What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 114 added, 178 removed, 281 unchanged (51% of the section changed)

9 unchanged sentences

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 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;

(ii) any reduction in our assets under management;

(iii) withdrawal, renegotiation or termination of investment advisory agreements;

(iv) damage to our reputation;

(v) failure to comply with investment guidelines or other contractual requirements;

(vi) inability to satisfy financial covenants and payments related to our indebtedness;

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 2020 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) a reduction in our assets under management;

(ii) inability to achieve expected acquisition-related benefits;

and other risks and uncertainties;

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

(iv) withdrawal, renegotiation or termination of investment advisory agreements;

(v) damage to our reputation;

(vi) inability to satisfy financial covenants or make debt payments;

(vii) inability to attract and retain key personnel;

(viii) challenges from the competition we face in our business;

(ix) adverse regulatory and legal developments;

(x) unfavorable changes in tax laws or limitations;

(xi) adverse developments related to unaffiliated subadvisers;

(xii) negative implications of changes in key distribution relationships;

(xiii) interruptions in or failure to provide critical technological service by us or third parties;

(xiv) volatility associated with our common stock;

(xv) adverse civil litigation and government investigations or proceedings;

(xvi) risk of loss on our investments;

(xvii) inability to make quarterly common stock dividends;

(xviii) lack of sufficient capital on satisfactory terms;

(xix) losses or costs not covered by insurance;

(xx) impairment of goodwill or intangible assets;

(xxi) inability to achieve expected acquisition-related benefits;

(viii) challenges from competition;

(ix) adverse developments related to unaffiliated subadvisers;

(x) negative implications of changes in key distribution relationships;

(xi) interruptions in or failure to provide critical technological service by us or third parties;

(xii) losses on our investments;

(xiii) lack of sufficient capital on satisfactory terms;

(xiv) adverse regulatory and legal developments;

(xv) failure to comply with investment guidelines or other contractual requirements;

(xvi) adverse civil litigation and government investigations or proceedings;

(xvii) unfavorable changes in tax laws or limitations;

(xviii) volatility in the trading of our common stock;

(xix) inability to make quarterly common stock dividend payments;

(xx) losses or costs not covered by insurance;

(xxi) impairment of goodwill or intangible assets;

and other risks and uncertainties.

15 unchanged sentences

Our sales efforts are supported by regional sales professionals, a national account relationship group, and separate teams for ETFs and the retirement and insurance channels.

We leverage third-party distributors for off-shore products and in certain international jurisdictions.

We leverage third-party distributors for offshore products and in certain international jurisdictions.

Our retail separate accounts are distributed through financial intermediaries and directly to private clients by teams at an affiliated manager.

2 unchanged sentences

Recent Market Developments

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.

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

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.

Governments around the world have responded to COVID-19 with economic stimulus measures.

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

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 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.

Governments around the world responded to the impact of COVID-19 with economic stimulus measures.

Despite the general recovery of the financial markets, particularly domestic equity securities, 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, continues to be uncertain.

Financial Highlights

• 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.

▪ Net income per diluted share was $4.54 in the first quarter of 2021, as compared to net loss per diluted share of $(0.58) in the first quarter of 2020.

▪ Total sales were $10.6 billion in the first quarter of 2021, an increase of $3.4 billion, or 47.4%, from $7.2 billion in the first quarter of 2020.

Net flows were $2.4 billion in the first quarter of 2021 compared to $(1.4) billion in the first quarter of 2020.

▪ Assets under management were $168.9 billion at March 31, 2021, an increase of $78.2 billion, or 86.2%, from March 31, 2020.

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.

On February 1, 2021, the Company completed the actions necessary to finalize its strategic partnership with Allianz Global Investors ("AllianzGI"), pursuant to which NFJ Investment Group was added as a newly established affiliated manager and the Company became the investment adviser, distributor and/or administrator of certain of AllianzGI's open-end, closed-end and retail separate account assets which in total added $29.5 billion in assets under management (the "AGI Transaction").

Agreement with Westchester Capital Management

On February 1, 2021, we entered into an agreement to acquire all of Westchester Capital Management ("Westchester").

The transaction is expected to close in the second half of the 2021, subject to customary closing conditions and approvals, including by fund shareholders.

Assets Under Management

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.

At March 31, 2021, total assets under management were $168.9 billion, representing an increase of $78.2 billion, or 86.2%, from March 31, 2020, and an increase of $36.7 billion, or 27.8%, from December 31, 2020.

The increase in total assets under management from March 31, 2020 included $40.5 billion of positive market performance, $29.5 billion from the AGI Transaction and $9.2 billion of positive net flows.

The change in total assets under management from December 31, 2020 was due to the increase from the AGI Transaction, $4.7 billion of positive market performance and $2.4 billion of positive net flows.

Operating Results

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.

In the first quarter of 2021, total revenues increased 50.0% to $216.9 million from $144.6 million in the first quarter of 2020, primarily as a result of higher average assets under management in our open-end funds as a result of positive market performance, net flows and the assets from the AGI Transaction.

Operating income increased $37.5 million to $62.1 million in the first quarter of 2021 compared to $24.6 million in the first quarter of 2020, primarily due to the same factors previously mentioned.

Assets Under Management by Product

The following table summarizes our assets under management by product:

As of September 30, Change

As of March 31, Change

(in millions) 2021 2020 $ %

5 unchanged sentences

Structured Products 3,985 4,343 (358) (8.2) %

Total Long-Term 115,027 102,846 12,181 11.8 %

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

Total $ 168,880 $ 90,694 $ 78,186 86.2 %

Average Assets Under Management (3) $ 154,344 $ 105,904 $ 48,440 45.7 %

Average Long-Term Assets Under Management (3) $ 104,358 $ 99,324 $ 5,034 5.1 %

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

retail funds, offshore funds and variable insurance funds.

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

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

(2) Includes ultra-short strategies previously included in a separate liquidity strategy.

Prior period amounts have been recast to conform to the current year presentation.

(3) Averages for the three-month period ended March 31 were calculated as follows:

– Funds - average daily or weekly balances

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020

9 unchanged sentences

Beginning balance $ 5,914 $ 6,748

Inflows 15 14 20 34

Outflows — — — —

Net flows — 5

32 unchanged sentences

Market performance 35 39

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

Ending balance $ 3,985 $ 4,343

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020

Total Long-Term

Beginning balance $ 132,194 $ 108,904

5 unchanged sentences

Ending balance $ 168,880 $ 90,694

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

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

retail funds, offshore funds and variable insurance funds.

(2) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from liquidity strategies, and the effect on net flows from non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), structured products reset transactions, and the use of leverage.

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

(2) Includes ultra-short strategies previously included in a separate liquidity strategy.

(3) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the effect on net flows from non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), structured products reset transactions, and the use of leverage.

Assets Under Management by Asset Class

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

As of September 30, Change % of Total

As of March 31, Change % of Total

(in millions) 2021 2020 $ % 2021 2020

1 unchanged sentence

Fixed income (1) 35,069 26,735 8,334 31.2 % 20.8 % 29.5 %

Multi-asset (2) 22,498 9,708 12,790 131.7 % 13.3 % 10.7 %

Alternatives (3) 5,130 3,664 1,466 40.0 % 3.0 % 4.0 %

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

Total $ 168,880 $ 90,694 $ 78,186 86.2 % 100.0 % 100.0 %

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

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

(1) Includes ultra-short strategies previously included in a separate liquidity strategy.

(2) Includes strategies with substantial holdings in at least two of the following asset classes:

equity, fixed income and alternatives.

(3) Includes real estate securities, infrastructure, mid-stream energy, long/short, and options strategies.

