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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 126 added, 191 removed, 248 unchanged (56% of the section changed)

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

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 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:

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 2021 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, resulting from:

(i) any reduction in our assets under management;

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(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;

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

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

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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.

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 earnings 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 investment products and through multiple distribution channels.

Our investment strategies are available in a diverse range of styles and disciplines, managed by differentiated investment managers.

We have offerings in various asset classes (equity, fixed income, multi-asset and alternative), geographies (domestic, global, international and emerging), market capitalizations (large, mid and small), styles (growth, core and value) and investment approaches (fundamental, quantitative and specialty).

Our retail products include open-end funds, 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.

We distribute our open-end funds principally through financial intermediaries.

We have broad distribution access in the US 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.

In addition, we leverage third-party distributors for global products sold in the US retail market as well as in certain international jurisdictions.

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

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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").

▪ Net income per diluted share was $4.22 in the first quarter of 2022, a decrease of $0.32, or 7.0%, as compared to net income per diluted share of $4.54 in the first quarter of 2021.

▪ Total sales were $9.4 billion in the first quarter of 2022, a decrease of $1.2 billion, or 11.1%, from $10.6 billion in the first quarter of 2021.

Net flows were $(2.0) billion in the first quarter of 2022 compared to $2.5 billion in the first quarter of 2021.

▪ Assets under management were $183.3 billion at March 31, 2022, an increase of $14.5 billion, or 8.6%, from March 31, 2021.

Stone Harbor Investment Partners

On January 1, 2022, the Company completed its acquisition of Stone Harbor Investment Partners LLC ("Stone Harbor"), a premier manager of emerging markets debt, multi-asset credit, global corporate, and other strategies with $14.7 billion of assets under management at December 31, 2021.

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

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.

On October 1, 2021, the Company completed its acquisition of Westchester Capital Management ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management.

AllianzGI Strategic Partnership

On February 1, 2021, the Company finalized a strategic partnership with Allianz Global Investors U.S.

LLC ("AllianzGI"), pursuant to which NFJ Investment Group ("NFJ") was established as a new affiliated investment 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 Relationship", together with Westchester and Stone Harbor, the "Transactions").

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.

At March 31, 2022, total assets under management were $183.3 billion, representing an increase of $14.5 billion, or 8.6%, from March 31, 2021, and a decrease of $3.8 billion, or 2.1%, from December 31, 2021.

The increase from March 31, 2021 included $19.8 billion from the addition of Stone Harbor and Westchester, partially offset by $1.8 billion of negative market performance and $1.0 billion of net outflows.

The decrease from December 31, 2021 was due to $16.5 billion in negative market performance and $2.0 billion of net outflows, partially offset by $14.7 billion from Stone Harbor.

Other Fee Earning Assets

Other fee earning assets include assets for which we provide services for an asset-based fee but do not serve as the investment adviser.

Other fee earning assets are not included in our assets under management.

At December 31, 2021, we had $3.5 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.

In the first quarter of 2022, total revenues increased 16.4% to $252.4 million from $216.9 million in the first quarter of 2021, primarily as a result of higher average assets under management as a result of the assets from the Transactions.

Operating income increased $3.4 million to $65.6 million in the first quarter of 2022 compared to $62.1 million in the first quarter of 2021, primarily due to the same factors previously mentioned.

Assets Under Management by Product

The following table summarizes our assets under management by product:

As of September 30, Change

As of March 31, Change

(in millions) 2022 2021 $ %

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Closed-End Funds 12,060 11,664 396 3.4 %

Exchange Traded Funds 1,321 543 778 143.3 %

Retail Separate Accounts 40,824 37,244 3,580 9.6 %

Institutional Accounts (2) 57,309 46,787 10,522 22.5 %

Structured Products 3,809 4,163 (354) (8.5) %

Total $ 183,342 $ 168,880 $ 14,462 8.6 %

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(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:

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents assets under management of institutional separate and commingled accounts including structured products.

(3) 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

– Retail Separate Accounts - prior-quarter ending balance

– Institutional Accounts - average of month-end balances

Asset Flows by Product

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2022 2021

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Beginning balance $ 12,068 $ 5,914

Inflows 3 15 3 20

Outflows — — — —

Net flows 8 —

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Ending balance $ 12,060 $ 11,664

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

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Ending balance $ 57,309 $ 46,787

Structured Products

Beginning balance $ 187,186 $ 132,194

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Market performance (16,457) 4,690

(28) (42) (89) (129)

Ending balance $ 3,809 $ 4,163 $ 3,809 $ 4,163

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 2021 2020

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 (2) 14,573 29,484

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(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.

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the impact of non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), current income or capital returned by structured products and the use of leverage.

(3) Represents assets under management of institutional separate and commingled accounts including structured products.

Assets Under Management by Asset Class

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

As of September 30, Change % of Total

The following table summarizes assets under management by asset class:

As of March 31, Change % of Total

(in millions) 2022 2021 $ % 2022 2021

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Total $ 183,342 $ 168,880 $ 14,462 8.6 % 100.0 % 100.0 %

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

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

equity, fixed income, and alternatives.

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

Average Assets Under Management and Average Basis Points

(2) Consists of event-driven, real estate securities, infrastructure, long/short and other strategies.

Average Assets Under Management and Average Fees Earned

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

Three Months Ended September 30,

Average Fee Earned

(expressed in basis points) Average Assets Under

(in millions) (2)

2021 2020 2021 2020

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,

Three Months Ended March 31,

Average Fee Earned

(expressed in basis points) Average Assets Under

(expressed in basis points)

Average Assets Under

(in millions) (3)

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Closed-End Funds 58.4 56.2 11,762 9,340

Exchange Traded Funds 10.7 7.5 1,114 689

Retail Separate Accounts 43.6 45.7 44,538 32,118

Institutional Accounts (2) 31.5 32.1 58,269 45,749

Structured Products 38.0 31.6 3,888 4,209

All Products 41.9 43.1 $ 190,106 $ 154,344

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

retail funds, offshore funds and variable insurance funds.

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents assets under management of institutional separate and commingled accounts including structured products.

(3) 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.

– Retail Separate Accounts - prior-quarter ending balance

– Institutional Accounts - average of month-end balances

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

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.

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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.

Institutional account fees are calculated based on an average of month-end balances, an average of current quarter’s asset values or 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 the funds.

The average fee rate earned on all products for the three months ended March 31, 2022 decreased by 1.2 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 Relationship and Stone Harbor.

Results of Operations

Summary Financial Data

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

Three Months Ended March 31,

(in thousands) 2022 2021 2022 vs.

2020 % 2021 2020 2021 vs.

Investment management fees $ 206,817 $ 173,269 $ 33,548 19.4 %

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$ 33,059 $ 36,588 $ (3,529) (9.6) %

Earnings (loss) per share-diluted $ 4.22 $ 4.54 $ (0.32) (7.0) %

Revenues by source were as follows:

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

Three Months Ended March 31,

(in thousands) 2022 2021 2022 vs.

2020 % 2021 2020 2021 vs.

Investment management fees

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Structured products 906 1,259 (353) (28.0) %

Other products 433 611 (178) (29.1) % 1,159 1,961 (802) (40.9) %

Total investment management fees 206,817 173,269 33,548 19.4 %

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Administration and shareholder service fees 24,344 22,560 1,784 7.9 %

Other income and fees 1,159 94 1,065 NM 3,053 425 2,628 618.4 %

Other income and fees 1,272 720 552 76.7 %

Total revenues $ 252,440 $ 216,897 $ 35,543 16.4 %

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

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.

Investment management fees increased by $33.5 million, or 19.4%, for the three months ended March 31, 2022, compared to the same period in the prior year.

The increase in investment management fees was due to an increase in average assets under management of $35.8 billion, or 23.2% as a result of the Transactions.

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.

Distribution and service fees decreased by $0.3 million, or 1.7%, for the three months ended March 31, 2022, compared to the same period in the prior year, due primarily to lower sales for open-end funds in share classes that have distribution and service fees primarily as a result of market performance and net outflows.

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.

Fund administration and shareholder service fees increased by $1.8 million, or 7.9%, for the three months ended March 31, 2022, 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, predominantly as a result of the Transactions.

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.

Other income and fees increased by $0.6 million, or 76.7%, for the three months ended March 31, 2022, compared to the same period in the prior year primarily due to a full quarter of fees associated with other fee-earning assets as a result of the AGI Relationship.

Operating Expenses

Operating expenses by category were as follows:

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

Three Months Ended March 31,

(in thousands) 2022 2021 2022 vs.

2020 % 2021 2020 2021 vs.

Operating expenses

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Other operating expenses of CIP 740 559 181 32.4 %

Restructuring and severance — 735 (735) (100.0) % — 1,155 (1,155) (100.0) %

Depreciation expense 935 1,098 (163) (14.8) %

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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.

Employment expenses for the three months ended March 31, 2022 were $106.0 million, which represented an increase of $14.2 million, or 15.5%, compared to the same period in the prior year.

The increase was primarily due to the addition of Stone Harbor and Westchester.

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 $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.

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

Distribution and other asset-based 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 period commissions are recovered from distribution fee revenues and contingent sales charges received upon redemption of shares.

Distribution and other asset-based expenses increased $0.6 million or 1.7%, as compared to the same period in the prior year primarily due to an increase in assets under management as a result of the Transactions partially offset by a lower percentage of sales and assets under management in share classes that have distribution and other asset-based expenses.

Other Operating Expenses

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

Other operating expenses for the three 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 for the three months ended March 31, 2022 increased by $12.1 million, or 62.0%, as compared to the same period in the prior year primarily due to discrete business initiative professional fees and the Transactions.

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.

Other operating expenses of CIP remained consistent during the three months ended March 31, 2022, compared to the same period in the prior year.

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.

Depreciation expense remained consistent during the three months ended March 31, 2022, 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 $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.

Amortization expense increased $5.2 million, or 54.9%, for the three months ended March 31, 2022, compared to the same period in the prior year, due to the additional amortization associated with the Transactions.

Other Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2022 2021 2022 vs.

2020 % 2021 2020 2021 vs.

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) %

Realized and unrealized gain (loss) on investments, net $ (2,982) $ 891 $ (3,873) (434.7) %

Realized and unrealized gain (loss) of CIP, net (13,344) (4,687) (8,657) 184.7 %

Other income (expense), net 287 1,771 (1,484) (83.8) %

1 unchanged sentence

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) on investments, net changed during the three months ended March 31, 2022 by $(3.9) 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, 2022 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.

Realized and unrealized gain (loss) of CIP, net changed $(8.7) million, during the three months ended March 31, 2022, compared to the same period in the prior year.

The change for the three months ended March 31, 2022 consisted primarily of an increase in unrealized losses of $54.4 million, due to changes in market values of leveraged loans, partially offset by changes in unrealized gains of $45.7 million 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.

Other income (expense), net changed $(1.5) million during the three months ended March 31, 2022, compared to the same period in the prior year.

The change during the three-month period was primarily due to decreased earnings from equity method investments during the current year period.

Interest Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2022 2021 2022 vs.

2020 % 2021 2020 2021 vs.

Interest Income (Expense)

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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 expense remained consistent during the three months ended March 31, 2022, 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 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 remained consistent during the three months ended March 31, 2022, compared to the same 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.

decreases were primarily due to a decrease in interest rates.

Interest and dividend income of investments of CIP decreased $3.5 million, or 14.6%, for the three months ended March 31, 2022, compared to the same period in the prior year.

The decrease was primarily due to a decrease in interest earned from our consolidated CLOs.

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.

Interest expense of CIP decreased $2.4 million, or 16.3%, for the three months ended March 31, 2022, compared to the same period in the prior year.

