VIRTUS INVESTMENT PARTNERS, INC. 10-Q

Item 1. Financial Statements Virtus Investment Partners, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share data) September 30, 2022 December 31, 2021 Assets: Cash and cash equivalents $ 309,248 $ 378,921 Investments 98,245 108,890 Accounts receivable, net 104,695 123,873 Assets of consolidated investment products ("CIP") Cash and cash equivalents of CIP 85,791 206,620 Cash pledged or on deposit of CIP 591 604 Investments of CIP 1,976,975 2,140,238 Other assets of CIP 17,432 44,210 Furniture, equipment and leasehold improvements, net 19,237 12,542 Intangible assets, net 467,476 500,571 Goodwill 348,836 338,406 Deferred taxes, net 24,979 19,204 Other assets 92,532 60,102 Total assets $ 3,546,037 $ 3,934,181 Liabilities and Equity Liabilities: Accrued compensation and benefits $ 145,361 $ 187,449 Accounts payable and accrued liabilities 37,758 48,496 Dividends payable 15,357 14,824 Contingent consideration (Note 4) 133,628 162,564 Debt 255,428 266,346 Other liabilities 90,698 60,225 Liabilities of CIP Notes payable of CIP 1,864,943 2,033,617 Securities purchased payable and other liabilities of CIP 72,483 185,068 Total liabilities 2,615,656 2,958,589 Commitments and Contingencies (Note 15) Redeemable noncontrolling interests 124,442 138,965 Equity: Equity attributable to Virtus Investment Partners, Inc.: Common stock, $ 0.01 par value, 1,000,000,000 shares authorized; 12,030,346 shares issued and 7,231,973 shares outstanding at September 30, 2022; and 11,906,747 shares issued and 7,506,151 shares outstanding at December 31, 2021 120 119 Additional paid-in capital 1,281,780 1,276,424 Retained earnings (accumulated deficit) 107,324 60,962 Accumulated other comprehensive income (loss) ( 771 ) 20 Treasury stock, at cost, 4,798,373 and 4,400,596 shares at September 30, 2022 and December 31, 2021, respectively ( 589,248 ) ( 509,248 ) Total equity attributable to Virtus Investment Partners, Inc. 799,205 828,277 Noncontrolling interests 6,734 8,350 Total equity 805,939 836,627 Total liabilities and equity $ 3,546,037 $ 3,934,181 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2022 2021 2022 2021 Revenues Investment management fees $ 172,850 $ 201,133 $ 564,691 $ 567,912 Distribution and service fees 15,746 23,293 52,912 67,091 Administration and shareholder service fees 20,563 26,479 66,889 74,916 Other income and fees 1,102 1,159 3,516 3,053 Total revenues 210,261 252,064 688,008 712,972 Operating Expenses Employment expenses 88,230 87,345 283,583 266,734 Distribution and other asset-based expenses 26,818 36,692 88,247 105,007 Other operating expenses 31,096 22,800 94,367 64,326 Operating expenses of consolidated investment products ("CIP") 538 639 1,927 1,857 Change in fair value of contingent consideration — — 2,900 — Restructuring expense 4,015 — 4,015 — Depreciation expense 938 915 2,835 2,994 Amortization expense 14,609 10,391 43,895 30,219 Total operating expenses 166,244 158,782 521,769 471,137 Operating Income (Loss) 44,017 93,282 166,239 241,835 Other Income (Expense) Realized and unrealized gain (loss) on investments, net ( 2,493 ) ( 504 ) ( 16,018 ) 2,881 Realized and unrealized gain (loss) of CIP, net ( 8,440 ) ( 2,801 ) ( 43,443 ) ( 4,741 ) Other income (expense), net ( 659 ) 1,001 199 3,598 Total other income (expense), net ( 11,592 ) ( 2,304 ) ( 59,262 ) 1,738 Interest Income (Expense) Interest expense ( 3,557 ) ( 2,348 ) ( 8,661 ) ( 6,918 ) Interest and dividend income 1,013 269 1,870 571 Interest and dividend income of investments of CIP 28,644 22,877 71,436 69,315 Interest expense of CIP ( 20,356 ) ( 13,442 ) ( 46,860 ) ( 42,342 ) Total interest income (expense), net 5,744 7,356 17,785 20,626 Income (Loss) Before Income Taxes 38,169 98,334 124,762 264,199 Income tax expense (benefit) 10,754 25,823 43,969 63,377 Net Income (Loss) 27,415 72,511 80,793 200,822 Noncontrolling interests 4,265 ( 13,775 ) 1,348 ( 42,531 ) Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 31,680 $ 58,736 $ 82,141 $ 158,291 Earnings (Loss) per Share—Basic $ 4.33 $ 7.64 $ 11.05 $ 20.59 Earnings (Loss) per Share—Diluted $ 4.25 $ 7.36 $ 10.76 $ 19.72 Weighted Average Shares Outstanding—Basic 7,308 7,691 7,434 7,688 Weighted Average Shares Outstanding—Diluted 7,463 7,984 7,636 8,028 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net Income (Loss) $ 27,415 $ 72,511 $ 80,793 $ 200,822 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment, net of tax of $ 31 and $ 6 for the three months ended September 30, 2022 and 2021, respectively, and $ 280 and $ 4 for the nine months ended September 30, 2022 and 2021, respectively. ( 504 ) ( 17 ) ( 791 ) ( 11 ) Other comprehensive income (loss) ( 504 ) ( 17 ) ( 791 ) ( 11 ) Comprehensive income (loss) 26,911 72,494 80,002 200,811 Comprehensive (income) loss attributable to noncontrolling interests 4,265 ( 13,775 ) 1,348 ( 42,531 ) Comprehensive Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 31,176 $ 58,719 $ 81,350 $ 158,280 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (in thousands) 2022 2021 Cash Flows from Operating Activities: Net income (loss) $ 80,793 $ 200,822 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense, intangible asset and other amortization 48,143 35,217 Stock-based compensation 19,267 21,833 Amortization of deferred commissions 3,653 2,606 Payments of deferred commissions ( 1,789 ) ( 4,664 ) Equity in earnings of equity method investments ( 527 ) ( 3,701 ) Realized and unrealized (gains) losses on investments, net 16,056 ( 2,875 ) Distributions from equity method investments 2,239 3,133 Sales (purchases) of investments, net ( 8,396 ) ( 3,453 ) Change in fair value of contingent consideration 2,900 — Deferred taxes, net ( 5,500 ) ( 2,672 ) Right of use asset 3,222 — Changes in operating assets and liabilities: Accounts receivable, net and other assets 32,940 ( 41,421 ) Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities ( 76,639 ) 23,242 Operating activities of consolidated investment products ("CIP"): Realized and unrealized (gains) losses on investments of CIP, net 41,312 ( 4,139 ) Purchases of investments by CIP ( 601,749 ) ( 917,355 ) Sales of investments by CIP 595,451 1,101,258 Net proceeds (purchases) of short-term investments and securities sold short by CIP ( 655 ) 16,165 Change in other assets and liabilities of CIP 4,129 ( 317 ) Net cash provided by (used in) operating activities 154,850 423,679 Cash Flows from Investing Activities: Capital expenditures and other asset purchases ( 5,495 ) ( 4,822 ) Acquisition of businesses, net of cash acquired of $ 8,443 ( 19,944 ) — Change in cash and cash equivalents of CIP due to consolidation (deconsolidation), net ( 308 ) ( 11,703 ) Net cash provided by (used in) investing activities ( 25,747 ) ( 16,525 ) Cash Flows from Financing Activities: Refinancing of credit agreement — 81,155 Payment of long-term debt ( 12,062 ) ( 11,826 ) Payment of deferred financing costs — ( 7,039 ) Common stock dividends paid ( 35,244 ) ( 20,030 ) Repurchase of common shares ( 80,000 ) ( 32,499 ) Payment of contingent consideration ( 33,036 ) — Taxes paid related to net share settlement of restricted stock units ( 16,450 ) ( 19,362 ) Affiliate equity sales (purchases) ( 11,089 ) — Net contributions from (distributions to) noncontrolling interests ( 1,091 ) 552 Financing activities of CIP: Payments on borrowings by CIP ( 129,996 ) ( 144,464 ) Net cash provided by (used in) financing activities ( 318,968 ) ( 153,513 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 650 ) — Net increase (decrease) in cash, cash equivalents and restricted cash ( 190,515 ) 253,641 Cash, cash equivalents and restricted cash, beginning of period 586,145 339,849 Cash, cash equivalents and restricted cash, end of period $ 395,630 $ 593,490 Non-Cash Investing Activities: Contingent consideration $ 1,200 $ 137,664 Non-Cash Financing Activities: Increase (decrease) to noncontrolling interests due to consolidation (deconsolidation) of CIP, net $ ( 338 ) $ ( 32,007 ) Common stock dividends payable $ 12,014 $ 11,478 (in thousands) September 30, 2022 December 31, 2021 Reconciliation of cash, cash equivalents and restricted cash Cash and cash equivalents $ 309,248 $ 378,921 Cash of CIP 85,791 206,620 Cash pledged or on deposit of CIP 591 604 Cash, cash equivalents and restricted cash at end of period $ 395,630 $ 586,145 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents Virtus Investment Partners, Inc. Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Permanent Equity Temporary Equity Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Attributed To Virtus Investment Partners, Inc. Non- controlling Interests Total Equity Redeemable Non- controlling Interests (in thousands, except per share data) Shares Par Value Shares Amount Balances at June 30, 2021 7,651,606 $ 119 $ 1,280,667 $ ( 35,704 ) $ 35 4,254,236 $ ( 464,248 ) $ 780,869 $ 8,968 $ 789,837 $ 131,525 Net income (loss) — — — 58,736 — — — 58,736 374 59,110 13,401 Foreign currency translation adjustments — — — — ( 17 ) — — ( 17 ) — ( 17 ) — Net subscriptions (redemptions) and other — — — — — — — — ( 529 ) ( 529 ) ( 13,257 ) Cash dividends declared ($ 1.50 per common share) — — ( 12,015 ) — — — — ( 12,015 ) — ( 12,015 ) — Repurchases of common shares ( 64,494 ) — — — — 64,494 ( 20,000 ) ( 20,000 ) — ( 20,000 ) — Issuance of common shares related to employee stock transactions 645 — — — — — — — — — — Taxes paid on stock-based compensation — — ( 148 ) — — — — ( 148 ) — ( 148 ) — Stock-based compensation — — 4,872 — — — — 4,872 — 4,872 — Balances at September 30, 2021 7,587,757 $ 119 $ 1,273,376 $ 23,032 $ 18 4,318,730 $ ( 484,248 ) $ 812,297 $ 8,813 $ 821,110 $ 131,669 Balances at June 30, 2022 7,275,337 $ 120 $ 1,275,907 $ 88,196 $ ( 267 ) 4,747,951 $ ( 579,248 ) $ 784,708 $ 6,997 $ 791,705 $ 139,147 Net income (loss) — — — 31,680 — — — 31,680 151 31,831 ( 4,416 ) Foreign currency translation adjustments — — — — ( 504 ) — — ( 504 ) — ( 504 ) — Net subscriptions (redemptions) and other — — 2,035 — — — — 2,035 ( 414 ) 1,621 ( 10,289 ) Cash dividends declared ($ 1.65 per common share) — — — ( 12,552 ) — — — ( 12,552 ) — ( 12,552 ) — Repurchases of common shares ( 50,422 ) — — — — 50,422 ( 10,000 ) ( 10,000 ) — ( 10,000 ) — Issuance of common shares related to employee stock transactions 7,058 — — — — — — — — — — Taxes paid on stock-based compensation — — ( 1,166 ) — — — — ( 1,166 ) ( 1,166 ) — Stock-based compensation — — 5,004 — — — — 5,004 — 5,004 — Balances at September 30, 2022 7,231,973 $ 120 $ 1,281,780 $ 107,324 $ ( 771 ) 4,798,373 $ ( 589,248 ) $ 799,205 $ 6,734 $ 805,939 $ 124,442 Permanent Equity Temporary Equity Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Attributed To Virtus Investment Partners, Inc. Non- controlling Interests Total Equity Redeemable Non- controlling Interests (in thousands, except per share data) Shares Par Value Shares Amount Balances at December 31, 2020 7,583,466 $ 118 $ 1,298,002 $ ( 135,259 ) $ 29 4,207,403 $ ( 451,749 ) $ 711,141 $ 9,799 $ 720,940 $ 115,513 Net income (loss) — — — 158,291 — — — 158,291 719 159,010 41,812 Foreign currency translation adjustments — — — — ( 11 ) — — ( 11 ) — ( 11 ) — Net subscriptions (redemptions) and other — — — — — — — — ( 1,705 ) ( 1,705 ) ( 25,656 ) Cash dividends declared ($ 3.14 per common share) — — ( 25,315 ) — — — — ( 25,315 ) — ( 25,315 ) — Repurchases of common shares ( 111,327 ) — — — — 111,327 ( 32,499 ) ( 32,499 ) — ( 32,499 ) — Issuance of common shares related to employee stock transactions 115,618 1 65 — — — — 66 — 66 — Taxes paid on stock-based compensation — — ( 19,428 ) — — — — ( 19,428 ) — ( 19,428 ) — Stock-based compensation — — 20,052 — — — — 20,052 — 20,052 — Balances at September 30, 2021 7,587,757 $ 119 $ 1,273,376 $ 