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) any reduction in our assets under management; (ii) general domestic and global economic, political, and pandemic conditions; (iii) inability to achieve the expected benefits of our strategic transactions; (iv) the on-going effects of the COVID-19 pandemic and associated global economic disruptions; (v) withdrawal, renegotiation or termination of investment advisory agreements; (vi) damage to our reputation; (vii) inability to satisfy financial covenants and payments related to our indebtedness; (viii) inability to attract and retain key personnel; (ix) challenges from the competition we face in our business; (x) adverse developments related to unaffiliated subadvisers; (xi) negative changes in key distribution relationships; (xii) interruptions in or failure to provide critical technological service by us or third parties; (xiii) loss on our investments; (xiv) lack of sufficient capital on satisfactory terms; (xv) adverse regulatory and legal developments; (xvi) failure to comply with investment guidelines or other contractual requirements; (xvii) adverse civil litigation and government investigations or proceedings; (xviii) unfavorable changes in tax laws or limitations; (xix) volatility associated with our common stock; (xx) inability to make quarterly common stock dividends; (xxi) certain corporate governance provisions in our charter and bylaws; (xxii) losses or costs not covered by insurance; (xxiii) 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 20 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 $7.36 in the third quarter of 2021, an increase of $3.65, or 98.3% as compared to net income per diluted share of $3.71 in the third quarter of 2020. ▪ Total sales were $7.6 billion in the third quarter of 2021, a decrease of $0.3 billion, or 3.2%, from $7.9 billion in the third quarter of 2020. Net flows were $(0.6) billion in the third quarter of 2021 compared to $1.3 billion in the third quarter of 2020. ▪ Assets under management were $177.3 billion at September 30, 2021, an increase of $60.8 billion, or 52.2%, from September 30, 2020. AllianzGI Strategic Partnership On February 1, 2021, the Company completed the actions necessary to finalize a 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"). Westchester Capital Management On October 1, 2021, the Company completed its previously announced acquisition of Westchester Capital Management ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management. The initial purchase price payment of $135.0 million was made at closing and an additional $20.0 million 21 Table of Contents payment is due near year end, subject to retention of revenue levels, which is expected. Agreement with Stone Harbor Investment Partners On June 25, 2021, the Company 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 September 30, 2021, total assets under management were $177.3 billion, representing an increase of $60.8 billion, or 52.2%, from September 30, 2020, and an increase of $45.1 billion, or 34.1%, from December 31, 2020. The increase in total assets under management from September 30, 2020 included $26.5 billion of positive market performance, $29.5 billion from the AGI Transaction and $5.9 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, $13.0 billion of positive market performance and $3.2 billion of positive net flows. In addition, at September 30, 2021, we had $3.7 billion of other fee earning assets. Operating Results In the third quarter of 2021, total revenues increased 62.8% to $252.1 million from $154.8 million in the third quarter of 2020, primarily as a result of higher average assets under management in open-end funds as a result of positive market performance, positive net flows and the assets from the AGI Transaction. Operating income increased $52.3 million to $93.3 million in the third quarter of 2021 compared to $41.0 million in the third 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 (in millions) 2021 2020 $ % Open-End Funds (1) (2) $ 73,044 $ 44,574 $ 28,470 63.9 % Closed-End Funds 11,721 5,629 6,092 108.2 % Exchange Traded Funds 1,321 543 778 143.3 % Retail Separate Accounts 41,528 24,727 16,801 67.9 % Institutional Accounts (2) 45,882 36,851 9,031 24.5 % Structured Products 3,809 4,163 (354) (8.5) % Total $ 177,305 $ 116,487 $ 60,818 52.2 % Average Assets Under Management (3) $ 168,934 $ 105,651 $ 63,283 59.9 % (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 nine-month period ended September 30 were calculated as follows: – Funds - average daily or weekly balances – Retail Separate Accounts - average of quarterly beginning balances – Institutional Accounts and Structured Products - average of month-end balances 22 Table of Contents Asset Flows by Product The following table summarizes asset flows by product: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Open-End Funds (1) (2) Beginning balance $ 75,333 $ 41,144 $ 50,771 $ 43,824 Inflows 3,635 3,997 14,231 12,770 Outflows (5,103) (3,501) (15,348) (13,363) Net flows (1,468) 496 (1,117) (593) Market performance (745) 3,006 3,854 1,528 Other (3) (76) (72) 19,536 (185) Ending balance $ 73,044 $ 44,574 $ 73,044 $ 44,574 Closed-End Funds Beginning balance $ 11,993 $ 5,639 $ 5,914 $ 6,748 Inflows 3 15 3 20 Outflows — — — — Net flows 3 15 3 20 Market performance (114) 54 505 (751) Other (3) (161) (79) 5,299 (388) Ending balance $ 11,721 $ 5,629 $ 11,721 $ 5,629 Exchange Traded Funds Beginning balance $ 1,260 $ 541 $ 837 $ 1,156 Inflows 174 60 581 220 Outflows (65) (35) (234) (408) Net flows 109 25 347 (188) Market performance (30) (12) 172 (380) Other (3) (18) (11) (35) (45) Ending balance $ 1,321 $ 543 $ 1,321 $ 543 Retail Separate Accounts Beginning balance $ 40,578 $ 22,054 $ 29,751 $ 20,414 Inflows 2,003 1,727 6,975 4,271 Outflows (1,231) (617) (2,960) (2,046) Net flows 772 1,110 4,015 2,225 Market performance 178 1,591 4,229 2,111 Other (3) — (28) 3,533 (23) Ending balance $ 41,528 $ 24,727 $ 41,528 $ 24,727 Institutional Accounts (2) Beginning balance $ 45,604 $ 34,819 $ 40,861 $ 32,859 Inflows 1,808 2,075 5,994 6,715 Outflows (1,727) (2,381) (5,779) (5,825) Net flows 81 (306) 215 890 Market performance 222 2,473 4,155 3,203 Other (3) (25) (135) 651 (101) Ending balance $ 45,882 $ 36,851 $ 45,882 $ 36,851 Structured Products Beginning balance $ 3,870 $ 4,264 $ 4,060 $ 3,903 Inflows — — — 491 Outflows (69) (69) (266) (184) Net flows (69) (69) (266) 307 Market performance 36 10 104 82 Other (3) (28) (42) (89) (129) Ending balance $ 3,809 $ 4,163 $ 3,809 $ 4,163 23 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Total Beginning balance $ 178,638 $ 108,461 $ 132,194 $ 108,904 Inflows 7,623 7,874 27,784 24,487 Outflows (8,195) (6,603) (24,587) (21,826) Net flows (572) 1,271 3,197 2,661 Market performance (453) 7,122 13,019 5,793 Other (3) (308) (367) 28,895 (871) Ending balance $ 177,305 $ 116,487 $ 177,305 $ 116,487 (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 September 30, Change % of Total (in millions) 2021 2020 $ % 2021 2020 Asset Class Equity $ 112,732 $ 72,811 $ 39,921 54.8 % 63.6 % 62.5 % Fixed income (1) 35,240 28,273 6,967 24.6 % 19.9 % 24.3 % Multi-asset (2) 23,641 11,105 12,536 112.9 % 13.3 % 9.5 % Alternatives (3) 5,692 4,298 1,394 32.4 % 3.2 % 3.7 % Total $ 177,305 $ 116,487 $ 60,818 52.2 % 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. 24 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 September 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (2) 2021 2020 2021 2020 Products Open-End Funds (1) 46.3 50.4 $ 75,073 $ 43,603 Closed-End Funds 56.2 62.1 12,091 5,742 Exchange Traded Funds 10.4 6.5 1,295 549 Retail Separate Accounts 44.0 45.7 40,578 22,054 Institutional Accounts 31.0 31.5 46,739 36,771 Structured Products 35.1 34.2 3,803 4,171 All Products 42.0 43.1 $ 179,579 $ 112,890 Nine Months Ended September 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (2) 2021 2020 2021 2020 Products Open-End Funds (1) 46.9 49.5 $ 71,816 $ 41,258 Closed-End Funds 55.8 62.2 11,122 5,944 Exchange Traded Funds 10.7 7.5 1,114 689 Retail Separate Accounts 44.6 47.7 36,647 20,043 Institutional Accounts 31.6 30.6 44,347 33,508 Structured Products 38.0 31.6 3,888 4,209 All Products 42.5 42.9 $ 168,934 $ 105,651 (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 - average of quarterly beginning 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 and nine months ended September 30, 2021 decreased by 1.1 and 0.4 basis points, respectively, compared to the same periods in the prior year primarily due to lower fee rates earned on the assets under management acquired from the AGI Transaction. 25 Table of Contents Results of Operations Summary Financial Data Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Investment management fees $ 201,133 $ 129,785 $ 71,348 55.0 % $ 567,912 $ 360,623 $ 207,289 57.5 % Other revenue 50,931 25,005 25,926 103.7 % 145,060 71,627 73,433 102.5 % Total revenues 252,064 154,790 97,274 62.8 % 712,972 432,250 280,722 64.9 % Total operating expenses 158,782 113,781 45,001 39.6 % 471,137 340,017 131,120 38.6 % Operating income (loss) 93,282 41,009 52,273 127.5 % 241,835 92,233 149,602 162.2 % Other income (expense), net (2,304) 6,177 (8,481) (137.3) % 1,738 (9,859) 11,597 (117.6) % Interest income (expense), net 7,356 5,726 1,630 28.5 % 20,626 5,622 15,004 266.9 % Income (loss) before income taxes 98,334 52,912 45,422 85.8 % 264,199 87,996 176,203 200.2 % Income tax expense (benefit) 25,823 11,978 13,845 115.6 % 63,377 29,847 33,530 112.3 % Net income (loss) 72,511 40,934 31,577 77.1 % 200,822 58,149 142,673 245.4 % Noncontrolling interests (13,775) (11,286) (2,489) 22.1 % (42,531) (21,507) (21,024) 97.8 % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 58,736 $ 29,648 $ 29,088 98.1 % $ 158,291 $ 36,642 $ 121,649 332.0 % Revenues Revenues by source were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Investment management fees Open-end funds $ 99,278 $ 63,458 $ 35,820 56.4 % $ 284,945 $ 176,584 $ 108,361 61.4 % Closed-end funds 17,116 8,959 8,157 91.0 % 46,451 27,695 18,756 67.7 % Retail separate accounts 46,625 26,412 20,213 76.5 % 126,612 74,524 52,088 69.9 % Institutional accounts 36,728 29,048 7,680 26.4 % 104,948 76,571 28,377 37.1 % Structured products 953 1,297 (344) (26.5) % 3,797 3,288 509 15.5 % Other products 433 611 (178) (29.1) % 1,159 1,961 (802) (40.9) % Total investment management fees 201,133 129,785 71,348 55.0 % 567,912 360,623 207,289 57.5 % Distribution and service fees 23,293 9,797 13,496 137.8 % 67,091 28,146 38,945 138.4 % Administration and shareholder service fees 26,479 15,114 11,365 75.2 % 74,916 43,056 31,860 74.0 % Other income and fees 1,159 94 1,065 NM 3,053 425 2,628 618.4 % Total revenues $ 252,064 $ 154,790 $ 97,274 62.8 % $ 712,972 $ 432,250 $ 280,722 64.9 % NM = Not Meaningful 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 $71.3 million, or 55.0%, and $207.3 million, or 57.5%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The increase in investment management fees during the three- and nine-month periods ended September 30, 2021 was due to an increase in average assets 26 Table of Contents under management of $66.7 billion, or 59.1% and $63.3 million, or 59.9%, respectively, primarily as a result of market performance and the AGI Transaction. 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 $13.5 million, or 137.8%, and $38.9 million, or 138.4%, for the three and nine months ended September 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 $11.4 million, or 75.2%, and $31.9 million, or 74.0%, for the three and nine months ended September 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 predominantly as a result of market performance and the AGI Transaction. 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 $1.1 million and $2.6 million, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year primarily due to 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 September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Operating expenses Employment expenses $ 87,345 $ 67,479 $ 19,866 29.4 % $ 266,734 $ 193,772 $ 72,962 37.7 % Distribution and other asset-based expenses 36,692 19,570 17,122 87.5 % 105,007 56,324 48,683 86.4 % Other operating expenses 22,800 16,343 6,457 39.5 % 64,326 52,664 11,662 22.1 % Other operating expenses of CIP 639 1,016 (377) (37.1) % 1,857 9,944 (8,087) (81.3) % Restructuring and severance — 735 (735) (100.0) % — 1,155 (1,155) (100.0) % Depreciation expense 915 1,106 (191) (17.3) % 2,994 3,560 (566) (15.9) % Amortization expense 10,391 7,532 2,859 38.0 % 30,219 22,598 7,621 33.7 % Total operating expenses $ 158,782 $ 113,781 $ 45,001 39.6 % $ 471,137 $ 340,017 $ 131,120 38.6 % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three and nine months ended September 30, 2021 were $87.3 million and $266.7 million, respectively, which represented an increase of $19.9 million, or 29.4%, and $73.0 million, or 37.7%, respectively, compared to the same periods in the prior year. The increase for the three and nine months ended September 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 27 Table of Contents 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 $17.1 million, or 87.5%, and $48.7 million, or 86.4%, for the three and nine months ended September 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 September 30, 2021 increased by $6.5 million, or 39.5%, 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 nine months ended September 30, 2021 increased $11.7 million, or 22.1%, as compared to the same period in the prior year primarily due to acquisition related professional fees in the current year. Other Operating Expenses of CIP Other operating expenses of CIP decreased $0.4 million, or 37.1%, for the three months ended September 30, 2021 and $8.1 million, or 81.3%, for the nine months ended September 30, 2021 compared to the same periods in the prior year. The decreases during the three- and nine-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 17.3%, and $0.6 million, or 15.9%, during the three and nine months ended September 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 $2.9 million, or 38.0%, and $7.6 million, or 33.7%, for the three and nine months ended September 30, 2021, respectively, 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 September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Other Income (Expense) Realized and unrealized gain (loss) on investments, net $ (504) $ 2,498 $ (3,002) NM $ 2,881 $ 2,068 $ 813 39.3 % Realized and unrealized gain (loss) of CIP, net (2,801) 2,680 (5,481) NM (4,741) (12,733) 7,992 (62.8) % Other income (expense), net 1,001 999 2 0.2 % 3,598 806 2,792 346.4 % Total Other Income (Expense), net $ (2,304) $ 6,177 $ (8,481) (137.3) % $ 1,738 $ (9,859) $ 11,597 (117.6) % 28 Table of Contents 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, 2021 by $(3.0) million and $0.8 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, 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 $(5.5) million and $8.0 million, during the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The change for the three and nine months ended September 30, 2021 consisted primarily of an increase in net realized and unrealized losses of $75.9 million and gains of $125.7 million, respectively, due to changes in market values of leveraged loans, partially offset by changes in unrealized gains of $70.4 million and losses of $117.8 million, respectively, related to the value of the notes payable. Other income (expense), net Other income (expense), net remained consistent for the three months ended September 30, 2021, and increased by $2.8 million for the nine months ended September 30, 2021, in each case compared to the same periods in the prior year. The increase during the nine-month period was 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, (in thousands) 2021 2020 2021 vs. 2020 % 2021 2020 2021 vs. 2020 % Interest Income (Expense) Interest expense $ (2,348) $ (2,877) $ 529 (18.4) % $ (6,918) $ (9,202) $ 2,284 (24.8) % Interest and dividend income 269 137 132 96.4 % 571 1,131 (560) (49.5) % Interest and dividend income of investments of CIP 22,877 26,088 (3,211) (12.3) % 69,315 83,951 (14,636) (17.4) % Interest expense of CIP (13,442) (17,622) 4,180 (23.7) % (42,342) (70,258) 27,916 (39.7) % Total Interest Income (Expense), net $ 7,356 $ 5,726 $ 1,630 28.5 % $ 20,626 $ 5,622 $ 15,004 266.9 % Interest Expense Interest expense decreased $0.5 million, or 18.4%, and $2.3 million, or 24.8%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The decreases were due to a decline 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 increased $0.1 million, or 96.4%, and decreased $0.6 million, or 49.5%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The increase during the three-month period was primarily due to a higher average investment balance as compared to the corresponding period in the prior year. The decrease during the nine-month period 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 $3.2 million, or 12.3%, and $14.6 million, or 17.4%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The 29 Table of Contents decreases were primarily due to a decrease in interest rates. Interest Expense of CIP Interest expense of CIP represents interest expense on the notes payable of CIP. Interest expense of CIP decreased by $4.2 million, or 23.7%, and $27.9 million, or 39.7%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. The decrease during the three and nine months ended September 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 24.0% and 33.9% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the estimated effective tax rate for the nine months ended September 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: September 30, 2021 December 31, 2020 Change (in thousands) 2021 vs. 2020 % Balance Sheet Data Cash and cash equivalents $ 437,242 $ 246,511 $ 190,731 77.4 % Investments 105,632 64,944 40,688 62.7 % Contingent consideration 137,664 — 137,664 100.0 % Debt 266,739 201,212 65,527 32.6 % Redeemable noncontrolling interests 131,669 115,513 16,156 14.0 % Total equity 821,110 720,940 100,170 13.9 % Nine Months Ended September 30, Change (in thousands) 2021 2020 2021 vs. 2020 Cash Flow Data Provided by (Used In): Operating Activities $ 423,679 $ (380,267) $ 803,946 Investing Activities (16,525) 8,935 (25,460) Financing Activities (153,513) 305,840 (459,353) Overview At September 30, 2021, we had $437.2 million of cash and cash equivalents and $105.6 million of investments, which included $78.1 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. 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, 30 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 September 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 $423.7 million for the nine months ended September 30, 2021 changed by $803.9 million from net cash used in operating activities of $380.3 million for the same period in the prior year primarily due to an increase in net sales of investments by CIP of $688.8 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 $16.5 million for the nine months ended September 30, 2021 compared to net cash provided by investing activities of $8.9 million in the same period for the prior year. The primary investing activities for the nine months ended September 30, 2021 related to a decrease of $11.7 million in cash of CIP due to the deconsolidation of investment products in the current year period, while there was an increase of $9.7 million in cash of CIP due to the consolidation of additional investment products for the nine months ended September 30, 2020. 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 $459.4 million to net cash used in financing activities of $153.5 million for the nine months ended September 30, 2021 as compared to net cash provided by financing activities of $305.8 million for the nine months ended September 30, 2020. The net change was primarily due to a decrease of $566.9 million in net borrowings of CIP during the nine months ended September 30, 2021 compared to the prior year period, partially offset by the net cash inflows of $69.3 million as a result of the amended and restated credit agreement more fully discussed below. 31 Table of Contents Credit Agreement Refinancing On September 28, 2021, We completed a refinancing of our credit agreement through an amended and restated credit agreement dated September 28, 2021 (the "Credit Agreement"). The Credit Agreement provides for (a) a $275.0 million term loan for the Company with a seven-year term (the "Term Loan") and (b) a $175.0 million revolving credit facility for the Company with a five-year term. A portion of the proceeds from the refinancing was used to pay off $194.0 million outstanding on the previous Term Loan. At September 30, 2021, $275.0 million was outstanding under the Term Loan, and the Company had no outstanding borrowings under its revolving credit facility. In accordance with ASC 835, Interest , the amounts outstanding under the Company's Term Loan are presented in the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $8.3 million as of September 30, 2021. Contractual Obligations Except for borrowing under our Credit Agreement, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2020 as disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2020. The table below sets forth these changes as of September 30, 2021, but does not update the other line items in the contractual obligations table that appears in the section of the Annual Report on Form 10-K described above: Payments Due (in thousands) Total Remainder of 2021 1-3 Years 3-5 Years More Than 5 Years Credit Facility, including commitment fee (1) $ 334,082 $ 2,914 $ 34,567 $ 22,468 $ 274,133 (1) At September 30, 2021, we had $275.0 million outstanding under the term loan of our Credit Agreement which has a variable rate. Payments due are estimated based on the variable interest rate and commitment fee rate in effect on September 30, 2021. 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 September 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 nine months ended September 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.