The decrease during the three months ended March 31, 2022 was primarily due to lower average debt balances of CIP during the current year period.

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.

federal, state and local taxes at an estimated effective tax rate of 30.0% and 22.5% for the three months ended March 31, 2022 and 2021, respectively.

The comparatively higher estimated effective tax rate for the three months ended March 31, 2022 was primarily due to valuation allowances recorded in the current year for the tax effects of unrealized losses on certain Company investments.

Liquidity and Capital Resources

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

September 30, 2021 December 31, 2020 Change

March 31, 2022 December 31, 2021 Change

(in thousands) 2022 vs.

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Total equity 824,233 836,627 (12,394) (1.5) %

Nine Months Ended

September 30, Change

Three Months Ended

March 31, Change

(in thousands) 2022 2021 2022 vs.

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Financing activities (145,777) (87,673) (58,104) 66.3 %

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.

At March 31, 2022, we had $225.2 million of cash and cash equivalents and $116.8 million of investments, which included $88.4 million of investment securities, compared to $378.9 million of cash and cash equivalents and $108.9 million of investments, which included $80.3 million of investment securities, at December 31, 2021.

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.

Our main uses of capital related to operating activities comprise employee compensation and related benefit costs, which include annual incentive compensation, other operating expenses, which primarily consist of investment research,

technology costs, professional fees, distribution and occupancy costs;

interest on our indebtedness;

and income taxes.

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

1 unchanged sentence

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.

(i) investments in organic growth, including seeding or launching new products and expanding distribution;

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

(iii) dividend payments to common stockholders;

(iv) repurchases of our common stock, or withholding obligations for the net settlement of employee share transactions;

(v) investments in our infrastructure;

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

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

and (viii) 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.

We operate an 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.

At March 31, 2022, 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

1 unchanged sentence

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.

CIP represent investment products for which we provide investment management services and where we either have a controlling financial interest or 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.

Net cash used in operating activities of $81.8 million for the three months ended March 31, 2022 changed by $231.9 million from net cash provided by operating activities of $150.2 million for the same period in the prior year primarily due to a $192.7 million reduction in sales of investments by CIP and increased compensation and benefit payments during 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.

Net cash used in investing activities was $22.6 million for the three months ended March 31, 2022 compared to net cash used in investing activities of $2.6 million in the same period for the prior year.

The primary investing activity during the three months ended March 31, 2022 related to cash paid for Stone Harbor.

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

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.

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:

(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.

Cash flows from financing activities consist primarily of transactions related to our common shares, issuance and repayment of debt by us and our CIP, payments of contingent consideration and changes to noncontrolling interests.

Net cash used in financing activities increased by $58.1 million to $145.8 million for the three months ended March 31, 2022 from $87.7 million for the three months ended March 31, 2021.

The net change was primarily due to contingent consideration payments of $33.0 million during the current-year period not in the prior-year period, along with an increase of $16.7 million in net borrowings of CIP during the three months ended March 31, 2022 compared to the prior year period.

Credit Agreement

The Company's credit agreement, as amended (the "Credit Agreement"), comprises (i) a $275.0 million term loan with a seven-year term (the "Term Loan") expiring in September 2028, and (ii) a $175.0 million revolving credit facility with a five-year term expiring in September 2026.

During the three months ended March 31, 2022, the Company repaid $0.7 million outstanding under its Term Loan.

At March 31, 2022, $273.6 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 $7.7 million as of March 31, 2022.

Critical Accounting Policies and Estimates

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A complete description of our significant accounting policies is included in our 2021 Annual Report on Form 10-K.

There were no material changes in our critical accounting policies in the three months ended September 30, 2021.

There were no material changes in our critical accounting policies and estimates in the three months ended March 31, 2022.

Recently Issued Accounting Pronouncements

2 unchanged sentences

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.

During the three months ended March 31, 2022, there were no material changes to the information contained in Part II, Item 7A of the Company's 2020 Annual Report on Form 10-K.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis