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 institutions and individuals. 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. 20 Table of Contents We offer investment strategies for institutional and individual 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 alternatives), geographies (domestic, global, international and emerging), market capitalizations (large, mid and small), styles (growth, core and value) and investment approaches (fundamental and quantitative). Our institutional products are offered through separate accounts and pooled or commingled structures to a variety of institutional clients. Our retail products include open-end funds, closed-end funds and retail separate accounts. We also provide subadvisory services to other investment advisers and serve as the collateral manager for structured products. Our institutional distribution resources include affiliate specific 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. 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. Financial Highlights ▪ Net income per diluted share was $4.19 in the third quarter of 2023, a decrease of $0.06, or 1.4%, compared to net income per diluted share of $4.25 in the third quarter of 2022. ▪ Total sales were $5.8 billion in the third quarter of 2023, an increase of $0.1 billion, or 1.5%, from $5.7 billion in the third quarter of 2022. Net flows were $(1.5) billion in the third quarter of 2023 compared to net flows of $(3.3) billion in the third quarter of 2022. ▪ Assets under management were $162.5 billion at September 30, 2023, an increase of $17.6 billion, or 12.1%, from September 30, 2022. AlphaSimplex On April 1, 2023, the Company completed the acquisition of AlphaSimplex Group, LLC ("AlphaSimplex") for $113.4 million in cash at closing, including $50.0 million drawn from the Company's revolving credit facility. At September 30, 2023, the Company had repaid $30.0 million of the amount drawn on the credit facility. Assets Under Management At September 30, 2023, total assets under management were $162.5 billion, representing an increase of $17.6 billion, or 12.1%, from September 30, 2022, and an increase of $13.2 billion, or 8.8%, from December 31, 2022. The increase from September 30, 2022 was due to $19.3 billion of positive market performance and $7.8 billion from the acquisition of AlphaSimplex, partially offset by $6.8 billion of net outflows. The increase from December 31, 2022 was due to $10.5 billion in positive market performance and $7.8 billion from the acquisition of AlphaSimplex, partially offset by $3.4 billion of net outflows. 21 Table of Contents Assets Under Management by Product The following table summarizes our assets under management by product: As of September 30, Change (in millions) 2023 2022 $ % Open-End Funds (1) $ 54,145 $ 54,454 $ (309) (0.6) % Closed-End Funds 9,472 10,146 (674) (6.6) % Retail Separate Accounts 38,665 33,381 5,284 15.8 % Institutional Accounts (2) 60,257 46,993 13,264 28.2 % Total $ 162,539 $ 144,974 $ 17,565 12.1 % Average Assets Under Management (3) $ 161,074 $ 172,853 $ (11,779) (6.8) % (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 Asset Flows by Product The following table summarizes asset flows by product: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Open-End Funds (1) Beginning balance $ 56,828 $ 59,479 $ 53,000 $ 78,706 Inflows 2,687 2,880 8,248 10,956 Outflows (4,137) (5,689) (13,621) (21,710) Net flows (1,450) (2,809) (5,373) (10,754) Market performance (1,034) (2,012) 3,900 (17,919) Other (2) (199) (204) 2,618 4,421 Ending balance $ 54,145 $ 54,454 $ 54,145 $ 54,454 Closed-End Funds Beginning balance $ 10,166 $ 10,645 $ 10,361 $ 12,068 Inflows — 157 24 189 Outflows — — — — Net flows — 157 24 189 Market performance (504) (531) (300) (1,977) Other (2) (190) (125) (613) (134) Ending balance $ 9,472 $ 10,146 $ 9,472 $ 10,146 Retail Separate Accounts Beginning balance $ 38,992 $ 35,248 $ 35,352 $ 44,538 Inflows 1,849 1,179 4,562 4,489 Outflows (1,524) (1,418) (4,246) (4,789) Net flows 325 (239) 316 (300) Market performance (652) (1,628) 2,997 (10,857) Other (2) — — — — Ending balance $ 38,665 $ 33,381 $ 38,665 $ 33,381 22 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Institutional Accounts (3) Beginning balance $ 62,330 $ 50,048 $ 50,663 $ 51,874 Inflows 1,274 1,507 6,786 7,408 Outflows (1,648) (1,930) (5,173) (6,585) Net flows (374) (423) 1,613 823 Market performance (1,434) (2,475) 3,912 (15,144) Other (2) (265) (157) 4,069 9,440 Ending balance $ 60,257 $ 46,993 $ 60,257 $ 46,993 Total Beginning balance $ 168,316 $ 155,420 $ 149,376 $ 187,186 Inflows 5,810 5,723 19,620 23,042 Outflows (7,309) (9,037) (23,040) (33,084) Net flows (1,499) (3,314) (3,420) (10,042) Market performance (3,624) (6,646) 10,509 (45,897) Other (2) (654) (486) 6,074 13,727 Ending balance $ 162,539 $ 144,974 $ 162,539 $ 144,974 (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. Assets Under Management by Asset Class The following table summarizes assets under management by asset class: As of September 30, Change % of Total (in millions) 2023 2022 $ % 2023 2022 Asset Class Equity $ 87,984 $ 78,034 $ 9,950 12.8 % 54.1 % 53.7 % Fixed income 37,352 36,910 442 1.2 % 23.0 % 25.5 % Multi-asset (1) 19,937 19,364 573 3.0 % 12.3 % 13.4 % Alternatives (2) 17,266 10,666 6,600 61.9 % 10.6 % 7.4 % Total $ 162,539 $ 144,974 $ 17,565 12.1 % 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 managed futures, event-driven, real estate securities, infrastructure, long/short, and other strategies. 23 Table of Contents Average Assets Under Management and Average Fees Earned The following tables summarize 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 Management (in millions) (3) 2023 2022 2023 2022 Products Open-End Funds (1) 51.1 46.8 $ 56,511 $ 60,185 Closed-End Funds 58.2 57.0 10,001 10,971 Retail Separate Accounts 43.3 42.2 38,992 35,248 Institutional Accounts (2) 30.3 31.3 62,368 50,668 All Products 42.0 41.5 $ 167,872 $ 157,072 Nine Months Ended September 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (3) 2023 2022 2023 2022 Products Open-End Funds (1) 49.4 46.4 $ 55,591 $ 67,105 Closed-End Funds 57.6 57.4 $ 10,216 $ 11,379 Retail Separate Accounts 43.9 42.9 $ 37,247 $ 40,203 Institutional Accounts (2) 31.2 31.1 $ 58,020 $ 54,166 All Products 42.1 41.5 $ 161,074 $ 172,853 (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 and nine months ended September 30, 2023 increased by 0.5 basis points and 0.6 basis points, respectively, compared to the same periods in the prior year primarily due to the addition of alternative strategies with higher fee rates from the AlphaSimplex acquisition. 24 Table of Contents Results of Operations Summary Financial Data Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % 2023 2022 $ % Investment management fees $ 184,869 $ 172,850 $ 12,019 7.0 % $ 529,326 $ 564,691 $ (35,365) (6.3) % Other revenue 34,402 37,411 (3,009) (8.0) % 101,355 123,317 (21,962) (17.8) % Total revenues 219,271 210,261 9,010 4.3 % 630,681 688,008 (57,327) (8.3) % Total operating expenses 174,368 166,244 8,124 4.9 % 518,153 521,769 (3,616) (0.7) % Operating income (loss) 44,903 44,017 886 2.0 % 112,528 166,239 (53,711) (32.3) % Other income (expense), net (2,803) (11,592) 8,789 (75.8) % (1,446) (59,262) 57,816 (97.6) % Interest income (expense), net 8,235 5,744 2,491 43.4 % 23,689 17,785 5,904 33.2 % Income (loss) before income taxes 50,335 38,169 12,166 31.9 % 134,771 124,762 10,009 8.0 % Income tax expense (benefit) 12,181 10,754 1,427 13.3 % 31,794 43,969 (12,175) (27.7) % Net income (loss) 38,154 27,415 10,739 39.2 % 102,977 80,793 22,184 27.5 % Noncontrolling interests (7,248) 4,265 (11,513) (269.9) % (3,190) 1,348 (4,538) (336.6) % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 30,906 $ 31,680 $ (774) (2.4) % $ 99,787 $ 82,141 $ 17,646 21.5 % Earnings (loss) per share-diluted $ 4.19 $ 4.25 $ (0.06) (1.4) % $ 13.50 $ 10.76 $ 2.74 25.5 % In the third quarter of 2023, total revenues increased 4.3% to $219.3 million from $210.3 million in the third quarter of 2022, primarily as a result of the addition of AlphaSimplex. Operating income increased $0.9 million to $44.9 million in the third quarter of 2023 compared to $44.0 million in the third quarter of 2022, due primarily to the aforementioned increased revenue, partially offset by increased operating expenses due to the addition of AlphaSimplex. Revenues Revenues by source were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % 2023 2022 $ % Investment management fees Open-end funds $ 80,294 $ 80,234 $ 60 0.1 % $ 229,721 $ 262,486 $ (32,765) (12.5) % Closed-end funds 14,673 15,773 (1,100) (7.0) % 44,025 48,887 (4,862) (9.9) % Retail separate accounts 44,441 39,154 5,287 13.5 % 127,323 134,069 (6,746) (5.0) % Institutional accounts 45,461 37,689 7,772 20.6 % 128,257 119,249 9,008 7.6 % Total investment management fees 184,869 172,850 12,019 7.0 % 529,326 564,691 (35,365) (6.3) % Distribution and service fees 14,333 15,746 (1,413) (9.0) % 42,618 52,912 (10,294) (19.5) % Administration and shareholder service fees 19,069 20,563 (1,494) (7.3) % 55,668 66,889 (11,221) (16.8) % Other income and fees 1,000 1,102 (102) (9.3) % 3,069 3,516 (447) (12.7) % Total revenues $ 219,271 $ 210,261 $ 9,010 4.3 % $ 630,681 $ 688,008 $ (57,327) (8.3) % Investment Management Fees Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments. Investment management fees increased by $12.0 million, or 7.0%, and decreased $35.4 million, or 6.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to the addition of AlphaSimplex. The decrease for the nine months ended September 30, 2023 was primarily due to lower average assets under management, partially offset by the addition of AlphaSimplex. 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 $1.4 million, or 9.0%, and $10.3 million, or 19.5%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, primarily due to lower average assets for open-end funds in share classes that have sales- and asset-based distribution and service fees. 25 Table of Contents 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 and certain of our closed-end funds. Fund administration and shareholder service fees decreased by $1.5 million, or 7.3%, and $11.2 million, or 16.8%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to the decrease in average assets under management in open-end funds during the periods as a result of market performance and net outflows. 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 $0.1 million, or 9.3%, and $0.4 million, or 12.7%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decline was primarily due to lower redemption income as well as the decline in average other fee-earning assets in the current year periods. Operating Expenses Operating expenses by category were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % 2023 2022 $ % Operating expenses Employment expenses $ 101,587 $ 88,230 $ 13,357 15.1 % $ 304,895 $ 283,583 $ 21,312 7.5 % Distribution and other asset-based expenses 24,157 26,818 (2,661) (9.9) % 73,332 88,247 (14,915) (16.9) % Other operating expenses 30,494 31,096 (602) (1.9) % 94,707 94,367 340 0.4 % Other operating expenses of CIP 553 538 15 2.8 % 1,613 1,927 (314) (16.3) % Restructuring expense 691 4,015 (3,324) (82.8) % 691 4,015 (3,324) (82.8) % Change in fair value of contingent consideration — — — — % (6,800) 2,900 (9,700) (334.5) % Depreciation expense 1,504 938 566 60.3 % 4,134 2,835 1,299 45.8 % Amortization expense 15,382 14,609 773 5.3 % 45,581 43,895 1,686 3.8 % Total operating expenses $ 174,368 $ 166,244 $ 8,124 4.9 % $ 518,153 $ 521,769 $ (3,616) (0.7) % Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three and nine months ended September 30, 2023 were $101.6 million and $304.9 million, respectively, which represented an increase of $13.4 million, or 15.1%, and $21.3 million, or 7.5%, respectively, compared to the same periods in the prior year. The increases were primarily due to the addition of AlphaSimplex, which includes retention payments to employees as part of the transaction consideration that were classified as employment expense. 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 and nine months ended September 30, 2023, distribution and other asset-based expenses decreased $2.7 million, or 9.9%, and $14.9 million, or 16.9%, respectively, compared to the same periods 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 $0.6 million, or 1.9%, and increased $0.3 million, or 0.4%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease in the three-month period ended September 30, 2023 was 26 Table of Contents primarily attributable to lower legal expenses and other third-party support costs partially offset by the addition of AlphaSimplex. The increase for the nine-month period ended September 30, 2023 was primarily due to the addition of AlphaSimplex, partially offset by a decrease in other third-party support costs. Other Operating Expenses of CIP Other operating expenses of CIP remained consistent during the three and nine months ended September 30, 2023 compared to the respective periods in the prior year. Change in Fair Value of Contingent Consideration Contingent consideration related to the Company's acquisitions are fair valued on each reporting date taking into consideration changes in various estimates, including underlying performance estimates, 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 $9.7 million change in fair value of contingent consideration for the nine months ended September 30, 2023 compared to the respective period in the prior year was primarily attributable to changes in underlying performance estimates and discount rates. Depreciation Expense Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements. Depreciation expense increased $0.6 million, or 60.3%, and $1.3 million, or 45.8%, for the three and nine months ended September 30, 2023, respectively, compared to the respective periods in the prior year. The increases were primarily due to the addition of AlphaSimplex, as well as software and equipment purchases made in the current year periods. Amortization Expense Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives. Amortization expense increased $0.8 million, or 5.3%, and $1.7 million, or 3.8%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, primarily due to the addition of AlphaSimplex. Other Income (Expense) Other Income (Expense), net by category were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % 2023 2022 $ % Other Income (Expense) Realized and unrealized gain (loss) on investments, net $ (1,918) $ (2,493) $ 575 (23.1) % $ 2,469 $ (16,018) $ 18,487 (115.4) % Realized and unrealized gain (loss) of CIP, net (1,013) (8,440) 7,427 (88.0) % (2,853) (43,443) 40,590 (93.4) % Other income (expense), net 128 (659) 787 (119.4) % (1,062) 199 (1,261) (633.7) % Total Other Income (Expense), net $ (2,803) $ (11,592) $ 8,789 (75.8) % $ (1,446) $ (59,262) $ 57,816 (97.6) % 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, 2023 by $0.6 million and $18.5 million, respectively, compared to the same periods in the prior year. The realized and unrealized gains and losses reflect changes in overall market conditions for the respective periods. Realized and unrealized gain (loss) of CIP, net Realized and unrealized gain (loss) of CIP, net changed by $7.4 million and $40.6 million during the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The change for the three months ended September 30, 2023 consisted primarily of unrealized gains of $41.8 million due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $34.4 million related to the value of the notes payable. The change for the nine months ended September 30, 2023 consisted primarily of unrealized gains of $124.8 million due to changes in market values of leveraged loans, partially offset by changes in unrealized losses of $84.2 million related to the value of the notes payable. 27 Table of Contents Other income (expense), net Other income (expense), net changed by $0.8 million and $1.3 million during the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to changes in the gains and losses on our equity method investments. Interest Income (Expense) Interest Income (Expense), net by category were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % 2023 2022 $ % Interest Income (Expense) Interest expense $ (6,222) $ (3,557) $ (2,665) 74.9 % $ (17,444) $ (8,661) $ (8,783) 101.4 % Interest and dividend income 2,872 1,013 1,859 183.5 % 8,785 1,870 6,915 369.8 % Interest and dividend income of investments of CIP 49,803 28,644 21,159 73.9 % 144,501 71,436 73,065 102.3 % Interest expense of CIP (38,218) (20,356) (17,862) 87.7 % (112,153) (46,860) (65,293) 139.3 % Total Interest Income (Expense), net $ 8,235 $ 5,744 $ 2,491 43.4 % $ 23,689 $ 17,785 $ 5,904 33.2 % Interest Expense Interest expense increased $2.7 million, or 74.9%, and $8.8 million, or 101.4%, during the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increases were attributable to higher average interest rates and higher average debt balances during the current year periods. Interest and Dividend Income Interest and dividend income increased $1.9 million, or 183.5%, and $6.9 million, or 369.8%, during the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increases were primarily attributable to higher interest earned on cash balances during the current year periods compared to the prior year periods. Interest and Dividend Income of Investments of CIP Interest and dividend income of investments of CIP increased $21.2 million, or 73.9%, and $73.1 million, or 102.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increases were primarily due to higher average interest rates during the current year periods and the addition of a CLO in the third and fourth quarter of 2023 and 2022, respectively. Interest Expense of CIP Interest expense of CIP represents interest expense on the notes payable of CIP. Interest expense of CIP increased $17.9 million, or 87.7%, and $65.3 million, or 139.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increases during the three and nine months ended September 30, 2023 were primarily due to higher average interest rates and the addition of a CLO in the third and fourth quarter of 2023 and 2022 respectively. Income Tax Expense (Benefit) The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 23.6% and 35.2% for the nine months ended September 30, 2023 and 2022, respectively. The lower estimated effective tax rate for the nine months ended September 30, 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. 28 Table of Contents Liquidity and Capital Resources Certain Financial Data The following table summarizes certain financial data relating to our liquidity and capital resources: September 30, 2023 December 31, 2022 Change (in thousands) $ % Balance Sheet Data Cash and cash equivalents $ 195,403 $ 338,234 $ (142,831) (42.2) % Investments 152,349 100,330 52,019 51.8 % Contingent consideration 94,421 128,400 (33,979) (26.5) % Debt 273,815 255,025 18,790 7.4 % Redeemable noncontrolling interests 96,266 113,718 (17,452) (15.3) % Total equity 867,552 822,936 44,616 5.4 % Nine Months Ended September 30, Change (in thousands) 2023 2022 $ % Cash Flow Data Provided by (Used in): Operating activities $ 229,840 $ 154,850 $ 74,990 48.4 % Investing activities (127,349) (25,747) (101,602) 394.6 % Financing activities (285,769) (318,968) 33,199 (10.4) % Overview At September 30, 2023, we had $195.4 million of cash and cash equivalents and $152.3 million of investments, which included $118.5 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, 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. 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 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. Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements or interruption of our business. At September 30, 2023, our broker-dealer 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 29 Table of Contents services and where we either have a controlling financial interest or are considered the primary beneficiary of an investment product that is considered a variable interest entity. Operating Cash Flow Net cash provided by operating activities of $229.8 million for the nine months ended September 30, 2023 increased by $75.0 million from net cash provided by operating activities of $154.9 million for the same period in the prior year primarily due to an increase of $129.9 million 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 $127.3 million for the nine months ended September 30, 2023 compared to net cash used in investing activities of $25.7 million in the same period for the prior year. The increase in cash used in investing activities during the nine months ended September 30, 2023 compared to the prior year period was primarily due to the acquisition of AlphaSimplex. 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 $33.2 million to $285.8 million for the nine months ended September 30, 2023 from $319.0 million for the nine months ended September 30, 2022. The net change was primarily due to a $55.0 million decrease in share repurchases and an increase of $30.0 million in net borrowings on the credit agreement in the current year, partially offset by a $54.9 million increase on the repayment on borrowings of CIP. Credit Agreement The Company's credit agreement (the "Credit Agreement"), most recently amended on June 20, 2023, changing the base interest rate from LIBOR to SOFR, 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, 2023, the Company repaid $30.0 million and $2.1 million outstanding under the revolving credit facility and Term Loan, respectively. At September 30, 2023, $20.0 million and $259.5 million were outstanding under the revolving credit facility and Term Loan, respectively. In accordance with ASC 835, Interest , the amounts outstanding under the Company's Term Loan are presented on the Condensed Consolidated Balance Sheet net of related debt issuance costs, which were $5.7 million as of September 30, 2023. 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 accounting policies and estimates in the three months ended September 30, 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 and nine months ended September 30, 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.