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 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; (ii) general domestic and global economic, political, and pandemic conditions; (iii) inability to achieve the expected benefits of our strategic transactions; (iv) the effects of the on-going 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 2021 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, as well as from select unaffiliated subadvisers. 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 are primarily driven by asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution, and shareholder services. 19 Table of Contents 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 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. 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. 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. Financial Highlights ▪ 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 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 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. 20 Table of Contents 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 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 March 31, Change (in millions) 2022 2021 $ % Open-End Funds (1) $ 73,149 $ 73,185 $ (36) 0.0 % Closed-End Funds 12,060 11,664 396 3.4 % Retail Separate Accounts 40,824 37,244 3,580 9.6 % Institutional Accounts (2) 57,309 46,787 10,522 22.5 % Total $ 183,342 $ 168,880 $ 14,462 8.6 % Average Assets Under Management (3) $ 190,106 $ 154,344 $ 35,762 23.2 % (1) Represents assets under management of U.S. 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 - prior-quarter ending balance – Institutional Accounts - average of month-end balances 21 Table of Contents Asset Flows by Product The following table summarizes asset flows by product: Three Months Ended March 31, (in millions) 2022 2021 Open-End Funds (1) Beginning balance $ 78,706 $ 51,608 Inflows 4,956 6,028 Outflows (8,378) (5,335) Net flows (3,422) 693 Market performance (6,907) 1,228 Other (2) 4,772 19,656 Ending balance $ 73,149 $ 73,185 Closed-End Funds Beginning balance $ 12,068 $ 5,914 Inflows 8 — Outflows — — Net flows 8 — Market performance (196) 105 Other (2) 180 5,645 Ending balance $ 12,060 $ 11,664 Retail Separate Accounts Beginning balance $ 44,538 $ 29,751 Inflows 2,022 2,699 Outflows (1,394) (896) Net flows 628 1,803 Market performance (4,342) 2,141 Other (2) — 3,549 Ending balance $ 40,824 $ 37,244 Institutional Accounts (3) Beginning balance $ 51,874 $ 44,921 Inflows 2,449 1,884 Outflows (1,623) (1,868) Net flows 826 16 Market performance (5,012) 1,216 Other (2) 9,621 634 Ending balance $ 57,309 $ 46,787 Total Beginning balance $ 187,186 $ 132,194 Inflows 9,435 10,611 Outflows (11,395) (8,099) Net flows (1,960) 2,512 Market performance (16,457) 4,690 Other (2) 14,573 29,484 Ending balance $ 183,342 $ 168,880 (1) Represents assets under management of U.S. 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. 22 Table of Contents Assets Under Management by Asset Class The following table summarizes assets under management by asset class: As of March 31, Change % of Total (in millions) 2022 2021 $ % 2022 2021 Asset Class Equity $ 102,989 $ 106,183 $ (3,194) (3.0) % 56.2 % 62.9 % Fixed income 45,418 35,069 10,349 29.5 % 24.8 % 20.8 % Multi-asset (1) 23,415 22,498 917 4.1 % 12.8 % 13.3 % Alternatives (2) 11,520 5,130 6,390 124.6 % 6.2 % 3.0 % Total $ 183,342 $ 168,880 $ 14,462 8.6 % 100.0 % 100.0 % (1) Includes strategies with substantial holdings in at least two of the following asset classes: equity, fixed income, and alternatives. (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 March 31, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (3) 2022 2021 2022 2021 Products Open-End Funds (1) 46.5 47.5 $ 75,537 $ 67,137 Closed-End Funds 58.4 56.2 11,762 9,340 Retail Separate Accounts 43.6 45.7 44,538 32,118 Institutional Accounts (2) 31.5 32.1 58,269 45,749 All Products 41.9 43.1 $ 190,106 $ 154,344 (1) Represents assets under management of U.S. 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 - 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. 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, 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. 23 Table of Contents Results of Operations Summary Financial Data Three Months Ended March 31, (in thousands) 2022 2021 2022 vs. 2021 % Investment management fees $ 206,817 $ 173,269 $ 33,548 19.4 % Other revenue 45,623 43,628 1,995 4.6 % Total revenues 252,440 216,897 35,543 16.4 % Total operating expenses 186,888 154,755 32,133 20.8 % Operating income (loss) 65,552 62,142 3,410 5.5 % Other income (expense), net (16,039) (2,025) (14,014) 692.0 % Interest income (expense), net 6,341 7,250 (909) (12.5) % Income (loss) before income taxes 55,854 67,367 (11,513) (17.1) % Income tax expense (benefit) 16,735 15,153 1,582 10.4 % Net income (loss) 39,119 52,214 (13,095) (25.1) % Noncontrolling interests (6,060) (15,626) 9,566 (61.2) % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 33,059 $ 36,588 $ (3,529) (9.6) % Earnings (loss) per share-diluted $ 4.22 $ 4.54 $ (0.32) (7.0) % Revenues Revenues by source were as follows: Three Months Ended March 31, (in thousands) 2022 2021 2022 vs. 2021 % Investment management fees Open-end funds $ 97,377 $ 89,120 $ 8,257 9.3 % Closed-end funds 16,940 12,940 4,000 30.9 % Retail separate accounts 49,603 37,512 12,091 32.2 % Institutional accounts 41,991 32,438 9,553 29.5 % Structured products 906 1,259 (353) (28.0) % Total investment management fees 206,817 173,269 33,548 19.4 % Distribution and service fees 20,007 20,348 (341) (1.7) % Administration and shareholder service fees 24,344 22,560 1,784 7.9 % Other income and fees 1,272 720 552 76.7 % Total revenues $ 252,440 $ 216,897 $ 35,543 16.4 % 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 $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 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. 