months ended June 30, 2020 , respectively, compared to the same periods in the prior year.

The decrease in investment management fees during the three-month period was due to a decrease in average assets under management of $4.1 billion , or 4.0% , partially offset by an increase in the total average fee rate of 0.6 basis points.

The increase in investment management fees during the six-month period was due to an increase in average assets under management of $2.7 billion and an increase in

the total average fee rate of 0.9 basis points.

Investment management fees increased by $9.8 million, or 8.1%, and $20.1 million, or 5.9%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year.

The increase in investment management fees during the three-month period was due to an increase in average assets under management of $8.3 billion, or 8.0%, and an increase in the total average fee rate of 0.3 basis points.

The increase in investment management fees during the

nine-month period was due to an increase in average assets under management of $4.6 billion and an increase in the total average fee rate of 0.9 basis points.

Distribution and Service Fees

Distribution and service fees are sales- and asset-based fees earned from open-end funds for marketing and distribution services.

Distribution and service fees decreased by $1.7 million , or 16.3% , and $2.3 million , or 11.3% , for the three and six months ended June 30, 2020 , respectively, compared to the same period in the prior year, primarily due to lower sales and average assets for open-end funds in share classes that have distribution and service fees.

Distribution and service fees decreased by $0.6 million, or 6.2%, and $3.0 million, or 9.6%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year, primarily due to lower average assets for open-end funds in share classes that have distribution and service fees.

Administration and Shareholder Service Fees

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our open-end mutual funds and certain of our closed-end funds.

Fund administration and shareholder service fees decreased by $1.8 million , or 11.7% , and $1.5 million , or 5.2% , for the three and six months ended June 30, 2020 , respectively, compared to the same periods in the prior year primarily due to the decrease in average assets under management for open-end funds.

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our open-end mutual funds, ETFs and certain of our closed-end funds.

Fund administration and shareholder service fees decreased by $0.2 million, or 1.1%, and $1.7 million, or 3.8%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to the decrease in average assets under management for our open-end, closed-end and ETFs during the periods.

Other Income and Fees

Other income and fees primarily represent contingent sales charges earned from investor redemptions of certain shares sold without a front-end sales charge.

Other income and fees remained generally consistent for the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

Other income and fees decreased for the three and nine months ended September 30, 2020, compared to the same periods in the prior year, primarily due to lower redemption income and professional service fees.

Operating Expenses

Operating expenses by category were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 vs.

2019 % 2020 2019 2020 vs.

Operating expenses

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Employment expenses consist of fixed and variable compensation and related employee benefit costs.

Employment expenses for the three and six months ended June 30, 2020 were $60.2 million and $126.3 million , respectively, which represented an increase of $2.0 million , or 3.5% , and $7.3 million , or 6.2% , compared to the same periods in the prior year.

The increase for the three months ended June 30, 2020 was primarily due to increased sales-based compensation partially offset by lower profit-based compensation.

The increase for the six months ended June 30, 2020 was primarily due to increased profit- and sales-based compensation partially offset by lower stock-based compensation.

Employment expenses for the three and nine months ended September 30, 2020 were $67.5 million and $193.8 million, respectively, which represented an increase of $6.2 million, or 10.1%, and $13.5 million, or 7.5%, compared to the same periods in the prior year.

The increase for the three and nine months ended September 30, 2020 was primarily due to increased sales- and profit-based compensation.

Distribution and Other Asset-Based Expenses

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and contingent sales charges received from shareholders of the funds upon redemption of their shares.

Distribution and other asset-based expenses decreased by $4.0 million , or 18.7% , and $4.3 million , or 10.5% , for the three and six months ended June 30, 2020 , respectively, as compared to the same periods in the prior year, primarily due to a lower percentage of sales and assets under management in share classes that have distribution and other asset-based expenses.

Distribution and other asset-based expenses decreased by $1.4 million, or 6.5%, and $5.7 million, or 9.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in the prior year, primarily due to a lower percentage of sales and assets under management in share classes that have distribution and other asset-based expenses.

Other Operating Expenses

Other operating expenses primarily consist of investment research and technology costs, professional fees, travel and distribution related costs, rent and occupancy expenses, and other business costs.

