VIRTUS INVESTMENT PARTNERS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward Looking Statements This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements that are not historical facts, including statements about our beliefs or expectations, are "forward-looking statements." These statements may be identified by such forward-looking terminology as "expect," "estimate," "intent," "plan," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "project," "opportunity," "predict," "would," "potential," "future," "forecast," "guarantee," "assume," "likely," "target" or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions and projections about the Company and the markets in which we operate, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net asset inflows and outflows, operating cash flows, business plans and ability to borrow, for all future periods. All forward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date of this Quarterly Report on Form 10-Q only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. 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 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 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. Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to above, in our 2020 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. Overview Our Business We provide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual brand. By offering a broad array of products, we believe we can appeal to a greater number of investors and have offerings across market cycles and through changes in investor preferences. Our earnings 19 Table of Contents are primarily driven by asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution and shareholder services. We offer investment strategies for individual and institutional investors in different product structures and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by a collection of differentiated investment managers. We have offerings in various asset classes (equity, fixed income and alternative), geographies (domestic, international and emerging), market capitalizations (large, mid and small), styles (growth, core and value) and investment approaches (fundamental, quantitative and thematic). Our retail products include open-end funds and exchange traded funds ("ETFs") as well as closed-end funds and retail separate accounts. Our institutional products are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. We also provide subadvisory services to other investment advisers and serve as the collateral manager for structured products. We distribute our open-end funds and ETFs principally through financial intermediaries. We have broad distribution access in the retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisers, banks and insurance companies. In many of these firms, we have a number of products that are on preferred "recommended" lists and on fee-based advisory programs. 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 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. Our institutional services are marketed through relationships with consultants as well as directly to clients. We target key market segments, including foundations and endowments, corporate, public and private pension plans, and subadvisory relationships. Recent Market Developments 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 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 $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 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. 20 Table of Contents Assets Under Management 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 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 March 31, Change (in millions) 2021 2020 $ % Open-End Funds (1) (2) $ 72,164 $ 34,361 $ 37,803 110.0 % Closed-End Funds 11,664 5,343 6,321 118.3 % Exchange Traded Funds 1,021 480 541 112.7 % Retail Separate Accounts 37,244 17,660 19,584 110.9 % Institutional Accounts (2) 42,802 28,507 14,295 50.1 % Structured Products 3,985 4,343 (358) (8.2) % Total $ 168,880 $ 90,694 $ 78,186 86.2 % Average Assets Under Management (3) $ 154,344 $ 105,904 $ 48,440 45.7 % (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds. (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 – Retail Separate Accounts - prior-quarter ending balances – Institutional Accounts and Structured Products - average of month-end balances 21 Table of Contents Asset Flows by Product The following table summarizes asset flows by product: Three Months Ended March 31, (in millions) 2021 2020 Open-End Funds (1) (2) Beginning balance $ 50,771 $ 43,824 Inflows 5,853 4,059 Outflows (5,258) (5,747) Net flows 595 (1,688) Market performance 1,130 (7,733) Other (3) 19,668 (42) Ending balance $ 72,164 $ 34,361 Closed-End Funds Beginning balance $ 5,914 $ 6,748 Inflows — 5 Outflows — — Net flows — 5 Market performance 105 (1,185) Other (3) 5,645 (225) Ending balance $ 11,664 $ 5,343 Exchange Traded Funds Beginning balance $ 837 $ 1,156 Inflows 175 86 Outflows (77) (233) Net flows 98 (147) Market performance 98 (505) Other (3) (12) (24) Ending balance $ 1,021 $ 480 Retail Separate Accounts Beginning balance $ 29,751 $ 20,414 Inflows 2,699 1,061 Outflows (896) (775) Net flows 1,803 286 Market performance 2,141 (3,040) Other (3) 3,549 — Ending balance $ 37,244 $ 17,660 Institutional Accounts (2) Beginning balance $ 40,861 $ 32,859 Inflows 1,884 1,499 Outflows (1,868) (1,777) Net flows 16 (278) Market performance 1,181 (4,150) Other (3) 744 76 Ending balance $ 42,802 $ 28,507 Structured Products Beginning balance $ 4,060 $ 3,903 Inflows — 491 Outflows (79) (42) Net flows (79) 449 Market performance 35 39 Other (3) (31) (48) Ending balance $ 3,985 $ 4,343 22 Table of Contents Three Months Ended March 31, (in millions) 2021 2020 Total Beginning balance $ 132,194 $ 108,904 Inflows 10,611 7,201 Outflows (8,178) (8,574) Net flows 2,433 (1,373) Market performance 4,690 (16,574) Other (3) 29,563 (263) Ending balance $ 168,880 $ 90,694 (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds. (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 March 31, Change % of Total (in millions) 2021 2020 $ % 2021 2020 Asset Class Equity $ 106,183 $ 50,587 $ 55,596 109.9 % 62.9 % 55.8 % 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 % Total $ 168,880 $ 90,694 $ 78,186 86.2 % 100.0 % 100.0 % (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. 23 Table of Contents 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 March 31, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (2) 2021 2020 2021 2020 Products Open-End Funds (1) 48.0 48.5 $ 66,247 $ 41,992 Closed-End Funds 56.2 62.8 9,340 6,524 Exchange Traded Funds 6.7 9.5 890 962 Retail Separate Accounts 45.7 48.7 32,118 20,414 Institutional Accounts 31.5 29.1 41,764 31,821 Structured Products 38.8 33.9 3,985 4,191 All Products 43.1 42.6 $ 154,344 $ 105,904 (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds. (2) Averages are calculated as follows: – Funds - average daily or weekly balances – Retail Separate Accounts - prior-quarter ending balances – Institutional Accounts and Structured Products - average of month-end balances 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. Retail separate account fees are calculated based on the end of the preceding or current quarter’s asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Structured product fees are calculated based on a combination of the underlying cash flows and the principal value of the product. Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to funds. Results of Operations Summary Financial Data Three Months Ended March 31, (in thousands) 2021 2020 2021 vs. 2020 % Investment management fees $ 173,269 $ 120,288 $ 52,981 44.0 % Other revenue 43,628 24,278 19,350 79.7 % Total revenues 216,897 144,566 72,331 50.0 % Total operating expenses 154,755 119,964 34,791 29.0 % Operating income (loss) 62,142 24,602 37,540 152.6 % Other income (expense), net (2,025) (15,601) 13,576 (87.0) % Interest income (expense), net 7,250 2,296 4,954 215.8 % Income (loss) before income taxes 67,367 11,297 56,070 496.3 % Income tax expense (benefit) 15,153 10,291 4,862 47.2 % Net income (loss) 52,214 1,006 51,208 5,090.3 % Noncontrolling interests (15,626) (5,291) (10,335) 195.3 % Net Income (Loss) Attributable to Common Stockholders $ 36,588 $ (4,285) $ 40,873 (953.9) % 24 Table of Contents Revenues Revenues by source were as follows: Three Months Ended March 31, (in thousands) 2021 2020 2021 vs. 2020 % Investment management fees Open-end funds $ 88,872 $ 59,108 $ 29,764 50.4 % Closed-end funds 12,940 10,179 2,761 27.1 % Retail separate accounts 37,512 25,714 11,798 45.9 % Institutional accounts 32,438 22,917 9,521 41.5 % Structured products 1,259 1,574 (315) (20.0) % Other products 248 796 (548) (68.8) % Total investment management fees 173,269 120,288 52,981 44.0 % Distribution and service fees 20,348 9,460 10,888 115.1 % Administration and shareholder service fees 22,560 14,653 7,907 54.0 % Other income and fees 720 165 555 336.4 % Total revenues $ 216,897 $ 144,566 $ 72,331 50.0 % Investment Management Fees 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 $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 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 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 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. 25 Table of Contents Operating Expenses Operating expenses by category were as follows: Three Months Ended March 31, (in thousands) 2021 2020 2021 vs. 2020 % Operating expenses Employment expenses $ 91,759 $ 66,130 $ 25,629 38.8 % Distribution and other asset-based expenses 32,294 19,409 12,885 66.4 % Other operating expenses 19,580 18,885 695 3.7 % Other operating expenses of CIP 559 6,749 (6,190) (91.7) % Depreciation expense 1,098 1,258 (160) (12.7) % Amortization expense 9,465 7,533 1,932 25.6 % Total operating expenses $ 154,755 $ 119,964 $ 34,791 29.0 % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. 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 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 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 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 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 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 increased for the three months ended March 31, 2021 compared to the same period in the prior year due 26 Table of Contents to the additional amortization associated with the AGI Transaction. Other Income (Expense) Other Income (Expense), net by category were as follows: Three Months Ended March 31, (in thousands) 2021 2020 2021 vs. 2020 % Other Income (Expense) 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) % Other income (expense), net 1,771 612 1,159 189.4 % Total Other Income (Expense), net $ (2,025) $ (15,601) $ 13,576 (87.0) % Realized and unrealized gain (loss) on investments, net 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 $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 $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 March 31, (in thousands) 2021 2020 2021 vs. 2020 % Interest Income (Expense) Interest expense $ (2,314) $ (3,199) $ 885 (27.7) % Interest and dividend income 136 752 (616) (81.9) % Interest and dividend income of investments of CIP 23,876 29,229 (5,353) (18.3) % Interest expense of CIP (14,448) (24,486) 10,038 (41.0) % Total Interest Income (Expense), net $ 7,250 $ 2,296 $ 4,954 215.8 % Interest Expense 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 $0.6 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. 27 Table of Contents Interest and Dividend Income of 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 $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 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 Certain Financial Data The following table summarizes certain financial data relating to our liquidity and capital resources: March 31, 2021 December 31, 2020 Change (in thousands) 2021 vs. 2020 % Balance Sheet Data Cash and cash equivalents $ 228,260 $ 246,511 $ (18,251) (7.4) % Investments 67,651 64,944 2,707 4.2 % Debt 195,726 201,212 (5,486) (2.7) % Redeemable noncontrolling interests 112,482 115,513 (3,031) (2.6) % Total equity 738,695 720,940 17,755 2.5 % Three Months Ended March 31, Change (in thousands) 2021 2020 2021 vs. 2020 % Cash Flow Data Provided by (Used In): Operating Activities $ 150,151 $ (252,320) $ 402,471 (159.5) % Investing Activities (2,608) 9,366 (11,974) (127.8) % Financing Activities (87,673) 314,641 (402,314) (127.9) % Overview 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. 28 Table of Contents Uses of Capital 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. In the first quarters of 2021 and 2020, we paid $96.9 million and $84.7 million, respectively, in incentive compensation earned during the years ended December 31, 2020 and 2019, respectively. In addition to operating activities, other uses of cash could include: (i) investments in organic growth, including expanding our distribution efforts; (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; (iv) dividend payments to common stockholders; (v) repurchases of our common stock; (vi) investments in our infrastructure; (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. Capital and Reserve Requirements We operate a broker-dealer subsidiary registered with the SEC that is subject to certain rules regarding minimum net capital. The broker-dealer is required to maintain a ratio of "aggregate indebtedness" to "net capital," as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital. 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 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 Cash and cash equivalents consist of cash in banks and money market fund investments. Investments consist primarily of investments in our sponsored funds. CIP represent investment products for which we provide investment management services and where we have either a controlling financial interest or we are considered the primary beneficiary of an investment product that is considered a variable interest entity. Operating Cash Flow 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 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 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. 29 Table of Contents 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 March 31, 2021, $199.8 million remained 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 $4.1 million as of March 31, 2021. Contractual Obligations Our contractual obligations are summarized in our 2020 Annual Report on Form 10-K. 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 Our financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K. 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 March 31, 2021. Recently Issued Accounting Pronouncements For a discussion of accounting standards, see Note 2 in our condensed consolidated financial statements. Item 3. 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.