24 Table of Contents 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 $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 $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 March 31, (in thousands) 2022 2021 2022 vs. 2021 % Operating expenses Employment expenses $ 105,993 $ 91,759 $ 14,234 15.5 % Distribution and other asset-based expenses 32,846 32,294 552 1.7 % Other operating expenses 31,712 19,580 12,132 62.0 % Other operating expenses of CIP 740 559 181 32.4 % Depreciation expense 935 1,098 (163) (14.8) % Amortization expense 14,662 9,465 5,197 54.9 % Total operating expenses $ 186,888 $ 154,755 $ 32,133 20.8 % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. 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. 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 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 remained consistent during the three months ended March 31, 2022, compared to the same period in the prior year. 25 Table of Contents Depreciation Expense Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements. Depreciation expense remained consistent during the three months ended March 31, 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 $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 March 31, (in thousands) 2022 2021 2022 vs. 2021 % Other Income (Expense) 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) % Total Other Income (Expense), net $ (16,039) $ (2,025) $ (14,014) 692.0 % Realized and unrealized gain (loss) on investments, net Realized and unrealized gain (loss) on investments, net changed during the three months ended March 31, 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 $(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 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 March 31, (in thousands) 2022 2021 2022 vs. 2021 % Interest Income (Expense) Interest expense $ (2,279) $ (2,314) $ 35 (1.5) % Interest and dividend income 328 136 192 141.2 % Interest and dividend income of investments of CIP 20,380 23,876 (3,496) (14.6) % Interest expense of CIP (12,088) (14,448) 2,360 (16.3) % Total Interest Income (Expense), net $ 6,341 $ 7,250 $ (909) (12.5) % Interest Expense Interest expense remained consistent during the three months ended March 31, 2022, compared to the same period in the prior year. 26 Table of Contents Interest and Dividend Income 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 $3.5 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 $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 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 Certain Financial Data The following table summarizes certain financial data relating to our liquidity and capital resources: March 31, 2022 December 31, 2021 Change (in thousands) 2022 vs. 2021 % Balance Sheet Data Cash and cash equivalents $ 225,217 $ 378,921 $ (153,704) (40.6) % Investments 116,767 108,890 7,877 7.2 % Contingent consideration 130,728 162,564 (31,836) (19.6) % Debt 265,954 266,346 (392) (0.1) % Redeemable noncontrolling interests 138,738 138,965 (227) (0.2) % Total equity 824,233 836,627 (12,394) (1.5) % Three Months Ended March 31, Change (in thousands) 2022 2021 2022 vs. 2021 % Cash Flow Data Provided by (Used in): Operating activities $ (81,775) $ 150,151 $ (231,926) (154.5) % Investing activities (22,575) (2,608) (19,967) 765.6 % Financing activities (145,777) (87,673) (58,104) 66.3 % Overview 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, which include annual incentive compensation, other operating expenses, which primarily consist of investment research, 27 Table of Contents 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. In the first quarters of 2022 and 2021, we paid $151.6 million and $96.9 million, respectively, in incentive compensation earned during the years ended December 31, 2021 and 2020, respectively. In addition to operating activities, other uses of cash could include: (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 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 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 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 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 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 $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 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 28 Table of Contents issuance costs, which were $7.7 million as of March 31, 2022. 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 2021 Annual Report on Form 10-K. 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 and estimates in the three months ended March 31, 2022. Recently Issued Accounting Pronouncements For a discussion of accounting standards, see Note 2 in our condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. During the three months ended March 31, 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.