VIRTUS INVESTMENT PARTNERS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward Looking Statements This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements that are not historical facts, including statements about our beliefs or expectations, are "forward-looking statements." These statements may be identified by such forward-looking terminology as "expect," "estimate," "intent," "plan," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "project," "opportunity," "predict," "would," "potential," "future," "forecast," "guarantee," "assume," "likely," "target" or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions and projections about the Company and the markets in which we operate, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net asset inflows and outflows, operating cash flows, business plans and ability to borrow, for all future periods. All forward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date of this Quarterly Report on Form 10-Q only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us that modify or impact any of the forward-looking statements contained in or accompanying this Quarterly Report on Form 10-Q, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, resulting from: (i) any reduction in our assets under management; (ii) 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. Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to above, in our 2022 Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and our other periodic reports filed with the Securities and Exchange Commission (the "SEC") could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity. Certain other factors that may impact our continuing operations, prospects, financial results and liquidity, or that may cause actual results to differ from such forward-looking statements, are discussed or included in the Company’s periodic reports filed with the SEC and are available on our website at www.virtus.com under "Investor Relations." You are urged to carefully consider all such factors. Overview Our Business We provide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual brand, as well as from select unaffiliated subadvisers for certain of our retail funds. 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 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 18 Table of Contents 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 and quantitative). Our retail products include open-end funds, closed-end funds and retail separate accounts. Our institutional products are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. We also provide subadvisory services to other investment advisers and serve as the collateral manager for structured products. 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. Our U.S. retail funds and retail separate accounts are distributed through financial intermediaries. We have broad distribution access in the U.S. retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisers, banks and insurance companies. In many of these firms, we have a number of products that are on preferred "recommended" lists and on fee-based advisory programs. Our 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 $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. AlphaSimplex 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 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. 19 Table of Contents Assets Under Management by Product The following table summarizes our assets under management by product: As of March 31, Change (in millions) 2023 2022 $ % Open-End Funds (1) $ 53,865 $ 73,149 $ (19,284) (26.4) % Closed-End Funds 10,358 12,060 (1,702) (14.1) % Retail Separate Accounts 37,397 40,824 (3,427) (8.4) % Institutional Accounts (2) 53,229 57,309 (4,080) (7.1) % Total $ 154,849 $ 183,342 $ (28,493) (15.5) % Average Assets Under Management (3) $ 152,361 $ 190,106 $ (37,745) (19.9) % (1) Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds. (2) Represents assets under management of institutional separate and commingled accounts including structured products. (3) Averages are calculated as follows: – Funds - average daily or weekly balances – Retail Separate Accounts - prior-quarter ending balances – Institutional Accounts - average of month-end balances 20 Table of Contents Asset Flows by Product The following table summarizes asset flows by product: Three Months Ended March 31, (in millions) 2023 2022 Open-End Funds (1) Beginning balance $ 53,000 $ 78,706 Inflows 3,011 4,956 Outflows (4,792) (8,378) Net flows (1,781) (3,422) Market performance 2,771 (6,907) Other (2) (125) 4,772 Ending balance $ 53,865 $ 73,149 Closed-End Funds Beginning balance $ 10,361 $ 12,068 Inflows 4 8 Outflows — — Net flows 4 8 Market performance 205 (196) Other (2) (212) 180 Ending balance $ 10,358 $ 12,060 Retail Separate Accounts Beginning balance $ 35,352 $ 44,538 Inflows 1,367 2,022 Outflows (1,288) (1,394) Net flows 79 628 Market performance 1,966 (4,342) Other (2) — — Ending balance $ 37,397 $ 40,824 Institutional Accounts (3) Beginning balance $ 50,663 $ 51,874 Inflows 1,852 2,449 Outflows (2,047) (1,623) Net flows (195) 826 Market performance 2,906 (5,012) Other (2) (145) 9,621 Ending balance $ 53,229 $ 57,309 Total Beginning balance $ 149,376 $ 187,186 Inflows 6,234 9,435 Outflows (8,127) (11,395) Net flows (1,893) (1,960) Market performance 7,848 (16,457) Other (2) (482) 14,573 Ending balance $ 154,849 $ 183,342 (1) Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds. (2) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the impact of non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), current income or capital returned by structured products and the use of leverage. (3) Represents assets under management of institutional separate and commingled accounts including structured products. 