What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 115 added, 154 removed, 254 unchanged (51% of the section changed)

11 unchanged sentences

(i) any reduction in our assets under management;

(ii) general domestic and global economic and political conditions (including war, acts of terrorism and civil unrest);

(iii) inability to achieve the expected benefits of our strategic transactions;

(iv) the ongoing effects of the COVID-19 pandemic and associated global economic disruption;

(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;

(ii) inability to achieve the expected benefits of our strategic transactions;

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

(iv) damage to our reputation;

(v) inability to satisfy financial debt covenants and required payments;

(vi) inability to attract and retain key personnel;

(vii) challenges from competition;

(viii) adverse developments related to unaffiliated subadvisers;

(ix) negative changes in key distribution relationships;

(x) interruptions, breaches, or failures of technology systems;

(xi) loss on our investments;

(xii) lack of sufficient capital on satisfactory terms;

(xiii) adverse regulatory and legal developments;

(xiv) failure to comply with investment guidelines or other contractual requirements;

(xv) adverse civil litigation, government investigations, or proceedings;

(xvi) unfavorable changes in tax laws or limitations;

(xvii) inability to make common stock dividend payments;

(xviii) impediments from certain corporate governance provisions;

(xix) losses or costs not covered by insurance;

(xx) impairment of goodwill or other intangible assets;

and other risks and uncertainties.

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We provide investment management and related services to individuals and institutions.

We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual brand, 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.

We offer investment strategies for individual and institutional investors in different investment products and through multiple distribution channels.

Our earnings are primarily from asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution, and shareholder services.

We offer investment strategies for individual and institutional investors in different investment products and through

multiple distribution channels.

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

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

Our retail products include open-end funds, closed-end funds and retail separate accounts.

1 unchanged sentence

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.

Our retail distribution resources in the U.S.

consist of regional sales professionals, a national account relationship group and specialized teams for retirement and ETFs.

retail funds and retail separate accounts are distributed through financial intermediaries.

We have broad distribution access in the U.S.

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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.

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.

Our private client business is marketed directly to individual clients by financial advisory teams at our affiliated investment managers.

Our institutional distribution resources include affiliate specific institutional sales teams primarily focused on the U.S.

market, supported by shared consultant relation support and non-U.S.

institutional distribution.

Our institutional products are marketed through relationships with consultants as well as directly to clients.

We target key market segments, including foundations and endowments, corporations, public and private pension plans, sovereign wealth funds and subadvisory relationships.

Financial Highlights

▪ Net income per diluted share was $4.25 in the third quarter of 2022, a decrease of $3.11, or 42.3%, as compared to net income per diluted share of $7.36 in the third quarter of 2021.

▪ Total sales were $5.7 billion in the third quarter of 2022, a decrease of $1.9 billion, or 24.9%, from $7.6 billion in the third quarter of 2021.

Net outflows were $3.3 billion in the third quarter of 2022 compared to $0.5 billion in the third quarter of 2021.

▪ Assets under management were $145.0 billion at September 30, 2022, a decrease of $32.3 billion, or 18.2%, from September 30, 2021.

On October 19, 2022, the Company entered into an agreement to acquire AlphaSimplex, a leading manager of liquid alternative investment solutions with $10.9 billion of assets under management at September 30, 2022.

Under the agreement, the Company would acquire 100% of AlphaSimplex for $130.0 million at closing which includes deferred retention incentives for management.

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.

Stone Harbor Investment Partners

On January 1, 2022, the Company acquired 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 acquired of Westchester Capital Management ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management.

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 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 AGI's open-end, closed-end, institutional and retail separate account assets.

▪ Net income per diluted share was $5.21 in the first quarter of 2023, an increase of $0.99, or 23.5%, as compared to net income per diluted share of $4.22 in the first quarter of 2022.

▪ Total sales were $6.2 billion in the first quarter of 2023, a decrease of $3.2 billion, or 33.9%, from $9.4 billion in the first quarter of 2022.

Net outflows were $1.9 billion in the first quarter of 2023 compared to $2.0 billion in the first quarter of 2022.

