Victory Capital Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Victory Capital Third Quarter 2024 Earnings Conference Call. All callers are in a listen only mode. Following the company's prepared remarks, there will be a question and answer session. I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations.

Operator

Please go ahead, Mr. Dennis.

Speaker 1

Thank you.

Speaker 2

Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make a number of forward looking statements. Victory Capital's actual results may differ materially from these statements. Furthermore, please note that the ultimate completion of a transaction with Amunde remains subject to certain closing conditions as well as regulatory approvals. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward looking statements.

Speaker 2

Our press release that was issued after the market closed yesterday disclosed both GAAP and non GAAP financial results. We believe the non GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the Investor Relations section of our website at ir. Vcm.com. It's now my pleasure to turn the call over to David Brown, Chairman and CEO.

Speaker 2

David?

Speaker 3

Thanks, Matt. Good morning, and welcome to Victory Capital's Q3 2024 Earnings Call. I am joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I will start today by providing an overview of the quarter. After that, I will turn the call over to Mike to review the financial results in greater detail.

Speaker 3

Following our prepared remarks, Mike, Matt and I will be available to take your questions. Quarterly business overview begins on Slide 5. Continuing with the momentum we had in the first half of the year, our business performed very well during the Q3. We ended the quarter with total client assets of more than $181,000,000,000 which is the 2nd highest quarter end level in our history. This helped propel revenue and earnings in the period, resulting in new quarterly records for earnings per share, adjusted EBITDA and margin, which expanded to 53.7% in the quarter.

Speaker 3

In addition to strong business performance, we made excellent progress toward closing the strategic and multifaceted transaction with Amundi. We signed the definitive agreement in July and immediately began working toward closing, which is anticipated to occur in the Q1 of 2025. We filed a proxy in early September for a special meeting of stockholders where our shareholders were asked to approve several proposals related to the transaction. All the proposals were supported by a majority of our shareholders in past. We greatly appreciate the support as we continue to execute on our growth strategy for the long term.

Speaker 3

The Amundi U. S. Business, which will become our 12th investment franchise upon close, is having a very strong year as well. Based on publicly available data, their mutual fund business has achieved approximately $2,000,000,000 of positive net long term flows in 2024 as of the end of the Q3. Keep in mind, this does not include their U.

Speaker 3

S. Institutional business nor does it include their international institutional and retail businesses. Another point of distinction for them is their investment performance, which remains very strong year to date. Their growth in AUM is tracking ahead of what we originally projected due to both better than expected organic growth and market action. On slide 6, I would like to take a step back to highlight some key milestones and strategic transactions in our history since our management buyout in July of 2013.

Speaker 3

Victory Capital has positively evolved from these transactions with enhanced scale and greater diversification of both investment capabilities and distribution channels. Every acquisition we made included several significant strategic elements with the goal of making our company better. When it comes to successful acquisitions in the investment management industry, we have a distinct corporate capability that we feel is advanced and coupled with our proven track record to execute sets us up well for the consolidation that we believe is just starting in the industry. For investment professionals who are passionate about what they do and want to own their outcome, our ownership coach provides a platform where they can succeed over the long term. Our platform is the ideal permanent home where we create an optimal environment for investment professionals to deliver investment excellence to our clients.

Speaker 3

While our company has evolved over the years, our core principles and the long term strategy for profitable growth have remained unchanged. The necessity for industry consolidation is even more apparent now than when we originally developed our strategy and operating platform, combining boutique style focused investment management with a centralized scaled and effective operating and distribution platform. Our 15 year exclusive distribution agreement with Amundi will make us an even more attractive acquirer of choice for high quality investment firms seeking all that we have to offer plus strong distribution both domestically as well as outside of the U. S. With nearly $300,000,000,000 of assets under management and a stronger balance sheet post closing, we'll be exceptionally well positioned to make additional strategic accretive acquisitions.

Speaker 3

As I mentioned during our last call in August, I firmly believe we are entering into a period of acceleration when it comes to industry consolidation. We purposefully and specifically designed and built our platform to thrive in this environment. Today, I am more optimistic about our prospects to continue to execute on our proven strategy and continue to move our organization forward in a very positive way. On Slide 7, you can see that we have achieved significant operating leverage due to our increasing scale over the years. This has compounded our earnings growth and free cash flow while also being a meaningful driver of value creation for shareholders.

Speaker 3

Since we became a public company in 2018, we've grown annualized adjusted EBITDA by $320,000,000 and expanded our adjusted EBITDA margin by more than 1500 basis points. You can also see from this graphic that our platform is resilient with margins remaining consistently strong in different market environments. A good example of this was during the COVID pandemic. The market struggled and it turned out to be one of the more volatile market periods historically speaking. Even with that as a backdrop, we did not experience margin degradation like many in the industry did.

Speaker 3

Turning to slide 8, an important metric to many current and prospective shareholders is adjusted earnings per share. You can see that we have more than tripled our adjusted earnings per share with tax benefit over the past 6 years. This is more than a 20% compound annual growth rate over that period. The growth has been a significant driver of total shareholder returns. This, plus our free cash flow, provides a capital to fuel our growth strategy, also increasing capital returns to shareholders.

Speaker 3

On slide 9, we have updated our capital allocation details, which remain skewed towards strategic inorganic growth initiatives designed to grow earnings and cash flow and ultimately shareholder value. We ended the quarter with $188,000,000 of cash on the balance sheet, which is up $69,000,000 from the end of June. Due to our proxy process, we were again prohibited from repurchasing shares during the quarter. Now that the proxy process is over, we will evaluate our ability to resume open market share repurchase activity and perform the appropriate analysis around this activity. Moving to slide 11, our investment performance remains strong with 67% of our AUM in mutual funds and ETFs earning overall 4 or 5 star ratings.

Speaker 3

This is broadly diversified encompassing 43 different products. Over the key 3 5 year periods, 60% and 73% of our total AUM outperformed their respective benchmarks. 14 of the 16 fixed income funds managed by Victory Income Investment franchise are rated either 4 or 5 stars overall by Morningstar, which represents 93% of their total AUM. We are very pleased to see this franchise have positive net flows for the year to date period and expect continued organic growth given the outlook for interest rates and investors allocating the fixed income asset classes. With that, I will turn the call over to Mike to go through the quarter's financial results in greater detail.

Speaker 3

Mike?

Speaker 4

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 13. Average assets under management for the quarter rose 3% from the Q2 to $172,000,000,000 Revenue also rose 3 percent to $225,600,000 up from $219,600,000 in the 2nd quarter. Revenue realization was 52.1 basis points in the quarter. For the year to date period, average assets under management were up 10% compared with the same period in 2023.

Speaker 4

3rd quarter GAAP operating income rose 9% from the 2nd quarter and reached a record $120,400,000 This is up more than 50% from the same quarter in 2023 and GAAP operating margin widened to 53.3%. Earnings per share reached the record high on both a GAAP basis at $1.24 per diluted share as well as on an adjusted basis at $1.35 per diluted share. Adjusted EBITDA was $121,300,000 in the 3rd quarter, which was 4% higher than in the 2nd quarter and adjusted EBITDA margin widened to 53.7%. Turning to the balance sheet. We accumulated $69,000,000 in cash during the quarter, bringing the cash balance to $188,000,000 at the end of the quarter.

Speaker 4

As mentioned, we are prohibited from repurchasing shares during the quarter, which contributed to the cash build up. Our net leverage ratio improved to 1.7 times and we returned $32,000,000 to shareholders in the form of quarterly cash dividends and a small amount of share repurchase activity associated with net settlements of employee equity awards. Our Board authorized a 7% dividend increase, bringing the quarterly dividend to $0.44 per share for the final quarter of this year. The dividend will be paid on December 23 to shareholders of record at the close of business on December 9. Turning to Slide 14, you can see that total client assets rose more than 4% or by $7,300,000,000 from $173,800,000,000 at the end of June to $181,100,000,000 at the end of September.

Speaker 4

Our AUM continues to be diversified from both the channel perspective as well as by client in the various channels and by asset class and investment vehicle. On Slide 15, we cover long term asset flows. Several of our investment franchises and our ETF platform Victory Shares continue to generate positive long term net flows in the quarter. Victory Income Investors posted its 3rd consecutive quarter of positive net flows and has made a significant contribution to net flows for the year to date period. We are encouraged by the outlook for this franchise given very strong investment performance and the current selling environment for fixed income products.

Speaker 4

For the year to date period, RS Global, Sophus, Integrity, Victory Shares and NEC have also achieved positive net long term flows. Net flows in July August were pressured by portfolio rebalancing activity, some with existing clients who remain clients post the rebalancing activity. We saw an improvement in net flows for the month of September. Lastly, our one but not yet funded pipeline is larger than it has been in over 3 years and is well diversified from a franchise and channel perspective. We expect most of these mandates to be funded in the Q4 of this year with some funding in the 1st part of next year.

Speaker 4

Slide 16 shows steady increase in sequential revenue for the past several quarters. Our average fee rate was 52.1 basis points in the 3rd quarter, which is down half of a basis point from the 2nd quarter due to product, asset class and channel mix shift, but within our expected range. As a reminder, we are focused on the profit margin of our products first, then the fee rate given our unique operating platform. Slide 17 highlights expenses recorded during the quarter. Total expenses declined by 5% to $118,100,000 compared with $123,800,000 in the 2nd quarter.

Speaker 4

A portion of the decline is attributable to the reversal of non cash earn out related compensation accruals taken in prior periods that led to reported compensation expenses declining by 22%. You can see from the graph on this slide that our cash compensation was relatively steady as a percentage of revenue. On Slide 18, we highlight our non GAAP metrics. Our reported $1.35 adjusted net income with tax benefit per diluted share is the highest level in our history and is up 3% from the prior record of $1.31 per diluted share reported for the Q2. Adjusted EBITDA and adjusted EBITDA margin were also company records at $121,300,000 53.7 percent respectively.

Speaker 4

Despite exceeding the 49% margin goal we have guided to, we are not changing our long term guidance. Finally, turning to Slide 19, we generated $99,800,000 in cash from operations during the quarter and for the 3rd consecutive quarter, our leverage ratio improved to 1.7 times down from 1.9 times at the end of June. This is down from 2.1 times at the beginning of the year. Our $100,000,000 credit facility was extended in the first half of this year and remains undrawn. I want to reiterate our $100,000,000 of expense synergies we expect to realize from the Amundi transaction.

Speaker 4

The synergies will be fully realized within 2 years of close, but the majority of them being realized in the 1st year. Lastly, when it comes to revenue synergies from the exclusive distribution agreement with Amundi, we will give guidance in the future as we move towards closing. That concludes our prepared remarks. I will now turn it back over to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from Ben Budish with Barclays. Please go ahead.

Speaker 3

Hi, good morning and thanks for taking

Speaker 5

the question. Maybe just starting on fixed income flows, you highlighted Victory Income Investors has been positive every quarter this year so far. So could you maybe talk about what's perhaps not going as well, that that's driving sort of the net outflows in that franchise and how do you think that may fair going into next year?

Speaker 3

Hi, it's Dave. Thanks for the question. We're really happy with the fixed income flows and what we're seeing. We've had a few one off things occur that has impacted the flows. But when we look forward and we look at the macro environment for fixed income, we look at the investment performance of Victory Income Investors, which is our fixed income franchise.

Speaker 3

And I think we referenced it in the prepared remarks. Excellent investment performance, really good distribution access and really consistent. In addition, we also have mutual fund offerings, institutional separate accounts and then also ETFs. So we're pretty bullish on the franchise. We're pretty bullish on the opportunity for us to participate in what's happening in fixed income.

Speaker 3

So really no concern, and a pretty positive outlook when we look forward.

Speaker 5

Got it. Maybe another kind of like a higher level strategic question. David, in your prepared remarks, you talked about the industry sort of still being in early stages consolidation. So I was wondering if you could unpack that a little bit. It seems like there has been some consolidation over the past several years.

Speaker 5

How do you think industry wide that looks over, say, like the next 5? And then specific for Victory, you're not paying cash or debt for this for the Amundi acquisition. How do you think about your readiness to do another acquisition in 2025 from an operational perspective? Thank you.

Speaker 3

So from an environmental perspective for the industry, I'm extremely constructive. We've had an election, which I think will give people certainty on the future. I think also the challenges in the industry, which is driving the need for consolidation, are only accelerating. And I think a rate environment where people have some more transparency and potentially lower rates, you put all of that together, I really believe that we are entering into a phase that is going to have more consolidation than the industry has ever seen. I've been pretty consistent on that.

Speaker 3

There have been some transactions, but I think there are going to be a lot more as we look forward. As far as specific to Victory, I think we are superiorly positioned to take advantage of the consolidation. We have a really, really good track record of executing on these kinds of acquisitions that I think will be very common going forward. We have a great offering as we laid out in our prepared remarks for investment professionals and we have great distribution access and we'll have scale. And we're ready.

Speaker 3

From a balance sheet perspective post close, we're going to be in a much better position than we are today. We're in a really good position today. And then operationally, we'll be ready as well. We have a really unique platform that is really conducive to acquisitions and onboarding acquisitions. And the Monday is just the latest one.

Speaker 3

We have a long track record of doing this and we have a great team. So I couldn't be more encouraged about the future from an acquisition standpoint. And we've been able to really create shareholder value. We've been able to create value for our clients in additional offerings. We've been able to create operating leverage.

Speaker 3

So I and our team are just unbelievably excited about the opportunity and how we're positioned looking forward.

Speaker 5

All right. I appreciate the thoughts and thanks for taking my question.

Operator

Your next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Speaker 6

Thank you and good morning. On the topic of the distribution partnership, Dave, you've raised in the past that Amundi has a significant presence in emerging economies via some of its joint ventures. So, how are you and Amundi thinking about distributing Victory's products in these economies relative to Amundi's presence in developed markets?

Speaker 3

So the distribution agreement doesn't distinguish between different geographies. As you stated, Amundi has a pretty large distribution offering in Europe. I believe close to 75% of their assets are in Europe and the other 20% is in Asia and surrounding areas. We will plan to go at all of the countries and areas really the same way. We're working with their teams today on structuring, on what products make sense for which regions.

Speaker 3

And then from there, we'll just work with them to get our products into the different structures if it's a JV or if it's not a JV. So there's really no distinguishing actions that we're taking to do something different in one region versus another. I think what's most important is they have really, really good distribution access. And their infrastructure is set up in all of these areas and especially in these emerging areas. I believe the emerging areas are going to take some time as those countries allow U.

Speaker 3

S. Investment into the country. So I think it's going to take a little bit of time. But long term, I think we're going to do really well in Europe and then in the other emerging areas that they have joint ventures in, in China and in India.

Speaker 6

Okay. Interesting. Switching topics, Victory shares, a couple of your free cash flow ETFs have had really strong inflows. What has worked well in terms of distribution for these products and how do you plan to replicate it with future product launches?

Speaker 3

So we're really in the early stages and I think you're referring to our VFLOW, which is VSLO ETF and then our SFLOW, which is SLO ETF. These are newer ETFs that have gained traction based on our distribution and based on the performance and the style of the investment style of the ETFs. But I think we're like I said, we're in early stages. And I think one thing that's unique about our business is we have a distribution force, our intermediary sales force, all of our sales people sell ETFs. And so they're really sitting down with advisors and financial advisors and RIAs and really trying to understand what the issues that the advisors face and really trying to come up with solutions and part of those solutions are these kinds of products.

Speaker 3

And so I think by doing that, it allows us to penetrate these advisors pretty quickly and I think you can see it with some of the results of those products. We have plans to launch more and we have also launched a number of new ETFs that are really just getting started. It's an exciting part of our platform. It's a part that's growing. It's a part that's growing at an accelerated pace.

Speaker 3

And as we look forward, I believe that we're going to see that be a bigger part of our business. And it's an area that we have we date back to 2015 from an acquisition. So we've been in the ETF business for over 8 years now.

Speaker 6

Thank you very much.

Operator

Your next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good morning. Thank you

Speaker 8

for the question. I was hoping you guys could expand on the institutional pipeline commentary you made that it's, I think you said, one of the strongest in several years. Maybe just a little color on the composition by the Tapa strategy, the Tapa channel and the fee rate associated will be helpful? And then I guess when you zoom out a little more broadly, do you think closing and getting these mandates in the door will be sort of enough to finally get Victory as a whole into positive organic growth in 2025?

Speaker 3

So on the institutional pipeline, it really spans across a number of different franchises. It's not just one, it's probably 3 or 4. And a lot of the pipeline and we have a large one but not yet funded book. I'm referring to our pipeline, which isn't one yet. But our one but not yet funded is pretty wide and deep as well.

Speaker 3

But on our pipeline, it's a number of different franchises. It isn't one specific institutional type of client. There are larger mandates. The fee rates are in line with what we typically charge on the institutional side. I think as you know, we are concerned with the fee rate, but we're very focused on the margin.

Speaker 3

And that's how we look at our business and we look at the platform and all of the opportunities adhere to our margin requirements. So it isn't going to erode our margins and it isn't going to erode our fee rate either. As far as looking forward, very hard to predict quarter by quarter flows. But I think with the activity that we see coupled with the Amundi distribution agreement outside the U. S, coupled with the Amundi U.

Speaker 3

S. Business closing in the Q1 and enlarging our intermediary sales force or institutional sales force, I think it puts us in an unbelievable position to grow our business organically. It puts us in the best position we've ever been as an organization because we'll have more salespeople, more distribution access here in the U. S. Than we've ever had.

Speaker 3

And then outside of the U. S, we are opening up a totally new world, a new channel for us that we have not had the size and scale that we'll have after we close. And that is one of the best parts about the Amunde transaction is the growth of the size and scale of our intermediary sales force in the U. S. And then what's going to happen outside the U.

Speaker 3

S. So I think it will put us in a great position. I don't like to predict flows because I don't know what's going to happen with the market and the industry, but it puts us in a great position to be successful.

Speaker 8

Got it. Okay. Makes sense. And the second question, I was hoping you guys could just update on where Amundi's revenues and expenses stand currently. Obviously, the markets have been very constructive and their flows have been pretty good.

Speaker 8

So an update on what that looks like today would be helpful.

Speaker 4

Yes. Thanks, Alex. This is Mike. Yes, the total AUM for Amundi U. S.

Speaker 4

Is not publicly disclosed. But I think in Dave's comments, he shared that we believe we'll be approaching $300,000,000,000 in AUM post close. Obviously, the market and organic growth has provided tailwinds for the Amundi U. S. Business as well as Victory's business.

Speaker 4

And I think the guidance we've provided in the past is that the fee rates at the Amundi U. S. Business are probably in the high 40s. So slightly lower than the fee rates at Victory. And then we've also guided to the long term 49% margins, which we feel very confident with achieving post the extraction of the $100,000,000 of expense synergies.

Speaker 4

So a lot of tailwind in both businesses. As Dave mentioned in his prepared remarks, the public data on the Mundi U. S. Mutual fund businesses organic growth for the year to date period. And they've had very strong performance as well.

Speaker 1

Yes. I got you. Great.

Speaker 3

And I would add to that just one other comment is when we evaluated the business when we were doing our diligence to where it is today, it has outperformed our expectations onto the positive on a number of different areas from an organic growth perspective, from an investment performance perspective. So we're really, really happy, and we're really impressed with the team and we're really impressed with the results and excited to have them part of our organization.

Speaker 5

All right. Thank you both.

Operator

Your next question comes from Brennan Hawken with UBS. Please go ahead.

Speaker 1

Follow-up on that last point, you spoke in speaking to Amundi outperforming your expectation. Is it possible to give us maybe an update on does that mean that accretion you would expect from the deal would be greater? And maybe could you give a little color or perspective on order of magnitude that we should expect?

Speaker 4

Thanks, Brennan. It's Mike. Yes, I think we'd still kind of stick with the guidance that we provided, which was low double digit accretion post the 1st full year of ownership. We've kind of confirmed the guidance with respect to the expense synergies and then we've provided that we'll provide some more clarity on revenue synergies as we get closer to the transaction. But we're really focused on kind of the execution phase, getting to closing and as Dave mentioned, kind of making sure that the business is ready to operate day 1, which we're fully confident that we'll be able to execute based on the playbook that we have.

Speaker 4

And as Dave mentioned, they've outperformed both in an investment performance flow and AUM perspective, which will provide some tailwinds. But I think at this point, with the close coming in Q1, I don't think we're ready to lock in anything different than the guidance we've provided in the past.

Speaker 1

Okay. I'll just let my imagination run away with it then. You also spoke to the opportunity to consolidate. Not asking you to tip your hand here, but like are there any particular parts of the market or from either a capability perspective or geographic or whatnot that you find interesting or you think are particularly compelling or maybe mispriced?

Speaker 3

We don't approach acquisitions that way. We start off with dozen acquisitions to make our company better. And there are a lot of ways to answer that question through an acquisition. Mundy gave us size and scale, gave us additional investment capabilities, gave us distribution access and it's going to make our company better. And so we'll approach the future acquisitions like that.

Speaker 3

We're not looking for a specific asset class. We're not looking for a specific asset class. We're not looking for a specific asset class. We're not looking for a And so we'll approach the future acquisitions like that. We're not looking for a specific asset class.

Speaker 3

We're not looking for a specific type of company. We're looking to make our company better. We're looking to make sure that there's a cultural match. We're looking for investment excellence over long periods of time. That's how we'll approach it.

Speaker 3

I do think size and scale is going to matter in the future as you think about the industry maturing. So I think anything that we will do, we will definitely have be looking through a lens of wanting to get larger and wanting to continue to get to have our size and scale grow because I think that's going to be really important to be competitive longer term. But outside of that, I don't think that there's anything unique or specific. There are, of course, areas in the market that are growing faster than other areas. We're well aware of that.

Speaker 3

We want to be in areas of growth. But that isn't going exactly to be the driving factor of exactly what we're going to do.

Speaker 1

Got it. Thanks for taking my questions.

Operator

Your next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thanks so much for the question. Maybe just continuing on that M and A topic there over the years. I guess where is their scope to make Victory better today? Where do you want to have greater scale?

Speaker 7

What is the appetite to extend into some of those growthier areas like private markets? And maybe you could give us a sense of the types of deals that are coming across your desk that you guys are evaluating?

Speaker 3

Thanks, Mike. First, like I said before, we want to get larger. I think there is going to be a need for firms to have size and scale. And post the Amundi close at $300,000,000,000 we will be sized and scaled today. But 5 years forward, that probably isn't going to be big enough to be competitive the way that we want to be competitive.

Speaker 3

So size and scale will matter. It will matter on the U. S. Intermediary distribution. It will matter as you think about the product set that you have able that you're able to offer to that distribution channel and the investments you're going to have to make with your partners around marketing, training, collateral, data technology and just having people out selling.

Speaker 3

So you have to be larger to accomplish all of those things. So that matters to us. We're going to want to have a larger product set than we have today to be able to partner with our potential clients and our existing clients. So going deeper on traditional asset management, yes. Private markets in certain areas will want to expand there.

Speaker 3

We'll do that creatively. We have been working very hard behind the scenes strategically on how we want to do that. Some firms have gone out and done acquisitions, some have partnered. We've observed the results of all of those and have a strategy for that. And so we want to expand our product set around just getting closer with our clients.

Speaker 3

And we'll do that through acquisition and product launches. And then lastly, we're going to still stick with our operating model and our business model. And I think it's unique. What we won't do is pivot away from who we are and what's made us successful, but we'll accomplish all of those things with the same model and the same mindset that we've done in the past.

Speaker 7

Great. And then just as a follow-up question as you're moving toward close here with the Amundi transaction, maybe you could speak to any sort of lessons learned over the years from prior transactions that you've done? What sort of how does that inform your sort of go forward here in terms of key actions to take or not to take and key actions to avoid perhaps that others do that you do a bit differently? And then perhaps related to that, you mentioned private markets as an area maybe of interest looking at others that have done acquisitions and partnerships. Just curious what lessons you take away from approaches that others have gone?

Speaker 7

With those private market approaches.

Speaker 3

So the lessons I'd say lessons learned on our previous acquisitions. We are conservative and patient.

Speaker 4

We

Speaker 3

do our diligence. We do our work. And we are patient and deliberate in putting these businesses onto our platform and we're also open minded. And I think that comes through in our approach and I think it comes through in all of our work and ultimately the execution. And those are things that we've refined over 11 years of being an independent company and all of the acquisitions we've done.

Speaker 3

We have the same team working on the acquisitions for the most part that we had a decade ago. And that's pretty important to have really experienced people working on the integration and the execution and that's a key element of our model. And all of the lessons we've learned, we're applying to this transaction. And when we complete this transaction, we'll apply the lessons we've learned on this one to the next one. As far as private markets, I mentioned that we've observed partnerships, we've observed some of the acquisitions.

Speaker 3

And I'm happy that we've had the ability to observe the success or lack of success in certain areas. I think each company is unique. And so how a private markets type product acquisition or partnership would work with our company will be unique to our company. And so it's hard to look at another company not having all the information and it not being our exact company to come up with lessons. But I would tell you that we're very happy with where we are with it and the ability to observe, the ability to build other parts of our business to make potentially an acquisition, a partnership, a product launch more successful.

Speaker 3

The private market investing is important. It's an area of growth. It's an area a lot of people are talking about. And I think that we'll when we look in the future, we'll participate in that part of the market in a way that's very similar to what we've done with our traditional business. And like I said, I think our ability to observe and go back and look at things strategically will benefit us in the future.

Speaker 7

Great. Thanks so much.

Operator

Your next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my question. Just one more on M and A. Probably speaking, I wonder if you could just talk about how bid ask spreads are looking like among your discussions and also wondering relatedly, if you could just frame what the motivation is like from potential sellers in getting a transaction done? Thanks.

Speaker 3

Yes. I think the bid ask is coming together. I think people are ready to transact. Market is strong. You can look at the future and you can game plan somewhat the next 4 years from a government administration perspective now.

Speaker 3

You can look at the Fed and rates and have a pretty strong opinion. I think that's an environment where people want to transact. So I like I said earlier, I think that there's going to be a lot of consolidation. I think the motivation is going to be an environment that is conducive to that from rates, from policy, and all of the reasons why an organization, depending on the type of organization, would transact. They're not those issues are not going away.

Speaker 3

In fact, they're probably becoming more intense. And so you put all that together and I think it's going to be a time where there's going to be a lot of consolidation and I go back to I think we're really well positioned for it. And I think people are realistic on pricing.

Speaker 9

Great. Very helpful there. And just one follow-up, if I may. In terms of recent conversations you may have had with institutional investors, wonder if you could just provide a little bit more color around sentiment activity and perhaps whether you expect the post election certainty could help drive more allocations or net flows there? Thanks.

Speaker 3

Yes. We haven't had the given the election was just a couple of days ago, we haven't had too many conversations. But I would imagine that there will be a desire to do more allocations and to kind of do the risk on trade. Although rates, even if they stay where they are today, I do think that the environment will be one of people can understand what the future might be. A lot of the uncertainty is taken out, and I think it's going to be really good for our business and for the investment management industry in general, to get rid of some of the uncertainty that was there before the election.

Speaker 9

Great. Very helpful there. Thanks again.

Operator

Your last question comes from Ken Worthington with JPMorgan. Please go ahead.

Speaker 10

Hi, good morning guys. Thanks for squeezing me in. This is Michael Cho in for Ken. I just wanted to follow-up quickly on the distribution with Amundi here. I realized revenue synergies are coming.

Speaker 10

But I guess just from an operational perspective, can you just update us where your initial priorities will be focused with respect to Victory products as you get the sales effort off the ground for this partnership?

Speaker 4

Michael, it's Mike. Thanks for the question. I think as Dave said earlier, the infrastructure at Amundi with respect to this global distribution partnership is in place. The Amundi U. S.

Speaker 4

Product is being distributed throughout the Amundi global network. And so our efforts really have been around evaluating which Victory products should be a high priority or a focused product with respect to that global network, doing some work with respect to structuring. There are some commingle vehicles that will be part of the retail distribution. And then also starting to think about education on those products. So really we're lining ourselves up to be focused from an execution perspective post closing, not just with new Victory products, but the current existing among the U.

Speaker 4

S. Products that are in the network and then leveraging those relationships, leveraging those contacts to bring forth Victory products from a prioritization perspective. So it really has been around education structuring and product design.

Speaker 10

Great. Thanks, Mike. And then just a quick follow-up on flows. You gave some monthly commentary for the quarter. I think you said July August were a little soft, maybe September was a little better.

Speaker 10

You sounded pretty constructive on 4Q. And any comments on October?

Speaker 4

Nothing at this point that we'd highlight for October. I'd say it's probably been closer to what we saw in September than the early part of Q3. But we don't necessarily provide monthly flow information. But I think as Dave mentioned earlier, we've got significant one funded pipeline that we're excited about here in the Q4. And then we've got some additional opportunities that are lined up for us as we get into the early part of next year.

Speaker 9

Perfect. Thank you.

Operator

There are no more questions. I will now turn the conference back over to Dave Brown for closing remarks.

Speaker 3

Thank you for your interest in Victory Capital. We will be attending the Goldman Sachs Global Financials Conference in New York City next month, and we hope to see all of you there. Have a wonderful day, and thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Key Takeaways

  • Victory Capital closed Q3 with $181 billion in client assets—the second-highest quarter end level in company history—and delivered record revenue of $225.6 million, GAAP EPS of $1.24 and adjusted EPS of $1.35, with EBITDA margin expanding to 53.7%.
  • The strategic transaction with Amundi remains on track, with definitive agreement signed, all shareholder proposals approved and closing expected in Q1 2025; Amundi’s U.S. mutual fund business has generated $2 billion of net long-term flows YTD.
  • Since becoming public in 2018, Victory has grown annualized adjusted EBITDA by $320 million and expanded adjusted EBITDA margin by over 1500 bps, while tripling adjusted EPS over six years (20% CAGR).
  • Capital position strengthened as cash rose to $188 million, net leverage improved to 1.7×, the board approved a 7% dividend increase to $0.44 per share, and share repurchases will resume now that the proxy process is complete.
  • Investment performance remains robust with 67% of AUM in mutual funds and ETFs rated 4 or 5 stars, 60–73% of AUM outperforming benchmarks over key periods, and fixed-income franchises posting positive net flows.
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Earnings Conference Call
Victory Capital Q3 2024
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