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 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. COVID-19 Impact The novel coronavirus global pandemic ("COVID-19") significantly impacted the global economy and financial markets, creating uncertainty, market volatility and dislocation. 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 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 $7.86 in the second quarter of 2021, as compared to net income per diluted share of $1.43 in the second quarter of 2020. ▪ Total sales were $9.6 billion in the second quarter of 2021, an increase of $0.1 billion, or 1.5%, from $9.4 billion in the second quarter of 2020. Net flows were $1.3 billion in the second quarter of 2021 compared to $2.8 billion in the second quarter of 2020. ▪ Assets under management were $178.6 billion at June 30, 2021, an increase of $70.2 billion, or 64.7%, from June 30, 2020. AllianzGI Strategic Partnership On February 1, 2021, we completed the actions necessary to finalize the strategic partnership with Allianz Global Investors ("AllianzGI"), pursuant to which NFJ Investment Group ("NFJ") was established as a new affiliated manager and the Company became the investment adviser, distributor and/or administrator for $29.5 billion of AllianzGI's open-end, closed-end, institutional and retail separate account assets (the "AGI Transaction"). In addition, the Company had $3.8 billion of other fee earning assets as of June 30, 2021, also as a result of the AllianzGI partnership. 20 Table of Contents 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 2021, subject to customary closing conditions and approvals, including by fund shareholders. The expected payment at closing is $135.0 million and there is an additional revenue-retention payment of up to $20.0 million due within six months of closing. Agreement with Stone Harbor Investment Partners On June 25, 2021, we entered into an agreement to acquire Stone Harbor Investment Partners LP ("Stone Harbor"). The transaction is expected to close near the end of 2021, subject to customary closing conditions and approvals, including by fund shareholders. Assets Under Management At June 30, 2021, total assets under management were $178.6 billion, representing an increase of $70.2 billion, or 64.7%, from June 30, 2020, and an increase of $46.4 billion, or 35.1%, from December 31, 2020. The increase in total assets under management from June 30, 2020 included $34.0 billion of positive market performance, $29.5 billion from the AGI Transaction and $7.7 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, $13.5 billion of positive market performance and $3.8 billion of positive net flows. In addition, at June 30, 2021, we had $3.8 billion of other fee earning assets. Operating Results In the second quarter of 2021, total revenues increased 83.6% to $244.0 million from $132.9 million in the second 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, positive net flows and the assets from the AGI Transaction. Operating income increased $59.8 million to $86.4 million in the second quarter of 2021 compared to $26.6 million in the second 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 June 30, Change (in millions) 2021 2020 $ % Open-End Funds (1) (2) $ 75,333 $ 41,144 $ 34,189 83.1 % Closed-End Funds 11,993 5,639 6,354 112.7 % Exchange Traded Funds 1,260 541 719 132.9 % Retail Separate Accounts 40,578 22,054 18,524 84.0 % Institutional Accounts (2) 45,604 34,819 10,785 31.0 % Structured Products 3,870 4,264 (394) (9.2) % Total $ 178,638 $ 108,461 $ 70,177 64.7 % Average Assets Under Management (3) $ 163,611 $ 102,031 $ 61,580 60.4 % (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 six-month period ended June 30 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 June 30, Six Months Ended June 30, (in millions) 2021 2020 2021 2020 Open-End Funds (1) (2) Beginning balance $ 72,164 $ 34,361 $ 50,771 $ 43,824 Inflows 4,743 4,714 10,596 8,773 Outflows (4,987) (4,115) (10,245) (9,862) Net flows (244) 599 351 (1,089) Market performance 3,469 6,255 4,599 (1,478) Other (3) (56) (71) 19,612 (113) Ending balance $ 75,333 $ 41,144 $ 75,333 $ 41,144 Closed-End Funds Beginning balance $ 11,664 $ 5,343 $ 5,914 $ 6,748 Inflows — — — 5 Outflows — — — — Net flows — — — 5 Market performance 514 380 619 (805) Other (3) (185) (84) 5,460 (309) Ending balance $ 11,993 $ 5,639 $ 11,993 $ 5,639 Exchange Traded Funds Beginning balance $ 1,021 $ 480 $ 837 $ 1,156 Inflows 232 74 407 160 Outflows (92) (140) (169) (373) Net flows 140 (66) 238 (213) Market performance 104 137 202 (368) Other (3) (5) (10) (17) (34) Ending balance $ 1,260 $ 541 $ 1,260 $ 541 Retail Separate Accounts Beginning balance $ 37,244 $ 17,660 $ 29,751 $ 20,414 Inflows 2,273 1,483 4,972 2,544 Outflows (833) (654) (1,729) (1,429) Net flows 1,440 829 3,243 1,115 Market performance 1,910 3,560 4,051 520 Other (3) (16) 5 3,533 5 Ending balance $ 40,578 $ 22,054 $ 40,578 $ 22,054 Institutional Accounts (2) Beginning balance $ 42,802 $ 28,507 $ 40,861 $ 32,859 Inflows 2,302 3,141 4,186 4,640 Outflows (2,184) (1,667) (4,052) (3,444) Net flows 118 1,474 134 1,196 Market performance 2,752 4,880 3,933 730 Other (3) (68) (42) 676 34 Ending balance $ 45,604 $ 34,819 $ 45,604 $ 34,819 Structured Products Beginning balance $ 3,985 $ 4,343 $ 4,060 $ 3,903 Inflows — — — 491 Outflows (118) (73) (197) (115) Net flows (118) (73) (197) 376 Market performance 33 33 68 72 Other (3) (30) (39) (61) (87) Ending balance $ 3,870 $ 4,264 $ 3,870 $ 4,264 22 Table of Contents Three Months Ended June 30, Six Months Ended June 30, (in millions) 2021 2020 2021 2020 Total Beginning balance $ 168,880 $ 90,694 $ 132,194 $ 108,904 Inflows 9,550 9,412 20,161 16,613 Outflows (8,214) (6,649) (16,392) (15,223) Net flows 1,336 2,763 3,769 1,390 Market performance 8,782 15,245 13,472 (1,329) Other (3) (360) (241) 29,203 (504) Ending balance $ 178,638 $ 108,461 $ 178,638 $ 108,461 (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 June 30, Change % of Total (in millions) 2021 2020 $ % 2021 2020 Asset Class Equity $ 113,751 $ 66,205 $ 47,546 71.8 % 63.8 % 61.0 % Fixed income (1) 35,426 27,427 7,999 29.2 % 19.8 % 25.3 % Multi-asset (2) 23,668 10,714 12,954 120.9 % 13.2 % 9.9 % Alternatives (3) 5,793 4,115 1,678 40.8 % 3.2 % 3.8 % Total $ 178,638 $ 108,461 $ 70,177 64.7 % 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 June 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (2) 2021 2020 2021 2020 Products Open-End Funds (1) 46.4 49.5 $ 74,126 $ 38,182 Closed-End Funds 55.1 61.8 11,936 5,566 Exchange Traded Funds 14.0 5.1 1,159 554 Retail Separate Accounts 44.2 49.0 37,244 17,660 Institutional Accounts 32.2 31.1 44,538 31,931 Structured Products 40.0 26.8 3,875 4,265 All Products 42.5 42.9 $ 172,878 $ 98,158 Six Months Ended June 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (2) 2021 2020 2021 2020 Products Open-End Funds (1) 47.2 49.0 $ 70,187 $ 40,087 Closed-End Funds 55.6 62.3 10,638 6,045 Exchange Traded Funds 10.8 7.3 1,024 758 Retail Separate Accounts 44.9 48.9 34,681 19,037 Institutional Accounts 31.9 30.1 43,151 31,876 Structured Products 39.4 30.3 3,930 4,228 All Products 42.8 42.8 $ 163,611 $ 102,031 (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. The average fee rate earned on all products for the three months ended June 30, 2021 decreased by 0.4 basis points compared to the same period in the prior year primarily due to lower fee rates earned on the assets under management acquired from the AGI Transaction. 24 Table of Contents Results of Operations Summary Financial Data Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Investment management fees $ 193,510 $ 110,550 $ 82,960 75.0 % $ 366,779 $ 230,838 $ 135,941 58.9 % Other revenue 50,501 22,344 28,157 126.0 % 94,129 46,622 47,507 101.9 % Total revenues 244,011 132,894 111,117 83.6 % 460,908 277,460 183,448 66.1 % Total operating expenses 157,600 106,272 51,328 48.3 % 312,355 226,236 86,119 38.1 % Operating income (loss) 86,411 26,622 59,789 224.6 % 148,553 51,224 97,329 190.0 % Other income (expense), net 6,067 (435) 6,502 NM 4,042 (16,036) 20,078 NM Interest income (expense), net 6,020 (2,400) 8,420 NM 13,270 (104) 13,374 NM Income (loss) before income taxes 98,498 23,787 74,711 314.1 % 165,865 35,084 130,781 372.8 % Income tax expense (benefit) 22,401 7,578 14,823 195.6 % 37,554 17,869 19,685 110.2 % Net income (loss) 76,097 16,209 59,888 369.5 % 128,311 17,215 111,096 645.3 % Noncontrolling interests (13,130) (4,930) (8,200) 166.3 % (28,756) (10,221) (18,535) 181.3 % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 62,967 $ 11,279 $ 51,688 458.3 % $ 99,555 $ 6,994 $ 92,561 NM NM = Not meaningful Revenues Revenues by source were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Investment management fees Open-end funds $ 96,795 $ 54,018 $ 42,777 79.2 % $ 185,667 $ 113,126 $ 72,541 64.1 % Closed-end funds 16,395 8,557 7,838 91.6 % 29,335 18,736 10,599 56.6 % Retail separate accounts 42,475 22,398 20,077 89.6 % 79,987 48,112 31,875 66.3 % Institutional accounts 35,782 24,606 11,176 45.4 % 68,220 47,523 20,697 43.6 % Structured products 1,585 417 1,168 280.1 % 2,844 1,991 853 42.8 % Other products 478 554 (76) (13.7) % 726 1,350 (624) (46.2) % Total investment management fees 193,510 110,550 82,960 75.0 % 366,779 230,838 135,941 58.9 % Distribution and service fees 23,450 8,889 14,561 163.8 % 43,798 18,349 25,449 138.7 % Administration and shareholder service fees 25,877 13,289 12,588 94.7 % 48,437 27,942 20,495 73.3 % Other income and fees 1,174 166 1,008 607.2 % 1,894 331 1,563 472.2 % Total revenues $ 244,011 $ 132,894 $ 111,117 83.6 % $ 460,908 $ 277,460 $ 183,448 66.1 % 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 $83.0 million, or 75.0%, and $135.9 million, or 58.9%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The increase in investment management fees during the three- and six- month periods ended June 30, 2021 was due to an increase in average assets under management of $74.7 billion, or 76.1% and $61.6 million, or 60.4%, respectively, primarily as a result of market performance, the AGI Transaction and positive net flows. 25 Table of Contents 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 $14.6 million, or 163.8%, and $25.4 million, or 138.7%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, due to higher average assets for open-end funds in share classes that have distribution and service fees primarily as a result of market performance and the AGI Transaction. 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 $12.6 million, or 94.7%, and $20.5 million, or 73.3%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year primarily due to the increase in average assets under management for our open-end and closed-end funds during the periods primarily as a result of market performance, the AGI Transaction and positive net flows. Other Income and Fees Other income and fees primarily represent fees related to other fee earning assets and contingent sales charges earned from investor redemptions of certain shares sold without a front-end sales charge. Other income and fees increased by $1.0 million, or 607.2%, and $1.6 million, or 472.2%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year primarily due fees associated with other fee earning assets as a result of the AGI Transaction. Operating Expenses Operating expenses by category were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Operating expenses Employment expenses $ 87,630 $ 60,163 $ 27,467 45.7 % $ 179,389 $ 126,293 $ 53,096 42.0 % Distribution and other asset-based expenses 36,021 17,345 18,676 107.7 % 68,315 36,754 31,561 85.9 % Other operating expenses 21,946 17,436 4,510 25.9 % 41,526 36,321 5,205 14.3 % Other operating expenses of CIP 659 2,179 (1,520) (69.8) % 1,218 8,928 (7,710) (86.4) % Restructuring and severance — 420 (420) (100.0) % — 420 (420) (100.0) % Depreciation expense 981 1,196 (215) (18.0) % 2,079 2,454 (375) (15.3) % Amortization expense 10,363 7,533 2,830 37.6 % 19,828 15,066 4,762 31.6 % Total operating expenses $ 157,600 $ 106,272 $ 51,328 48.3 % $ 312,355 $ 226,236 $ 86,119 38.1 % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three and six months ended June 30, 2021 were $87.6 million and $179.4 million, which represented an increase of $27.5 million, or 45.7%, and $53.1 million, or 42.0%, compared to the same period in the prior year. The increase for the three and six months ended June 30, 2021 was primarily due to increased profit-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 26 Table of Contents and contingent sales charges received from shareholders of the funds upon redemption of their shares. Distribution and other asset-based expenses increased by $18.7 million, or 107.7%, and $31.6 million, or 85.9%, for the three and six months ended June 30, 2021, as compared to the same periods 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 primarily as a result of the AGI Transaction. 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 June 30, 2021 increased by $4.5 million, or 25.9%, as compared to the same period in the prior year primarily due to acquisition related professional fees and additional expenses as a result of the newly established affiliated manager, NFJ. Other operating expenses for the six months ended June 30, 2021 increased $5.2 million, or 14.3%, as compared to the same period in the prior year primarily due to acquisition related professional fees in the current year, 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 $1.5 million, or 69.8%, for the three months ended June 30, 2021 and $7.7 million, or 86.4%, for the six months ended June 30, 2021 compared to the same periods in the prior year. The decreases during the six-month periods were primarily due to the costs associated with the issuance of a new CLO in the prior year periods that did not recur. Depreciation Expense Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements. Depreciation expense decreased $0.2 million, or 18.0%, and $0.4 million, or 15.3%, during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, primarily due to certain assets becoming fully depreciated. Amortization Expense Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives. Amortization expense increased for the three and six months ended June 30, 2021 compared to the same periods 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 June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Other Income (Expense) Realized and unrealized gain (loss) on investments, net $ 2,494 $ 7,114 $ (4,620) (64.9) % $ 3,385 $ (430) $ 3,815 NM Realized and unrealized gain (loss) of CIP, net 2,747 (6,744) 9,491 NM (1,940) (15,413) 13,473 (87.4) % Other income (expense), net 826 (805) 1,631 NM 2,597 (193) 2,790 NM Total Other Income (Expense), net $ 6,067 $ (435) $ 6,502 NM $ 4,042 $ (16,036) $ 20,078 NM 27 Table of Contents 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, 2021 by $(4.6) million and $3.8 million, 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, 2021 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 $9.5 million, and $13.5 million, during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The change for the three and six months ended June 30, 2021 consisted primarily of an increase in net realized and unrealized gains of $90.5 million and $201.7 million, respectively, due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $81.0 million and $188.2 million, respectively, related to the value of the notes payable. Other income (expense), net Other income (expense), net increased by $1.6 million and $2.8 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, primarily due to increased earnings from equity method investments during the current year periods. Interest Income (Expense) Interest Income (Expense), net by category were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Interest Income (Expense) Interest expense $ (2,256) $ (3,126) $ 870 (27.8) % $ (4,570) $ (6,325) $ 1,755 (27.7) % Interest and dividend income 166 242 (76) (31.4) % 302 994 (692) (69.6) % Interest and dividend income of investments of CIP 22,562 28,634 (6,072) (21.2) % 46,438 57,863 (11,425) (19.7) % Interest expense of CIP (14,452) (28,150) 13,698 (48.7) % (28,900) (52,636) 23,736 (45.1) % Total Interest Income (Expense), net $ 6,020 $ (2,400) $ 8,420 NM $ 13,270 $ (104) $ 13,374 NM Interest Expense Interest expense decreased $0.9 million, or 27.8%, and $1.8 million, or 27.7%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The decreases were due to a decrease in the average debt outstanding and a lower average interest rate compared to the same periods 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 $0.1 million, or 31.4%, and $0.7 million, or 69.6%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The decreases were primarily due to lower interest rates earned on cash 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 $6.1 million, or 21.2%, and $11.4 million, or 19.7%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The decreases were primarily due to a decrease in interest rates. 28 Table of Contents Interest Expense of CIP Interest expense of CIP represents interest expense on the notes payable of CIP. Interest expense of CIP decreased by $13.7 million, or 48.7%, and $23.7 million, or 45.1%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year. The decrease during the three and six months ended June 30, 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-to-date period that 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 22.6% and 50.9% for the six months ended June 30, 2021 and 2020, respectively. The decrease in the estimated effective tax rate for the six months ended June 30, 2021 as compared to the same period in the prior year was primarily due to income tax expense associated with valuation allowances recorded for unrealized losses on certain Company investments in the corresponding prior year period that did not recur. Liquidity and Capital Resources Certain Financial Data The following table summarizes certain financial data relating to our liquidity and capital resources: June 30, 2021 December 31, 2020 Change (in thousands) 2021 vs. 2020 % Balance Sheet Data Cash and cash equivalents $ 275,439 $ 246,511 $ 28,928 11.7 % Investments 81,775 64,944 16,831 25.9 % Contingent consideration 137,664 — 137,664 — % Debt 190,224 201,212 (10,988) (5.5) % Redeemable noncontrolling interests 131,525 115,513 16,012 13.9 % Total equity 789,837 720,940 68,897 9.6 % Six Months Ended June 30, Change (in thousands) 2021 2020 2021 vs. 2020 Cash Flow Data Provided by (Used In): Operating Activities $ 239,180 $ (449,712) $ 688,892 Investing Activities (5,527) 9,249 (14,776) Financing Activities (167,645) 370,577 (538,222) Overview At June 30, 2021, we had $275.4 million of cash and cash equivalents and $81.8 million of investments, which included $54.4 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 June 30, 2021, we had $193.8 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 comprise employee compensation and related benefit costs including payment of annual incentive compensation, interest on our indebtedness, income taxes and other operating expenses, 29 Table of Contents 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 adding seed capital to expand distribution opportunities and 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, or withholding obligations for the net settlement of employee share transactions; (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 SEC registered broker-dealer subsidiary 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 June 30, 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 $239.2 million for the six months ended June 30, 2021 changed by $688.9 million from net cash used in operating activities of $449.7 million for the same period in the prior year primarily due to an increase in net sales of investments by CIP of $618.4 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 $5.5 million for the six months ended June 30, 2021 compared to net cash provided by investing activities of $9.2 million in the same period for the prior year. The primary investing activities for the six months ended June 30, 2021 were $4.3 million of capital expenditures and other asset purchases. The primary investing activities for the six months ended June 30, 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 $538.2 million to net cash used in financing activities of $167.6 million for the six months ended June 30, 2021 as compared to net cash provided by financing activities of $370.6 million for the six months ended June 30, 2020. The net change was primarily due to a decrease of $558.7 million in net borrowings of CIP during the six months ended June 30, 2021 compared to the prior year period. 30 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 June 30, 2021, $193.8 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 $3.6 million as of June 30, 2021. Contractual Obligations Our contractual obligations are summarized in our 2020 Annual Report on Form 10-K. As of June 30, 2021, there have been no material changes 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 June 30, 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 and six months ended June 30, 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.