Average Assets Under Management and Average Basis Points

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

Three Months Ended September 30,

Average Fee Earned

(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

Closed-End Funds 62.1 64.7 5,742 6,649

Exchange Traded Funds 13.7 25.3 549 1,048

Retail Separate Accounts 47.6 48.0 22,054 18,260

Institutional Accounts 31.7 31.8 36,506 31,462

Structured Products 34.2 37.3 4,171 3,957

All Long-Term Products 47.0 46.9 111,497 102,833

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

Average Fee Earned

8 unchanged sentences

Structured Products 38.8 33.9 3,985 4,191

All Long-Term Products 46.9 46.1 104,358 99,324

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

All Products 43.1 42.6 $ 154,344 $ 105,904

5 unchanged sentences

– Institutional Accounts and Structured Products - average of month-end balances

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

Average fees earned represent investment management fees before the impact of consolidation of investment products ("CIP") divided by average net assets.

Average fees earned represent investment management fees before the impact of consolidation of investment products ("CIP") and are net of revenue related adjustments divided by average net assets.

Revenue related adjustments are based on specific agreements and reflect the portion of investment management fees passed-through to third-party client intermediaries for services to investors in sponsored investment products.

Fund fees are calculated based on average daily or weekly net assets.

3 unchanged sentences

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 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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2021 2020 2021 vs.

2019 % 2020 2019 2020 vs.

Investment management fees $ 173,269 $ 120,288 $ 52,981 44.0 %

9 unchanged sentences

Noncontrolling interests (15,626) (5,291) (10,335) 195.3 %

Net Income (Loss) Attributable to Stockholders 29,648 24,085 5,563 23.1 % 36,642 72,757 (36,115) (49.6) %

Preferred stockholder dividends — (2,085) 2,085 (100.0) % — (6,253) 6,253 (100.0) %

Net Income (Loss) Attributable to Common Stockholders $ 36,588 $ (4,285) $ 40,873 (953.9) %

Revenues by source were as follows:

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

Three Months Ended March 31,

(in thousands) 2021 2020 2021 vs.

2019 % 2020 2019 2020 vs.

Investment management fees

12 unchanged sentences

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 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.

Investment management fees increased by $53.0 million, or 44.0%, for the three months ended March 31, 2021, compared to the same period 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 $48.4 billion, or 45.7%.

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 $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.

Distribution and service fees increased by $10.9 million, or 115.1%, for the three months ended March 31, 2021, compared to the same period in the prior year, primarily due to higher 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, 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.

Fund administration and shareholder service fees increased by $7.9 million, or 54.0%, for the three months ended March 31, 2021, compared to the same period in the prior year primarily due to the increase in average assets under management for our open-end and closed-end funds during the period.

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 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.

Other income and fees increased for the three months ended March 31, 2021, compared to the same period in the prior year, primarily due to $3.4 billion of other fee earning assets as a result of the AGI Transaction.

Operating Expenses

Operating expenses by category were as follows:

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

Three Months Ended March 31,

(in thousands) 2021 2020 2021 vs.

2019 % 2020 2019 2020 vs.

Operating expenses

3 unchanged sentences

Other operating expenses of CIP 559 6,749 (6,190) (91.7) %

Restructuring and severance 735 523 212 40.5 % 1,155 2,019 (864) (42.8) %

Depreciation expense 1,098 1,258 (160) (12.7) %

3 unchanged sentences

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

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.

Employment expenses for the three months ended March 31, 2021 were $91.8 million, which represented an increase of $25.6 million, or 38.8%, compared to the same period in the prior year.

The increase for the three months ended March 31, 2021 was primarily due to increased profit- and sales-based compensation.

Distribution and Other Asset-Based Expenses

Distribution and other asset-based expenses consist primarily of payments to third-party client intermediaries for providing services to investors in sponsored investment products.

These payments are primarily based on percentages of sales, assets under management or revenues.

These payments are primarily based on assets under management or on a percentage of sales.

These expenses also include the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to shareholders.

The deferred sales commissions are amortized on a straight-line basis over the periods in which commissions are generally recovered from distribution fee revenues

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

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.

The deferred sales commissions are amortized on a straight-line basis over the periods in which commissions are generally recovered from distribution fee revenues and contingent sales charges received from shareholders of the funds upon redemption of their shares.

Distribution and other asset-based expenses increased by $12.9 million, or 66.4%, for the three months ended March 31, 2021, as compared to the same period in the prior year, primarily due to an increased 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 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 for the three months ended March 31, 2021 increased by $0.7 million, or 3.7%, as compared to the same period in the prior year, due to professional fees in the current year related to the Westchester and AGI transactions, partially offset by 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 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 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.

Other operating expenses of CIP decreased $6.2 million, or 91.7% to $0.6 million for the three months ended March 31, 2021 compared to the same period in the prior year.

The decrease during the three-month period was primarily due to the costs associated with the issuance of a new CLO in the prior year period that did not recur.

Depreciation Expense

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

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.

Depreciation expense remained consistent during the three months ended March 31, 2021, compared to the same period in the prior year.

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 nine months ended September 30, 2020 compared to the same periods in the prior year.

Amortization expense increased for the three months ended March 31, 2021 compared to the same period in the prior year due

to the additional amortization associated with the AGI Transaction.

Other Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2021 2020 2021 vs.

2019 % 2020 2019 2020 vs.

Other Income (Expense)

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) on investments, net $ 891 $ (7,544) $ 8,435 (111.8)%

Realized and unrealized gain (loss) of CIP, net (4,687) (8,669) 3,982 (45.9) %

2 unchanged sentences

Realized and unrealized gain (loss) on investments, net

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) on investments, net changed during the three months ended March 31, 2021 by $8.4 million, as compared to the same period in the prior year.

The realized and unrealized gains and losses during the three-months ended March 31, 2021 reflected changes in overall market conditions experienced during the period.

Realized and unrealized gain (loss) of CIP, net

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.

Realized and unrealized gain (loss) of CIP, net changed $4.0 million, or 45.9%, during the three months ended March 31, 2021, compared to the same period in the prior year.

The change for the three months ended March 31, 2021 consisted primarily of an increase in net realized and unrealized gains of $111.2 million, due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $107.2 million related to the value of the notes payable.

Other income (expense), net

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.

Other income (expense), net increased by $1.2 million, or 189.4%, for the three months ended March 31, 2021 compared to the same period in the prior year, primarily due to increased earnings from equity method investments during the current year period.

Interest Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2021 2020 2021 vs.

2019 % 2020 2019 2020 vs.

Interest Income (Expense)

5 unchanged sentences

Interest Expense

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 expense decreased $0.9 million, or 27.7%, for the three months ended March 31, 2021 compared to the same period in the prior year.

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

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 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 decreased $0.6 million, or 81.9%, for the three months ended March 31, 2021, compared to the same period in the prior year.

The decrease was primarily due to lower interest rates earned on cash as compared to the corresponding period in the prior year.

Interest and Dividend Income of Investments of CIP

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 and dividend income of investments of CIP decreased $5.4 million, or 18.3%, for the three months ended March 31, 2021, compared to the same period in the prior year.

The decrease 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 $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.

Interest expense of CIP decreased by $10.0 million, or 41.0%, for the three months ended March 31, 2021, compared to the same period in the prior year.

The decrease during the three months ended March 31, 2021 was primarily due to lower variable interest rates partially offset by higher average debt balances of CIP during the current year periods, as well as $3.3 million of amortization of discounts on notes payable in the prior year period which did not recur.

Income Tax Expense (Benefit)

The provision for income taxes reflected U.S.

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.

Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment.

The Company has evaluated the current legislation and, at this time, does not anticipate the CARES Act to have a material impact on its condensed consolidated financial statements.

federal, state and local taxes at an estimated effective tax rate of 22.5% and 91.1% for the three months ended March 31, 2021 and 2020, respectively.

The decrease in the estimated effective tax rate for the three months ended March 31, 2021 was primarily due to valuation allowances recorded in the prior year period for the tax effects of unrealized losses on certain Company investments.

Liquidity and Capital Resources

1 unchanged sentence

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

September 30, 2020 December 31, 2019 Change

March 31, 2021 December 31, 2020 Change

(in thousands) 2021 vs.

5 unchanged sentences

Total equity 738,695 720,940 17,755 2.5 %

Nine Months Ended

September 30, Change

Three Months Ended

March 31, Change

(in thousands) 2021 2020 2021 vs.

4 unchanged sentences

Financing Activities (87,673) 314,641 (402,314) (127.9) %

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.

At March 31, 2021, we had $228.3 million of cash and cash equivalents and $67.7 million of investments, which included $40.9 million of investment securities, compared to $246.5 million of cash and cash equivalents and $64.9 million of investments, which included $40.0 million of investment securities, at December 31, 2020.

At March 31, 2021, we had $199.8 million of principal outstanding under our term loan maturing June 1, 2024 and no outstanding borrowings under our $100.0 million revolving credit facility.

Uses of Capital

Our main uses of capital related to operating activities include payments of annual incentive compensation, interest on our indebtedness, income taxes and other operating expenses, which primarily consist of investment research, technology costs, professional fees and distribution and occupancy costs.

Our main uses of capital related to operating activities comprise employee compensation and related benefit costs including payment of annual incentive compensation, interest on our indebtedness, income taxes and other operating expenses, which primarily consist of investment research, technology costs, professional fees, distribution and occupancy costs.

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

2 unchanged sentences

(i) investments in organic growth, including expanding our distribution efforts;

(ii) seeding or launching new products, including seeding funds or sponsoring CLO issuances;

(ii) seeding or launching new products, including funds or sponsoring CLO issuances;

(iii) principal payments on debt outstanding through scheduled amortization, excess cash flow payment requirements or additional paydowns;

2 unchanged sentences

(vi) investments in our infrastructure;

(vii) investments in inorganic growth opportunities as they arise where the purchase price can take the form of upfront payments and/or contingent consideration;

(viii) integration costs, including restructuring and severance, related to potential acquisitions, if any;

(vii) investments in inorganic growth opportunities which may require upfront and/or future payments;

(viii) integration costs, including restructuring and severance, related to acquisitions, if any;

and (ix) purchases of affiliate noncontrolling interests.

3 unchanged sentences

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 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.

At March 31, 2021, 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

3 unchanged sentences

Operating Cash Flow

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.

Net cash provided by operating activities of $150.2 million for the three months ended March 31, 2021 changed by $402.5 million from net cash used in operating activities of $252.3 million for the same period in the prior year primarily due to a decrease in net purchases of investments by CIP of $379.0 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 $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.

Net cash used in investing activities was $2.6 million for the three months ended March 31, 2021 compared to net cash provided by investing activities of $9.4 million in the same period for the prior year.

The primary investing activities for the three months ended March 31, 2021 were $2.6 million of capital expenditures and other asset purchases.

The primary investing activities for the three months ended March 31, 2020 were related to the consolidation of investment products.

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 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.

Net cash related to financing activities changed by $402.3 million to net cash used in financing activities of $87.7 million for the three months ended March 31, 2021 as compared to net cash provided by financing activities of $314.6 million for the three months ended March 31, 2020.

The net change was primarily due to a decrease of $397.4 million in net borrowings of CIP during the three months ended March 31, 2021 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 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.

At March 31, 2021, $199.8 million remained outstanding under the Term Loan, and there were no outstanding borrowings under the Credit Facility.

Contractual Obligations

Our contractual obligations are summarized in our 2020 Annual Report on Form 10-K.

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.

As of March 31, 2021, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2020.

Critical Accounting Policies and Estimates

3 unchanged sentences

A complete description of our significant accounting policies is included in our 2020 Annual Report on Form 10-K.

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

There were no material changes in our critical accounting policies in the three months ended March 31, 2021.

Recently Issued Accounting Pronouncements

For a discussion of accounting standards, see Note 2 in our condensed consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

The Company is primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices.

During the three months ended March 31, 2021, there were no material changes to the information contained in Part II, Item 7A of the Company's 2020 Annual Report on Form 10-K.

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