Other operating expenses for the three and six months ended June 30, 2020 decreased by $1.7 million , or 9.1% , and $1.6 million , or 4.2% , respectively, as compared to the same periods in the prior year, due to decreased travel expenses primarily as a result of the impact of COVID-19 on the current operating environment.

Other operating expenses for the three and nine months ended September 30, 2020 decreased by $1.9 million, or 10.3%, and $3.5 million, or 6.2%, respectively, as compared to the same periods in the prior year, due to decreased travel and related expenses primarily as a result of the impact of COVID-19 on the current operating environment.

Other Operating Expenses of CIP

Other operating expenses of CIP decreased $0.4 million , or 15.1% to $2.2 million for the three months ended June 30, 2020 and increased $5.9 million , or 195.7% , to $8.9 million , for the six months ended June 30, 2020 , compared to the same periods in the prior year.

The decrease during the three-month period was primarily due to costs associated with the issuance of a CLO in the prior-year period.

The increase in the six-month period was primarily due to costs associated with the issuance of an additional CLO as well as the refinancing of debt for two CLOs in the current year period.

Other operating expenses of CIP increased $0.6 million, or 170.2% to $1.0 million for the three months ended September 30, 2020 and increased $6.5 million, or 192.9%, to $9.9 million, for the nine months ended September 30, 2020, compared to the same periods in the prior year.

The increase during the three-month period was primarily due to costs associated with the refinancing of debt for a CLO in the current year period.

The increase in the nine-month period was primarily due to costs associated with the issuance of a new CLO as well as the refinancing of debt for two CLOs in the current year period.

Restructuring and Severance

During the three and six months ended June 30, 2020 , we incurred $0.4 million in restructuring and severance costs.

During the three and six months ended June 30, 2019, we incurred $0.3 million and $1.5 million , respectively in restructuring and severance costs.

During the three and nine months ended September 30, 2020, we incurred $0.7 million and $1.2 million, respectively, in restructuring and severance costs.

During the three and nine months ended September 30, 2019, we incurred $0.5 million and $2.0 million, respectively in restructuring and severance costs.

The costs primarily related to severance costs in all periods.

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Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements.

Depreciation expense remained generally consistent for the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

Depreciation expense decreased for the three and nine months ended September 30, 2020, compared to the same periods in the prior year, primarily due to a higher level of equipment being fully depreciated in the current year periods.

Amortization Expense

Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives.

Amortization expense remained generally consistent for the three and six months ended June 30, 2020 compared to the same periods in the prior year.

Amortization expense remained generally consistent for the three and nine months ended September 30, 2020 compared to the same periods in the prior year.

Other Income (Expense)

Other Income (Expense), net by category were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 vs.

2019 % 2020 2019 2020 vs.

Other Income (Expense)

Realized and unrealized gain (loss) on investments, net

Realized and unrealized gain (loss) on investments, net $ 2,498 $ 2 $ 2,496 N/M $ 2,068 $ 5,474 $ (3,406) (62.2) %

Realized and unrealized gain (loss) of CIP, net 2,680 (5,344) 8,024 (150.1) % (12,733) 2,455 (15,188) (618.7) %

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Realized and unrealized gain (loss) on investments, net

Realized and unrealized gain (loss) on investments, net changed during the three and six months ended June 30, 2020 by $5.1 million , or 248.9% , and $(5.9) million , or (107.9)% , respectively, as compared to the same periods in the prior year.

The realized and unrealized gains and losses during the three and six months ended June 30, 2020 reflected changes in overall market conditions experienced during the periods.

Realized and unrealized gain (loss) on investments, net changed during the three and nine months ended September 30,

2020 by $2.5 million and $(3.4) million, respectively, as compared to the same periods in the prior year.

The realized and unrealized gains and losses during the three- and nine-months ended September 30, 2020 reflected changes in overall market conditions experienced during the periods.

Realized and unrealized gain (loss) of CIP, net

Realized and unrealized gain (loss) of CIP, net changed $(16.5) million , or (169.4)% , and $(23.2) million , or (297.6)% , respectively, during the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

The change consisted primarily of an increase in net realized and unrealized losses of $81.7 million and $171.9 million for the three- and six-month periods ended June 30, 2020, respectively, primarily due to changes in market values of leveraged loans, partially offset by an increase of $65.2 million and $148.7 million in the three- and six-month periods, respectively, in unrealized gains on notes payable.