▪ Assets under management were $154.8 billion at March 31, 2023, a decrease of $28.5 billion, or 15.5%, from March 31, 2022.

On April 1, 2023, the Company completed its previously announced acquisition of AlphaSimplex Group, LLC ("AlphaSimplex"), a leading manager of quantitative alternative investment solutions.

Transaction consideration of $130.0 million was financed with existing balance sheet resources and $50.0 million drawn from the Company's revolving credit facility.

Assets Under Management

At September 30, 2022, total assets under management were $145.0 billion, representing a decrease of $32.3 billion, or 18.2%, from September 30, 2021, and a decrease of $42.2 billion, or 22.6%, from December 31, 2021.

The decrease from

September 30, 2021 was due to $39.6 billion of negative market performance and $10.0 billion of net outflows partially offset by an increase of $19.8 billion in assets under management from the addition of Stone Harbor and Westchester.

The decrease from December 31, 2021 was due to $45.9 billion in negative market performance and $10.0 billion of net outflows, partially offset by an increase of $14.7 billion in assets under management from the addition of Stone Harbor.

Other Fee Earning Assets

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

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

At September 30, 2021, we had $2.5 billion of other fee earning assets.

Operating Results

In the third quarter of 2022, total revenues decreased 16.6% to $210.3 million from $252.1 million in the third quarter of 2021, primarily as a result of lower average assets under management due to negative market performance and net outflows partially offset by an increase in assets under management from Stone Harbor and Westchester.

Operating income decreased $49.3 million to $44.0 million in the third quarter of 2022 compared to $93.3 million in the third quarter of 2021, due primarily to the previously mentioned factors.

At March 31, 2023, total assets under management were $154.8 billion, representing a decrease of $28.5 billion, or 15.5%, from March 31, 2022, and an increase of $5.5 billion, or 3.7%, from December 31, 2022.

The decrease from March 31, 2022 was due to $12.8 billion of negative market performance and $13.4 billion of net outflows.

The increase from December 31, 2022 was due to $7.8 billion in positive market performance partially offset by $1.9 billion of net outflows.

Assets Under Management by Product

The following table summarizes our assets under management by product:

As of September 30, Change

As of March 31, Change

(in millions) 2023 2022 $ %

10 unchanged sentences

– Funds - average daily or weekly balances

– Retail Separate Accounts - prior-quarter ending balance

– Retail Separate Accounts - prior-quarter ending balances

– Institutional Accounts - average of month-end balances

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022

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Beginning balance $ 10,361 $ 12,068

Inflows 157 3 189 3

Outflows — — — —

Net flows 4 8

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The following table summarizes assets under management by asset class:

As of September 30, Change % of Total

As of March 31, Change % of Total

(in millions) 2023 2022 $ % 2023 2022

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Total $ 154,849 $ 183,342 $ (28,493) (15.5) % 100.0 % 100.0 %

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

(1) Consists of strategies and client accounts with substantial holdings in at least two of the following asset classes:

equity, fixed income, and alternatives.

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

Three Months Ended September 30,

Average Fee Earned

(expressed in basis points)

Average Assets Under

(in millions) (3)

2022 2021 2022 2021

Open-End Funds (1) 46.8 45.7 $ 60,185 $ 76,368

Closed-End Funds 57.0 56.2 10,971 12,091

Retail Separate Accounts 42.2 44.0 35,248 40,578

Institutional Accounts (2) 31.3 31.3 50,668 50,542

All Products 41.5 42.0 $ 157,072 $ 179,579

Nine Months Ended September 30,

Three Months Ended March 31,

Average Fee Earned

13 unchanged sentences

– Funds - average daily or weekly balances

– Retail Separate Accounts - prior-quarter ending balance

– Retail Separate Accounts - prior-quarter ending balances

– 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").

Average fees earned represent investment management fees, net of revenue-related adjustments, divided by average net assets, excluding the impact of consolidated 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

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.

1 unchanged sentence

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 and nine months ended September 30, 2022 decreased by 0.5 basis points and 1.0 basis points, respectively, compared to the same periods in the prior year primarily due to a lower proportion of assets under management in equity products as a result of negative equity markets in the current year periods partially offset by a higher proportion of alternative assets in the current year periods.

The average fee rate earned on all products for the three months ended March 31, 2023 remained consistent compared to the same period in the prior year as higher fee rates on open-end funds were offset by a lower blended rate on closed-end funds due to changes in the underlying asset mix.

Results of Operations

Summary Financial Data

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

Three Months Ended March 31,

(in thousands) 2023 2022 2023 vs.

2021 % 2022 2021 2022 vs.

Investment management fees $ 164,478 $ 206,817 $ (42,339) (20.5) %

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Operating income (loss) 28,579 65,552 (36,973) (56.4) %

Other income (expense), net (11,592) (2,304) (9,288) 403.1 % (59,262) 1,738 (61,000) N/M

Other income (expense), net 4,923 (16,039) 20,962 (130.7) %

Interest income (expense), net 9,844 6,341 3,503 55.2 %

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Earnings (loss) per share-diluted $ 5.21 $ 4.22 $ 0.99 23.5 %

N/M = Not Meaningful

In the first quarter of 2023, total revenues decreased 21.6% to $197.9 million from $252.4 million in the first quarter of 2022, primarily as a result of lower average assets under management due to negative market performance and net outflows.

Operating income decreased $37.0 million to $28.6 million in the first quarter of 2023 compared to $65.6 million in the first quarter of 2022, due primarily to the aforementioned lower revenue.

Revenues by source were as follows:

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

Three Months Ended March 31,

(in thousands) 2023 2022 2023 vs.

2021 % 2022 2021 2022 vs.

Investment management fees

10 unchanged sentences

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 decreased by $28.3 million, or 14.1%, for the three months ended September 30, 2022, and decreased $3.2 million, or 0.6%, for the nine months ended September 30, 2022, compared to the same periods in the prior year.

The decrease in investment management fees during the three-month period was due to a decrease in average assets under management of $22.5 billion, or 12.5%, as well as a lower blended fee rate, partially offset by the addition of Stone Harbor and

Westchester assets under management.

The decrease in investment management fees during the nine-month period was due to the lower blended fee rate offset by an increase in average assets under management of $3.9 billion, or 2.3%, as a result of the addition of Stone Harbor and Westchester.

Investment management fees decreased by $42.3 million, or 20.5%, for the three months ended March 31, 2023 compared to the same period in the prior year due to lower average assets under management.

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 $7.5 million, or 32.4%, and $14.2 million, or 21.1%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year, due primarily to lower sales for open-end funds in share classes that have sales-based distribution and service fees.

Distribution and service fees decreased by $5.9 million, or 29.3%, for the three months ended March 31, 2023 compared to the same period in the prior year, due primarily to lower sales and assets for open-end funds in share classes that have sales- and asset-based distribution and service fees.

Administration and Shareholder Service Fees

1 unchanged sentence

retail funds, ETFs, and certain of our closed-end funds.

Fund administration and shareholder service fees decreased by $5.9 million, or 22.3%, and $8.0 million, or 10.7%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year primarily due to the net decrease in average assets under management for our open-end and closed-end funds during the periods as a result of market performance and net outflows in our open-end funds.

Fund administration and shareholder service fees decreased by $6.0 million, or 24.6%, for the three months ended March 31, 2023, compared to the same period in the prior year

primarily due to the decrease in average assets under management for our open-end and closed-end funds during the period as a result of market performance and net outflows in our open-end funds.

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 $0.5 million, or 15.2%, for the nine months ended September 30, 2022, compared to the same period in the prior year.

The increase for the nine months ended September 30, 2022 was primarily due to higher redemption income in the period.

Other income and fees decreased by $0.4 million, or 30.5%, for the three months ended March 31, 2023, compared to the same period in the prior year primarily due to lower average other fee earning assets and redemptions.

Operating Expenses

Operating expenses by category were as follows:

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

Three Months Ended March 31,

(in thousands) 2023 2022 2023 vs.