21 Table of Contents Assets Under Management by Asset Class The following table summarizes assets under management by asset class: As of March 31, Change % of Total (in millions) 2023 2022 $ % 2023 2022 Asset Class Equity $ 87,511 $ 102,989 $ (15,478) (15.0) % 56.5 % 56.2 % Fixed income 36,596 45,418 (8,822) (19.4) % 23.6 % 24.8 % Multi-asset (1) 20,597 23,415 (2,818) (12.0) % 13.3 % 12.8 % Alternatives (2) 10,145 11,520 (1,375) (11.9) % 6.6 % 6.2 % Total $ 154,849 $ 183,342 $ (28,493) (15.5) % 100.0 % 100.0 % (1) Consists of strategies and client accounts with substantial holdings in at least two of the following asset classes: equity, fixed income, and alternatives. (2) Consists of event-driven, real estate securities, infrastructure, long/short and other strategies. Average Assets Under Management and Average Fees Earned The following table summarizes the average management fees earned in basis points and average assets under management: Three Months Ended March 31, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (3) 2023 2022 2023 2022 Products Open-End Funds (1) 47.6 46.5 $ 54,141 $ 75,537 Closed-End Funds 57.1 58.4 10,424 11,762 Retail Separate Accounts 44.2 43.6 35,352 44,538 Institutional Accounts (2) 31.8 31.5 52,444 58,269 All Products 42.0 41.9 $ 152,361 $ 190,106 (1) Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds. (2) Represents assets under management of institutional separate and commingled accounts including structured products. (3) Averages are calculated as follows: – Funds - average daily or weekly balances – Retail Separate Accounts - prior-quarter ending 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 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 assets. Retail separate account fees are calculated based on the end of the preceding or current quarter’s asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances, an average of current quarter’s asset values or on a combination of the underlying cash flows and the principal value of the product. Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to the funds. The average fee rate earned on all products for the three months ended March 31, 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. 22 Table of Contents Results of Operations Summary Financial Data Three Months Ended March 31, (in thousands) 2023 2022 2023 vs. 2022 % Investment management fees $ 164,478 $ 206,817 $ (42,339) (20.5) % Other revenue 33,396 45,623 (12,227) (26.8) % Total revenues 197,874 252,440 (54,566) (21.6) % Total operating expenses 169,295 186,888 (17,593) (9.4) % Operating income (loss) 28,579 65,552 (36,973) (56.4) % Other income (expense), net 4,923 (16,039) 20,962 (130.7) % Interest income (expense), net 9,844 6,341 3,503 55.2 % Income (loss) before income taxes 43,346 55,854 (12,508) (22.4) % Income tax expense (benefit) 8,703 16,735 (8,032) (48.0) % Net income (loss) 34,643 39,119 (4,476) (11.4) % Noncontrolling interests 3,981 (6,060) 10,041 (165.7) % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 38,624 $ 33,059 $ 5,565 16.8 % Earnings (loss) per share-diluted $ 5.21 $ 4.22 $ 0.99 23.5 % 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 Revenues by source were as follows: Three Months Ended March 31, (in thousands) 2023 2022 2023 vs. 2022 % Investment management fees Open-end funds $ 71,266 $ 97,377 $ (26,111) (26.8) % Closed-end funds 14,678 16,940 (2,262) (13.4) % Retail separate accounts 40,079 49,603 (9,524) (19.2) % Institutional accounts 38,455 42,897 (4,442) (10.4) % Total investment management fees 164,478 206,817 (42,339) (20.5) % Distribution and service fees 14,153 20,007 (5,854) (29.3) % Administration and shareholder service fees 18,359 24,344 (5,985) (24.6) % Other income and fees 884 1,272 (388) (30.5) % Total revenues $ 197,874 $ 252,440 $ (54,566) (21.6) % Investment Management Fees Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments. Investment management fees 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 $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 Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our U.S. retail funds, ETFs, and certain of our closed-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 23 Table of Contents 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 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 March 31, (in thousands) 2023 2022 2023 vs. 2022 % Operating expenses Employment expenses $ 98,614 $ 105,993 $ (7,379) (7.0) % Distribution and other asset-based expenses 23,715 32,846 (9,131) (27.8) % Other operating expenses 30,730 31,712 (982) (3.1) % Other operating expenses of CIP 700 740 (40) (5.4) % Depreciation expense 1,145 935 210 22.5 % Amortization expense 14,391 14,662 (271) (1.8) % Total operating expenses $ 169,295 $ 186,888 $ (17,593) (9.4) % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. 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. 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 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. 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 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 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. 24 Table of Contents Amortization Expense Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives. 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 March 31, (in thousands) 2023 2022 2023 vs. 2022 % Other Income (Expense) Realized and unrealized gain (loss) on investments, net $ 2,670 $ (2,982) $ 5,652 (189.5) % Realized and unrealized gain (loss) of CIP, net 2,596 (13,344) 15,940 (119.5) % Other income (expense), net (343) 287 (630) (219.5) % Total Other Income (Expense), net $ 4,923 $ (16,039) $ 20,962 (130.7) % Realized and unrealized gain (loss) on investments, net 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 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 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 March 31, (in thousands) 2023 2022 2023 vs. 2022 % Interest Income (Expense) Interest expense $ (5,005) $ (2,279) $ (2,726) 119.6 % Interest and dividend income 3,238 328 2,910 887.2 % Interest and dividend income of investments of CIP 46,814 20,380 26,434 129.7 % Interest expense of CIP (35,203) (12,088) (23,115) 191.2 % Total Interest Income (Expense), net $ 9,844 $ 6,341 $ 3,503 55.2 % Interest Expense 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 $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 $26.4 million, or 129.7%, for the three months ended 25 Table of Contents 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 $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 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 Certain Financial Data The following table summarizes certain financial data relating to our liquidity and capital resources: March 31, 2023 December 31, 2022 Change (in thousands) 2023 vs. 2022 % Balance Sheet Data Cash and cash equivalents $ 213,424 $ 338,234 $ (124,810) (36.9) % Investments 115,663 100,330 15,333 15.3 % Contingent consideration 101,221 128,400 (27,179) (21.2) % Debt 254,621 255,025 (404) (0.2) % Redeemable noncontrolling interests 106,630 113,718 (7,088) (6.2) % Total equity 844,297 822,936 21,361 2.6 % Three Months Ended March 31, Change (in thousands) 2023 2022 2023 vs. 2022 % Cash Flow Data Provided by (Used in): Operating activities $ (42,959) $ (81,775) $ 38,816 (47.5) % Investing activities (13,145) (22,575) 9,430 (41.8) % Financing activities (115,078) (145,777) 30,699 (21.1) % Overview 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, as well as interest on our indebtedness and income taxes. Annual incentive compensation, which is one of the largest annual operating cash expenditures, is typically paid in the first quarter of the year. In the first quarters of 2023 and 2022, we paid $142.1 million and $151.6 million, respectively, in incentive compensation earned during the years ended December 31, 2022 and 2021, respectively. In addition to operating activities, other uses of cash could include: (i) investments in organic growth, including 26 Table of Contents seeding or launching new products and expanding distribution; (ii) debt principal payments through scheduled amortization, excess cash flow payment requirements or additional paydowns; (iii) dividend payments to common stockholders; (iv) repurchases of our common stock, or withholding obligations for the net settlement of employee share transactions; (v) investments in our infrastructure; (vi) investments in inorganic growth opportunities that may require upfront and/or future payments; (vii) integration costs, including restructuring and severance, related to acquisitions, if any; and (viii) purchases of affiliate equity interests. Capital and Reserve Requirements We operate an SEC registered broker-dealer subsidiary that is subject to certain rules regarding minimum net capital. The broker-dealer is required to maintain a ratio of "aggregate indebtedness" to "net capital," as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital. Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital, or interruption of our business. At March 31, 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 Cash and cash equivalents consist of cash in banks and money market fund investments. Investments consist primarily of investments in our sponsored funds. CIP represent investment products for which we provide investment management services and where we either have a controlling financial interest or are considered the primary beneficiary of an investment product that is considered a variable interest entity. Operating Cash Flow Net cash used in operating activities of $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 $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 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 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. 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 $6.3 million as of March 31, 2023. 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 Our financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K. 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 27 Table of Contents 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. During the three months ended March 31, 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.