23,032 $ 18 4,318,730 $ ( 484,248 ) $ 812,297 $ 8,813 $ 821,110 $ 131,669 Balances at December 31, 2021 7,506,151 $ 119 $ 1,276,424 $ 60,962 $ 20 4,400,596 $ ( 509,248 ) $ 828,277 $ 8,350 $ 836,627 $ 138,965 Net income (loss) — — — 82,141 — — — 82,141 ( 184 ) 81,957 ( 1,164 ) Foreign currency translation adjustments — — — — ( 791 ) — — ( 791 ) — ( 791 ) — Net subscriptions (redemptions) and other — — 2,035 — — — — 2,035 ( 1,432 ) 603 ( 13,359 ) Cash dividends declared ($ 4.65 per common share) — — — ( 35,779 ) — — — ( 35,779 ) — ( 35,779 ) — Repurchases of common shares ( 397,777 ) — — — — 397,777 ( 80,000 ) ( 80,000 ) — ( 80,000 ) — Issuance of common shares related to employee stock transactions 123,599 1 ( 1 ) — — — — — — — — Taxes paid on stock-based compensation — — ( 16,450 ) — — — — ( 16,450 ) ( 16,450 ) — Stock-based compensation — — 19,772 — — — — 19,772 — 19,772 — Balances at September 30, 2022 7,231,973 $ 120 $ 1,281,780 $ 107,324 $ ( 771 ) 4,798,373 $ ( 589,248 ) $ 799,205 $ 6,734 $ 805,939 $ 124,442 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents Virtus Investment Partners, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Business Virtus Investment Partners, Inc. (the "Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries. The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of: mutual funds registered pursuant to the Investment Company Act of 1940, as amended ("U.S. retail funds"); Undertaking for Collective Investment in Transferable Securities ("UCITS") and Qualifying Investor Funds ("QIFs"), collectively, "global funds" and collectively with mutual funds, exchange traded funds ("ETFs"), and variable insurance funds, the "open-end funds"; closed-end funds (collectively, with open-end funds, the "funds"); and retail separate accounts. Institutional investment management services are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. The Company also provides subadvisory services to other investment advisers and serves as the collateral manager for structured products. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report on Form 10-K") filed with the Securities and Exchange Commission (the "SEC"). The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2021 Annual Report on Form 10-K. 3. Revenues The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees, and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which these fees are calculated are variable in nature and subject to factors outside of the Company's control, such as additional investments, withdrawals and market performance. Because of this, these fees are considered constrained until the end of the contractual measurement period (monthly or quarterly), which is when asset values are generally determinable. Investment Management Fees by Source The following table summarizes investment management fees by source: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Investment management fees Open-end funds $ 80,234 $ 99,711 $ 262,486 $ 286,104 Closed-end funds 15,773 17,116 48,887 46,451 Retail separate accounts 39,154 46,625 134,069 126,612 Institutional accounts 37,689 37,681 119,249 108,745 Total investment management fees $ 172,850 $ 201,133 $ 564,691 $ 567,912 6 Table of Contents 4. Acquisitions Stone Harbor Investment Partners On January 1, 2022, the Company acquired Stone Harbor Investment Partners, LLC ("Stone Harbor"), which was accounted for in accordance with ASC 805, Business Combinations ("ASC 805"). Transaction consideration consisted of $ 28.2 million paid in cash at closing, net working capital adjustment of $ 0.7 million to be paid in the fourth quarter of 2022, and $ 1.2 million in contingent consideration recorded at fair value, which represents future potential earn-out payments based on pre-established performance metrics related to revenue retention and revenue growth rates. Future contingent consideration will be paid, if earned, in 2023, 2026 and 2027. The contingent consideration has been accounted for as a liability within contingent consideration on the Company's Condensed Consolidated Balance Sheet. The initial transaction consideration of $ 30.1 million was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values at the date of the acquisition, as well as goodwill of $ 10.3 million and definite-lived intangible assets of $ 10.8 million. The Company expects $ 21.1 million of the purchase price to be tax deductible over 15 years. The transaction consideration allocation is based upon preliminary information and is subject to change if additional information becomes available. The revenues and operating income of Stone Harbor were not material to the Company's results of operations for the three and nine months ended September 30, 2022. The following table summarizes the identified acquired assets and liabilities assumed as of the Stone Harbor acquisition date: January 1, 2022 (in thousands) Assets: Cash and cash equivalents $ 8,443 Intangible assets 10,800 Goodwill 10,259 Other assets 54,264 Total Assets 83,766 Liabilities Accounts payable, accrued and other liabilities 53,713 Total liabilities 53,713 Total Net Assets Acquired $ 30,053 Identifiable Intangible Assets Acquired The Company identified and recorded the following intangible assets as a result of the Stone Harbor acquisition: January 1, 2022 Approximate Fair Value ( in thousands) Weighted Average of Useful Life (in years) Definite-lived intangible assets: Investment management agreements $ 6,000 7.3 Trade names 1,000 6.0 Software 3,800 4.0 Total definite-lived intangible assets $ 10,800 The fair value of investment management agreements was estimated using a discounted cash flow method, the fair value of the trade names was estimated using a royalty savings method, and the fair value of the software was estimated using a royalty savings method and replacement cost approach. The fair value estimates were prepared with the assistance of an independent valuation firm. 7 Table of Contents Westchester Capital Management On October 1, 2021, the Company acquired Westchester Capital Management, LLC ("Westchester"), which was accounted for in accordance with ASC 805. Transaction consideration consisted of $ 156.8 million in cash and contingent consideration representing future potential earn-out payments based on pre-established performance metrics related to revenue growth rates, accounted for as a liability on the Company's Condensed Consolidated Balance sheet. Future contingent consideration payments will be made, if earned, in 2025 and 2026. As of September 30, 2022, the contingent consideration balance was $ 15.4 million. The total transaction consideration of $ 169.3 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. Goodwill of $ 23.0 million and intangible assets of $ 144.4 million were recorded as a result of the acquisition. The Company expects $ 155.6 million of the purchase price to be tax deductible over 15 years. The revenues and operating income of Westchester were not material to the Company's results of operations for the three and nine months ended September 30, 2022. Fund Adoption and NFJ Investment Group On February 1, 2021, the Company executed an agreement with Allianz Global Investors U.S. LLC ("AGI"), pursuant to which the Company became the investment adviser, distributor and/or administrator of certain of AGI's open-end, closed-end and retail separate account assets. This transaction was classified as an asset acquisition, and the cost of the acquisition was allocated to the assets acquired on the basis of their relative fair values. Additionally, as part of the transaction, AGI’s Value Equity team joined the Company as a newly established affiliated manager, NFJ Investment Group ("NFJ"). The addition of NFJ was classified as a business combination under ASC 805, and assets acquired were recorded at fair value. Assets acquired primarily consisted of definite-lived intangible assets representing investment contracts as well as indefinite-lived assets consisting of goodwill related to NFJ. The revenues and operating income of NFJ were not material to the Company's results of operations for the three and nine months ended September 30, 2022 or 2021. Transaction consideration consists of variable cash payments based on a percentage of the investment management fees earned on certain open-end, closed-end and retail separate account assets from the transaction. Payments are to be made annually on the anniversary of the closing date of the transactions over seven years . Contingent payment obligations related to NFJ, which were accounted for in accordance with ASC 805, are remeasured at fair value as of each reporting period-end, with the change in fair value recorded within the Condensed Consolidated Statement of Operations. An estimate of these future payments has been recorded as a liability and included as contingent consideration on the Company's Condensed Consolidated Balance Sheet. A payment of $ 33.0 million was made in the first quarter of 2022. The estimated value of future revenue participation payments at September 30, 2022 was $ 117.0 million. 5. Goodwill and Intangible Assets, Net Activity in goodwill was as follows: (in thousands) Balance at December 31, 2021 $ 338,406 Acquisitions 10,430 Balance at September 30, 2022 $ 348,836 Below is a summary of intangible assets, net: Definite-Lived Indefinite-Lived Total (in thousands) Gross Book Value Accumulated Amortization Net Book Value Net Book Value Net Book Value Balances at December 31, 2021 $ 755,576 $ ( 297,303 ) $ 458,273 $ 42,298 $ 500,571 Additions 10,800 — 10,800 — 10,800 Intangible amortization — ( 43,895 ) ( 43,895 ) — ( 43,895 ) Balances at September 30, 2022 $ 766,376 $ ( 341,198 ) $ 425,178 $ 42,298 $ 467,476 8 Table of Contents Definite-lived intangible asset amortization for the remainder of fiscal year 2022 and succeeding fiscal years is estimated as follows: Fiscal Year Amount (in thousands) Remainder of 2022 $ 14,609 2023 57,835 2024 52,194 2025 47,426 2026 46,446 2027 and thereafter 206,668 Total $ 425,178 6. Investments Investments consist primarily of investments in the Company's sponsored products. The Company's investments, excluding the assets of consolidated investment products ("CIP") discussed in Note 17, at September 30, 2022 and December 31, 2021 were as follows: (in thousands) September 30, 2022 December 31, 2021 Investment securities - fair value $ 73,134 $ 80,335 Equity method investments (1) 11,593 13,038 Nonqualified retirement plan assets 11,588 13,321 Other investments 1,930 2,196 Total investments $ 98,245 $ 108,890 (1) The Company's equity method investments are valued on a three-month lag based upon the availability of financial information. Investment Securities - fair value Investment securities - fair value consist of investments in the Company's sponsored funds and separately managed accounts. The composition of the Company’s investment securities - fair value was as follows: September 30, 2022 December 31, 2021 (in thousands) Cost Fair Value Cost Fair Value Investment Securities - fair value Sponsored funds $ 70,788 $ 61,699 $ 63,090 $ 66,326 Equity securities 11,570 11,435 10,659 14,009 Total investment securities - fair value $ 82,358 $ 73,134 $ 73,749 $ 80,335 For each of the three and nine months ended September 30, 2022, the Company recognized net realized gains of $ 0.4 million on the sale of its investment securities - fair value. For the three and nine months ended September 30, 2021, the Company recognized net realized gains of $ 0.2 million and $ 2.0 million, respectively, on the sale of its investment securities - fair value. 9 Table of Contents 7. Fair Value Measurements The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of CIP discussed in Note 17, as of September 30, 2022 and December 31, 2021 by fair value hierarchy level were as follows: September 30, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 242,567 $ — $ — $ 242,567 Investment securities - fair value Sponsored funds 61,699 — — 61,699 Equity securities 11,435 — — 11,435 Nonqualified retirement plan assets 11,588 — — 11,588 Total assets measured at fair value $ 327,289 $ — $ — $ 327,289 Liabilities Contingent consideration $ — $ — $ 72,980 $ 72,980 Total liabilities measured at fair value $ — $ — $ 72,980 $ 72,980 December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 307,277 $ — $ — $ 307,277 Investment securities - fair value Sponsored funds 66,326 — — 66,326 Equity securities 14,009 — — 14,009 Nonqualified retirement plan assets 13,321 — — 13,321 Total assets measured at fair value $ 400,933 $ — $ — $ 400,933 Liabilities Contingent consideration $ — $ — $ 88,400 $ 88,400 Total liabilities measured at fair value $ — $ — $ 88,400 $ 88,400 The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value: Cash equivalents represent investments in money market funds. Cash investments in money market funds are valued using published net asset values and are classified as Level 1. Sponsored funds represent investments in open-end funds, closed-end funds and ETFs for which the Company acts as the investment manager. The fair value of open-end funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1. Equity securities represent securities traded on active markets, are valued at the official closing price (typically the last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1. Nonqualified retirement plan assets represent mutual funds within the Company's nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1. Contingent consideration represents liabilities associated with the Company's business combinations. See Note 4 for a discussion of the transactions. The estimated fair values are measured using a simulation model using unobservable market data inputs prepared with the assistance of an independent valuation firm. These liabilities are categorized as Level 3. 10 Table of Contents Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments. The following table presents a reconciliation of beginning and ending balances of recurring fair value measurements classified as Level 3: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Contingent consideration, beginning of period $ 72,980 $ 63,500 $ 88,400 $ — Additions for acquisition — — 1,200 63,500 Reduction for payments made — — ( 19,520 ) — Increase (reduction) of liability related to re-measurement of fair value — — 2,900 — Contingent consideration, end of period $ 72,980 $ 63,500 $ 72,980 $ 63,500 8. Equity Transactions Dividends Declared On August 17, 2022, the Company declared a quarterly cash dividend of $ 1.65 per common share to be paid on November 15, 2022 to stockholders of record at the close of business on October 31, 2022. Common Stock Repurchases During the three and nine months ended September 30, 2022, the Company repurchased 50,422 and 397,777 common shares, respectively, at a weighted average price of $ 198.29 and $ 201.09 per share, respectively, for a total cost, including fees and expenses, of $ 10.0 million and $ 80.0 million, respectively, under its share repurchase program. In May 2022, the Company's Board of Directors authorized an additional 750,000 shares to be repurchased under the share repurchase program. As of September 30, 2022, 881,672 shares remained available for repurchase. Under the terms of the program, the Company may repurchase shares of its common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time. 9. Accumulated Other Comprehensive Income (Loss) The changes in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2022 and 2021 were as follows: Foreign Currency Translation Adjustments (in thousands) Balance at December 31, 2021 $ 20 Net current-period other comprehensive income (loss) (1) ( 791 ) Balance at September 30, 2022 $ ( 771 ) Foreign Currency Translation Adjustments (in thousands) Balance at December 31, 2020 $ 29 Net current-period other comprehensive income (loss) (1) ( 11 ) Balance at September 30, 2021 $ 18 (1) Consists of foreign currency translation adjustments, net of tax of $ 280 and $ 4 for the nine months ended September 30, 2022 and 2021, respectively. 10. Stock-Based Compensation Equity-based awards, including restricted stock units ("RSUs"), performance stock units ("PSUs"), stock options and unrestricted shares of common stock may be granted to officers, employees and directors of the Company pursuant to the 11 Table of Contents Company's Omnibus Incentive and Equity Plan (the "Omnibus Plan"). At September 30, 2022, 661,463 shares of common stock remained available for issuance of the 3,370,000 shares that are authorized for issuance under the Omnibus Plan. Stock-based compensation expense is summarized as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Stock-based compensation expense $ 5,148 $ 5,989 $ 19,267 $ 21,833 Restricted Stock Units Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs may be time-vested or performance-contingent (PSUs) that convert into RSUs after performance measurement is complete and generally vest in one to three years . Shares that are issued upon vesting are newly issued shares from the Omnibus Plan and are not issued from treasury stock. RSU activity, inclusive of PSUs, for the nine months ended September 30, 2022 is summarized as follows: Number of Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2021 430,730 $ 138.01 Granted 183,277 $ 194.54 Forfeited ( 37,069 ) $ 117.60 Settled ( 196,518 ) $ 118.79 Outstanding at September 30, 2022 380,420 $ 177.16 For the nine months ended September 30, 2022 and 2021, a total of 77,508 and 72,795 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $ 16.5 million and $ 19.4 million for the nine months ended September 30, 2022 and 2021, respectively, in minimum employee tax withholding obligations related to RSUs withheld for the net share settlements. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting. During the nine months ended September 30, 2022, the Company granted 30,516 PSUs that contain performance-based metrics in addition to a service condition. Compensation expense for PSUs is generally recognized over a three-year service period based upon the value determined using a combination of (i) the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718, Stock Compensation ("ASC 718") and (ii) the Monte Carlo simulation valuation model for awards that contain a "market condition" performance metric under ASC 718. Compensation expense for PSU awards that contain a market condition is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the market condition. Compensation expense for PSU awards with a performance condition is recorded each period based upon a probability assessment of the expected outcome of the performance metric with a final adjustment upon measurement at the end of the performance period. As of September 30, 2022, unamortized stock-based compensation expense for unvested RSUs and PSUs was $ 32.5 million with a weighted-average remaining contractual life of 1.2 years. 11. Restructuring Expense During the three and nine months ended September 30, 2022, the Company incurred $ 4.0 million in restructuring costs, primarily related to the write-down of right-of-use assets for a lease in conjunction with the consolidation of certain office space. 12. Earnings (Loss) Per Share Earnings (loss) per share ("EPS") is calculated in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing net income (loss) attributable to Virtus Investment Partners, Inc. by the weighted-average number of common shares outstanding for the period, excluding dilution for potential common stock issuances. Diluted EPS reflects the 12 Table of Contents potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, including shares issuable upon the vesting of RSUs and stock option exercises using the treasury stock method, as determined under the if-converted method. The computation of basic and diluted EPS is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Net Income (Loss) $ 27,415 $ 72,511 $ 80,793 $ 200,822 Noncontrolling interests 4,265 ( 13,775 ) 1,348 ( 42,531 ) Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 31,680 $ 58,736 $ 82,141 $ 158,291 Shares (in thousands): Basic: Weighted-average number of shares outstanding 7,308 7,691 7,434 7,688 Plus: Incremental shares from assumed conversion of dilutive instruments 155 293 202 340 Diluted: Weighted-average number of shares outstanding 7,463 7,984 7,636 8,028 Earnings (Loss) per Share—Basic $ 4.33 $ 7.64 $ 11.05 $ 20.59 Earnings (Loss) per Share—Diluted $ 4.25 $ 7.36 $ 10.76 $ 19.72 The following table details the securities that have been excluded from the above computation of weighted-average number of shares for diluted EPS, because the effect would be anti-dilutive. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Restricted stock units 31 5 32 2 Total anti-dilutive securities 31 5 32 2 13. Income Taxes In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and at each interim period thereafter. The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 35.2 % and 24.0 % for the nine months ended September 30, 2022 and 2021, respectively. The higher estimated effective tax rate for the nine months ended September 30, 2022 was primarily due to valuation allowances recorded in the current year for the tax effects of unrealized losses on certain Company investments. 14. Debt Credit Agreement The Company's credit agreement, as amended (the "Credit Agreement"), comprises (i) a $ 275.0 million seven-year term loan (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 nine months ended September 30, 2022, the Company repaid $ 12.1 million outstanding under its Term Loan. At September 30, 2022, $ 262.2 million was outstanding under the Term Loan and there were no outstanding borrowings under the 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 $ 6.8 million as of September 30, 2022. 15. Commitments and Contingencies Legal Matters The Company is involved from time to time in litigation and arbitration, as well as examinations, inquiries and 13 Table of Contents investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company's activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. The Company records a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Contingencies . The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage, indemnities and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company's results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments, and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome, and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's results of operations or cash flows in particular quarterly or annual periods. 16. Redeemable Noncontrolling Interests Redeemable noncontrolling interests represent third-party investments in the Company's CIP and minority interests held in a consolidated affiliate. Minority interests held in the affiliate are subject to holder put rights and Company call rights at established multiples of earnings before interest, taxes, depreciation and amortization and, as such, are considered redeemable at other than fair value. The rights are exercisable at pre-established intervals (between four and seven years from their issuance) or upon certain conditions, such as retirement. The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related noncontrolling interests. The Company, in purchasing affiliate equity, has the option to settle in cash or shares of the Company's common stock and is entitled to the cash flow associated with any purchased equity. Minority interests in an affiliate are recorded at estimated redemption value within redeemable noncontrolling interests on the Company's Condensed Consolidated Balance Sheets, and any changes in the estimated redemption value are recorded on the Condensed Consolidated Statements of Operations within noncontrolling interests. Redeemable noncontrolling interests for the nine months ended September 30, 2022 included the following amounts: (in thousands) CIP Affiliate Noncontrolling Interests Total Balances at December 31, 2021 $ 12,416 $ 126,549 $ 138,965 Net income (loss) attributable to noncontrolling interests ( 2,222 ) 6,000 3,778 Changes in redemption value (1) — ( 4,942 ) ( 4,942 ) Total net income (loss) attributable to noncontrolling interests ( 2,222 ) 1,058 ( 1,164 ) Affiliate equity sales (purchases) — ( 11,089 ) ( 11,089 ) Net subscriptions (redemptions) and other 5,966 ( 8,236 ) ( 2,270 ) Balances at September 30, 2022 $ 16,160 $ 108,282 $ 124,442 (1) Relates to noncontrolling interests redeemable at other than fair value. 17. Consolidation The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest, which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity. 14 Table of Contents The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either (i) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (ii) where as a group, the holders of the equity investment at risk do not possess (x) the power through voting or similar rights to direct the activities that most significantly impact the entity's economic performance, (y) the obligation to absorb expected losses or the right to receive expected residual returns of the entity, or (z) proportionate voting and economic interests and where substantially all of the entity's activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In the normal course of its business, the Company sponsors various investment products, some of which are consolidated by the Company. CIP includes both VOEs, made up primarily of open-end funds in which the Company holds a controlling financial interest, and VIEs, which primarily consist of CLOs of which the Company is considered the primary beneficiary. The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to Virtus Investment Partners, Inc. The Company's risk with respect to these investment products is limited to its beneficial interests in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products beyond the Company's investments in, and fees generated from, these products. The following table presents the balances of CIP that, after intercompany eliminations, were reflected on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021: As of September 30, 2022 December 31, 2021 VOEs VIEs VOEs VIEs (in thousands) CLOs Other CLOs Other Cash and cash equivalents $ 781 $ 83,660 $ 1,941 $ 787 $ 205,192 $ 1,245 Investments 19,451 1,901,419 56,105 21,544 2,055,107 63,587 Other assets 112 16,542 778 64 43,327 819 Notes payable — ( 1,864,943 ) — — ( 2,033,617 ) — Securities purchased payable and other liabilities ( 597 ) ( 71,674 ) ( 212 ) ( 558 ) ( 184,214 ) ( 296 ) Noncontrolling interests ( 5,862 ) ( 6,734 ) ( 10,298 ) ( 4,935 ) ( 8,350 ) ( 7,481 ) Net interests in CIP $ 13,885 $ 58,270 $ 48,314 $ 16,902 $ 77,445 $ 57,874 Consolidated CLOs The majority of the Company's CIP that are VIEs are CLOs. At September 30, 2022, the Company consolidated six CLOs. The financial information of certain CLOs is included on the Company's condensed consolidated financial statements on a one-month lag based upon the availability of their financial information. A majority-owned consolidated private fund, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, is also included. Investments of CLOs The CLOs held investments of $ 1.9 billion at September 30, 2022 consisting of bank loan investments, which comprise the majority of the CLOs' portfolio asset collateral and are senior secured corporate loans across a variety of industries. These bank loan investments mature at various dates between 2023 and 2030 and pay interest at LIBOR plus a spread of up to 10.0 %. The CLOs may elect to reinvest any prepayments received on bank loan investments up until the periods between October 2019 and October 2026, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations. At September 30, 2022, the fair value of the senior bank loans was less than the unpaid principal balance by $ 110.4 million. At September 30, 2022, there were no material collateral assets in default. Notes Payable of CLOs The CLOs held notes payable with a total value, at par, of $ 2.1 billion at September 30, 2022, consisting of senior secured floating rate notes payable with a par value of $ 1.9 billion and subordinated notes with a par value of $ 233.7 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.8 % to 8.9 %. 15 Table of Contents The principal amounts outstanding of these note obligations mature on dates ranging from October 2027 to October 2034. The Company's beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited to (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes of the consolidated CLOs have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, Consolidation (Topic 810) ("ASU 2014-13") results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at September 30, 2022, as shown in the table below: (in thousands) Subordinated notes $ 57,087 Accrued investment management fees 1,183 Total Beneficial Interests $ 58,270 The following table represents income and expenses of the consolidated CLOs included on the Company’s Condensed Consolidated Statements of Operations for the period indicated: Nine Months Ended September 30, 2022 (in thousands) Income: Realized and unrealized gain (loss), net $ ( 26,864 ) Interest income 68,152 Total Income 41,288 Expenses: Other operating expenses 1,495 Interest expense 46,860 Total Expense 48,355 Noncontrolling interests 184 Net Income (Loss) Attributable to CIP $ ( 6,883 ) As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation: Nine Months Ended September 30, 2022 (in thousands) Distributions received and unrealized gains (losses) on the subordinated notes held by the Company $ ( 13,024 ) Investment management fees 6,141 Total Economic Interests $ ( 6,883 ) 16 Table of Contents Fair Value Measurements of CIP The assets and liabilities of CIP measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by fair value hierarchy level were as follows: As of September 30, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 83,660 $ — $ — $ 83,660 Debt investments 809 1,905,523 44,495 1,950,827 Equity investments 20,822 4,012 1,314 26,148 Total assets measured at fair value $ 105,291 $ 1,909,535 $ 45,809 $ 2,060,635 Liabilities Notes payable $ — $ 1,864,943 $ — $ 1,864,943 Short sales 395 — — 395 Total liabilities measured at fair value $ 395 $ 1,864,943 $ — $ 1,865,338 As of December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 205,192 $ — $ — $ 205,192 Debt investments 273 2,107,736 2,695 2,110,704 Equity investments 26,111 2,961 462 29,534 Total assets measured at fair value $ 231,576 $ 2,110,697 $ 3,157 $ 2,345,430 Liabilities Notes payable $ — $ 2,033,617 $ — $ 2,033,617 Short sales 515 — — 515 Total liabilities measured at fair value $ 515 $ 2,033,617 $ — $ 2,034,132 The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CIP measured at fair value: Cash equivalents represent investments in money market funds. Cash investments in money market funds are valued using published net asset values and are classified as Level 1. Debt and equity investments represent the underlying debt, equity and other securities held in CIP. Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1. Level 2 investments represent most debt securities, including bank loans and certain equity securities (including non-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readily available market prices, and are valued using an independent pricing service. Debt investments are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Bank loan investments, which are included as debt investments, are generally priced at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Level 3 investments include debt and equity securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security. Notes payable represent notes issued by CIP CLOs and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (i) the fair value of the beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent 17 Table of Contents compensation for services. The fair value of the beneficial interests held by the Company is based on third-party pricing information without adjustment. Short sales are transactions in which a security is sold that is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded on the Condensed Consolidated Balance Sheets within other liabilities of CIP and are classified as Level 1 based on the underlying equity security. The securities purchase payable at September 30, 2022 and December 31, 2021 approximated fair value due to the short-term nature of the instruments. The following table is a reconciliation of assets of CIP for Level 3 investments for which significant unobservable inputs were used to determine fair value: Nine Months Ended September 30, (in thousands) 2022 2021 Balance at beginning of period $ 3,157 $ 54,182 Realized gains (losses), net ( 596 ) ( 209 ) Change in unrealized gains (losses), net ( 425 ) 1,580 Purchases 1,930 8,267 Amortization 9 78 Sales ( 12,142 ) ( 31,501 ) Transfers to Level 2 ( 53,746 ) ( 54,445 ) Transfers from Level 2 107,622 68,635 Balance at end of period (1) $ 45,809 $ 46,587 (1) The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment. Transfers between Level 2 and Level 3 were due to trading activities at period end. Nonconsolidated VIEs The Company serves as the collateral manager for other collateralized loan and collateralized bond obligations (collectively, "CDOs") that are not consolidated. The assets and liabilities of these CDOs reside in bankruptcy remote, special purpose entities in which the Company has no ownership of, nor holds any notes issued by, the CDOs, and provides neither recourse nor guarantees. The Company has determined that the investment management fees it receives for serving as collateral manager for these CDOs did not represent a variable interest since (i) the fees the Company earns are compensation for services provided and are commensurate with the level of effort required to provide the investment management services, (ii) the Company does not hold other interests in the CDOs that individually, or in the aggregate, would absorb more than an insignificant amount of the CDOs' expected losses or receive more than an insignificant amount of the CDOs' expected residual return, and (iii) the investment management arrangement only includes terms, conditions and amounts that are customarily present in arrangements for similar services negotiated at arm's length. The Company has interests in certain other VIEs that the Company does not consolidate as it is not the primary beneficiary since its interest in these entities does not provide the Company with the power to direct the activities that most significantly impact the entities' economic performance. At September 30, 2022, the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $ 25.4 million . 18. Subsequent Event On October 19, 2022, the Company entered into an agreement to acquire AlphaSimplex Group, LLC, a leading manager of liquid alternative investment solutions with $ 10.9 billion of assets under management at September 30, 2022. The transaction is expected to close near the end of the first quarter of 2023, subject to customary closing conditions, necessary regulatory approvals, and approvals by the mutual fund boards and fund shareholders. 18 Table of Contents