Realized and unrealized gain (loss) of CIP, net changed $8.0 million, or (150.1)%, and $(15.2) million, or (618.7)%, respectively, during the three and nine months ended September 30, 2020, compared to the same periods in the prior year.

The change for the three months ended September 30, 2020 consisted primarily of an increase in net realized and unrealized gains of $85.1 million, due to changes in market values of leveraged loans, partially offset by unrealized losses of $77.1 million related to changes in the value of the notes payable.

The change for the nine months ended September 30, 2020 consisted primarily of net realized and unrealized losses of $86.8 million due to changes in market values of leveraged loans, partially offset by unrealized gains of $71.7 million related to the changes in value of the notes payable.

Other income (expense), net

Other income (expense), net decreased $1.5 million , or (215.7)% , and $1.3 million , or (116.8)% , respectively, for the three and six months ended June 30, 2020 compared to the same periods in the prior year due to losses from equity method investments during the current year periods.

Other income (expense), net increased by $0.3 million, or 33.9%, for the three months ended September 30, 2020 compared to the same period in the prior year due primarily to increased earnings from equity method investments during the current year period.

Other income (expense), net decreased by $1.1 million, or 57.4%, for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to lower profits from equity method investments during the current year period.

Interest Income (Expense)

Interest Income (Expense), net by category were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 vs.

2019 % 2020 2019 2020 vs.

Interest Income (Expense)

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Interest Expense

Interest expense decreased $2.0 million , or 39.3% , and $4.0 million , or 38.7% , respectively, for the three and six months ended June 30, 2020 compared to the same periods in the prior year.

The decreases were due to a decrease in the average levels of debt outstanding, including a gain on the early extinguishment of debt in the current six-month period, and a lower average interest rate compared to the same periods in the prior year.

Interest expense decreased $2.0 million, or 41.2%, and $6.0 million, or 39.5%, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in the prior year.

The decreases were due to a decrease in the average levels of debt outstanding and a lower average interest rate compared to the same periods in the prior year.

Also contributing to the decrease for the nine months ended September 30, 2020 was a $0.7 million gain recognized on the early extinguishment of debt.

Interest and Dividend Income

Interest and dividend income is earned on cash equivalents and our marketable securities.

Interest and dividend income decreased $0.7 million , or 74.9% , and $1.2 million , or 53.9% , respectively, for the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

The decreases were primarily due to lower interest rates earned on cash and lower investment balances as compared to the corresponding periods in the prior year.

Interest and dividend income decreased $0.7 million, or 84.1%, and $1.9 million, or 62.5%, respectively, for the three and nine months ended September 30, 2020, compared to the same periods in the prior year.

The decreases were primarily due to lower interest rates earned on cash and lower dividends paid by our investments as compared to the corresponding periods in the prior year.

Interest and Dividend Income of Investments of CIP

Interest and dividend income of investments of CIP decreased $0.7 million , or 2.5% , and increased $1.1 million , or 1.9% , respectively, for the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

The decrease during the three-month period was primarily due to a decrease in interest rates partially offset by increased investments of CIP.

The increase during the six-months ended June 30, 2020 compared to the same period in the prior year was due to increased investments of CIP during the current year period.

Interest and dividend income of investments of CIP decreased $4.2 million, or 13.9%, and $3.1 million, or 3.6%, respectively, for the three and nine months ended September 30, 2020, compared to the same periods in the prior year.

The decrease during the three and nine-month periods was primarily due to a decrease in interest rates partially offset by increased investments of CIP.

Interest Expense of CIP

Interest expense of CIP represents interest expense on the notes payable of CIP.

Interest expense of CIP decreased by $2.9 million , or 9.4% , and increased by $1.9 million , or 3.7% , respectively, for the three and six months ended June 30, 2020 , compared to the same periods in the prior year.

The decrease during the three months ended June 30, 2020 was primarily due to $4.5 million of amortization of discounts on notes payable in the prior year partially offset by higher average debt balances of CIP during the current year period.

The increase during the six-month period was primarily due to higher average debt balances of CIP during the current year period.

Interest expense of CIP decreased by $3.6 million, or 17.1%, and $1.8 million, or 2.5%, respectively, for the three and nine months ended September 30, 2020, compared to the same periods in the prior year.

The decrease during the three- and nine- months ended September 30, 2020 was primarily due to lower variable interest rates partially offset by higher average debt balances of CIP during the current year periods.

Income Tax Expense (Benefit)

The provision for income taxes reflected U.S.

federal, state and local taxes at an estimated effective tax rate of 50.9% and 20.5% for the six months ended June 30, 2020 and 2019 , respectively.

The increase in the estimated effective tax rate for the six months ended June 30, 2020 was primarily due to unrealized losses on various Company investments for which a valuation allowance was recorded.

federal, state and local taxes at an estimated effective tax rate of 33.9% and 24.0% for the nine months ended September 30, 2020 and 2019, respectively.

The increase in the estimated effective tax rate for the nine months ended September 30, 2020 was primarily due to valuation allowances recorded for the tax effects of unrealized losses on certain Company investments.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act, referred to herein as the CARES Act, which contains several income tax provisions.

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The following table summarizes certain financial data relating to our liquidity and capital resources:

June 30, 2020

December 31, 2019

(in thousands)

September 30, 2020 December 31, 2019 Change

(in thousands) 2020 vs.

Balance Sheet Data

Cash and cash equivalents $ 202,212 $ 221,781 $ (19,569) (8.8) %

Investments 54,446 83,206 (28,760) (34.6) %

Debt 218,014 277,839 (59,825) (21.5) %

Redeemable noncontrolling interests 99,277 63,845 35,432 55.5 %

Six Months Ended June 30,

(in thousands)

Total equity 688,012 686,257 1,755 0.3 %

Nine Months Ended

September 30, Change

(in thousands) 2020 2019 2020 vs.

Cash Flow Data

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Financing Activities 305,840 113,921 191,919 168.5 %

At June 30, 2020 , we had $168.3 million of cash and cash equivalents and $61.3 million of investments, which included $40.0 million of investment securities, compared to $221.8 million of cash and cash equivalents and $83.2 million of investments, which included $61.0 million of investment securities, at December 31, 2019 .

At June 30, 2020 , we had $240.7 million of principal outstanding under our term loan maturing June 1, 2024 and no outstanding borrowings under our $100.0 million revolving credit facility.

The Company's liquidity and capital resources were not materially impacted by the economic conditions during the first six months of 2020 as a result of the COVID-19 pandemic.

At September 30, 2020, we had $202.2 million of cash and cash equivalents and $54.4 million of investments, which included $31.6 million of investment securities, compared to $221.8 million of cash and cash equivalents and $83.2 million of investments, which included $61.0 million of investment securities, at December 31, 2019.

At September 30, 2020, we had $223.2 million of principal outstanding under our term loan maturing June 1, 2024 and no outstanding borrowings under our $100.0 million revolving credit facility.

The Company's liquidity and capital resources were not materially impacted by the economic conditions during the first nine months of 2020 as a result of the COVID-19 pandemic.

Uses of Capital

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Annual incentive compensation, which is one of the largest annual operating cash expenditures, is typically paid in the first quarter of the year.

In the first quarter of 2020 and 2019 , we paid $84.7 million and $76.2 million, respectively, in incentive compensation earned during the years ended December 31, 2019 and 2018 , respectively.

In the first quarters of 2020 and 2019, we paid $84.7 million and $76.2 million, respectively, in incentive compensation earned during the years ended December 31, 2019 and 2018, respectively.

In addition to operating activities, other uses of cash could include:

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Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital or interruption of our business.

At June 30, 2020 , the ratio of aggregate indebtedness to net capital of our broker-dealer was below the maximum allowed, and net capital was significantly greater than the required minimum.

At September 30, 2020, the ratio of aggregate indebtedness to net capital of our broker-dealer was below the maximum allowed, and net capital was significantly greater than the required minimum.

Balance Sheet

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Operating Cash Flow

Net cash used in operating activities of $449.7 million for the six months ended June 30, 2020 increased by $306.0 million from net cash used in operating activities of $143.7 million for the same period in the prior year primarily due to increased net purchases of investments by CIP of $294.0 million in the current year period compared to the prior year period.

Net cash used in operating activities of $380.3 million for the nine months ended September 30, 2020 increased by $277.3 million from $103.0 million for the same period in the prior year primarily due to increased net purchases of investments by CIP of $274.1 million in the current year period compared to the prior year period.

Investing Cash Flow

Cash flows from investing activities consist primarily of capital expenditures and other investing activities related to our business operations.

Net cash provided by investing activities was $9.2 million for the six months ended June 30, 2020 compared to net cash used in investing activities of $5.6 million in the same period for the prior year.

The primary investing activities for the six months ended June 30, 2020 were related increases in cash of CIP due to the consolidation of additional investment products.

The primary investing activities for the six months ended June 30, 2019 were capital expenditures and other asset purchases of $6.1 million partially offset by the sale of investments in unconsolidated CLOs of $2.0 million.

Net cash provided by investing activities was $8.9 million for the nine months ended September 30, 2020 compared to $13.5 million in the same period for the prior year.

The primary investing activities for the nine months ended September 30, 2020 were related to increases in cash of CIP due to the consolidation of additional investment products.

The primary investing activities for the nine months ended September 30, 2019 were related to the increase in cash of $18.4 million from the consolidation of investment products partially offset by capital expenditures and other asset purchases of $7.0 million.

Financing Cash Flow

Cash flows from financing activities consist primarily of the issuance of common stock, return of capital through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions, issuance of and repayment of debt by us, our CIP and contributions to noncontrolling interests related to CIP.

Net cash provided by financing activities increased by $224.6 million to $370.6 million for the six months ended June 30, 2020 as compared to net cash provided by financing activities of $145.9 million for the six months ended June 30, 2019 .

Net cash provided by financing activities increased during the period primarily due to an increase of $249.9 million in net borrowings of CIP during the six months ended June 30, 2020 compared to the prior year period, partially offset by an increase of $19.2 million on the repayment of debt during the six months ended June 30, 2020 compared to the prior year period.

Cash flows from financing activities consist primarily of the issuance of common stock, return of capital through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions, issuance and repayment of debt and changes to noncontrolling interests.

Net cash provided by financing activities increased by $191.9 million to $305.8 million for the nine months ended September 30, 2020 as compared to $113.9 million for the nine months ended September 30, 2019.

Net cash provided by financing activities increased during the period primarily due to an increase of $221.8 million in net borrowings of CIP during the nine months ended September 30, 2020 compared to the prior year period, partially offset by an increase of $21.7 million on the repayment of debt during the nine months ended September 30, 2020 compared to the prior year period.

C redit Agreement

The Company's credit agreement, as amended (the "Credit Agreement"), is comprised of (i) $365.0 million of seven-year term debt (the "Term Loan") expiring in June 2024 and (ii) a $100.0 million five-year revolving credit facility (the "Credit Facility") expiring in June 2022.

At June 30, 2020 , $240.7 million was outstanding under the Term Loan, and there were no outstanding borrowings under the Credit Facility.

In accordance with Accounting Standards Codification 835, Interest, the amounts outstanding under the Term Loan are presented in the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $5.9 million as of June 30, 2020 .

At September 30, 2020, $223.2 million was outstanding under the Term Loan, and there were no outstanding borrowings under the Credit Facility.

In accordance with Accounting Standards Codification 835, Interest, the amounts outstanding under the Term Loan are presented on the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $5.2 million as of September 30, 2020.

Contractual Obligations

Our contractual obligations are summarized in our 2019 Annual Report on Form 10-K.

As of June 30, 2020 , there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2019 .

As of September 30, 2020, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2019.

Critical Accounting Policies and Estimates

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A complete description of our significant accounting policies is included in our 2019 Annual Report on Form 10-K.

There were no material changes in our critical accounting policies in the three months ended June 30, 2020 .

There were no material changes in our critical accounting policies in the three months ended September 30, 2020.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis