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 2023 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 strategic transactions; (iii) withdrawal, renegotiation or termination of investment management 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 2023 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 our investment managers, each having its own distinct investment style, autonomous investment process and individual brand, as well as from select unaffiliated managers for certain of our 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. 18 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 institutional separate accounts and commingled accounts, including subadvisory services to other investment advisers and Company sponsored structured products to a variety of institutional clients. Our retail products include open-end funds, closed-end funds and retail separate accounts. Our institutional distribution resources include affiliate-specific sales teams primarily focused on the U.S. market, supported by shared consultant relations and U.S. and non-U.S. institutional sales 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 wealth management business is marketed directly to individual clients by financial advisory teams at our affiliated investment managers. Financial Highlights ▪ Total revenues were $227.0 million in the third quarter of 2024, an increase of $7.8 million, or 3.5%, compared to total revenues of $219.3 million in the third quarter of 2023. ▪ Operating income was $55.3 million in the third quarter of 2024, an increase of $10.4 million, or 23.1%, compared to $44.9 million in the third quarter of 2023. ▪ Net income per diluted share was $5.71 in the third quarter of 2024, an increase of $1.52, or 36.3%, compared to net income per diluted share of $4.19 in the third quarter of 2023. Assets Under Management Total sales were $6.6 billion in the third quarter of 2024, an increase of $0.8 billion, or 13.5%, from $5.8 billion in the third quarter of 2023. Net flows were $(1.7) billion in the third quarter of 2024 compared to net flows of $(1.5) billion in the third quarter of 2023. At September 30, 2024, total assets under management were $183.7 billion, representing an increase of $21.2 billion, or 13.0%, from September 30, 2023, and an increase of $11.5 billion, or 6.7%, from December 31, 2023. The increase in total assets under management from September 30, 2023 included $33.0 billion from positive market performance partially offset by $9.4 billion of net outflows. The increase in total assets under management from December 31, 2023 included $18.7 billion from positive market performance partially offset by $5.6 billion of net outflows. Assets Under Management by Product The following table summarizes our assets under management by product: As of September 30, Change (in millions) 2024 2023 $ % Open-End Funds (1) $ 58,100 $ 54,145 $ 3,955 7.3 % Closed-End Funds 10,432 9,472 960 10.1 % Retail Separate Accounts (2) 50,610 38,665 11,945 30.9 % Institutional Accounts (3) 64,600 60,257 4,343 7.2 % Total $ 183,742 $ 162,539 $ 21,203 13.0 % Average Assets Under Management (4) $ 174,841 $ 161,074 $ 13,767 8.5 % (1) Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds. (2) Includes investment models provided to managed account sponsors. (3) Represents assets under management of institutional separate and commingled accounts including structured products. (4) Averages are calculated as follows: 19 Table of Contents – 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) 2024 2023 2024 2023 Open-End Funds (1) Beginning balance $ 55,852 $ 56,828 $ 56,062 $ 53,000 Inflows 3,118 2,687 9,371 8,248 Outflows (4,143) (4,137) (12,367) (13,621) Net flows (1,025) (1,450) (2,996) (5,373) Market performance 3,410 (1,034) 5,490 3,900 Other (2) (137) (199) (456) 2,618 Ending balance $ 58,100 $ 54,145 $ 58,100 $ 54,145 Closed-End Funds Beginning balance $ 9,915 $ 10,166 $ 10,026 $ 10,361 Inflows — — — 24 Outflows — — (41) — Net flows — — (41) 24 Market performance 845 (504) 1,167 (300) Other (2) (328) (190) (720) (613) Ending balance $ 10,432 $ 9,472 $ 10,432 $ 9,472 Retail Separate Accounts (3) Beginning balance $ 45,672 $ 38,992 $ 43,202 $ 35,352 Inflows 2,260 1,849 6,805 4,562 Outflows (1,829) (1,524) (5,212) (4,246) Net flows 431 325 1,593 316 Market performance 4,507 (652) 5,812 2,997 Other (2) — — 3 — Ending balance $ 50,610 $ 38,665 $ 50,610 $ 38,665 Institutional Accounts (4) Beginning balance $ 62,146 $ 62,330 $ 62,969 $ 50,663 Inflows 1,219 1,274 4,141 6,786 Outflows (2,349) (1,648) (8,284) (5,173) Net flows (1,130) (374) (4,143) 1,613 Market performance 3,790 (1,434) 6,242 3,912 Other (2) (206) (265) (468) 4,069 Ending balance $ 64,600 $ 60,257 $ 64,600 $ 60,257 Total Beginning balance $ 173,585 $ 168,316 $ 172,259 $ 149,376 Inflows 6,597 5,810 20,317 19,620 Outflows (8,321) (7,309) (25,904) (23,040) Net flows (1,724) (1,499) (5,587) (3,420) Market performance 12,552 (3,624) 18,711 10,509 Other (2) (671) (654) (1,641) 6,074 Ending balance $ 183,742 $ 162,539 $ 183,742 $ 162,539 20 Table of Contents (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) Includes investment models provided to managed account sponsors. (4) 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) 2024 2023 $ % 2024 2023 Asset Class Equity $ 106,784 $ 87,984 $ 18,800 21.4 % 58.1 % 54.1 % Fixed income 39,014 37,352 1,662 4.4 % 21.2 % 23.0 % Multi-asset (1) 21,619 19,937 1,682 8.4 % 11.8 % 12.3 % Alternatives (2) 16,325 17,266 (941) (5.5) % 8.9 % 10.6 % Total $ 183,742 $ 162,539 $ 21,203 13.0 % 100.0 % 100.0 % (1) Consists of multi-asset offerings not included in equity, fixed income, and alternatives. (2) Consists of managed futures, event-driven, real estate securities, infrastructure, long/short and other strategies. 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) (4) 2024 2023 2024 2023 Products Open-End Funds (1) 49.7 51.1 $ 56,731 $ 56,511 Closed-End Funds 58.5 58.2 10,159 10,001 Retail Separate Accounts (2) 43.7 43.3 45,672 38,992 Institutional Accounts (3) 31.0 30.3 63,428 62,368 All Products 41.9 42.0 $ 175,990 $ 167,872 Nine Months Ended September 30, Average Fee Earned (expressed in basis points) Average Assets Under Management (in millions) (4) 2024 2023 2024 2023 Products Open-End Funds (1) 50.2 49.4 $ 56,750 $ 55,591 Closed-End Funds 58.6 57.6 9,972 10,216 Retail Separate Accounts (2) 43.6 43.9 45,230 37,247 Institutional Accounts (3) 30.9 31.2 62,889 58,020 All Products 42.0 42.1 $ 174,841 $ 161,074 (1) Represents assets under management of U.S. retail funds, global funds, ETFs and variable insurance funds. (2) Includes investment models provided to managed account sponsors. (3) Represents assets under management of institutional separate and commingled accounts including structured products. (4) 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 21 Table of Contents Average fees earned represent investment management fees, net of revenue-related adjustments, and excluding the impact of consolidated investment products ("CIP") divided by average net assets. 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 was flat for the three and nine months ended September 30, 2024 compared to the same periods in the prior year. Results of Operations Summary Financial Data Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Investment management fees $ 193,843 $ 184,869 $ 8,974 4.9 % $ 573,855 $ 529,326 $ 44,529 8.4 % Other revenue 33,186 34,402 (1,216) (3.5) % 99,600 101,355 (1,755) (1.7) % Total revenues 227,029 219,271 7,758 3.5 % 673,455 630,681 42,774 6.8 % Total operating expenses 171,771 174,368 (2,597) (1.5) % 541,686 518,153 23,533 4.5 % Operating income (loss) 55,258 44,903 10,355 23.1 % 131,769 112,528 19,241 17.1 % Other income (expense), net (28) (2,803) 2,775 (99.0) % (8,419) (1,446) (6,973) 482.2 % Interest income (expense), net 9,671 8,235 1,436 17.4 % 26,019 23,689 2,330 9.8 % Income (loss) before income taxes 64,901 50,335 14,566 28.9 % 149,369 134,771 14,598 10.8 % Income tax expense (benefit) 15,797 12,181 3,616 29.7 % 36,376 31,794 4,582 14.4 % Net income (loss) 49,104 38,154 10,950 28.7 % 112,993 102,977 10,016 9.7 % Noncontrolling interests (8,124) (7,248) (876) 12.1 % (24,541) (3,190) (21,351) 669.3 % Net Income (Loss) Attributable to Virtus Investment Partners, Inc. $ 40,980 $ 30,906 $ 10,074 32.6 % $ 88,452 $ 99,787 $ (11,335) (11.4) % Earnings (loss) per share-diluted $ 5.71 $ 4.19 $ 1.52 36.3 % $ 12.23 $ 13.50 $ (1.27) (9.4) % In the third quarter of 2024, total revenues increased 3.5% to $227.0 million from $219.3 million in the third quarter of 2023, primarily as a result of increased average assets under management during the current year period compared to the prior year period. Operating income increased $10.4 million to $55.3 million in the third quarter of 2024 compared to $44.9 million in the third quarter of 2023, due primarily to the aforementioned increased revenue, as well as decreased operating expenses. 22 Table of Contents Revenues Revenues by source were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Investment management fees Open-end funds $ 79,428 $ 80,294 $ (866) (1.1) % $ 237,991 $ 229,721 $ 8,270 3.6 % Closed-end funds 14,942 14,673 269 1.8 % 43,741 44,025 (284) (0.6) % Retail separate accounts 52,068 44,441 7,627 17.2 % 153,265 127,323 25,942 20.4 % Institutional accounts 47,405 45,461 1,944 4.3 % 138,858 128,257 10,601 8.3 % Total investment management fees 193,843 184,869 8,974 4.9 % 573,855 529,326 44,529 8.4 % Distribution and service fees 13,567 14,333 (766) (5.3) % 41,007 42,618 (1,611) (3.8) % Administration and shareholder service fees 18,560 19,069 (509) (2.7) % 55,546 55,668 (122) (0.2) % Other income and fees 1,059 1,000 59 5.9 % 3,047 3,069 (22) (0.7) % Total Revenues $ 227,029 $ 219,271 $ 7,758 3.5 % $ 673,455 $ 630,681 $ 42,774 6.8 % 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 agreements, which generally require monthly or quarterly payments. Investment management fees increased by $9.0 million, or 4.9%, and $44.5 million, or 8.4%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily due to the increase in 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 $0.8 million, or 5.3%, and $1.6 million, or 3.8%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily due to lower sales and average assets under management 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 closed-end funds. Fund administration and shareholder service fees decreased by $0.5 million, or 2.7% for the three months ended September 30, 2024 and remained consistent during the nine months ended September 30, 2024, compared to the same periods in the prior year. The decrease during the three-month period is due to the decrease in average assets under management of our U.S. retail funds. Other Income and Fees Other income and fees primarily represent fees related to other fee-earning assets and marketing fees earned on certain ETFs. Other income and fees remained consistent during the three and nine months ended September 30, 2024 compared to the same periods in the prior year. 23 Table of Contents Operating Expenses Operating expenses by category were as follows: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Operating expenses Employment expenses $ 105,555 $ 101,587 $ 3,968 3.9 % $ 326,385 $ 304,895 $ 21,490 7.0 % Distribution and other asset-based expenses 24,175 24,157 18 0.1 % 72,218 73,332 (1,114) (1.5) % Other operating expenses 30,363 30,494 (131) (0.4) % 94,788 94,707 81 0.1 % Other operating expenses of CIP 465 553 (88) (15.9) % 4,064 1,613 2,451 152.0 % Change in fair value of contingent consideration (4,000) — (4,000) N/M (7,300) (6,800) (500) 7.4 % Restructuring expense — 691 (691) (100.0) % 1,487 691 796 115.2 % Depreciation expense 2,330 1,504 826 54.9 % 6,628 4,134 2,494 60.3 % Amortization expense 12,883 15,382 (2,499) (16.2) % 43,416 45,581 (2,165) (4.7) % Total operating expenses $ 171,771 $ 174,368 $ (2,597) (1.5) % $ 541,686 $ 518,153 $ 23,533 4.5 % N/M = Not Meaningful Employment Expenses Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses of $105.6 million increased by $4.0 million, or 3.9%, for the three months ended September 30, 2024 primarily due to an increase in sales- and profit-based compensation. Employment expenses increased by $21.5 million, or 7.0%, for the nine months ended September 30, 2024, compared to the same period in the prior year primarily due to an increase in profit- and sales-based compensation and the addition of AlphaSimplex. 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 remained consistent for the three months ended September 30, 2024 and decreased by $1.1 million, or 1.5%, for the nine months ended September 30, 2024 compared to the same periods in the prior year. The decrease during the nine-month period was primarily due to decreases 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 data costs, software application and development expenses, professional fees, travel and distribution-related costs, rent and occupancy expenses, and other business costs. Other operating expenses remained consistent during the three and nine months ended September 30, 2024 compared to the same periods in the prior year. Other Operating Expenses of CIP Other operating expenses of CIP remained consistent for the three months ended September 30, 2024 and increased by $2.5 million, or 152.0%, for the nine months ended September 30, 2024, compared to the same periods in the prior year. The increase during the nine-month period was primarily due to the refinancing of two CLOs in the current year to date period. Change in Fair Value of Contingent Consideration Contingent consideration related to the Company's acquisitions are fair valued on each reporting date incorporating changes in various estimates, including underlying performance estimates, discount rates and the 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 $4.0 million and $0.5 million changes in fair value of contingent consideration for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year were primarily attributable to changes in underlying performance estimates. 24 Table of Contents Depreciation Expense Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements. Depreciation expense increased $0.8 million, or 54.9%, and $2.5 million, or 60.3%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. The increase during both periods was primarily due to the acceleration of depreciation on leasehold improvements associated with a terminated lease in the current year periods, software and equipment purchases and depreciation expense associated with new office space. Amortization Expense Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives. Amortization expense decreased $2.5 million, or 16.2%, for the three months ended September 30, 2024, compared to the same period in the prior year, primarily due to intangible assets becoming fully amortized during the current year period. Amortization expense decreased by $2.2 million, or 4.7%, for the nine months ended September 30, 2024, compared to the same period in the prior year, primarily due to intangible assets becoming fully amortized during the current year period partially offset by the addition of AlphaSimplex intangible assets in the second quarter of the prior year. 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) 2024 2023 $ % 2024 2023 $ % Other Income (Expense) Realized and unrealized gain (loss) on investments, net $ 4,552 $ (1,918) $ 6,470 (337.3) % $ 6,415 $ 2,469 $ 3,946 159.8 % Realized and unrealized gain (loss) of CIP, net (5,128) (1,013) (4,115) 406.2 % (16,529) (2,853) (13,676) 479.4 % Other income (expense), net 548 128 420 328.1 % 1,695 (1,062) 2,757 (259.6) % Total Other Income (Expense), net $ (28) $ (2,803) $ 2,775 (99.0) % $ (8,419) $ (1,446) $ (6,973) 482.2 % 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, 2024 by $6.5 million and $3.9 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 $(4.1) million and $(13.7) million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. The change for the three months ended September 30, 2024 consisted primarily of changes in net unrealized and realized losses of $51.8 million, due to changes in market values of leveraged loans, partially offset by unrealized gains of $47.7 million related to the value of the notes payable. The change for the nine months ended September 30, 2024 consisted primarily of changes in net unrealized and realized losses of $46.1 million, due to changes in market values of leveraged loans partially offset by unrealized gains of $32.4 million related to the value of the notes payable. Other income (expense), net Other income (expense), net changed by $0.4 million and $2.8 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily due to changes in the gains and losses on our equity method investments. 25 Table of Contents 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) 2024 2023 $ % 2024 2023 $ % Interest Income (Expense) Interest expense $ (5,807) $ (6,222) $ 415 (6.7) % $ (17,099) $ (17,444) $ 345 (2.0) % Interest and dividend income 2,913 2,872 41 1.4 % 9,025 8,785 240 2.7 % Interest and dividend income of investments of CIP 50,628 49,803 825 1.7 % 154,128 144,501 9,627 6.7 % Interest expense of CIP (38,063) (38,218) 155 (0.4) % (120,035) (112,153) (7,882) 7.0 % Total Interest Income (Expense), net $ 9,671 $ 8,235 $ 1,436 17.4 % $ 26,019 $ 23,689 $ 2,330 9.8 % Interest Expense Interest expense decreased $0.4 million, or 6.7%, and $0.3 million, or 2.0%, for the three and nine months ended September 30, 2024, respectively, primarily due to lower average debt outstanding during the current year periods. Interest and Dividend Income Interest and dividend income remained consistent during the three and nine months ended September 30, 2024 compared to the same periods in the prior year. Interest and Dividend Income of Investments of CIP Interest and dividend income of investments of CIP increased $0.8 million, or 1.7%, and $9.6 million, or 6.7% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. The increases were primarily due to the addition of a CLO in the third quarter of 2023 and higher average interest rates during the current year periods. Interest Expense of CIP Interest expense of CIP represents interest expense on the notes payable of CIP. Interest expense of CIP remained consistent for the three months ended September 30, 2024 compared to the same period in the prior year and increased by $7.9 million, or 7.0% for the nine months ended September 30, 2024 compared to the same period in the prior year. The increase for the current year to date period is primarily attributable to the addition of a CLO in the third quarter of 2023. Income Tax Expense (Benefit) The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 24.4% and 23.6% for the nine months ended September 30, 2024 and 2023, respectively. The higher estimated effective tax rate for the nine months ended September 30, 2024 was primarily due to a change in excess tax benefits associated with stock-based compensation. 26 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, 2024 December 31, 2023 Change (in thousands) $ % Balance Sheet Data Cash and cash equivalents $ 195,533 $ 239,602 $ (44,069) (18.4) % Investments 164,671 132,696 31,975 24.1 % Contingent consideration 59,404 90,938 (31,534) (34.7) % Debt 237,467 253,412 (15,945) (6.3) % Redeemable noncontrolling interests 98,111 104,869 (6,758) (6.4) % Total equity 892,722 868,289 24,433 2.8 % Nine Months Ended September 30, Change (in thousands, Provided by (Used in); 2024 2023 $ % Cash Flow Data Operating activities $ 104,562 $ 229,840 $ (125,278) (54.5) % Investing activities (4,816) (127,349) 122,533 (96.2) % Financing activities (129,506) (285,769) 156,263 (54.7) % Overview At September 30, 2024, we had $195.5 million of cash and cash equivalents and $164.7 million of investments, which included $127.9 million of investment securities, compared to $239.6 million of cash and cash equivalents and $132.7 million of investments, which included $97.3 million of investment securities, at December 31, 2023. Uses of Capital Our operating expenses consist of employee compensation and related benefit costs and other operating expenses, which primarily consist of investment research and data costs, software application and development expenses, professional fees, distribution and occupancy costs, as well as interest on our indebtedness and income taxes. Annual incentive compensation, our largest annual operating cash expenditure, is paid in the first quarter of the year. In 2024 and 2023, we paid $146.1 million and $142.1 million, respectively, in incentive compensation earned during the years ended December 31, 2023 and 2022, 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 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 technology 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 Certain of our subsidiaries are registered with the SEC, Central Bank of Ireland or other regulators that subject them 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, 2024, these subsidiaries were in compliance with all minimum net capital requirements. 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 have either a controlling financial interest or are considered the primary beneficiary of an investment product that is considered a variable interest entity. 27 Table of Contents Operating Cash Flow Net cash provided by operating activities of $104.6 million for the nine months ended September 30, 2024 decreased by $125.3 million from net cash provided by operating activities of $229.8 million for the same period in the prior year primarily due to a decrease of $139.4 million in net sales of investments by CIP in the current year period. Investing Cash Flow Cash flows from investing activities consist primarily of capital expenditures and other investing activities related to our business operations. Net cash used in investing activities of $4.8 million for the nine months ended September 30, 2024 decreased by $122.5 million from net cash used in investing activities of $127.3 million for the same period in the prior year primarily due to the AlphaSimplex acquisition in the prior year. 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 purchases and sales of noncontrolling interests. Net cash used in financing activities of $129.5 million for the nine months ended September 30, 2024 decreased by $156.3 million from net cash used of $285.8 million for the same period in the prior year primarily due to a $187.7 million increase in net borrowings of CIP attributable to the refinancing of two CLOs in the current period partially offset by the prior year period $50.0 million borrowing on the credit facility as part of the AlphaSimplex acquisition. 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. The Company repaid $17.1 million outstanding under the Term Loan during the nine months ended September 30, 2024 and had $241.8 million outstanding under the Term Loan at September 30, 2024. 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 $4.3 million as of September 30, 2024. 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 2023 Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our 2023 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, 2024. 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, 2024, there were no material changes to the information contained in Part II, Item 7A of the Company's 2023 Annual Report on Form 10-K.