2021 % 2022 2021 2022 vs.

Operating expenses

3 unchanged sentences

Other operating expenses of CIP 700 740 (40) (5.4) %

Restructuring expense 4,015 — 4,015 100.0 % 4,015 — 4,015 100.0 %

Change in fair value of contingent consideration — — — — % 2,900 — 2,900 100.0 %

Depreciation expense 1,145 935 210 22.5 %

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Employment expenses consist of fixed and variable compensation and related employee benefit costs.

Employment expenses for the three and nine months ended September 30, 2022 were $88.2 million and $283.6 million, which represented an increase of $0.9 million, or 1.0%, and $16.8 million, or 6.3%, respectively, compared to the same periods in the prior year.

The increases in both periods were primarily due to the addition of Stone Harbor and Westchester.

Employment expenses for the three months ended March 31, 2023 were $98.6 million, which represented a decrease of $7.4 million, or 7.0%, compared to the same period in the prior year.

The decrease was primarily due to lower incentive compensation expenses in the current year period.

Distribution and Other Asset-Based Expenses

Distribution and other asset-based expenses consist primarily of payments to third-party client intermediaries for providing services to investors in sponsored investment products.

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

These payments are primarily based on assets under management.

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.

During the three and nine months ended

September 30, 2022, distribution and other asset-based expenses decreased $9.9 million, or 26.9%, and $16.8 million, or 16.0%, respectively, as compared to the same periods in the prior year primarily due to lower sales and a decrease in assets under management in share classes that have sales- and asset-based distribution and other asset-based expenses.

During the three months ended March 31, 2023, distribution and other asset-based expenses decreased $9.1 million, or 27.8%, as compared to the same period in the prior year primarily due to a decrease in assets under management in share classes that have asset-based 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.

For the three and nine months ended September 30, 2022, other operating expenses increased by $8.3 million, or 36.4%, and $30.0 million, or 46.7%, respectively, as compared to the same periods in the prior year primarily due to the addition of Stone Harbor and Westchester, as well as higher travel and related expenses.

Other operating expenses decreased $1.0 million, or 3.1%, for the three months ended March 31, 2023 as compared to the same period in the prior year primarily due to lower legal and professional fees incurred, partially offset by higher travel-related expenses, in the current year period.

Other Operating Expenses of CIP

Other operating expenses of CIP remained consistent during the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

Restructuring Expense

Restructuring expense primarily consist of costs incurred during the three and nine months ended September 30, 2022 related to the write-down of right-of-use assets for a lease in conjunction with the consolidation of certain office space.

Change in Fair Value of Contingent Consideration

Our contingent consideration related to our NFJ, Westchester and Stone Harbor transactions are remeasured at fair value each reporting date taking into consideration changes in various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved.

The change in fair value is recorded in the current period as a gain or loss.

The change in value of continent consideration of $2.9 million during the nine months ended September 30, 2022 was primarily attributable to higher future revenue projections and the time value of money.

Other operating expenses of CIP remained consistent during the three months ended March 31, 2023 compared to the same period in the prior year.

Depreciation Expense

Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements.

Depreciation expense remained consistent during the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

Depreciation expense increased $0.2 million, or 22.5%, for the three months ended March 31, 2023 compared to the same periods in the prior year.

This increase is primarily attributable to software and equipment purchases made in the current year period.

Amortization Expense

Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives.

Amortization expense increased $4.2 million, or 40.6%, and $13.7 million, or 45.3%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The increases during the three- and nine-month periods were due to the additional amortization associated with the acquisitions of Stone Harbor and Westchester.

Amortization expense decreased $0.3 million, or 1.8%, for the three months ended March 31, 2023 compared to the same period in the prior year due to certain intangible assets becoming fully amortized in the prior year.

Other Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2023 2022 2023 vs.

2021 % 2022 2021 2022 vs.

Other Income (Expense)

4 unchanged sentences

Realized and unrealized gain (loss) on investments, net

Realized and unrealized gain (loss) on investments, net changed during the three and nine months ended September 30, 2022 by $(2.0) million and $(18.9) million, respectively, as compared to the same periods in the prior year.

The realized and unrealized gains and losses during the periods reflected changes in overall market conditions experienced during the periods.

Realized and unrealized gain (loss) on investments, net changed during the three months ended March 31, 2023 by $5.7 million as compared to the same period in the prior year.

The realized and unrealized gains and losses during the period reflected changes in overall market conditions experienced during the periods.

Realized and unrealized gain (loss) of CIP, net

Realized and unrealized gain (loss) of CIP, net changed $(5.6) million and $(38.7) million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The changes for the three and nine months ended September 30, 2022 consisted primarily of an increase in net realized and unrealized gains of $5.7 million and losses of $119.1 million, respectively, due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $11.3 million and gains of $80.4 million, respectively, related to the value of the notes payable.

Realized and unrealized gain (loss) of CIP, net changed by $15.9 million during the three months ended March 31, 2023 compared to the same period in the prior year.

The change for the three months ended March 31, 2023 consisted primarily of an increase in unrealized gains of $53.3 million due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $37.3 million related to the value of the notes payable.

Other income (expense), net

Other income (expense), net decreased $1.7 million and $3.4 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The decreases during the three- and nine-month periods were primarily due to lower equity method investment income during the current year periods.

Other income (expense), net changed by $0.6 million during the three months ended March 31, 2023 compared to the same period in the prior year.

The change during the three-month period was primarily due to equity method investment losses during the current year period compared to equity method investment gains during the prior year period.

Interest Income (Expense)

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

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

Three Months Ended March 31,

(in thousands) 2023 2022 2023 vs.

2021 % 2022 2021 2022 vs.

Interest Income (Expense)

5 unchanged sentences

Interest Expense

Interest expense increased $1.2 million, or 51.5%, and $1.7 million, or 25.2%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The increases were attributable to higher interest rates.

Interest expense increased $2.7 million, or 119.6%, during the three months ended March 31, 2023 compared to the same period in the prior year.

The increase was attributable to higher interest rates on our debt.

Interest and Dividend Income

Interest and dividend income increased $0.7 million, or 276.6%, and $1.3 million, or 227.5%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The increases were attributable to higher average investment balances and increasing interest rates during the current year periods compared to prior year periods.

Interest and dividend income increased $2.9 million, or 887.2%, during the three months ended March 31, 2023 compared to the same period in the prior year.

The increase was primarily attributable to higher interest earned on cash balances during the current year period compared to prior year period.

Interest and Dividend Income of Investments of CIP

Interest and dividend income of investments of CIP increased $5.8 million, or 25.2%, and $2.1 million, or 3.1%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The increases were primarily due to higher average interest rates.

Interest and dividend income of investments of CIP increased $26.4 million, or 129.7%, for the three months ended

March 31, 2023, compared to the same period in the prior year.

The increase was primarily due to higher average interest rates during the current year and the addition of a new CLO in the fourth quarter of 2022.

Interest Expense of CIP

Interest expense of CIP represents interest expense on the notes payable of CIP.

Interest expense of CIP increased $6.9 million, or 51.4%, and $4.5 million, or 10.7%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The increases during the three and nine months ended September 30, 2022 were primarily due to higher average interest rates.

Interest expense of CIP increased $23.1 million, or 191.2% for the three months ended March 31, 2023 compared to the same period in the prior year.

The increase during the three months ended March 31, 2023 was primarily due to higher average interest rates and the addition of a new CLO in the fourth quarter of 2022.

Income Tax Expense (Benefit)

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.

federal, state and local taxes at an estimated effective tax rate of 20.1% and 30.0% for the three months ended March 31, 2023 and 2022, respectively.

The lower estimated effective tax rate for the three months ended March 31, 2023 was primarily due to excess tax benefits associated with stock-based compensation and the change in valuation allowances in the current year related to the tax effects of unrealized gains on certain of our investments.

The higher effective tax rate in the prior year period was due to valuation allowances recorded for the tax effects of unrealized losses on certain of our investments.

Liquidity and Capital Resources

1 unchanged sentence

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

September 30, 2022 December 31, 2021 Change

March 31, 2023 December 31, 2022 Change

(in thousands) 2023 vs.

6 unchanged sentences

Total equity 844,297 822,936 21,361 2.6 %

Nine Months Ended

September 30, Change

Three Months Ended

March 31, Change

(in thousands) 2023 2022 2023 vs.

4 unchanged sentences

Financing activities (115,078) (145,777) 30,699 (21.1) %

At September 30, 2022, we had $309.2 million of cash and cash equivalents and $98.2 million of investments, which included $73.1 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.

At March 31, 2023, we had $213.4 million of cash and cash equivalents and $115.7 million of investments, which included $80.7 million of investment securities, compared to $338.2 million of cash and cash equivalents and $100.3 million of investments, which included $77.0 million of investment securities, at December 31, 2022.

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, 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.

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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;

(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;

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

and (viii) purchases of affiliate noncontrolling interests.

and (viii) purchases of affiliate equity interests.

Capital and Reserve Requirements

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Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital, or interruption of our business.

At September 30, 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.

At March 31, 2023, 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

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Operating Cash Flow

Net cash provided by operating activities of $154.9 million for the nine months ended September 30, 2022 changed by $268.8 million from net cash provided by operating activities of $423.7 million for the same period in the prior year primarily due to a $207.0 million reduction in net sales of investments by CIP and a decrease in accrued compensation and other liability balances.

Net cash used in operating activities of $43.0 million for the three months ended March 31, 2023 decreased by $38.8 million from net cash used in operating activities of $81.8 million for the same period in the prior year primarily due to a $51.8 million reduction in net sales of investments by CIP.

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 $25.7 million for the nine months ended September 30, 2022 compared to net cash used in investing activities of $16.5 million in the same period for the prior year.

The increase in cash used in investing activities during the nine months ended September 30, 2022 compared to the prior year period related to cash paid for the Stone Harbor acquisition in the nine months ended September 30, 2022.

Net cash used in investing activities was $13.1 million for the three months ended March 31, 2023 compared to net cash used in investing activities of $22.6 million in the same period for the prior year.

The decrease in cash used in investing activities during the three months ended March 31, 2023 compared to the prior year period related to the decrease in cash paid for acquisitions and other investments.

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 $165.5 million to $319.0 million for the nine months ended September 30, 2022 from $153.5 million for the nine months ended September 30, 2021.

The net change was primarily due to an inflow of $81.2 million from the refinancing of our credit agreement in the prior year, an increase from the prior year in outflows from repurchases of common shares of $47.5 million and contingent consideration payments of $33.0 million, partially offset by a decrease of $14.5 million in net borrowings of CIP during the nine months ended September 30, 2022 compared to the prior year period.

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

Net cash used in financing activities decreased by $30.7 million to $115.1 million for the three months ended March 31, 2023 from $145.8 million for the three months ended March 31, 2022.

The net change was primarily due to a $30.0 million decrease in share repurchases.

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 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.

During the three months ended March 31, 2023, the Company repaid $0.7 million outstanding under its Term Loan.

At March 31, 2023, $260.9 million was outstanding under the Term Loan and there were no outstanding borrowings under the revolving credit facility.

On April 3, 2023, the Company borrowed $50.0 million under the revolving credit facility to partially finance its acquisition of AlphaSimplex Group, LLC.

Critical Accounting Policies and Estimates

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A complete description of our significant accounting policies is included in our 2022 Annual Report on Form 10-K.

There were no material changes in our critical accounting policies and estimates in the three months ended September 30, 2022.

There were no material changes in our critical

accounting policies and estimates in the three months ended March 31, 2023.

Recently Issued Accounting Pronouncements

For a discussion of accounting standards, see Note 2 in our condensed consolidated financial statements.

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, 2023, there were no material changes to the information contained in Part II, Item 7A of the Company's 2022 Annual Report on Form 10-K.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis