// 2018 Annual Report
To Our Fellow Shareholders,
David C. Brown
Chairman and Chief Executive Officer
2018 was a year of exceptional progress for
Victory Capital. After becoming a public
company in the first quarter of 2018, we
announced two acquisitions that will trans-
form, diversify and improve our business.
We also continued to deliver strong invest-
ment results for our clients and prudently
executed against our financial plan. We
accomplished this in the face of continued
strong headwinds for the investment man-
agement industry, including fee compression
pressures, secular trends toward passive
investing, and evolving distribution trends.
2018 also marked Victory Capital’s fifth
anniversary as an independent company.
In 2013, following our management buyout
(MBO) from KeyCorp, we established a
long-term strategic vision for our Company
that has served as the foundation for our
next-generation, integrated multi-boutique
business model.
1.
2.
3.
4.
5.
The key tenets of our strategic vision include:
Investment autonomy – Our Investment
Franchises have the autonomy to make
independent investment decisions on behalf
of their clients.
Centralized operating platform – Our investment
professionals are focused on managing money
and servicing clients. They are not encumbered
by day-to-day administrative and operational
functions or distribution pressures.
Investment excellence – We seek to provide
superior long-term investment results for
our clients.
Strategy for long-term sustainable growth –
We pursue organic growth by leveraging the
specialized capabilities of our Franchises and
Solutions Platform. We also will grow inorganically
by acquiring firms that offer specialized product
capabilities that we believe solve problems in
client portfolios and/or expand distribution
opportunities for our Investment Franchises.
Culture of ownership – We foster a culture of
ownership in which our employees elect to invest
significantly in our business and in our products,
thus aligning our interests with those of our clients
and shareholders.
Next-generation, integrated multi-boutique model
Today, Victory Capital is a global investment manager
with nine Investment Franchises that are operationally
integrated, but separately branded. Our Franchises are
specialist managers who make investment decisions
independently from one another and develop and
construct their own research methods and portfolios.
We also offer a Solutions Platform, featuring our
VictoryShares ETF brand, that consists of multi-
franchise and customized strategies, which are
primarily rules-based.
Our Franchises and Solutions Platform are supported
by a centralized client service, distribution, marketing
and operations platform that enables our investment
professionals to
investment
investment professionals
excellence. We have 114
across 13 offices worldwide (10 of which are in the U.S.).
focus on delivering
a stabilizing effect on our financial performance.
Additionally, having access to both channels enhances
our ability to attract new clients in all market cycles.
Investment excellence
Our Franchises and Solutions Platform seek to out-
perform their respective benchmarks and peers over
the long term. We are honored to have received notable
industry recognition for the results that we have delivered.
Victory Capital was ranked ninth in “Barron’s Best
Fund Families of 2018” for the one-year period ended
December 31, 2018. We also ranked in fourth place in
the mixed asset category and fifth place in the taxable
bond category for 2018. This is the second consecutive
year that Victory Capital has been ranked among the
top 10 best fund families and the fifth consecutive year
that it has been ranked among the top 25 best fund
families by Barron’s.
We believe our strong long-term track record provides
clear evidence that our unique culture and our platform,
which allows our investment professionals to focus on
producing investment results, are working for our clients.
Importantly, our operating platform is “centralized
but not standardized.” This means that our Franchises
dictate the way in which they receive support and
investment resources. We believe this customized
approach fuels each Franchise’s ability to maintain a
meaningful investment edge while reaping the benefits
of a scaled and efficient platform.
Our diversified product platform features a wide range
of asset classes and distinct investment approaches.
Our clients choose from a suite of 71 investment
strategies. We support those strategies with a scaled
client service platform that includes nearly 90 sales
and marketing professionals.
Our broad and deep distribution expertise has led to
strong diversification across business channels, with
approximately 56% of our assets under management
(AUM) from institutional clients and 44% from retail
clients. We believe this client diversification has
We believe our strong long-term track record provides
clear evidence that our unique culture and our plat-
form, which allows our investment professionals to
focus on producing investment results, are working for
our clients.
Financial results*
Victory Capital achieved year-over-year growth of reve-
nue, adjusted EBITDA, and adjusted net income during
2018. On a GAAP basis, our net income and earnings
per diluted share more than doubled last year’s levels.
Compared with 2017, 2018 adjusted EBITDA margin ex-
panded 230 basis points. This was supported by low-
er operating expenses, which declined more than $20
million in 2018. We believe our ability to deliver these
results despite the extreme market disruption in the
fourth quarter clearly demonstrates the durability of
our next-generation integrated multi-boutique model
in different market environments.
2
Our capital structure policy balances our growth strat-
egy by ensuring we sustainably invest in our business
and return capital to our shareholders. In 2018, we pru-
dently managed our debt levels and accumulated cash
in support of our acquisition strategy. Over the course
of the year, we reduced our net debt/EBITDA ratio from
3.2X at December 31, 2017, to 1.5X at December 31,
2018. Additionally, we ended 2018 with a cash balance
of $51.5 million. We also initiated a share repurchase
program through which we purchased 856,275 shares
in 2018 and believe this illustrates our willingness to
be proactive on the capital management front, reflects
our confidence in our strategic vision, and is designed
to drive long-term shareholder value.
Strategy for long-term growth
Two key components of our strategic vision are our ability
to grow organically by leveraging our existing investment
capabilities and inorganically through acquisitions.
Over the past five years, we have grown parts of our
business organically by leveraging the diverse capabilities
of our Investment Franchises and our Solutions Platform
coupled with our well-established distribution system.
The growth of our Sycamore Capital Franchise and our
VictoryShares ETF platform provides strong evidence of
our ability to grow organically. When we completed our
MBO in July 2013, Sycamore managed total assets of
$5.2 billion. As of the end of 2018, that AUM had grown to
$17.9 billion, a 244% increase. Since we introduced ETFs
to our platform in 2015, with the acquisition of CEMP, our
ETF AUM has grown from $198 million to $3 billion as of
December 31, 2018, an increase of 1415%.
Our business model and experience also ideally position
us to benefit from accelerating consolidation in the asset
management industry. In the five years since our MBO,
We have created strong
alignment of interests
with our clients through
employee ownership in
our Company and in our
investment products.
we have completed three strategic acquisitions and an
important minority investment. In 2018, we announced
plans to acquire Harvest Volatility Management, LLC
(Harvest) and USAA Asset Management Company
(which includes its mutual fund, ETF, and 529 College
Savings Plan businesses).
Together these two acquisitions will
make us a stronger company by:
> Diversifying our AUM
>
Increasing our size and scale
> Expanding our product capabilities
> Enhancing our distribution opportunities,
including entry into a new, unique USAA
direct member channel
We believe our differentiated platform, which provides
operating scale while preserving investment autonomy,
coupled with our experience with integrating acquisitions,
makes us a compelling acquirer for high-quality asset
managers in today’s environment. We believe we are
as well positioned as any firm in the industry to benefit
from consolidation given our business model and
our experience.
Ownership culture
A key component of the success that we have achieved
on behalf of our clients stems from our ownership culture.
We have created strong alignment of interests with our
clients through employee ownership in our Company and
in our investment products.
We believe the opportunity to own equity in a well-
diversified public company that is structured like ours
is attractive to existing employees and those who join
our Company through acquisitions. It is also an import-
ant component in attracting new talent and has contrib-
uted to high employee retention rates.
Additionally, as of December 31, 2018, our employees
have elected to invest approximately $100 million in
the products that we manage, directly aligning their
investment outcomes with those of our clients.
We believe the combination of these cultural mechanisms
promotes long-term thinking, enhances the client experi-
ence, and ultimately creates value for our shareholders.
3
We are committed to continually reinvesting in
our platform to ensure that we are providing the best
resources to our Franchises and the most timely
and relevant solutions to our clients.
We generally seek prospects that will provide us with
enhanced investment offerings, complementary prod-
ucts/investing strategies, additional financial strength,
and/or a broader distribution footprint. Our focus is not
only on U.S. investment managers but also on opportu-
nities in investment styles and footprints that have an
international or emerging markets presence.
We look forward to executing on the integrations of
Harvest and USAA Asset Management during the
coming year and welcome the unique capabilities and
opportunities that these organizations will bring to our
Company and to our clients.
Looking forward, we believe we are very well positioned
to continue to provide our clients with excellent in-
vestment results, exceptional service, and access to a
broad range of innovative solutions.
On behalf of all our employees, we would like to thank
our clients for the trust and confidence that they have
placed in us.
Vision for the future
When we established our long-term strategic vision
back in 2013, we did not know exactly what challeng-
es we would face as a newly independent firm in a
demanding and
increasingly competitive environ-
ment for active managers. We believed, however, that
to be successful we would need to create a business
model in which specialist investment managers could
operate independently while taking advantage of a
scaled, best-in-class centralized, but not standardized,
operating platform.
Today, we have clear evidence that our model is work-
ing for our Investment Franchises and for clients. We are
committed to continually reinvesting in our platform to
ensure that we are providing the best resources to our
Franchises and the most timely and relevant solutions
to our clients. Importantly, because our platform is inte-
grated, we need to invest only once (not nine individual
times) for each Franchise to see a measurable impact.
We intend to continue to accelerate growth through
strategic acquisitions as market conditions permit.
Sincerely,
David Brown
Chairman and Chief Executive Officer
*This letter contains references to adjusted EBITDA, adjusted
EBITDA margin, and adjusted net income, which are non-GAAP fi-
nancial measures. Management uses these non-GAAP financial
measures internally for planning and forecasting purposes and to
measure the performance of the Company. We believe these non-
GAAP financial measures provide useful and meaningful information
to us and investors because it enhances investors’ understanding of
the continuing operating performance of our business and facilitates
the comparison of performance between past and future periods.
These non-GAAP financial measures should be considered in addi-
tion to, but not as a substitute for, the information prepared in accor-
dance with GAAP. A reconciliation of these non-GAAP measures to
the most directly comparable GAAP financial measures are provided
in this annual report to shareholders beginning on page 73.
4
NEXT-GENERATION, INTEGRATED MULTI-BOUTIQUE MODEL
Our Franchises and Solutions Platform retain their own unique brands and independent investment
processes, while leveraging Victory Capital’s centralized distribution, technology and operations platform.
SM
®
®
®
20190311-773120
5
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements may include, without limitation, any statements
preceded by, followed by, or including words such as “target,”
“believe,” “expect,” “aim,” “intend,” “may,” “anticipate,” “assume,”
“budget,” “continue,” “estimate,” “future,” “objective,” “outlook,” “plan,”
“potential,” “predict,” “project,” “will,” “can have,” “likely,” “should,”
“would,” “could,” and other words and terms of similar meaning
or the negative thereof. Such forward-looking statements involve
known and unknown risks, uncertainties, and other important factors
beyond Victory Capital’s control, as discussed in Victory Capital’s
filings with the SEC, that could cause Victory Capital’s actual results,
performance, or achievements to be materially different from the
expected results, performance, or achievements expressed or
implied by such forward-looking statements.
Although it is not possible to identify all such risks and factors, they
include, among others, the following: reductions in AUM based
on investment performance, client withdrawals, difficult market
conditions, and other factors; the nature of the Company’s contracts
and investment advisory agreements; the Company’s ability to
maintain historical returns and sustain its historical growth; the
Company’s dependence on third parties to market its strategies
and provide products or services for the operation of its business;
the Company’s ability to retain key investment professionals or
members of its senior management team; the Company’s reliance
on the technology systems supporting its operations; the Company’s
integrate new companies;
ability to successfully acquire and
the concentration of the Company’s
long-only
small- and mid-cap equity and U.S. clients; risks and uncertainties
associated with non-U.S. investments; the Company’s efforts to
establish and develop new teams and strategies; the ability of the
investments
in
ADDITIONAL DISCLOSURES
For more information, please visit www.vcm.com.
Go to www.victorysharesliterature.com for ETF prospectuses or
www.victoryfundliterature.com for mutual fund prospectuses.
VictoryShares ETFs are distributed by Foreside Fund Services, LLC.
Victory Funds mutual funds are distributed by Victory Capital Advisers,
Inc. Neither Victory Capital Advisers, Inc. nor its affiliates are affiliated
with Foreside Fund Services, LLC.
Barron’s ranked Victory Capital 9th overall, 4th in the Mixed Asset
category, and 5th in the Taxable Bond category out 57 fund families
for the one-year period ended December 31, 2018; 10th out of 58 firms
for the-one-year period ended December 31, 2017; 21st out of 61 firms
for the one-year period ended December 31, 2016; 25th out of 67 firms
for the one-year period ended December 31, 2015; and 15th out of 65
firms for the one-year period ended December 31, 2014.
How Barron’s Ranks the Fund Families
All mutual and exchange-traded funds are required to report their
returns (to regulators as well as in advertising and marketing material)
after fees are deducted, to better reflect what investors would actually
experience. But our aim is to measure manager skill, independent of
expenses beyond annual management fees. That’s why we calculate
returns before any 12b-1 fees are deducted. Similarly, fund loads, or
sales charges, aren’t included in our calculation of returns. Each fund’s
performance is measured against all of the other funds in its Lipper
category, with a percentile ranking of 100 being the highest and one
the lowest. This result is then weighted by asset size, relative to the fund
family’s other assets in its general classification. If a family’s biggest
funds do well, that boosts its overall ranking; poor performance in its
biggest funds hurts a firm’s ranking.
To be included in the ranking, a firm must have at least three funds in
the general equity category, one world equity, one mixed equity (such
implement effective
tax proceedings) or regulatory actions;
Company’s investment teams to identify appropriate investment
opportunities; the Company’s ability to limit employee misconduct;
the Company’s ability to meet the guidelines set by its clients; the
Company’s exposure to potential litigation (including administrative
or
the Company’s
information and cybersecurity
ability to
policies, procedures, and capabilities; the Company’s substantial
indebtedness; the potential impairment of the Company’s goodwill
and intangible assets; disruption to the operations of third parties
whose functions are integral to the Company’s ETF platform; the
Company’s determination that Victory Capital is not required to
register as an “investment company” under the 1940 Act; the
fluctuation of the Company’s expenses; the Company’s ability to
respond to recent trends in the investment management industry;
the level of regulation on investment management firms and the
Company’s ability to respond to regulatory developments; the
competitiveness of the investment management industry; the dual
class structure of the Company’s common stock; the level of control
over the Company retained by Crestview GP; the Company’s status
as an emerging growth company and a controlled company; and
other risks and factors listed under “Risk Factors” and elsewhere in
the Company’s filings with the SEC.
Such
forward-looking statements are based on numerous
assumptions regarding Victory Capital’s present and future business
strategies and the environment in which it will operate in the future.
Any forward-looking statement made in this report speaks only
as of the date hereof. Except as required by law, Victory Capital
assumes no obligation to update these forward-looking statements,
or to update the reasons actual results could differ materially from
those anticipated in the forward-looking statements, even if new
information becomes available in the future.
as a balanced or target-date fund), two taxable bond funds, and one
national tax-exempt bond fund.
We have historically excluded single-sector and country equity funds,
but those are now factored into the rankings as general equity. We
exclude all passive index funds, including pure index, enhanced index,
and index-based, but include actively managed ETFs and so-called
smart-beta ETFs, which are passively managed but created from
active strategies. Finally, the score is multiplied by the weighting of its
general classification, as determined by the entire Lipper universe of
funds. The category weightings for the one-year results in 2018 were
general equity, 34.8%; mixed asset, 21.3%; world equity, 17.1%; taxable
bond, 22.4%; and tax-exempt bond, 4.4%.
The category weightings for the five-year results were general equity,
35.9%; mixed asset, 19.7%; world equity, 17.3%; taxable bond, 22.5%;
and tax-exempt bond, 4.5%. For the 10-year list, they were general
equity, 37.1%; mixed asset, 20%; world equity, 16.7%; taxable bond,
21.2%; and tax-exempt bond, 4.9%.
The scoring: Say a fund in the general U.S. equity category has
$500 million in assets, accounting for half of the firm’s assets in that
category, and its performance lands it in the 75th percentile for the
category. The first calculation would be 75 times 0.5, which comes to
37.5. That score is then multiplied by 34.8%, general equity’s overall
weighting in Lipper’s universe. So, it would be 37.5 times 0.348, which
equals 13.05. Similar calculations are done for each fund in our study.
Then the numbers are added for each category and overall. The shop
with the highest total score wins. The same process is repeated to
determine the five- and 10-year rankings.
Source: “Barron’s Fund Family Ranking: How the Best Active Managers
Performed,” March 8, 2019.
6
20190311-773120
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:95)
(cid:134)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 001-38388
Victory Capital Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4900 Tiedeman Road 4th Floor Brooklyn, OH
(Address of principal executive offices)
32-0402956
(I.R.S. Employer
Identification No.)
44144
(Zip Code)
(216) 898-2400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.01 par value
(Title of each class)
Securities registered pursuant to section 12(g) of the Act: None
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer (cid:134)
Non-accelerated filer (cid:95)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Emerging growth company (cid:95)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of Class A common equity held by non-affiliates of the registrant at June 29, 2018, which was the last business day of the registrant’s
most recently completed second fiscal quarter, was $132,343,390 based on the closing price of $10.58 for one share of Class A common stock, as reported on NASDAQ
on that date. For purposes of this calculation only, it is assumed that the affiliates of the registrant include the executive officers, directors and those holding 10 percent
or more of the registrant’s common stock.
The number of outstanding shares of the registrant's Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, as of
February 28, 2019 was 14,555,975 and 52,940,026, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on or about May 1,
2019 are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
7
27
51
51
51
51
52
53
54
81
83
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 125
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters . . 127
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . 127
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
PART IV
Signatures
Our design logos and the marks “Victory Capital,” “Victory Capital Management,” “Victory Capital Advisers,”
“Victory Funds,” “VictoryShares,” “Victory Connect,” “CEMP,” “CEMP Volatility Weighted Indexes,” “Diversified,”
“Diversified Equity Management,” “Expedition Investment Partners,” “INCORE Capital Management,” “Integrity,”
“Integrity Asset Management,” “Munder,” “Munder Capital Management,” “The Munder Funds,” “NewBridge,”
“NewBridge Asset Management,” “RS Funds,” “RS Investments,” “Sophus Capital,” “Sycamore Capital” and “Trivalent
Investments,” are owned by us or one of our subsidiaries. All other trademarks, service marks and trade names appearing
in this report are the property of their respective owners.
In this report, when we refer to:
•
•
the “2014 Credit Agreement,” we are referring to the credit agreement dated as of October 31, 2014 (as
amended);
“CEMP,” we are referring to Compass Efficient Model Portfolios, LLC;
2
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the “CEMP Acquisition,” we are referring to our acquisition of the CEMP business in 2015;
“Cerebellum,” we are referring to Cerebellum Capital, LLC;
“Crestview,” we are referring to Crestview Advisors, L.L.C.;
“Crestview GP,” we are referring to Crestview Partners II GP, L.P.;
“Crestview Victory,” we are referring to Crestview Victory, L.P.;
“ETFs,” we are referring to exchange traded funds;
the “Existing Credit Agreement,” we are referring to the credit agreement dated as of February 12, 2018 (as
amended from time to time);
“Harvest,” we are referring to Harvest Volatility Management, LLC;
the “Harvest Acquisition,” we are referring to our pending acquisition of Harvest;
the “Harvest Commitment Letter,” we are referring to the amended and restated commitment letter we
entered into on September 21, 2018 (as amended from time to time) with Royal Bank of Canada and Barclays
Bank PLC;
the “Harvest Purchase Agreement,” we are referring to the purchase agreement entered into on September
21, 2018 between the Company, Harvest, the members of Harvest listed on Annex A thereto (collectively
the “Members”), Curtis Brockelman, Jr. and LPC Harvest, LP, each solely in their joint capacity as Members’
Representative, to purchase 100% of the outstanding equity interests of Harvest;
“IPO,” we are referring to the initial public offering of Class A common stock of Victory Capital Holdings,
Inc.;
“Munder,” we are referring to our Munder Capital Management Franchise;
the “Munder Acquisition,” we are referring to our acquisition of Munder Capital in 2014;
“Munder Capital,” we are referring to Munder Capital Management;
the “RS Acquisition,” we are referring to our acquisition of RS Investments in 2016;
“RS Investments,” we are referring to RS Investment Management Co. LLC;
“Reverence Capital,” we are referring to Reverence Capital Partners, LP;
the “USAA AMCO Acquisition,” we are referring to our pending acquisition of USAA Asset Management
Company and its mutual fund and ETF businesses and USAA 529 College Savings Plan and USAA Transfer
Agency Company d/b/a USAA Shareholder Account Services pursuant to the USAA Stock Purchase
Agreement;
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the “USAA AMCO Credit Facilities Commitment Letter,” we are referring to the commitment letter we
entered into on November 6, 2018 (as amended from time to time) with Barclays Bank PLC and Royal Bank
of Canada;
the “USAA Stock Purchase Agreement,” we are referring to the stock purchase agreement entered into on
November 6, 2018 between the Company, USAA Investment Corporation, and, for certain limited purposes,
USAA Capital Corporation and its mutual fund and ETF businesses and USAA 529 College Savings Plan to
purchase 100% of the outstanding common stock of USAA Asset Management Company and USAA
Transfer Agency Company d/b/a USAA Shareholder Account Services (each a “USAA Acquired Company”
and collectively, the “USAA Acquired Companies”);
“VCA,” we are referring to Victory Capital Advisers, Inc., our broker dealer subsidiary registered with the
Securities and Exchange Commission;
“VCM,” we are referring to Victory Capital Management Inc., our wholly owned registered investment
adviser;
“Victory,” the “Company,” “we,” “our” or “us,” we are referring to Victory Capital Holdings, Inc. and its
consolidated subsidiaries, except where otherwise stated or where it is clear that the term means only Victory
Capital Holdings, Inc. exclusive of its subsidiaries;
the “Victory Funds,” we are referring to the Victory Portfolios, Victory Variable Insurance Funds, Victory
Institutional Funds and the mutual fund series of Victory Portfolio II, a family of open-end mutual funds;
and
“VictoryShares,” we are referring to Victory’s ETF brand.
In this report, we rely on and refer to certain market and industry data and forecasts related thereto. We obtained
this information and these statistics from sources other than us, which we have supplemented where necessary with
information from publicly available sources and our own internal estimates. We use these sources and estimates and
believe them to be reliable, but we cannot give any assurance that any of the projected results will be achieved.
Forward-Looking Statements
This report includes forward-looking statements, including in the sections entitled “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These
forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals
and expectations concerning our market position, future operations, margins, profitability, future efficiencies, capital
expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion,
the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,”
“continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify
forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These
expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements
are reasonable, we can give no assurance that these expectations will prove to have been correct. Some of these
expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and
outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and
other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:
•
reductions in AUM based on investment performance, client withdrawals, difficult market conditions and
other factors;
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the nature of our contracts and investment advisory agreements;
our ability to maintain historical returns and sustain our historical growth;
our dependence on third parties to market our strategies and provide products or services for the operation
of our business;
our ability to retain key investment professionals or members of our senior management team;
our reliance on the technology systems supporting our operations;
our ability to successfully acquire and integrate new companies;
the concentration of our investments in long only small- and mid-cap equity and U.S. clients;
risks and uncertainties associated with non-U.S. investments;
our efforts to establish and develop new teams and strategies;
the ability of our investment teams to identify appropriate investment opportunities;
our ability to limit employee misconduct;
our ability to meet the guidelines set by our clients;
our exposure to potential litigation (including administrative or tax proceedings) or regulatory actions;
our ability to implement effective information and cyber security policies, procedures and capabilities;
our substantial indebtedness;
the potential impairment of our goodwill and intangible assets;
disruption to the operations of third parties whose functions are integral to our ETF platform;
our determination that we are not required to register as an “investment company” under the 1940 Act;
the fluctuation of our expenses;
our ability to respond to recent trends in the investment management industry;
the level of regulation on investment management firms and our ability to respond to regulatory
developments;
the competitiveness of the investment management industry;
the dual class structure of our common stock;
the level of control over us retained by Crestview GP;
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our status as an emerging growth company and a controlled company;
our ability to close and integrate the Harvest and USAA AMCO acquisitions; and
other risks and factors listed under “Risk Factors” and elsewhere in this report.
In light of these risks, uncertainties and other factors, the forward-looking statements contained in this report
might not prove to be accurate. All forward-looking statements speak only as of the date made and we undertake no
obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future
events or otherwise.
Non-GAAP Financial Measures
This report contains “non-GAAP financial measures” that are financial measures that either exclude or include
amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance
with generally accepted accounting principles in the United States, or GAAP. Specifically, we make use of the non-GAAP
financial measures “Adjusted EBITDA” and “Adjusted Net Income.”
Adjustments we make to GAAP net income to calculate Adjusted EBITDA are:
• We add back income tax;
• We add back interest paid on debt and other financing costs, net of interest income;
• We add back depreciation on property and equipment;
• We add back other business taxes;
• We add back amortization of acquisition-related intangibles;
• We add back the expense associated with share-based compensation associated with equity issued from pools
that were created in connection with our management-led buyout with Crestview GP from KeyCorp, the
Munder Acquisition and the RS Acquisition and as a result of any equity grants related to our initial public
offering, or IPO;
• We add back direct incremental costs of acquisitions and IPO, including expenses associated with third-party
advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early
termination costs, loss on other receivable recorded in connection with an acquisition and severance,
retention and transaction incentive compensation;
• We add back debt issuance costs;
• We add back pre-IPO governance expenses paid to Crestview and Reverence Capital (these payments
terminated as of the completion of the IPO);
• We adjust for earnings/losses on equity method investments; and
• We add back annual incentive compensation paid in excess of expected levels due to acquisitions.
6
Adjustments we make to GAAP net income to calculate Adjusted Net Income are:
• We add back other business taxes;
• We add back amortization of acquisition-related intangibles;
• We add back the expense associated with share-based compensation associated with equity issued from pools
that were created in connection with our management-led buyout with Crestview GP from KeyCorp, the
Munder Acquisition and the RS Acquisition and as a result of any equity grants related to the IPO;
• We add back direct incremental costs of acquisitions and IPO, including expenses associated with third-party
advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early
termination costs, loss on other receivable recorded in connection with an acquisition and severance,
retention and transaction incentive compensation;
• We add back debt issuance costs;
• We add back pre-IPO governance expenses paid to Crestview and Reverence Capital (these payments
terminated as of the completion of the IPO);
• We add back annual incentive compensation paid in excess of expected levels due to acquisitions;
• We subtract an estimate of income tax expense on the adjustments; and
• We subtract the impact of re-measuring our U.S. net deferred taxes under the Tax Cuts and Jobs Act enacted
on December 22, 2017.
Adjusted EBITDA and Adjusted Net Income are not recognized terms under GAAP and do not purport to be
alternatives to net income/(loss) attributable to us as a measure of operating performance. Non-GAAP financial measures
are used to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our
business than GAAP results alone.
Our management uses these non-GAAP performance measures to evaluate the underlying operations of our
business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in
GAAP measures that we believe distort the economic value of our organization and we believe that many investors use
this information when assessing the financial performance of companies in the investment management industry. We have
included these non-GAAP measures to provide investors with the same financial metrics used by management to assess
the operating performance of our Company.
Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared
in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar
terms are used to identify these measures.
Item 1. Business
Overview
We are an independent investment management firm operating a next generation, integrated multi-boutique
model with $52.8 billion in AUM as of December 31, 2018. Our differentiated model features a scalable operating platform
that provides centralized distribution, marketing and operations infrastructure to our Franchises and Solutions Platform.
As of December 31, 2018, our Franchises and our Solutions Platform collectively managed a diversified set of 71
investment strategies for a wide range of institutional and retail clients.
7
Our Franchises are operationally integrated but are separately branded and make investment decisions
independently from one another within guidelines established by their respective investment mandates that we monitor.
Our integrated multi-boutique model creates a supportive environment in which our investment professionals, largely
unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence.
VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities.
Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily
rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and
VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and
supported by our centralized distribution, marketing and operational support functions.
Our centralized key functions include distribution, marketing, trading, middle- and back-office administration,
legal, compliance and finance. Our integrated model aims to “centralize, not standardize.” We believe by providing our
Franchises with control over their portfolio management tools, risk analytics and other investment-related functions, we
can minimize disruptions to their investment process and ensure that they are able to invest in the fashion that they find
most optimal.
In addition to our integrated multi-boutique business model, we believe there are four main attributes that
differentiate us from other publicly traded investment management firms:
• We have constructed a set of distinct investment approaches in specialized asset classes where we believe
active managers are well positioned to generate alpha over a full market cycle through security selection and
portfolio construction. We believe our strategies in these specialized asset classes, which we refer to as our
current focus asset classes, will drive our future growth. These strategies have experienced less fee
compression than strategies in more commoditized asset classes, and we believe demand for them typically
exceeds capacity.
• We have a track record of successfully sourcing, executing and integrating sizable acquisitions and making
these acquisitions financially attractive by extracting significant synergies as a result of integrating the
acquired entity onto our operating platform. In addition, we have been able to expand the distribution for
the products of the acquired entities through our centralized distribution platform. Our recently announced
acquisitions of Harvest and the USAA Acquired Companies are evidence of the appeal of our differentiated
platform, combining scale and boutique qualities, making us an attractive acquirer to firms looking for a
strategic partner.
• We have a diversified business that offers a suite of active products and hybrid rules-based products through
our proprietary ETF brand, VictoryShares, across a wide range of asset classes and distinct investment
approaches, to a broad and diverse group of institutional and retail clients. We offer our 71 investment
strategies through nine Franchises and our Solutions Platform, with no Franchise accounting for more than
34% of total AUM as of December 31, 2018. Each of our Franchises employs a different investment
approach, which we believe leads to diversification in investment return streams among Franchises, even
when asset classes overlap. These factors also mitigate key man risk.
• We foster a culture that encourages long-term thinking through promoting meaningful employee ownership.
We have a high degree of employee ownership, with approximately 82% of our employees beneficially
owning approximately 27% of our shares as of December 31, 2018. Many of such employees have purchased
their equity interests in our firm. In addition, as of December 31, 2018 our current and former employees
have collectively invested approximately $100 million in products we manage, directly aligning their
investment outcomes with those of our clients.
Since our management-led buyout with Crestview GP from KeyCorp in August 2013, we have completed three
acquisitions and a strategic minority investment and grown our AUM from $17.9 billion to $52.8 billion as of
8
December 31, 2018. In addition, in the third quarter of 2018, the Company entered into an agreement to purchase Harvest
and, in the fourth quarter of 2018, the Company entered into an agreement to purchase the USAA Acquired Companies.
We regularly evaluate potential acquisition candidates and maintain a strong network of industry participants and advisors
that provide opportunities to establish potential target relationships and source transactions. Our management leads and
participates in our acquisition strategy, leveraging their many years of experience actively operating our Company on a
day-to-day basis towards successfully sourcing, executing and integrating acquisitions. We continue to seek to make
acquisitions that will add high quality investment teams, that enhance our growth and financial profile, improve our
diversification by asset class and investment strategy, achieve our integration and synergy expectations, expand our
distribution capabilities and optimize our operating platform.
We believe, based on our acquisition experience, that there is a significant opportunity for us to grow through
additional acquisitions. We believe the universe of potential acquisition targets has grown as a result of the evolution of
the distribution landscape, the increasing cost of regulatory compliance, management fee compression and outflows from
actively managed funds to passive products. In the United States, as of November 30, 2018, investment management firms
with up to $100 billion of AUM collectively manage approximately $9.0 trillion total AUM. We intend to primarily focus
our acquisition efforts on firms with $10 billion to $75 billion in AUM, a size range in which we have successfully
executed two transactions (the Munder Acquisition and the RS Acquisition), announced two additional transactions
(Harvest and the USAA Acquired Companies) and in which investment management firms in the United States collectively
manage approximately $5.7 trillion of AUM. We would consider firms both below and above this AUM range should they
provide a compelling opportunity.
Through our acquisitions to date, we have added Franchises we believe can outperform the market, and where
we have a strong understanding of the core business’s ability to drive growth for those Franchises and our Company as a
whole. These acquisitions have shifted our AUM mix from 38% in our current focus asset classes at the time of our
management-led buyout in 2013 to 78% in our current focus asset classes as of December 31, 2018. We believe our
deliberate repositioning of our business through acquisitions has equipped us with stronger investment strategies in more
compelling asset classes, providing us with a next generation investment management platform.
AUM as of MBO in 2013
AUM as of December 31, 2018
Commodities /
Other
0%
Fixed Income
16%
U.S. Large
Cap Equities
46%
Total Current
Focus Asset
Classes: 38%
U.S. Mid Cap
Equities
18%
U.S. Small Cap
Equities
13%
Global / Non-
U.S. Equities
7%
Solutions
0%
Fixed Income
13%
Commodities /
Other
2%
U.S. Large
Cap Equities
7%
Solutions
7%
Global / Non-
U.S. Equities
9%
U.S. Mid Cap
Equities
38%
Total Current
Focus Asset
Classes: 78%
U.S. Small Cap
Equities
24%
Total: $17.9 billion
Total: $52.8 billion
We offer our clients an array of equity and fixed income strategies that encompass a diverse spectrum of market
capitalization segments, investment styles and approaches. Our current focus asset classes—which consist of U.S.
small- and mid-cap equities, global/non-U.S. equities and solutions—collectively comprised 78% of our AUM as of
December 31, 2018. We believe strategies in these asset classes are better positioned to attract positive net flows and
maintain stable fee rates over the long term. As of December 31, 2018, we estimate we had approximately $105 billion of
total excess capacity in our four- and five-star funds in these asset classes that were open to new investors (of which
approximately $67 billion is in our Solutions Platform).
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As outlined below, our business is diversified on multiple fronts, including by business, Franchise and Solutions
Platform, client type and investment vehicle.
AUM by Business
Solutions
7%
Franchises
93%
AUM by Client Type
Taft-Hartley
Plans
1%
Endow ments/
Family
1%
CTFs
1%
Institutional
56%
Insurance
6%
Public
7%
Corporate
5%
Sub-Advisory
16%
Institutional
Fund Clients
19%
Intermediary
25%
Retail
44%
Retirement
19%
Data as of December 31, 2018.
AUM by Franchise
RS
18%
Sub-advised
3%
Solutions
7%
Sophus
3%
RS Intl
<1%
RS Value
5%
RS Grow th
13%
New Bridge
2%
Trivalent
5%
Expedition
1%
Sycamore
34%
Integrity
9%
INCORE
11%
Munder
7%
AUM by Investment Vehicle
VIP
4%
CTFs
1%
Institutional
56%
Mutual Funds
(institutional)
19%
Separate
Account
32%
Wrap
1%
UMA
2%
Mutual Funds
(retail/retireme
nt)
35%
Retail
44%
ETF
6%
(1)
Includes assets managed by Diversified, which were transferred to Munder on May 15, 2017. See “—Our
Franchises—Munder Capital Management.”
Within individual asset classes, our Franchises employ different investment approaches. This diversification
reduces the correlation between return streams generated by multiple Franchises investing within the same asset class. For
example, we have several Franchises focused on Emerging Markets within global/non-U.S. equity, each with a different
investment approach. Trivalent’s investment team is one of the longest industry practitioners of small cap investing and
primarily focuses on quantitative analysis for stock selection. Sophus employs a front-end quantitative screen balanced to
first rank stocks, then further applies fundamental research to make investment decisions. Due to the differences in
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investment approaches, each Franchise has a different return profile for investors in different market environments while
having exposure to their desired asset classes.
Data as of December 31, 2018.
(1)
Includes assets managed by Diversified, which were transferred to Munder on May 15, 2017. See “—Our
Franchises—Munder Capital Management.”
Our multi-channel distribution capabilities provide another degree of diversification, with approximately 56% of
our AUM from institutional clients and 44% from retail clients as of December 31, 2018. We believe this client
diversification has a stabilizing effect on our revenue, as institutional and retail investors have shown to exhibit different
demand patterns and respond to trends in different ways.
We believe we have created a strong alignment of interests with clients and shareholders through employee
ownership, our Franchise revenue share structure and employee investments in Victory products. Notably, the majority of
our employee shareholders acquired their equity in connection with the management-led buyout with Crestview GP from
KeyCorp, as well as in connection with the Munder Acquisition and the RS Acquisition. We believe the opportunity to
own equity in a well-diversified company is attractive, both to existing employees and those who join as part of
acquisitions. We principally compensate our investment professionals through a revenue share program, which we believe
further incentivizes our investment professionals to focus on investment performance, while simultaneously minimizing
potential distractions from the expense allocation process that would be involved in a profit-sharing program. In addition,
as of December 31, 2018, our current and former employees collectively have invested approximately $100 million in
products we manage, directly aligning their investment outcomes with those of our clients. We believe the combination of
these mechanisms has promoted long-term thinking, an enhanced client experience and ultimately the creation of value
for our shareholders.
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Our senior management team has an average of over 26 years of experience in the industry, each bringing
significant expertise to his or her role. Our Chief Executive Officer and President, Chief Financial Officer and Chief
Administrative Officer have been with us (and our predecessor) for 14.5 and 13 years, respectively, overseeing the
transformation of the business from a bank subsidiary to an independent investment management firm. Our Franchises’
CIOs are highly experienced, having an average of approximately 27 years of experience. Our sales leaders have had
significant tenures, with an average of approximately 29 years of experience with us or a predecessor firm.
Competitive Strengths
We believe we have significant competitive strengths that position us for sustained growth over the long term.
Integrated Multi-Boutique Model Providing Investment Autonomy, Centralized Distribution, Marketing and
Support Functions to Investment Franchises
We believe our integrated multi-boutique model allows us to achieve the benefits from both the scale of large
managers and the focus of smaller managers. Our Franchises retain investment autonomy while benefiting from our
centralized middle- and back-office functions. We have demonstrated an ability to integrate our Franchises onto our
flexible infrastructure without significantly increasing incremental fixed costs, which is a key component to the scalability
of our model. Our structure enables our Franchises to focus their efforts on the investment process, providing them the
platform to enhance their investment performance and consequently their growth prospects. Our centralized operations
allow our Franchises to customize their desired investment support functions in ways that are best suited for their
investment workflow. Through our centralized distribution platform, our Franchises are able to sell their products to
institutional investors, retirement plans, brokerages and wealth managers to which it is challenging for smaller managers
to gain access.
Within our model, each Franchise retains its own brand and logo, which it has built over time. Unlike other
models with unified branding, there is no requirement for newly acquired Franchises to adjust their product set due to
pre-existing products on our platform; they are simply marketed under their own brand as they were previously. Because
of this dynamic, we have the flexibility to add new Franchises either to gain greater exposure to certain asset classes or
increase capacity in places where we already have exposure.
Proven Acquirer with Compelling Proposition
We believe our platform will allow us to continue to be a consolidator within the investment management
industry, providing us with an opportunity to further grow and scale our business. Through several transactions, we have
demonstrated an ability to successfully source, execute and integrate new Franchises.
We believe our integrated multi-boutique model is compelling for potential Franchises with entrepreneurial
leaders. Under our model, Franchises retain the brands they have built as well as autonomy over their investment decisions,
while simultaneously benefiting from the ability to leverage our centralized distribution, marketing and operations
platform. Our model further relieves our Franchises of much of their administrative burdens and allows them instead to
focus on the investment process, which we believe provides them a platform to enhance their performance. By offering a
platform on which Franchises can focus on their core competencies, grow their own brand faster and participate in a
revenue share program, we believe we are providing an attractive proposition. Furthermore, we believe Victory equity is
attractive to Franchise investment personnel, as these personnel receive the advantage of sharing in the potential upside of
the entirety of our diversified investment management business.
Because we integrate a significant portion of each Franchise’s distribution, operational and administrative
functions, we have been able to extract significant expense synergies from our acquisitions, enabling us to create greater
value from transactions. As of December 31, 2018, we had generated net annualized expense synergies of approximately
$76 million from our three acquisitions. For example, in the acquisition of RS Investments which closed in 2016, we
successfully achieved net annual expense synergies of $53 million, which represents over 45% of RS Investments’
expenses in the year prior to the acquisition. We incurred $9.9 million in total one-time expenses to achieve those
synergies.
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As evidenced by the announcements to acquire Harvest and the USAA Acquired Companies, we will seek to
continue to augment our next generation investment management platform by focusing on acquisition candidates that
provide investment capabilities that are complementary, that expand our distribution capabilities, that optimize our
operating platform and achieve our integration and synergy expectations. Since our management-led buyout with
Crestview GP, our strategy of enhancing our capabilities within our current focus asset classes has driven strong organic
growth within these asset classes. Furthermore, the distribution channels obtained through acquisitions have enhanced our
flows.
Portfolio of Specialized Asset Classes with Potential for Outperformance
In assembling our portfolio of Franchises, we have selected investment managers offering strategies in specialized
asset classes where active managers have shown an established track record of outperformance relative to benchmarks
through security selection and portfolio construction. We continue to build our platform to address the needs of clients
who would like exposure to asset classes that have potential for alpha generation. We find that larger industry trends of
flows moving from actively managed strategies to passive ones are not as pronounced in our current focus asset classes.
Diversified Platform Across Investment Strategies, Franchises and Client Type
We have strategically built an investment platform that is diversified by investment strategy, Franchise and client
type. Within each asset class, Franchises with overlapping investment mandates still contribute to our diversification by
pursuing different investment philosophies and/or processes. For example, U.S. small cap equities, which accounted for
approximately 25% of our AUM as of December 31, 2018, consists of four Franchises, each following a different
investment strategy. We believe the diversity in investment styles reduces the correlation between the return profiles of
strategies within the same asset class, and consequently provides an additional layer of diversification and AUM and
revenue stability.
We believe our AUM is well diversified at the Franchise level, with no Franchise accounting for more than 34%
of AUM, and the median Franchise comprising 7% of AUM, as of December 31, 2018. Furthermore, we believe our
Franchises’ brand independence reduces the impact of each individual Franchise’s performance on clients’ perceptions of
the other Franchises. The distribution of AUM by Franchise, as well as succession planning, mitigates the level of key
man risk typically associated with investment management businesses.
We believe our client base serves as another important diversifying element, as different client segments have
shown to have distinct characteristics, including asset class and product preferences, sales and redemptions trends, and
exposure to secular trends. We strive to maintain a balance between institutional and retail clients, with 56% and 44% of
our AUM as of December 31, 2018 in each of these channels, respectively. We also have the capability to deliver our
strategies in investment vehicles designed to meet the needs and preferences of investors in each channel. These investment
vehicles include mutual funds with channel-specific share classes, institutional separate accounts, SMA/UMA/CTF
products and ETFs. If a strategy is currently not offered in the wrapper of choice for a client, we have the infrastructure
and ability to create a new investment vehicle, which helps our Franchises further diversify their investor bases.
Attractive Financial Profile
Our revenues have shown to be recurring in nature, as they are based on the level of client assets we manage. The
majority of our strategies are in asset classes that require specialized skill, are in higher demand and typically command
higher fee rates. With the growth of our Solutions Platform, our average fee rate is likely to decline as that business
continues to grow, however, our fee revenue is generated from strategies with differing return profiles, thus diversifying
our revenue stream.
Because we largely outsource our middle- and back-office functions, as well as technology support, we have
relatively minimal capital expenditure requirements. Approximately two-thirds of our operating expenses are variable in
nature, consisting of the incentive compensation pool for employees, sales commissions, third-party distribution costs,
sub-advising and the fees we pay to certain of our vendors.
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We have identified three primary net income growth drivers. Firstly, we grow our AUM organically through
inflows into our strategies and the market appreciation of those strategies. Secondly, we have a proven ability to grow
through synergistic acquisitions. Thirdly, we have constructed a scalable platform; as our AUM increases, we expect
margins to expand.
Economic and Structural Alignment of Interests Promotes Owner-Centric Culture
Through our revenue share compensation model and broad employee ownership, we have structurally aligned
our employees’ interests with those of our clients and other shareholders and have created an owner-centric culture that
encourages employees to act in the best interests of clients and our Company, as well as to think long term. Additionally,
our employees invest in products managed by our Franchises and Solutions Platform, providing direct alignment with the
interests of our clients.
We directly align the compensation paid to our investment teams with the performance of their respective
Franchises by structuring formula-based revenue sharing on the products they manage. We believe that compensation
based on revenue rather than profits encourages investment professionals to focus their attention on investment
performance, while encouraging them to provide good client service, focus on client retention and attract new flows. We
believe the formula-based, client-aligned nature of our revenue sharing fosters a culture of transparency where Franchises
understand how and on what terms they are being measured to earn compensation.
We believe the high percentage of employee ownership creates a collective alignment with our success. Further,
we believe granting equity is attractive to potential new employees and is a retentive mechanism for current employees.
As of December 31, 2018, our employees beneficially owned approximately 27% of our shares. In addition to being aligned
with our financial success through their equity ownership, our current and former employees collectively have invested
approximately $100 million in products we manage as of December 31, 2018.
Our Growth Strategy
We have a purposeful strategy aimed to achieve continued growth and success for our Company and our
Franchises. The growth we pursue is both organic and inorganic. We seek to grow organically by offering our clients
strategies that are value-added to their overall portfolios with strong performance track records. We intend to continue to
supplement our growth through disciplined acquisitions as evidenced by the announcements to acquire Harvest and the
USAA Acquired Companies. We primarily seek to acquire investment management firms that will add high quality
investment teams, that enhance our growth and financial profile, improve our diversification by asset class and investment
strategy, achieve our integration and synergy expectations, expand our distribution capabilities and optimize our operating
platform. We believe one of our key advantages in a competitive sales process is our ability to provide access to new
distribution channels. We believe that our centralized distribution and marketing platform drives organic growth at our
acquired Franchises both by opening new distribution channels to them and providing them with the support of our sales
and marketing professionals while allowing them to focus on investment performance.
Organic Growth
A key driver of our growth strategy lies in enhancing the strength of each of our existing Franchises. We primarily
do this by providing them with access to our centralized distribution, marketing and operations platform. Largely
unencumbered by the burdens of administrative and operational tasks, our investment professionals can focus on delivering
investment excellence and maintaining strong client relationships. We also expect to help our Franchises through fund and
share class launches and product development. We believe we are well positioned to help our Franchises grow their product
offerings and diversify their investor base, with the ability to offer their strategies in multiple investment vehicles to meet
clients’ needs.
Our platform provides significant operating leverage to our Franchises and is a key factor in our continued
success. As we continue to grow and expand, we will continue to look for ways to invest in our operations, in order to
achieve greater economies of scale and provide better services to our Franchises. We continue to expand our distribution
capabilities as well, demonstrated by our entry in 2016 into an exclusive distribution agreement with an independent
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investment management firm in Japan, as well as our launch during the first quarter of 2017 of two emerging market
UCITS funds with a global financial advisory firm.
We continually look to the future, and as a result, our infrastructure investments can range from the immediate to
the long term. As an example, we have acquired a minority interest in Cerebellum Capital, an investment management
firm that specializes in machine learning. Cerebellum Capital’s techniques help to design, execute and improve investment
programs and the firm is working with a number of our Franchises to help them optimize their investment processes. We
believe investments like these provide tools that can provide enhancements to our Franchises’ investment processes, give
our Franchises access to proprietary technology that can give them an advantage and help position our Franchises for the
future.
Certain of our Franchise strategies have or may have capacity constraints, and we may choose to limit access to
new or existing investors in these strategies such as we have done for two mutual funds managed by the Sycamore Capital
Franchise, which had an aggregate of $14.3 billion in AUM as of December 31, 2018.
We believe there is significant growth potential in solutions products, most notably in ETFs. Through our
VictoryShares brand, we offer ETFs that seek to improve the risk, return and diversification profile of client portfolios.
Our approach furthers our commitment to rules-based investing and includes single- and multi-factor strategies designed
to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum
volatility and targeted factor exposure. VictoryShares is designed to provide investors with rules-based solutions that
bridge the gap between the active and passive elements of their portfolios. Since the CEMP Acquisition in 2015, our ETF
products have grown from less than $200 million in AUM to approximately $3.0 billion in AUM as of December 31, 2018.
As of December 31, 2018, we ranked 26th in overall ETF AUM among 144 issuers and 21st out of 144 ETF issuers in net
flows for 2018. VictoryShares ETFs have posted positive net flows every quarter since the CEMP acquisition in 2015 and
in 2018 grew their market share by 33%.
Growth through Acquisitions
We intend to continue to accelerate growth through disciplined acquisitions. On September 21, 2018, the
Company entered into the Harvest Purchase Agreement, whereby the Company has agreed to purchase 100% of the equity
interests of Harvest, an asset management company specializing in yield enhancement overlay, risk reduction, alternative
beta and absolute return investment strategies. Harvest offers a suite of value-added investment strategies for client
portfolios that are designed to provide investors with risk-managed sources of income, absolute return and varying levels
of market exposure. The acquisition will expand our Solutions Platform by adding a historically strong organic grower to
our platform and will further diversify our AUM into strategies that are managed to be neutral to changing market cycles.
In addition, on November 6, 2018, we entered into an agreement to acquire the USAA Acquired Companies and their
Mutual Fund and ETF businesses and USAA 529 College Savings Plan. The USAA Acquired Companies have proven
expertise in managing fixed income, global multi-asset and equity strategies through both internal investment teams and
external subadvisors. We expect the USAA AMCO Acquisition will diversify our AUM, expand our investment
capabilities, increase our size and scale and introduce a new and unique USAA direct-member distribution channel to our
existing distribution platform.
We regularly evaluate potential acquisition candidates and maintain a strong network among industry participants
and advisers that provide opportunities to establish potential target relationships and source transactions. We primarily
seek investment management firms that will add high quality investment teams, that enhance our growth and financial
profile, improve our diversification by asset class and investment strategy, achieve our integration and synergy
expectations, expand our distribution capabilities and optimize our operating platform. We have a preference for investing
in asset classes where we have knowledge, provided that further acquisitions must continue to diversify our portfolio in
terms of investment strategy. Our focus is not only on U.S. investment managers but also on investment styles that have
an international or emerging market presence.
We believe the universe of potential acquisition targets has grown as a result of the evolution of the distribution
landscape, the increasing cost of regulatory compliance, management fee compression and outflows from actively
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managed funds to passive products. We believe our integrated multi-boutique model makes us an attractive acquirer.
Further, our centralized distribution, marketing and operations platform allows us to achieve synergies.
Our Franchises
As of December 31, 2018, we had our nine Franchises diversified across investment approaches, with no
Franchise accounting for more than 34% of our AUM. Our Franchises are independent from one another from an
investment perspective, maintain their own separate brands and logos, which they have built over time, and are led by
dedicated CIOs. We customize each Franchise’s interactions with our centralized platform and the formula for its
respective revenue share.
Our Franchises are:
Expedition Investment Partners
Expedition Investment Partners applies a fundamental growth-oriented approach to investing in secular changes
occurring in the small-capitalization companies of emerging and frontier classified countries. Expedition’s team has
diverse backgrounds, is fluent in multiple languages and travels extensively for on-site due diligence at opportunistic and
lesser known companies in the emerging and frontier market areas. Expedition is based in New York, NY and managed
$0.3 billion in AUM as of December 31, 2018. Expedition’s investment team consists of seven professionals with an
average industry experience of approximately 17 years.
INCORE Capital Management
INCORE Capital Management uses niche and customized fixed income strategies focusing on exploiting
structural inefficiencies in the U.S. fixed income markets. INCORE conducts extensive research that includes identifying
slower prepayment rates on mortgages, market inefficiencies along particular areas of the yield curve, and proprietary
quantitative credit quality modeling. INCORE is based in Birmingham, MI and Brooklyn, OH and managed $5.9 billion
in AUM as of December 31, 2018. INCORE’s investment team consists of 14 professionals with an average industry
experience of approximately 20 years.
Integrity Asset Management
Integrity Asset Management utilizes a dynamic value-oriented approach to U.S. mid- and small-capitalization
companies. Integrity conducts fundamental stock research to find attractive companies that have compelling discounts to
the prevailing market conditions. Integrity is based in Rocky River, OH, and managed $4.7 billion in AUM as of
December 31, 2018. Integrity’s investment team consists of 12 professionals with an average industry experience of
approximately 19 years.
Munder Capital Management
Munder Capital Management has an experienced team utilizing a “Growth-at-a-Reasonable-Price” strategy in the
U.S. equity markets designed to generate consistently strong performance over a market cycle. Munder performs extensive
fundamental research in order to find attractive growth companies that it expects will exceed market expectations. Of the
companies with independently determined growth attributes, valuation is applied to find the most inexpensive growth
companies. Munder is based in Birmingham, MI, and managed $3.7 billion in AUM (including assets formerly managed
by Diversified) as of December 31, 2018. Munder’s investment team consists of nine professionals with an average
industry experience of approximately 25 years.
NewBridge Asset Management
NewBridge Asset Management applies a high conviction growth-oriented strategy focusing on U.S.
large-capitalization companies experiencing superior long-term growth rates with strong management teams. Most of
NewBridge’s team has worked together since 1996 doing fundamental research on high growth companies. NewBridge
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usually holds between 25 and 35 securities. NewBridge is based in New York, NY and managed $1.3 billion in AUM as
of December 31, 2018. NewBridge’s investment team consists of six professionals with an average industry experience of
approximately 22 years.
RS Investments
RS Investments is made up of three investment teams: RS Value; RS Growth; and RS International. RS Value
and RS Growth apply an original and proprietary fundamental approach to investing in value and growth-oriented U.S.
equity strategies. The RS Value and RS Growth teams conduct hundreds of company research meetings each year. RS
International utilizes a highly disciplined quantitative approach to managing core-oriented global and international equity
strategies. RS Investments is based in San Francisco, CA and managed $9.6 billion in AUM as of December 31, 2018. RS
Investments’ three investment teams consist of 17 professionals with an average industry experience of approximately
20 years.
Sophus Capital
Sophus Capital utilizes a disciplined quantitative process that accesses market conditions in emerging equity
markets and rank orders attractive companies that are further researched from a fundamental basis. Sophus’ team members
travel to companies to conduct fundamental research. Sophus is based in Des Moines, IA, with offices in London, Hong
Kong and Singapore, and managed $1.6 billion in AUM as of December 31, 2018. Sophus’ investment team consists of
10 professionals with an average industry experience of approximately 16 years.
Sycamore Capital
Sycamore Capital applies a quality value-oriented approach to U.S. mid- and small- capitalization companies.
Sycamore conducts fundamental research to find companies with strong high-quality balance sheets that are undervalued
versus comparable high quality companies. Sycamore is based in Cincinnati, OH and managed $17.9 billion in AUM as
of December 31, 2018, which includes two mutual funds with an aggregate of $14.3 billion in AUM that we have generally
closed to new investors. Sycamore’s investment team consists of 10 professionals with an average industry experience of
approximately 15 years.
Trivalent Investments
Trivalent Investments utilizes a disciplined approach to stock selection across large to small companies in the
international and emerging markets space. Trivalent is one of the longest standing practitioners of international
small-capitalization investing in the industry. Trivalent’s investment strategy is primarily a proprietary quantitative process
that drives stock selection across various countries. Trivalent frequently conducts reviews of stock selection rankings
within a portfolio construction and risk management context in order to isolate performance to stock selection. Trivalent
is based in Boston, MA, and managed $2.5 billion in AUM as of December 31, 2018. Trivalent’s investment team consists
of seven professionals with an average industry experience of approximately 22 years.
Non-Franchise/Subadvisory Relationships
Park Avenue
Park Avenue Institutional Advisers LLC, a unit of New York-based Guardian Life Insurance Company of
America, subadvises five of our fixed income funds: the Victory Floating Rate, High Yield, Strategic Income, Tax-Exempt,
and High Income Municipal Bond funds. Guardian was the controlling shareholder of RS Investments prior to the RS
Acquisition. Park Avenue and VCM have entered into a written sub-advisory agreement, pursuant to which Park Avenue
provides sub-advisory services with respect to those fixed income funds, subject to the general oversight of VCM and the
board of trustees of the Victory Funds.
Under the sub-advisory agreement, VCM pays Park Avenue monthly fees for each sub-advised fund based on
a percentage of the fees due from such fund to VCM for such month.
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Park Avenue employs a fundamental value approach to investing that gauges value relative to risk, rather than
simply reaching for yield. Investment decisions are based on rigorous, independent research into each investment’s credit
quality, structure and collateral. Park Avenue is based in New York, NY, and managed $0.9 billion in AUM for the
Company as of December 31, 2018. Park Avenue’s investment team consists of eight portfolio managers with an average
industry experience of approximately 29 years.
SailingStone
SailingStone Capital Partners is an independent investment advisory firm focused exclusively on providing
investment solutions in the global natural resource sector. SailingStone manages concentrated, long-only natural resource
equity portfolios for investors and subadvises our Victory Global Natural Resources Fund. SailingStone was formed in
2014 by members of the RS Investments global natural resources, or GNR, team, pursuant to a written agreement between
RS Investments and the GNR team to spin off the GNR business into an independent specialized investment management
firm. RS Investments assigned all of its rights in the agreement to VCM in the RS Acquisition. SailingStone’s sub-advisory
services are subject to the general oversight of VCM and the board of trustees of the Victory Funds.
Under the sub-advisory agreement, VCM pays SailingStone a monthly fee, based on the Victory Global Natural
Resource Fund’s assets.
In addition, through December 31, 2018, we were entitled to a declining percentage of the revenue of
SailingStone from certain separate account clients that were transferred in January 2014.
SailingStone is based in San Francisco, CA, and managed $0.5 billion in AUM for the Company as of
December 31, 2018. SailingStone’s investment team consists of six professionals with an average industry experience of
approximately 18 years.
Solutions Platform
Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily
rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and
VictoryShares, which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and
supported by our centralized distribution, marketing and operational support functions. As of December 31, 2018,
VictoryShares’ investment management fees were between 30 and 45 basis points. Our Solutions Platform managed
$3.8 billion in AUM as of December 31, 2018.
Our Products and Investment Performance
As of December 31, 2018, our nine Franchises and Solutions Platform offered 71 investment strategies with the
majority in our current focus asset classes, consisting of U.S. small- and mid-cap equities, global/non-U.S. equities and
solutions. These asset classes collectively comprised 78% of our $52.8 billion AUM as of December 31, 2018.
Product Mix
Our investment strategies are offered through open-end mutual funds, SMAs, UMAs, ETFs, CTFs and wrap
separate account programs. Our product mix is expanding, as we have the ability to add investment vehicles to any strategy
that is offered by our Franchises.
Each individual asset class is diversified through the investment strategies of our Franchises, which each employ
different investment approaches. Due to the differences in investment approaches, each of our Franchises has different
return profiles for investors in different market environments while having exposure to their desired asset classes.
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Investment Performance
Our Franchises have established a long track record of benchmark-relative outperformance, including prior to
their acquisition by us. As of December 31, 2018, 88% of our strategies by AUM had returns in excess of their respective
benchmarks over a ten-year period, 74% over a five-year period and 68% over a three-year period. On an equal-weighted
basis, 75% of our strategies have outperformed their benchmarks over a ten-year period, 63% over a five-year period and
59% over a three-year period. We consider both the AUM-weighted and equal-weighted metrics in evaluating our
investment performance. The advantage of the AUM-weighted metric is that it reflects the investment performance of our
Company as a whole, indicating whether we tend to outperform our benchmarks for the assets we manage. The
disadvantage is that the metric fails to capture the overall effectiveness of our individual investment strategies; it does not
capture whether most of our strategies tend to outperform their respective benchmarks. Conversely, the Equal-weighted
metric reflects the overall effectiveness of our individual investment strategies, but fails to capture the investment
performance of our Company as a whole.
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The table below sets forth our 10 largest strategies by AUM as of December 31, 2018 and their average annual
total returns compared to their respective benchmark index over the one-, three-, five- and 10-year periods ended
December 31, 2018. These strategies represented approximately 66% of our total AUM as of December 31, 2018.
Strategy/Benchmark Index
(9.40)%
Sycamore Mid Cap Value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell Midcap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.29)%
2.89 %
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 years 5 years 10 years
8.20 % 14.50 %
5.44 % 13.03 %
2.76 % 1.47 %
8.82 %
6.06 %
2.76 %
1 year
Sycamore Small Cap Value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.86)%
5.43 %
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7.43)% 11.12 %
7.37 %
3.75 %
Integrity Small Cap Value Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17.52)%
Russell 2000 Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.86)%
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.62 %
7.37 %
(4.66)% (1.75) %
8.29 % 14.52 %
3.61 % 10.40 %
4.68 % 4.12 %
3.89 % 13.29 %
3.61 % 10.40 %
0.28 % 2.89 %
5.11 % 13.24 %
Munder Mid-Cap Core Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.63)%
(9.06)%
Russell Midcap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.26 % 14.03 %
(3.57)% (1.01) % (1.15)% (0.79)%
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.03 %
7.04 %
RS Mid Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell Midcap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.47)%
6.12 % 15.44 %
7.42 % 15.12 %
(4.75)%
(1.72)% (1.86) % (1.30)% 0.32 %
6.73 %
8.59 %
RS Small Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7.65)%
(9.31)%
1.66 %
9.40 %
7.24 %
2.16 %
8.08 % 17.21 %
5.13 % 13.52 %
2.95 % 3.69 %
Trivalent International Small-Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19.74)%
S&P Developed ex-U.S. SmallCap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18.75)%
(0.99)%
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.62 %
3.46 %
0.16 %
4.29 % 12.86 %
2.38 % 9.55 %
1.91 % 3.31 %
Sophus Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18.07)%
MSCI Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14.58)%
(3.49)%
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.84 %
9.25 %
0.59 %
2.80 % N/A
1.65 % 8.02 %
1.15 % N/A
RS Large Cap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 1000 Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.17 %
(8.47)%
(8.27)%
6.95 %
(0.20)% (0.78) %
6.16 % N/A %
5.95 % 11.18 %
0.21 % N/A %
INCORE Investment Grade Convertible Securities . . . . . . . . . . . . . . . . . . . .
INCORE Investment Grade Convertible Securities (VXA1 - VX5C)(2) . . .
Excess Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.21 %
1.03 %
8.37 % 10.54 %
2.10 % 12.23 % 10.71 % 11.47 %
(1.07)% (3.02) % (2.34)% (0.93)%
(1)
(2)
Includes two mutual funds with an aggregate of $14.3 billion in AUM as of December 31, 2018 that we have
generally closed to new investors.
Time blended benchmark which consists of ICE BofAML Investment Grade U.S. Convertible 5% Constrained
Index (VX5C) beginning on December 1, 2017 and ICE BofAML U.S. Convertible – Investment Grade Index
(VXA1) prior to December 1, 2017.
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For each period shown, performance statistics include only strategies that existed during that entire period (including prior
to our acquisition of the strategies).
Our products have consistently won awards for performance, with five consecutive years of ranking in Barron’s
Top Fund Families ratings, coming in at #9, #10, #21, #25 and #15 overall for 2018, 2017, 2016, 2015 and 2014,
respectively.
In addition, a significant percentage of our mutual fund assets have high Morningstar ratings. As of December 31,
2018, 23 Victory Funds and ETFs had four or five star overall ratings. On an AUM-weighted basis, 65% of our fund AUM
had an overall rating of four or five stars by Morningstar. Over a five-year and three-year basis, 64% and 56% of our fund
AUM achieved four or five star ratings, respectively.
Morningstar data as of December 31, 2018.
Integrated Distribution, Marketing and Operations
The centralization of our distribution, marketing and operational functions is a key component in our model,
allowing our Franchises to focus on their core competencies of security selection and portfolio construction. In addition,
we believe it provides our Franchises with the benefits of operating at scale, providing them with access to larger clients
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as well as a more streamlined cost structure. As of December 31, 2018, we had 61 employees in management and support
functions, 88 sales and marketing professionals and 114 investment professionals.
Our centralized distribution and marketing functions lead the sales effort for both our institutional and retail
channels. Our sales teams are staffed with accomplished professionals that are given specific training on how to position
each of our strategies. Our teams have historically focused on developing relationships with institutional consultants and
retail intermediaries. These relationships can enhance our platform’s overall reach and allow our Franchises and Solutions
Platform to access more clients.
To ensure high levels of client service, our sales teams liaise regularly with product specialists at our Franchises.
The specialists are tasked with responding to institutional client and retail inquiries on product performance and also
educating prospective investors and retail partners in coordination with the relevant internal sales team members. Our
distribution and marketing professionals collaborate closely with our Franchises’ product specialists in order to attract new
clients while also servicing and generating additional sales from existing clients.
Institutional Sales: Our institutional sales team attracts and builds relationships with institutional clients, the
largest institutional consultants and mutual fund complexes and other organizations seeking sub-advisers. Our institutional
clientele includes corporations, public funds, non-profit organizations, Taft-Hartley plans, sub-advisory clients,
international clients and insurance companies. Our institutional sales and client-service professionals manage existing
client relationships, serve consultants and prospects and/or focus on specific segments. They have extensive experience
and a comprehensive understanding of our investment activities. On average, each of our client-facing institutional sales
professionals has over 20 years of industry tenure.
Retail Sales: Our retail sales team is split among regional external wholesalers, retirement specialists and
national account specialists, all of whom are supported by an internal calling desk. In the retail channel, we focus on
gathering assets through intermediaries, such as banks, broker-dealers, wirehouses, retirement platforms and RIA
networks. As of December 31, 2018, 57% of our retail AUM was through intermediaries, while 43% was through
retirement platforms. We offer mutual funds and separately managed wrap and unified managed accounts on intermediary
and retirement platforms. We have agreements with many of the largest platforms in our retail channel, which has provided
an opportunity to place our retail products on those platforms. Further, to enhance our presence on large distribution
platforms, we have focused our efforts on servicing intermediary home offices and research departments. These efforts
have led to strong growth in platform penetration, as measured by investment products on approved and recommended
lists, as well as our inclusion in model portfolios. This penetration provides the opportunity for us to sell more products
through distribution platforms. As of December 31, 2018, we had at least one and as many as 20 products on the research
recommended/model portfolios of the top ten U.S. intermediary platforms by AUM. These top intermediary platforms
included Morgan Stanley, Wells Fargo, Merrill Lynch and Raymond James. We also have agreements with all of the top
20 retirement platforms by AUM, including Fidelity, Vanguard, Voya and Merrill Lynch. As of December 31, 2018, we
had at least one and as many as eight approved products on the recommended list of each of those top 20 retirement
platforms that have recommended lists.
Marketing: Our distribution efforts are supplemented by our marketing function, which is primarily responsible
for enhancing the visibility and quality of our portfolio of brands. They are specifically tasked with managing corporate,
Franchise and Solutions Platform branding efforts, database management, the development of marketing materials, website
design and the publishing of white papers. They are also a key component in our responses to requests for proposals sent
over by prospective clients. The success of their efforts can be seen by our eVestment #1 ranking for Institutional Brand
Awareness among asset managers with between $25 billion and $50 billion in AUM in 2015, our #4 ranking among asset
managers with between $50 billion and $100 billion in AUM in both 2016 and 2017 and our #6 ranking among asset
managers with between $50 billion and $100 billion in AUM in 2018.
Operations: Our centralized operations functions provide our Franchises and Solutions Platform with the
support they need so that they can focus on their investment processes. Our centralized operations functions include trading
platforms, risk and compliance, middle- and back-office support, finance, human resources, accounting and legal.
Although our operations are centralized, we do allow our Franchises a degree of customization with respect to their desired
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investment support functions, which we believe helps them maintain their individualized investment processes and
minimize undue disruptions.
We outsource certain middle- and back-office activities, such as trade settlement, portfolio analytics, custodian
reconciliation, portfolio accounting, corporate action processing, performance calculation and client reporting, to scaled,
recognized service providers, who provide their services to us on a variable-cost basis. Systems and processes are
customized as necessary to support our investment processes and operations. We maintain relationships with multiple
vendors for the majority of our outsourced functions, which we believe mitigates vendor-specific risk. We also have
information security, business continuity and data privacy programs in place to help mitigate risk.
Outsourcing these functions enables us to grow our AUM, both organically and through acquisitions, without the
incremental capital expenditures and working capital that would typically be needed. Under our direction and oversight,
our outsourced model enhances our ability to integrate our acquisitions, as we are experienced in working with our vendors
to efficiently bring additional Franchises onto our platform in a cost-efficient manner.
We believe both the scalability of our business and our cost structure, in which approximately two-thirds of our
operating expenses are variable, should drive increasing margins and facilitate free cash flow conversion. Additionally,
we believe having a majority of our expenses tied to AUM and the number of client accounts provides downside margin
protection should there be sustained net outflows or adverse market conditions.
Competition
We compete in various markets, asset classes and investment vehicles. We sell our investment products in the
traditional institutional segments and intermediary and retirement distribution channels, which include mutual funds, wrap
accounts, UMAs and ETFs. We face competition in attracting and retaining assets from other investment management
firms. Additionally, we compete with other acquirers of investment management firms, including independent, fully
integrated investment management firms and multi-boutique businesses, insurance companies, banks, private equity firms
and other financial institutions.
We compete with other managers offering similar strategies. Some of these organizations have greater financial
resources and capabilities than we are able to offer and have had strong performance track records. We compete with other
investment management firms for client assets based on the following primary factors:
•
•
•
•
•
•
our investment performance track record of delivering alpha;
the specialized nature of our investment strategies;
fees charged;
access to distribution channels;
client service; and
our employees’ alignment of interests with investors.
We compete with other potential acquirers of investment management firms primarily on the basis of the
following factors:
•
•
the strength of our distribution relationships;
the value we add through centralized distribution, marketing and operations platforms;
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•
•
•
the investment autonomy Franchises retain post acquisition;
the tenure and continuity of our management and investment professionals; and
the value that can be delivered to the seller through realization of synergies created by the combination of
the businesses.
Our ability to continue to compete effectively will also depend upon our ability to retain our current investment
professionals and employees and to attract highly qualified new investment professionals and employees. For additional
information concerning the competitive risks that we face, see “Risk Factors—Risks Related to Our Industry—The
investment management industry is intensely competitive.”
Employees
As of December 31, 2018, we had 263 employees. We are not subject to any collective bargaining agreement and
have never been subject to a work stoppage. We believe we have maintained satisfactory relationships with our employees.
Business Organization
Victory Capital Holdings, Inc. was formed in 2013 for the purpose of acquiring VCM and VCA from KeyCorp.
VCM is a registered investment adviser managing assets through open-end mutual funds, separately managed accounts,
unified management accounts, ETFs, collective trust funds, wrap separate account programs and UCITs. VCM also
provides mutual fund administrative services for the Victory Portfolios, Victory Variable Insurance Funds, Victory
Institutional Funds and the mutual fund series of the Victory Portfolios II (collectively, “the Victory Funds”), a family of
open-end mutual funds, and the VictoryShares (the Company’s ETF brand). VCM additionally employs all of our U.S.
investment professionals across our Franchises and Solutions Platform, which are not separate legal entities. VCA is
registered with the SEC as an introducing broker-dealer and serves as distributor and underwriter for the Victory Funds.
Initial Public Offering and Debt Repayment
On February 12, 2018, we issued 11,700,000 shares of Class A common stock in the IPO at a price of $13.00 per
share for net proceeds of $143.0 million after deducting underwriting discounts. Net proceeds received from the IPO and
the Existing Credit Agreement of $143.0 million and $355.9 million, respectively, together with $0.8 million of cash on
hand, were used to repay the $499.7 million of outstanding term loans under the 2014 Credit Agreement.
On March 13, 2018, the Company issued an additional 1,110,860 shares of Class A common stock pursuant to
the underwriters’ exercise of their option for net proceeds of $13.5 million after deducting underwriting discounts. The net
proceeds from the underwriters’ exercise of their option and operating cash flow were used to pay down $80.0 million of
the Existing Credit Agreement in 2018 to bring the balance to $280.0 million at December 31, 2018. See Note 10 to the
audited consolidated financial statements included elsewhere in this report.
Regulatory Environment and Compliance
Our business is subject to extensive regulation in the United States at the federal level and, to a lesser extent, the
state level, as well as regulation by self-regulatory organizations and outside the United States. Under these laws and
regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit,
restrict or prohibit an investment adviser from carrying on its business in the event that it fails to comply with such laws
and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations,
censures and fines.
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SEC Investment Adviser and Investment Company Registration/Regulation
VCM is registered with the SEC as an investment adviser under the Advisers Act, and the Victory Funds,
VictoryShares and several of the investment companies we sub-advise are registered under the 1940 Act. The Advisers
Act and the 1940 Act, together with the SEC’s regulations and interpretations thereunder, impose substantive and material
restrictions and requirements on the operations of advisers and registered funds. The SEC is authorized to institute
proceedings and impose sanctions for violations of the Advisers Act and the 1940 Act, ranging from fines and censures to
termination of an adviser’s registration. As an investment adviser, we have a fiduciary duty to our clients. The SEC has
interpreted that duty to impose standards, requirements and limitations on, among other things: trading for proprietary,
personal and client accounts; allocations of investment opportunities among clients; use of soft dollars; execution of
transactions; and recommendations to clients. We manage accounts for all of our clients on a discretionary basis, with
authority to buy and sell securities for each portfolio, select broker-dealers to execute trades and negotiate brokerage
commission rates. In connection with certain of these transactions, we receive soft dollar credits from broker-dealers that
have the effect of reducing certain of our expenses. All of our soft dollar arrangements are intended to be within the safe
harbor provided by Section 28(e) of the Exchange Act. If our ability to use soft dollars were reduced or eliminated as a
result of the implementation of statutory amendments or new regulations, our operating expenses would increase.
As a registered adviser, VCM is subject to many additional requirements that cover, among other things:
disclosure of information about our business to clients; maintenance of written policies and procedures; maintenance of
extensive books and records; restrictions on the types of fees we may charge; custody of client assets; client privacy;
advertising; and solicitation of clients. The SEC has authority to inspect any investment adviser and typically inspects a
registered adviser periodically to determine whether the adviser is conducting its activities (i) in accordance with
applicable laws, (ii) in a manner that is consistent with disclosures made to clients and (iii) with adequate systems and
procedures to ensure compliance.
For the year ended December 31, 2018, 83% of our total revenues were derived from our services to investment
companies registered under the 1940 Act—i.e., mutual funds and ETFs. The 1940 Act imposes significant requirements
and limitations on a registered fund, including with respect to its capital structure, investments and transactions. While we
exercise broad discretion over the day-to-day management of the business and affairs of the Victory Funds, VictoryShares
and the investment portfolios of the Victory Funds and VictoryShares and the funds we sub-advise, our own operations
are subject to oversight and management by each fund’s board of directors. Under the 1940 Act, a majority of the directors
of our registered funds must not be “interested persons” with respect to us (sometimes referred to as the “independent
director” requirement) in order to rely on certain exemptive rules under the 1940 Act relevant to the operation of registered
funds. The responsibilities of the fund’s board include, among other things: approving our investment advisory agreement
with the fund (or, for sub-advisory arrangements, our sub-advisory agreement with the fund’s investment adviser);
approving other service providers; determining the method of valuing assets; and monitoring transactions involving
affiliates. Our investment advisory agreements with these funds may be terminated by the funds on not more than 60 days’
notice and are subject to annual renewal by the fund’s board after the initial term of one to two years. The 1940 Act also
imposes on the investment adviser or sub-adviser to a registered fund a fiduciary duty with respect to the receipt of the
adviser’s investment management fees or the sub-adviser’s sub-advisory fees. That fiduciary duty may be enforced by the
SEC, by administrative action or by litigation by investors in the fund pursuant to a private right of action.
As required by the Advisers Act, our investment advisory agreements may not be assigned without the client’s
consent. Under the 1940 Act, investment advisory agreements with registered funds (such as the mutual funds and ETFs
we manage) terminate automatically upon assignment. The term “assignment” is broadly defined and includes direct
assignments as well as assignments that may be deemed to occur upon the transfer, directly or indirectly, of a “controlling
block” of our outstanding voting securities. See “Risk Factors—Risks Related to Our Business—An assignment could
result in termination of our investment advisory agreements to manage SEC-registered funds and could trigger consent
requirements in our other investment advisory agreements.”
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SEC Broker-Dealer Registration/FINRA Regulation
VCA is subject to regulation by the SEC, FINRA and various states. In addition, certain of our employees are
registered with FINRA and such states and subject to SEC, state and FINRA regulation. The failure of these companies
and/or employees to comply with relevant regulation could have a material adverse effect on our business.
ERISA-Related Regulation
We are a fiduciary under ERISA with respect to assets that we manage for benefit plan clients subject to ERISA.
ERISA, the regulations promulgated thereunder and applicable provisions of the Internal Revenue Code impose certain
duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and impose
monetary penalties for violations of these prohibitions. The duties under ERISA require, among other obligations, that
fiduciaries perform their duties solely in the interests of ERISA plan participants and beneficiaries.
CFTC Regulation
VCM is registered with the CFTC as a commodity pool operator and is a member of the NFA, a self-regulatory
organization for the U.S. derivatives industry. In addition, certain of our employees are registered with the CFTC and
members of NFA. Registration with the CFTC and NFA membership subject VCM to regulation by the CFTC and the
NFA including, but not limited to, reporting, recordkeeping, disclosure, self-examination and training requirements.
Registration with the CFTC also subjects VCM to periodic on-site audits. Each of the CFTC and NFA is authorized to
institute proceedings and impose sanctions for violations of applicable regulations.
Non-U.S. Regulation
In addition to the extensive regulation to which we are subject in the United States, we are subject to regulation
internationally. Our business is also subject to the rules and regulations of the countries in which we market our funds or
services and conduct investment activities.
In Singapore, we are subject to, among others, the Securities and Futures Act, or the SFA, the Financial Advisers
Act, or the FAA, and the subsidiary legislation promulgated pursuant to these Acts, which are administered by the
Monetary Authority of Singapore, or the MAS. We and our employees conducting regulated activities specified in the
SFA and/or the FAA are required to be licensed with the MAS. Failure to comply with applicable laws, regulations, codes,
directives, notices and guidelines issued by the MAS may result in penalties including fines, censures and the suspension
or revocation of licenses granted by the MAS.
In Hong Kong, we are subject to the Securities and Futures Ordinance, or the SFO, and its subsidiary legislation,
which governs the securities and futures markets and regulates, among others, offers of investments to the public and
provides for the licensing of dealing in securities and investment management activities and intermediaries. This legislation
is administered by the Securities and Futures Commission, or the SFC. The SFC is also empowered under the SFO to
establish standards for compliance as well as codes and guidelines. We and our employees conducting any of the regulated
activities specified in the SFO are required to be licensed with the SFC, and are subject to the rules, codes and guidelines
issued by the SFC from time to time. Failure to comply with the applicable laws, regulations, codes and guidelines could
result in various sanctions being imposed, including fines, reprimands and the suspension or revocation of the licenses
granted by the SFC.
Compliance
Our legal and compliance functions are integrated into one team of 10 professionals as of December 31, 2018.
This group is responsible for all legal and regulatory compliance matters, as well as for monitoring adherence to client
investment guidelines. Our legal and compliance teams work through a well-established reporting and communication
structure to ensure we have a consistent and holistic program for legal and regulatory compliance. Senior management is
also involved at various levels in all of these functions. We cannot assure that our legal and compliance functions will be
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effective to prevent all losses. See “Risk Factors—Risks Relating to Our Business—If our techniques for managing risk
are ineffective, we may be exposed to material unanticipated losses.”
For more information about our regulatory environment, see “Risk Factors—Risks Relating to Our Industry—As
an investment management firm, we are subject to extensive regulation” and “Risk Factors—Risks Relating to Our
Industry—The regulatory environment in which we operate is subject to continual change and regulatory developments
designed to increase oversight may materially adversely affect our business.”
Available Information
We routinely file annual, quarterly and current reports, proxy statements and other information required by the
Exchange Act with the SEC. Our SEC filings are available to the public from the SEC’s public internet site at
http://www.sec.gov.
We maintain a public internet site at ir.vcm.com/investor-relations and make available free of charge through this
site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements
and Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed
or furnished pursuant to the Exchange Act, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. We also post on our website the charters for our board of directors’ Audit Committee,
Nominating and Governance Committee and Compensation Committee, as well as our Corporate Governance Guidelines
and our Code of Business Conduct and Ethics governing our directors, officers, and employees. The information on our
website is not incorporated by reference into this annual report.
Item 1A. Risk Factors
The risks described below are not the only ones facing us. The occurrence of any of the following risks or
additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially
and adversely affect our business, financial condition or results of operations. In such case the trading price of our Class A
common stock could decline. This report also contains forward-looking statements and estimates that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a
result of specific factors, including the risks and uncertainties described below.
Risks Relating to Our Business
We earn substantially all of our revenues based on AUM, and any reduction in AUM would reduce our revenues and
profitability. AUM fluctuates based on many factors, including investment performance, client withdrawals and
difficult market conditions.
We earn substantially all of our revenues from asset-based fees from investment management products and
services to individuals and institutions. Therefore, if our AUM declines, our fee revenue will decline, which will reduce
our profitability as certain of our expenses are fixed. There are several reasons that AUM could decline:
• The performance of our investment strategies is critical to our business, and any real or perceived negative
absolute or relative performance could negatively impact the maintenance and growth of AUM. Net flows
related to our strategies can be affected by investment performance relative to other competing strategies or
to established benchmarks. Our investment strategies are rated, ranked, recommended or assessed by
independent third parties, distribution partners, and industry periodicals and services. These assessments may
influence the investment decisions of our clients. If the performance or assessment of our strategies is seen
as underperforming relative to peers, it could result in an increase in the withdrawal of assets by existing
clients and the inability to attract additional commitments from existing and new clients. In addition, certain
of our strategies have or may have capacity constraints, as there is a limit to the number of securities available
for the strategy to operate effectively. In those instances, we may choose to limit access to those strategies to
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new or existing investors, such as we have done for two mutual funds managed by the Sycamore Capital
Franchise which had an aggregate of $14.3 billion in AUM as of December 31, 2018.
• General domestic and global economic and political conditions can influence AUM. Changes in interest
rates, the availability and cost of credit, inflation rates, economic uncertainty, changes in laws, trade barriers,
commodity prices, currency exchange rates and controls and national and international political
circumstances (including wars, terrorist acts and security operations) and other conditions may impact the
equity and credit markets, which may influence our AUM. If the security markets decline or experience
volatility, our AUM and our revenues could be negatively impacted. In addition, diminishing investor
confidence in the markets and/or adverse market conditions could result in a decrease in investor risk
tolerance. Such a decrease could prompt investors to reduce their rate of commitment or to fully withdraw
from markets, which could lower our overall AUM.
• Capital and credit markets can experience substantial volatility. The significant volatility in the markets in
the recent past has highlighted the interconnection of the global markets and demonstrated how the
deteriorating financial condition of one institution may materially adversely impact the performance of other
institutions. In the event of extreme circumstances, including economic, political or business crises, such as
a widespread systemic failure in the global financial system or failures of firms that have significant
obligations as counterparties, we may suffer significant declines in AUM and severe liquidity or valuation
issues.
• Changes in interest rates can have adverse effects on our AUM. Increases in interest rates may adversely
affect the net asset values of our AUM. Furthermore, increases in interest rates may result in reduced prices
in equity markets. Conversely, decreases in interest rates could lead to outflows in fixed income assets that
we manage as investors seek higher yields.
Any of these factors could reduce our AUM and revenues and, if our revenues decline without a commensurate
reduction in our expenses, would lead to a reduction in our net income.
We derive substantially all of our revenues from contracts and relationships that may be terminated upon short or no
notice.
We derive substantially all of our revenues from investment advisory and sub-advisory agreements, all of which
are terminable by clients upon short notice or no notice.
Our investment advisory agreements with registered funds, which are funds registered under the Investment
Company Act of 1940, as amended, or the 1940 Act, including mutual funds and ETFs, are generally terminable by the
funds’ boards or a vote of a majority of the funds’ outstanding voting securities on not more than 60 days’ written notice,
as required by law. After an initial term (not to exceed two years), each registered fund’s investment advisory agreement
must be approved and renewed annually by that fund’s board, including by its independent members. In addition, all of
our separate account clients and certain of the mutual funds that we sub-advise have the ability to re-allocate all or any
portion of the assets that we manage away from us at any time with little or no notice. When a sub-adviser terminates its
sub-advisory agreement to manage a fund that we advise there is a risk that investors in the fund could redeem their assets
in the fund, which would cause our AUM to decrease.
These investment advisory agreements and client relationships may be terminated or not renewed for any number
of reasons. The decrease in revenues that could result from the termination of a material client relationship or group of
client relationships could have a material adverse effect on our business.
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Investors in certain funds that we advise can redeem their assets from those funds at any time without prior notice.
Investors in the mutual funds and certain other pooled investment vehicles that we advise or sub-advise may
redeem their assets from those funds at any time on fairly limited or no prior notice, thereby reducing our AUM. These
investors may redeem for any number of reasons, including general financial market conditions, the absolute or relative
investment performance we have achieved, or their own financial conditions and requirements. In a declining stock market,
the pace of redemptions could accelerate. Poor investment performance relative to other funds tends to result in decreased
client commitments and increased redemptions. For the year ended December 31, 2018, we generated approximately 87%
of our total revenues from mutual funds and other pooled investment vehicles that we advise (including our proprietary
mutual funds, or the Victory Funds, VictoryShares, and other entities for which we are adviser or sub-adviser). The
redemption of assets from those funds could adversely affect our revenues and have a material adverse effect on our
earnings.
If our strategies perform poorly, clients could redeem their assets and we could suffer a decline in our AUM, which
would reduce our earnings.
The performance of our strategies is critical in retaining existing client assets as well as attracting new client
assets. If our strategies perform poorly for any reason, our earnings could decline because:
•
•
•
our existing clients may redeem their assets from our strategies or terminate their relationships with us;
the Morningstar and Lipper ratings and rankings of mutual funds and ETFs we manage may decline, which
may adversely affect the ability of those funds to attract new or retain existing assets; and
third-party financial intermediaries, advisors or consultants may remove our investment products from
recommended lists due to poor performance or for other reasons, which may lead our existing clients to
redeem their assets from our strategies or reduce asset inflows from these third parties or their clients.
Our strategies can perform poorly for a number of reasons, including: general market conditions; investor
sentiment about market and economic conditions; investment styles and philosophies; investment decisions; the
performance of the companies in which our strategies invest and the currencies in which those investment are made; the
fees we charge; the liquidity of securities or instruments in which our strategies invest; and our inability to identify
sufficient appropriate investment opportunities for existing and new client assets on a timely basis. In addition, while we
seek to deliver long-term value to our clients, volatility may lead to under-performance in the short term, which could
adversely affect our results of operations.
In addition, when our strategies experience strong results relative to the market, clients’ allocations to our
strategies typically increase relative to their other investments and we sometimes experience withdrawals as our clients
rebalance their investments to fit their asset allocation preferences despite our strong results.
While clients do not have legal recourse against us solely on the basis of poor investment results, if our strategies
perform poorly, we are more likely to become subject to litigation brought by dissatisfied clients. In addition, to the extent
clients are successful in claiming that their losses resulted from fraud, negligence, willful misconduct, breach of contract
or other similar misconduct, these clients may have remedies against us, the mutual funds and other pooled investment
vehicles we advise and/or our investment professionals under various U.S. and non-U.S. laws.
The historical returns of our existing strategies may not be indicative of their future results or of the strategies we may
develop in the future.
The historical returns of our strategies and the ratings and rankings we or the mutual funds and ETFs that we
advise have received in the past should not be considered indicative of the future results of these strategies or of any other
strategies that we may develop in the future. The investment performance we achieve for our clients varies over time and
the variance can be wide. The ratings and rankings we or the mutual funds and ETFs we advise have received are typically
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revised monthly. Our strategies’ returns have benefited during some periods from investment opportunities and positive
economic and market conditions. In other periods, general economic and market conditions have negatively affected
investment opportunities and our strategies’ returns. These negative conditions may occur again, and in the future we may
not be able to identify and invest in profitable investment opportunities within our current or future strategies.
New strategies that we launch or acquire in the future may present new and different investment, regulatory,
operational, distribution and other risks than those presented by our current strategies. New strategies may invest in
instruments with which we have no or limited experience, create portfolios that present new or different risks or have
higher performance expectations that are more difficult to meet. Any real or perceived problems with future strategies or
vehicles could cause a disproportionate negative impact on our business and reputation.
We depend on third parties to market our strategies.
Our ability to attract additional assets to manage is highly dependent on our access to third-party intermediaries.
We gain access to investors in the Victory Funds and VictoryShares primarily through consultants, 401(k) platforms,
broker-dealers, financial advisors and mutual fund platforms through which shares of the funds are sold. We have
relationships with certain third-party intermediaries through which we access clients in multiple distribution channels. Our
10 largest intermediary relationships across multiple distribution channels represented approximately 30% of our total
AUM as of December 31, 2018.
We compensate most of the intermediaries through which we gain access to investors in the Victory Funds and
VictoryShares by paying fees, most of which are a percentage of assets invested in the Victory Funds and VictoryShares
through that intermediary and with respect to which that intermediary provides shareholder and administrative services.
The allocation of such fees between us and the Victory Funds and VictoryShares is determined by the board of the Victory
Funds and VictoryShares, based on information and a recommendation from us, with the intent of allocating to us all costs
attributable to marketing and distribution of (i) shares of the Victory Funds not otherwise covered by distribution fees paid
pursuant to a distribution and service plan adopted in accordance with Rule 12b-1 under the 1940 Act and
(ii) VictoryShares.
In the future, our expenses in connection with those intermediary relationships could increase if the portion of
those fees determined to be in connection with marketing and distribution, or otherwise allocated to us, increased. Clients
of these intermediaries may not continue to be accessible to us on terms we consider commercially reasonable, or at all.
The absence of such access could have a material adverse effect on our results of operations.
We access institutional clients primarily through consultants. Our institutional business is dependent upon
referrals from consultants. Many of these consultants review and evaluate our products and our firm from time to time. As
of December 31, 2018, 35% of our institutional separate accounts AUM was acquired through consultants. Poor reviews
or evaluations of either a particular strategy or us as an investment management firm may result in client withdrawals or
may impair our ability to attract new assets through these consultants.
The loss of key investment professionals or members of our senior management team could have a material adverse
effect on our business.
We depend on the skills and expertise of our portfolio managers and other investment professionals and our
success depends on our ability to retain the key members of our investment teams, who possess substantial experience in
investing and have been primarily responsible for the historical investment performance we have achieved.
Because of the tenure and stability of our portfolio managers, our clients may attribute the investment
performance we have achieved to these individuals. The departure of a portfolio manager could cause clients to withdraw
assets from the strategy, which would reduce our AUM, investment management fees and our net income. The departure
of a portfolio manager also could cause consultants and intermediaries to stop recommending a strategy, clients to refrain
from allocating additional assets to the strategy or delay such additional assets until a sufficient new track record has been
established, and could also cause the departure of other portfolio managers or investment professionals. We have instituted
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succession planning at our Franchises in an attempt to minimize the disruption resulting from these potential changes, but
we cannot predict whether such efforts will be successful.
We also rely upon the contributions of our senior management team to establish and implement our business
strategy and to manage the future growth of our business. The loss of any of the senior management team could limit our
ability to successfully execute our business strategy or adversely affect our ability to retain existing and attract new client
assets and related revenues.
Any of our investment or management professionals may resign at any time, join our competitors or form a
competing company. Although many of our portfolio managers and each of our named executive officers are subject to
post-employment non-compete obligations, these non-competition provisions may not be enforceable or may not be
enforceable to their full extent. In addition, we may agree to waive non-competition provisions or other restrictive
covenants applicable to former investment or management professionals in light of the circumstances surrounding their
relationship with us. We do not generally carry “key man” insurance that would provide us with proceeds in the event of
the death or disability of any of the key members of our investment or management teams.
Competition for qualified investment and management professionals is intense and we may fail to successfully
attract and retain qualified personnel in the future. Our ability to attract and retain these personnel will depend heavily on
the amount and structure of compensation and opportunities for equity ownership we offer. Any cost-reduction initiative
or adjustments or reductions to compensation or changes to our equity ownership culture could cause instability within
our existing investment teams and negatively impact our ability to retain key personnel. In addition, changes to our
management structure, corporate culture and corporate governance arrangements could negatively impact our ability to
retain key personnel.
We rely on third parties to provide products or services for the operation of our business, and a failure or inability by
such parties to provide these products or services could materially adversely affect our business.
We have determined, based on an evaluation of various factors, that it is more efficient to use third parties for
certain functions and services. As a result, we have contracted with a limited number of third parties to provide critical
operational support, such as middle- and back-office functions, information technology services and various fund
administration and accounting roles, and the funds contract with third parties in custody and transfer agent roles. Our third
parties with which we do business may also be sources of cybersecurity or other technological risks. While we engage in
certain actions to reduce the exposure, such as collaborating to develop secure transmission capabilities, performing onsite
security control assessments and limiting third party access to the least privileged level necessary to perform job functions,
our business would be disrupted if key service providers fail or become unable to continue to perform those services or
fail to protect against or respond to cyber-attacks, data breaches or other incidents. Moreover, to the extent our third-party
providers increase their pricing, our financial performance will be negatively impacted. In addition, upon termination of a
third-party contract, we may encounter difficulties in replacing the third-party on favorable terms, transitioning services
to another vendor, or in assuming those responsibilities ourselves, which may have a material adverse effect on our
business.
Operational risks may disrupt our business, result in losses or limit our growth.
We are heavily dependent on the capacity and reliability of the communications, information and technology
systems supporting our operations, whether developed, owned and operated by us or by third parties. We also rely on
manual workflows and a variety of manual user controls. Operational risks such as trading or other operational errors or
interruption of our financial, accounting, trading, compliance and other data processing systems, whether caused by human
error, fire, other natural disaster or pandemic, power or telecommunications failure, cyber-attack or viruses, act of terrorism
or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational
damage, and thus materially adversely affect our business. The potential for some types of operational risks, including, for
example, trading errors, may be increased in periods of increased volatility, which can magnify the cost of an error.
Insurance and other safeguards might not be available or might only partially reimburse us for our losses.
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Although we have backup systems in place, our backup procedures and capabilities in the event of a failure or
interruption may not be adequate. As our client base, number and complexity of strategies and client relationships increase,
developing and maintaining our operational systems and infrastructure may become increasingly challenging.
We may also suffer losses due to employee negligence, fraud or misconduct. Non-compliance with policies,
employee misconduct, negligence or fraud could result in legal liability, regulatory sanctions and serious reputational or
financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the
actions of “rogue traders” or other employees. It is not always possible to deter or detect employee misconduct and the
precautions we take to prevent and detect this activity may not always be effective. Employee misconduct could have a
material adverse effect on our business.
The significant growth we have experienced over the past few years may be difficult to sustain and our growth strategy
is dependent in part upon our ability to make and successfully integrate new strategic acquisitions.
Our AUM has increased from $17.9 billion following our 2013 management-led buyout with Crestview GP from
KeyCorp to $52.8 billion as of December 31, 2018, primarily as a result of acquisitions. The absolute measure of our AUM
represents a significant rate of growth that may be difficult to sustain. The continued long-term growth of our business
will depend on, among other things, successfully making new acquisitions, retaining key investment professionals,
maintaining existing strategies and selectively developing new, value-added strategies. There is no certainty that we will
be able to identify suitable candidates for acquisition at prices and terms we consider attractive, consummate any such
acquisition on acceptable terms, have sufficient resources to complete an identified acquisition or that our strategy for
pursuing acquisitions will be effective. In addition, any acquisition can involve a number of risks, including the existence
of known, unknown or contingent liabilities. An acquisition may impose additional demands on our staff that could strain
our operational resources and require expenditure of substantial legal, investment banking and accounting fees. We may
be required to issue additional shares of common stock or spend significant cash to consummate an acquisition, resulting
in dilution of ownership or additional debt leverage, or spend additional time and money on facilitating the acquisition that
otherwise would be spent on the development and expansion of our existing business.
We may not be able to successfully manage the process of integrating an acquired company’s people and other
applicable assets to extract the value and synergies projected to be realized in connection with the acquisition. The process
of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our
combined businesses and the possible loss of key personnel and AUM. The diversion of management’s attention and any
delays or difficulties encountered in connection with acquisitions and the integration of an acquired company’s operations
could have an adverse effect on our business.
Our business growth will also depend on our success in achieving superior investment performance from our
strategies, as well as our ability to maintain and extend our distribution capabilities, to deal with changing market and
industry conditions, to maintain adequate financial and business controls and to comply with new legal and regulatory
requirements arising in response to both the increased sophistication of the investment management industry and the
significant market and economic events of the last decade.
We may not be able to manage our growing business effectively or be able to sustain the level of growth we have
achieved historically.
A majority of our existing AUM is managed in long-only equity investments. We have also historically derived a
substantial portion of our revenues from fees on investments in small- and mid-cap equities and substantially all of our
revenues from U.S. clients.
As of December 31, 2018, approximately 85% of our AUM was invested in U.S. and international equity. Under
market conditions in which there is a general decline in the value of equity securities, the AUM in each of our equity
strategies is likely to decline. Unlike some of our competitors, we do not currently offer strategies that invest in privately
held companies or take short positions in equity securities, which could offset some of the poor performance of our
long-only equity strategies under such market conditions. Even if our investment performance remains strong during such
market conditions relative to other long-only equity strategies, investors may choose to withdraw assets from our
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management or allocate a larger portion of their assets to non-long-only or non-equity strategies. In addition, the prices of
equity securities may fluctuate more widely than the prices of other types of securities, making the level of our AUM and
related revenues more volatile.
As of December 31, 2018, approximately 62% of our total AUM was concentrated in small- and mid-cap equities.
As a result, a substantial portion of our operating results depends upon the performance of those investments, and our
ability to retain client assets in those investments. If a significant portion of the investors in such investments decided to
withdraw their assets or terminate their investment advisory agreements for any reason, including poor investment
performance or adverse market conditions, our revenues from those investments would decline, which would have a
material adverse effect on our earnings and financial condition.
In addition, we have historically derived substantially all of our revenue from clients in the United States. If
economic conditions weaken or slow, particularly in the United States, this could have a substantial adverse impact on our
results of operations.
Our efforts to establish and develop new teams and strategies may be unsuccessful and could negatively impact our
results of operations and could negatively impact our reputation and culture.
We seek to add new investment teams that invest in a way that is consistent with our philosophy of offering high
value-added strategies. We also look to offer new strategies managed by our existing teams. We expect the costs associated
with establishing a new team and/or strategy initially to exceed the revenues generated, which will likely negatively impact
our results of operations. If new strategies, whether managed by a new team or by an existing team, invest in instruments,
or present operational issues and risks, with which we have little or no experience, it could strain our resources and increase
the likelihood of an error or failure. See “Risk Factors-Risks Relating to the USAA AMCO Acquisition and the Harvest
Acquisition.”
In addition, the historical returns of our existing strategies may not be indicative of the investment performance
of any new strategy, and the poor performance of any new strategy could negatively impact the reputation of our other
strategies.
We may support the development of new strategies by making one or more seed investments using capital that
would otherwise be available for our general corporate purposes and acquisitions. Making such a seed investment could
expose us to potential capital losses.
The performance of our strategies or the growth of our AUM may be constrained by unavailability of appropriate
investment opportunities.
The ability of our investment teams to deliver strong investment performance depends in large part on their ability
to identify appropriate investment opportunities in which to invest client assets. If the investment team for any of our
strategies is unable to identify sufficient appropriate investment opportunities for existing and new client assets on a timely
basis, the investment performance of the strategy could be adversely affected. In addition, if we determine that sufficient
investment opportunities are not available for a strategy, we may choose to limit the growth of the strategy by limiting the
rate at which we accept additional client assets for management under the strategy, closing the strategy to all or
substantially all new investors or otherwise taking action to limit the flow of assets into the strategy. If we misjudge the
point at which it would be optimal to limit access to or close a strategy, the investment performance of the strategy could
be negatively impacted. The risk that sufficient appropriate investment opportunities may be unavailable is influenced by
a number of factors, including general market conditions, but is particularly acute with respect to our strategies that focus
on small- and mid-cap equities, and is likely to increase as our AUM increases, particularly if these increases occur very
rapidly. By limiting the growth of strategies, we may be managing the business in a manner that reduces the total amount
of our AUM and our investment management fees over the short term.
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An assignment could result in termination of our investment advisory agreements to manage SEC-registered funds and
could trigger consent requirements in our other investment advisory agreements.
Under the 1940 Act, each of the investment advisory agreements between registered funds and our subsidiary,
VCM, and investment sub-advisory agreements between the investment adviser to a registered fund and VCM, will
terminate automatically in the event of its assignment, as defined in the 1940 Act.
Assignment, as generally defined under the 1940 Act and the Investment Advisers Act of 1940, as amended, or
the Advisers Act, includes direct assignments as well as assignments that may be deemed to occur, under certain
circumstances, upon the direct or indirect transfer of a “controlling block” of our outstanding voting securities. A
transaction is not an assignment under the 1940 Act or the Advisers Act, however, if it does not result in a change of actual
control or management of VCM.
Upon the occurrence of such an assignment, VCM could continue to act as adviser or sub-adviser to any such
registered fund only if that fund’s board and shareholders approved a new investment advisory agreement, except in the
case of certain of the registered funds that we sub-advise for which only board approval would be necessary pursuant to a
manager-of-managers SEC exemptive order. In addition, as required by the Advisers Act, each of the investment advisory
agreements for the separate accounts and pooled investment vehicles we manage provides that it may not be assigned, as
defined in the Advisers Act, without the consent of the client. If an assignment were to occur, we cannot be certain that
we would be able to obtain the necessary approvals from the boards and shareholders of the registered funds we advise or
the necessary consents from our separate account or pooled investment vehicle clients.
If an assignment of an investment advisory agreement is deemed to occur, and our clients do not consent to the
assignment or enter into a new agreement, our results of operations could be materially and adversely affected.
Reputational harm could result in a loss of AUM and revenues.
The integrity of our brands and reputation is critical to our ability to attract and retain clients, business partners
and employees and maintain relationships with consultants. We operate within the highly regulated financial services
industry and various potential scenarios could result in harm to our reputation. They include internal operational failures,
failure to follow investment or legal guidelines in the management of accounts, intentional or unintentional
misrepresentation of our products and services in offering or advertising materials, public relations information, social
media or other external communications, employee misconduct or investments in businesses or industries that are
controversial to certain special interest groups. Any real or perceived conflict between our and our shareholders’ interests
and our clients’ interests, as well as any fraudulent activity or other exposure of client assets or information, may harm our
reputation. The negative publicity associated with any of these factors could harm our reputation and adversely impact
relationships with existing and potential clients, third-party distributors, consultants and other business partners and subject
us to regulatory sanctions or litigation. Damage to our brands or reputation could negatively impact our standing in the
industry and result in loss of business in both the short term and the long term.
Additionally, while we have ultimate control over the business activities of our Franchises, they generally have
the autonomy to manage their day-to-day operations, and if we fail to intervene in potentially serious matters that may
arise, our reputation could be damaged and our results of operations could be materially adversely affected.
Our failure to comply with investment guidelines set by our clients, including the boards of registered funds, and
limitations imposed by applicable law, could result in damage awards against us and a loss of AUM, either of which
could adversely affect our results of operations or financial condition.
When clients retain us to manage assets on their behalf, they generally specify certain guidelines regarding
investment allocation and strategy that we are required to follow in managing their assets. The boards of registered funds
we manage generally establish similar guidelines regarding the investment of assets in those funds. We are also required
to invest the registered funds’ assets in accordance with limitations under the 1940 Act and applicable provisions of the
Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Other clients, such as plans subject to the
Employee Retirement Income Security Act of 1974, as amended, or ERISA, or non-U.S. funds, require us to invest their
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assets in accordance with applicable law. Our failure to comply with any of these guidelines and other limitations could
result in losses to clients or investors in a fund which, depending on the circumstances, could result in our obligation to
make clients or fund investors whole for such losses. If we believed that the circumstances did not justify a reimbursement,
or clients and investors believed the reimbursement we offered was insufficient, they could seek to recover damages from
us or could withdraw assets from our management or terminate their investment advisory agreement with us. Any of these
events could harm our reputation and materially adversely affect our business.
If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.
In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures
and systems that enable us to identify, monitor and mitigate our exposure to operational, legal and reputational risks,
including from the investment autonomy of our Franchises. Our risk management methods may prove to be ineffective
due to their design or implementation, or as a result of the lack of adequate, accurate or timely information or otherwise.
If our risk management efforts are ineffective, we could suffer losses that could have a material adverse effect on our
financial condition or operating results. Additionally, we could be subject to litigation, particularly from our clients or
investors, and sanctions or fines from regulators.
Our techniques for managing operational, legal and reputational risks in client portfolios may not fully mitigate
the risk exposure in all economic or market environments, including exposure to risks that we might fail to identify or
anticipate. Because our clients invest in our strategies in order to gain exposure to the portfolio securities of the respective
strategies, we have not adopted corporate-level risk management policies to manage market, interest rate or exchange rate
risks that could affect the value of our overall AUM.
We provide a broad range of services to the Victory Funds, VictoryShares and sub-advised mutual funds which may
expose us to liability.
We provide a broad range of administrative services to the Victory Funds and VictoryShares, including providing
personnel to the Victory Funds and VictoryShares to serve as directors and officers, the preparation or supervision of the
preparation of the Victory Funds’ and VictoryShares’ regulatory filings, maintenance of board calendars and preparation
or supervision of the preparation of board meeting materials, management of compliance and regulatory matters, provision
of shareholder services and communications, accounting services, including the supervision of the activities of the Victory
Funds’ and VictoryShares’ accounting services provider in the calculation of the funds’ net asset values, supervision of
the preparation of the Victory Funds’ and VictoryShares’ financial statements and coordination of the audits of those
financial statements, tax services, including calculation of dividend and distribution amounts and supervision of tax return
preparation, supervision of the work of the Victory Funds’ and VictoryShares’ other service providers and VCA acting as
a distributor. If we make a mistake in the provision of those services, the Victory Funds or VictoryShares could incur costs
for which we might be liable. In addition, if it were determined that the Victory Funds or VictoryShares failed to comply
with applicable regulatory requirements as a result of action or failure to act by our employees, we could be responsible
for losses suffered or penalties imposed. In addition, we could have penalties imposed on us, be required to pay fines or
be subject to private litigation, any of which could decrease our future income or negatively affect our current business or
our future growth prospects. Although less extensive than the range of services we provide to the Victory Funds and
VictoryShares, we also provide a limited range of services, in addition to investment management services, to sub-advised
mutual funds.
In addition, we from time to time provide information to the funds for which we act as sub-adviser (or to a person
or entity providing administrative services to such a fund), and to UCITS, for which we act as investment manager (or to
the promotor of the UCITS or a person or entity providing administrative services to such a UCITS), which is used by
those funds or UCITS in their efforts to comply with various regulatory requirements. If we make a mistake in the provision
of those services, the sub-advised fund or UCITS could incur costs for which we might be liable. In addition, if it were
determined that the sub-advised fund or UCITS failed to comply with applicable regulatory requirements as a result of
action or failure to act by our employees, we could be responsible for losses suffered or penalties imposed. In addition, we
could have penalties imposed on us, be required to pay fines or be subject to private litigation, any of which could decrease
our future income or negatively affect our current business or our future growth prospects.
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Failure to implement effective information and cyber security policies, procedures and capabilities could disrupt
operations and cause financial losses.
Our operations rely on the effectiveness of our information and cyber security policies, procedures and
capabilities to provide secure processing, storage and transmission of confidential and other information in our computer
systems, software, networks and mobile devices and on the computer systems, software, networks and mobile devices of
third parties on which we rely. Although we maintain a system of internal controls designed to provide reasonable
assurance that fraudulent activity is either prevented or detected on a timely basis and we take other protective measures
and endeavor to modify them as circumstances warrant, our computer systems, software, networks and mobile devices
may be vulnerable to cyber-attacks, sabotage, unauthorized access, computer viruses, worms or other malicious code, and
other events that have a security impact. In addition, our interconnectivity with service providers and other third parties
may be adversely affected if any of them are subject to a successful cyber-attack or other information security event. While
we collaborate with service providers and other third parties to develop secure transmission capabilities and other measures
to protect against cyber-attacks, we cannot ensure that we or any third party has all appropriate controls in place to protect
the confidentiality of such information.
An externally caused information security incident, such as a hacker attack, virus or worm, or an internally caused
issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause
disclosure or modification of sensitive or confidential client or competitive information and could result in material
financial loss, loss of competitive position, regulatory actions, breach of clients contracts, reputational harm or legal
liability. If one or more of such events occur, it could potentially jeopardize our or our clients’, employees’ or
counterparties’ confidential and other information processed and stored in, and transmitted through, our or third-party
computer systems, software, networks and mobile devices, or otherwise cause interruptions or malfunctions in our, our
clients’, our counterparties’ or third parties’ operations. As a result, we could experience material financial loss, loss of
competitive position, regulatory fines and/or sanctions, breach of client contracts, reputational harm or legal liability,
which, in turn, could have an adverse effect on our financial condition and results of operations.
Additionally, some of our client contracts require us to indemnify clients in the event of a cyber breach if our
systems do not meet minimum security standards. We may be required to spend significant additional resources to modify
our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are either not insured against fully or not fully covered through any insurance that we
maintain.
Further, recent well-publicized security breaches at other companies have led to enhanced government and
regulatory scrutiny of the measures taken by companies to protect against cyber-attacks and data privacy breaches, and
have resulted in heightened security requirements, including additional regulatory expectations for oversight of vendors
and service providers. For example, in May 2018, the European Union’s new General Data Protection Regulation became
effective, and similar regulations are also being considered in other jurisdictions.
Certain of our strategies invest principally in the securities of non-U.S. companies, which involve foreign currency
exchange, tax, political, social and economic uncertainties and risks.
As of December 31, 2018, approximately 9% of our total AUM was invested in strategies that primarily invest in
securities of non-U.S. companies and securities denominated in currencies other than the U.S. dollar. Fluctuations in
foreign currency exchange rates could negatively affect the returns of our clients who are invested in these securities. In
addition, an increase in the value of the U.S. dollar relative to non-U.S. currencies is likely to result in a decrease in the
U.S. dollar value of our AUM, which, in turn, would likely result in lower revenue and profits.
Investments in non-U.S. issuers may also be affected by tax positions taken in countries or regions in which we
are invested as well as political, social and economic uncertainty. Declining tax revenues may cause governments to assert
their ability to tax the local gains and/or income of foreign investors (including our clients), which could adversely affect
client interests in investing outside their home markets. Many financial markets are not as developed, or as efficient, as
the U.S. financial markets, and, as a result, those markets may have limited liquidity and higher price volatility, and may
lack established regulations. Liquidity may also be adversely affected by political or economic events, government
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policies, and social or civil unrest within a particular country, and our ability to dispose of an investment may also be
adversely affected if we increase the size of our investments in smaller non-U.S. issuers. Non-U.S. legal and regulatory
environments, including financial accounting standards and practices, may also be different, and there may be less publicly
available information about such companies. These risks could adversely affect the performance of our strategies that are
invested in securities of non-U.S. issuers and may be particularly acute in the emerging or less developed markets in which
we invest. In addition to our Trivalent, Sophus, Expedition Franchises, certain of our other Franchises and Solutions
Platform invest in emerging or less developed markets.
The expansion of our business outside of the United States raises tax and regulatory risks, may adversely affect our
profit margins and places additional demands on our resources and employees.
We have expanded and intend to continue to expand our distribution efforts into non-U.S. markets through
partnered distribution efforts and product offerings, including Europe, Japan, Singapore and Hong Kong. For example, we
organized and serve as investment manager of two Ireland-domiciled UCITS, the Victory Sophus Emerging Markets
UCITS Fund and the Victory Expedition Emerging Markets Small Cap UCITS Fund. Clients outside the United States
may be adversely affected by political, social and economic uncertainty in their respective home countries and regions,
which could result in a decrease in the net client cash flows that come from such clients. This expansion has required and
will continue to require us to incur a number of up-front expenses, including those associated with obtaining and
maintaining regulatory approvals and office space, as well as additional ongoing expenses, including those associated with
leases, the employment of additional support staff and regulatory compliance.
Non-U.S. clients may be less accepting of the U.S. practice of payment for certain research products and services
through soft dollars (“soft dollars” are a means of paying brokerage firms for their services through commission revenue,
rather than through direct payments) or such practices may not be permissible in certain jurisdictions, which could have
the effect of increasing our expenses. In addition, the European Commission adopted several acts under the revised Markets
in Financial Instruments Directive (known as “MiFID II”) that prevent the “bundling” of the cost of research together with
trading commissions. As a result, clients subject to MiFID II may be unable to use soft dollars to pay for research services
in the United Kingdom and in Europe.
Our U.S.-based employees routinely travel outside the United States as a part of our investment research process
or to market our services and may spend extended periods of time in one or more non-U.S. jurisdictions. Their activities
outside the United States on our behalf may raise both tax and regulatory issues. If and to the extent we are incorrect in
our analysis of the applicability or impact of non-U.S. tax or regulatory requirements, we could incur costs or penalties or
be the subject of an enforcement or other action. Operating our business in non-U.S. markets is generally more expensive
than in the United States. In addition, costs related to our distribution and marketing efforts in non-U.S. markets generally
have been more expensive than comparable costs in the United States. To the extent that our revenues do not increase to
the same degree as our expenses increase in connection with our continuing expansion outside the United States, our
profitability could be adversely affected. Expanding our business into non-U.S. markets may also place significant
demands on our existing infrastructure and employees.
We are also subject to a number of laws and regulations governing payments and contributions to political persons
or other third parties, including restrictions imposed by the Foreign Corrupt Practices Act, or the FCPA, as well as trade
sanctions administered by the Office of Foreign Assets Control, or OFAC, the U.S. Department of Commerce and the U.S.
Department of State. Similar laws in non-U.S. jurisdictions may also impose stricter or more onerous requirements and
implementing them may disrupt our business or cause us to incur significantly more costs to comply with those laws.
Different laws may also contain conflicting provisions, making compliance with all laws more difficult. Any determination
that we have violated the FCPA or other applicable anti-corruption laws or sanctions could subject us to, among other
things, civil and criminal penalties, material fines, profit disgorgement, injunctions on future conduct, securities litigation
and a general loss of investor confidence, any one of which could adversely affect our business prospects, financial
condition, results of operations or the market value of our Class A common stock. While we have developed and
implemented policies and procedures designed to ensure strict compliance by us and our personnel with the FCPA and
other anti-corruption laws or sanctions in jurisdictions in which we operate, such policies and procedures may not be
effective in all instances to prevent violations.
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Following the June 2016 vote to exit the EU, the United Kingdom (“UK”) served notice under Article 50 of the
Treaty of European Union on March 29, 2017 to initiate the two-year long process of exiting from the EU, commonly
referred to as “Brexit”. There is substantial uncertainty surrounding the terms upon which the UK will ultimately exit the
EU. As a result, the UK’s relationship with the EU, as well as whether an agreement will be reached by the March 29,
2019 exit deadline, remains unclear. Moreover, the passage of time without a resolution in place may have adverse effects
on the United Kingdom, European and worldwide economy and market conditions and contribute to currency exchange
fluctuations. Although we do not currently expect Brexit to have a major impact on our business, any negative impact to
overall investor confidence or instability in the global macroeconomic environment could have an adverse economic
impact on our results of operations.
Our substantial indebtedness may expose us to material risks.
As of December 31, 2018, we had $280.0 million of outstanding term loans under the Existing Credit Agreement.
Our substantial indebtedness may make it more difficult for us to withstand or respond to adverse or changing business,
regulatory and economic conditions or to take advantage of new business opportunities or make necessary capital
expenditures. In addition, the Existing Credit Agreement contains financial and operating covenants that may limit our
ability to conduct our business. While we are currently in compliance in all material respects with the financial and
operating covenants under the Existing Credit Agreement, we cannot assure that at all times in the future we will satisfy
all such financial and operating covenants (or any such covenants applicable at the time) or obtain any required waiver or
amendment, in which event all outstanding indebtedness could become immediately due and payable. This could result in
a substantial reduction in our liquidity and could challenge our ability to meet future cash needs of the business.
To the extent we service our debt from our cash flow, such cash will not be available for our operations or other
purposes. Because of our significant debt service obligations, the portion of our cash flow used to service those obligations
could be substantial if our revenues decline, whether because of market declines or for other reasons. Any substantial
decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt
service requirements or force us to modify our operations. Our ability to repay the principal amount of any outstanding
loans under the Existing Credit Agreement, to refinance our debt or to obtain additional financing through debt or the sale
of additional equity securities will depend on our performance, as well as financial, business and other general economic
factors affecting the credit and equity markets generally or our business in particular, many of which are beyond our
control. Any such alternatives may not be available to us on satisfactory terms or at all. See “Risk Factors-Risks Relating
to the USAA AMCO Acquisition and the Harvest Acquisition.”
Potential impairment of goodwill and intangible assets could reduce our assets.
As of December 31, 2018, our goodwill and intangible assets totaled $671.8 million. The value of these assets
may not be realized for a variety of reasons, including, but not limited to, significant redemptions, loss of clients, damage
to brand name and unfavorable economic conditions. In accordance with the guidance under Financial Accounting
Standards Board, or FASB, ASC 350-20 “Intangibles—Goodwill and Other,” we review the carrying value of goodwill
and intangible assets not subject to amortization on an annual basis, or more frequently if indications exist suggesting that
the fair value of our intangible assets may be below their carrying value. Determining goodwill and intangible assets, and
evaluating them for impairment, requires significant management estimates and judgment, including estimating value and
assessing useful life in connection with the allocation of purchase price in the acquisition creating them. We evaluate the
value of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Should such reviews indicate impairment, a reduction of the carrying value of
the intangible asset could occur, resulting in a charge that may, in turn, adversely affect our AUM, results of operations
and financial condition.
Disruption to the operations of third parties whose functions are integral to our ETF platform may adversely affect the
prices at which VictoryShares trade, particularly during periods of market volatility.
Shares of ETFs, such as VictoryShares, trade on stock exchanges at prices at, above or below the ETF’s most
recent net asset value. While ETFs utilize a creation/redemption feature and arbitrage mechanism designed to make it more
likely that the ETF’s shares normally will trade at prices close to the ETF’s net asset value, exchange prices may deviate
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significantly from the ETF’s net asset value. ETF market prices are subject to numerous potential risks, including trading
halts invoked by a stock exchange, inability or unwillingness of market makers, authorized participants, settlement systems
or other market participants to perform functions necessary for an ETF’s arbitrage mechanism to function effectively, or
significant market volatility. If market events lead to incidences where ETFs trade at prices that deviate significantly from
an ETF’s net asset value, or trading halts are invoked by the relevant stock exchange or market, investors may lose
confidence in ETF products and redeem their holdings, which may cause our AUM, revenue and earnings to decline.
If we were deemed an investment company required to register under the 1940 Act, we would become subject to
burdensome regulatory requirements and our business activities could be restricted.
Generally, a company is an “investment company” required to register under the 1940 Act if, absent an applicable
exception or exemption, it (i) is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the
business of investing, reinvesting or trading in securities; or (ii) engages, or proposes to engage, in the business of
investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities”
having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on
an unconsolidated basis.
We hold ourselves out as an investment management firm and do not propose to engage primarily in the business
of investing, reinvesting or trading in securities. We believe we are engaged primarily in the business of providing
investment management services and not in the business of investing, reinvesting or trading in securities. We also believe
our primary source of income is properly characterized as income earned in exchange for the provision of services. We
believe less than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated
basis comprise assets that could be considered investment securities.
We intend to conduct our operations so that we will not be deemed an investment company required to register
under the 1940 Act. However, if we were to be deemed an investment company required to register under the 1940 Act,
restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with our
affiliates, could make it impractical for us to continue our business as currently conducted and could have a material
adverse effect on our financial performance and operations.
Our expenses are subject to fluctuations that could materially impact our results of operations.
Our results of operations are dependent upon the level of our expenses, which can vary from period to period.
We have certain fixed expenses that we incur as a going concern, and some of those expenses are not subject to adjustment.
If our revenues decrease, without a corresponding decrease in expenses, our results of operations would be negatively
impacted. While a majority of our expenses are variable and we attempt to project expense levels in advance, there is no
guarantee that an unforeseen expense will not arise or that we will be able to adjust our variable expenses quickly enough
to match a declining asset base. Consequently, either event could have either a temporary or permanent negative impact
on our results of operations.
Risks Relating to Our Industry
Recent trends in the investment management industry could reduce our AUM, revenues and net income.
Certain passive products and asset classes, such as index and certain types of ETFs, are becoming increasingly
popular with investors, including institutional investors. In recent years, across the investment management industry,
passive products have experienced inflows and traditional actively managed products have experienced outflows, in each
case, in the aggregate. In order to maintain appropriate fee levels in a competitive environment, we must be able to continue
to provide clients with investment products and services that are viewed as appropriate in relation to the fees charged,
which may require us to demonstrate that our strategies can outperform such passive products. If our clients, including our
funds’ boards, were to view our fees as being high relative to the market or the returns provided by our investment products,
we may choose to reduce our fee levels or existing clients may withdraw their assets in order to invest in passive products,
and we may be unable to attract additional commitments from existing and new clients, which would lead to a decline in
39
our AUM and market share. To the extent we offer such passive products, we may not be able to compete with other firms
offering similar products.
Our revenues and net income are dependent on our ability to maintain current fee levels for the products and
services we offer. The competitive nature of the investment management industry has led to a trend toward lower fees in
certain segments of the investment management market. Our ability to sustain fee levels depends on future growth in
specific asset classes and distribution channels. These factors, as well as regulatory changes, could further inhibit our
ability to sustain fees for certain products. A reduction in the fees charged by us could reduce our revenues and net income.
Our fees vary by asset class and produce different revenues per dollar of AUM based on factors such as the type
of assets being managed, the applicable strategy, the type of client and the client fee schedule. Institutional clients may
have significant negotiating leverage in establishing the terms of an advisory relationship, particularly with respect to the
level of fees paid, and the competitive pressure to attract and retain institutional clients may impact the level of fee income
earned by us. We may decline to manage assets from potential clients who demand lower fees even though such assets
would increase our revenue and AUM in the short term.
As an investment management firm, we are subject to extensive regulation.
Investment management firms are subject to extensive regulation in the United States, primarily at the federal
level, including regulation by the SEC under the 1940 Act and the Advisers Act, by the U.S. Department of Labor, or the
DOL, under ERISA, by the Commodity Futures Trading Commission, or the CFTC, by the National Futures Association,
or NFA, under the Commodity Exchange Act, and by the Financial Industry Regulatory Authority, Inc., or FINRA. The
U.S. mutual funds and ETFs we manage are registered with and regulated by the SEC as investment companies under the
1940 Act. The Advisers Act imposes numerous obligations on investment advisers, including recordkeeping, advertising
and operating requirements, disclosure obligations and prohibitions on fraudulent activities. The 1940 Act imposes similar
obligations, as well as additional detailed operational requirements, on registered funds, which must be adhered to by their
investment advisers. We have also expanded our distribution effort into non-U.S. markets through partnered distribution
efforts and product offerings, including Europe, Japan, Singapore and Hong Kong. In the future, we may further expand
our business outside of the United States in such a way or to such an extent that we may be required to register with
additional foreign regulatory agencies or otherwise comply with additional non-U.S. laws and regulations that do not
currently apply to us and with respect to which we do not have compliance experience. Our lack of experience in complying
with any such non-U.S. laws and regulations may increase our risk of being subject to regulatory actions and becoming
party to litigation in such non-U.S. jurisdictions, which could be more expensive. Moreover, being subject to regulation in
multiple jurisdictions may increase the cost, complexity and time required for engaging in transactions that require
regulatory approval.
Accordingly, we face the risk of significant intervention by regulatory authorities, including extended
investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties. Among other things, we could be fined, lose our licenses or be
prohibited or limited from engaging in some of our business activities or corporate transactions. The requirements imposed
by our regulators are designed to ensure the integrity of the financial markets and to protect clients and other third parties
who deal with us, and are not designed to protect our shareholders. Consequently, these regulations often serve to limit
our activities, including through net capital, client protection and market conduct requirements.
The regulatory environment in which we operate is subject to continual change and regulatory developments designed
to increase oversight may materially adversely affect our business.
We operate in a legislative and regulatory environment that is subject to continual change, the nature of which
we cannot predict. We may be adversely affected as a result of new or revised legislation or regulations imposed by the
SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the
financial markets. The SEC and its staff are currently engaged in various initiatives and reviews that seek to improve and
modernize the regulatory structure governing the asset management industry, and registered investment companies in
particular. In so doing, it has adopted rules that include (i) new monthly and annual reporting requirements for certain U.S.
registered funds; (ii) enhanced reporting regimes for investment advisers; and (iii) implementing liquidity risk management
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programs for ETFs and open-end funds. These rules, many of which are currently in an implementation period, will
increase our public reporting and disclosure requirements, which could be costly and may impede the Company’s growth.
In addition, in June 2018, the SEC issued a proposed rule under the Investment Company Act of 1940 (the “Investment
Company Act’) known as the “ETF Rule”. The ETF Rule is intended to establish a clear and consistent framework that, if
adopted, would allow most types of ETFs operating under the Investment Company Act to come to market without
applying for individual exemptive orders.
The requirements imposed by our regulators (including both U.S. and non-U.S. regulators) are designed to ensure
the integrity of the financial markets and to protect clients and other third parties who deal with us, and are not designed
to protect our shareholders. Consequently, these regulations often serve to limit our activities and/or increase our costs,
including through client protection and market conduct requirements. New laws or regulations, or changes in the
enforcement of existing laws or regulations, applicable to us and our clients may adversely affect our business. Our ability
to function in this environment will depend on our ability to constantly monitor and promptly react to legislative and
regulatory changes. There have been a number of highly publicized regulatory inquiries that have focused on the
investment management industry. These inquiries already have resulted in increased scrutiny of the industry and new
rules and regulations for mutual funds and investment managers. This regulatory scrutiny may limit our ability to engage
in certain activities that might be beneficial to our shareholders.
We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory organizations, as well as by courts. It is impossible to determine the
extent of the impact of any new U.S. or non-U.S. laws, regulations or initiatives that may be proposed, or whether any of
the proposals will become law. Compliance with any new laws or regulations could be more difficult and expensive and
affect the manner in which we conduct business. See “Regulatory Environment and Compliance.”
The investment management industry is intensely competitive.
The investment management industry is intensely competitive, with competition based on a variety of factors,
including investment performance, fees, continuity of investment professionals and client relationships, the quality of
services provided to clients, corporate positioning and business reputation, continuity of selling arrangements with
intermediaries and differentiated products. A number of factors, including the following, serve to increase our competitive
risks:
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a number of our competitors have greater financial, technical, marketing and other resources, more
comprehensive name recognition and more personnel than we do;
potential competitors have a relatively low cost of entering the investment management industry;
certain investors may prefer to invest with an investment manager that is not publicly traded based on the
perception that a publicly traded asset manager may focus on the manager’s own growth to the detriment of
investment performance for clients;
other industry participants, hedge funds and alternative asset managers may seek to recruit our investment
professionals; and
certain competitors charge lower fees for their investment management services than we do.
Additionally, intermediaries through which we distribute our funds may also sell their own proprietary funds and
investment products, which could limit the distribution of our strategies. If we are unable to compete effectively, our
earnings could be reduced and our business could be materially adversely affected.
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Risks Relating to Our Capital Structure
A relatively large percentage of our common stock is concentrated with a small number of shareholders, which could
increase the volatility in our stock trading and affect our share price.
A large percentage of our common stock is held by a limited number of shareholders. If our larger shareholders
decide to liquidate their positions, it could cause significant fluctuation in the share price of our common stock. Public
companies with a relatively concentrated level of institutional shareholders, such as we have, often have difficulty
generating trading volume in their stock, which may increase the volatility in the price of our common stock.
The market price of our Class A common stock is likely to be volatile and could decline.
The stock market in general has been highly volatile. As a result, the market price and trading volume for our
Class A common stock may also be highly volatile, and investors in our Class A common stock may experience a decrease
in the value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could
cause the market price of our Class A common stock to fluctuate significantly include:
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our operating and financial performance and prospects and the performance of other similar companies;
our quarterly or annual earnings or those of other companies in our industry;
conditions that impact demand for our products and services;
the public’s reaction to our press releases, financial guidance and other public announcements, and filings
with the SEC;
changes in earnings estimates or recommendations by securities or research analysts who track our Class A
common stock;
• market and industry perception of our level of success in pursuing our growth strategy;
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strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in government and other regulations;
changes in accounting standards, policies, guidance, interpretations or principles;
departure of key personnel;
the number of shares publicly traded;
investor scrutiny of our dual-class structure, including new rules adopted by certain index providers, such as
S&P Dow Jones and FTSE Russell, that limit or preclude inclusion of companies with multiple-class capital
structure in certain indices;
sales of common stock by us, our investors or members of our management team; and
changes in general market, economic and political conditions in the U.S. and global economies or financial
markets, including those resulting from natural disasters, telecommunications failures, cyber-attacks, civil
unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.
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Any of these factors may result in large and sudden changes in the trading volume and market price of our Class A
common stock.
Following periods of volatility in the market price of a company’s securities, shareholders often file securities
class-action lawsuits against such company. Our involvement in a class-action lawsuit could divert our senior
management’s attention and, if adversely determined, could have a material and adverse effect on our business, financial
condition and results of operations.
The dual class structure of our common stock has the effect of concentrating voting control with those shareholders
who hold our Class B common stock.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Our
Employee Shareholders Committee, Crestview GP, Reverence Capital, our directors and executive officers and each of
and their respective affiliates, hold in the aggregate 98.8% of the total voting power of our outstanding common stock and
the unvested restricted stock as of December 31, 2018. Because of the ten-to-one voting ratio between our Class B common
stock and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority
of the voting power of our common stock and therefore will be able to control all matters submitted to our shareholders
for approval. Our Class B common stock will be converted into shares of Class A common stock, which conversion will
occur automatically, in the case of each share of Class B common stock, upon transfers (subject to limited exceptions,
such as certain transfers effected for estate planning purposes), a termination of employment by an employee shareholder
or upon the date the number of shares of Class B common stock then outstanding (including unvested restricted shares) is
less than 10% of the aggregate number of shares of Class A common stock and Class B common stock then outstanding
(including unvested restricted shares). We may issue additional shares of our Class B common stock in the future,
including in connection with acquisitions or equity grants to employees.
The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing
the relative voting power of those holders of Class B common stock who retain their shares in the long term, including the
holders of newly issued shares of Class B common stock and the holders of Class B common stock subject to the Employee
Shareholders’ Agreement, whose shares will be voted by the Employee Shareholders Committee.
Crestview GP controls us and its interests may conflict with ours or other shareholders’ in the future.
Crestview GP does not hold any of our Class A common stock, but beneficially owns 52.2% of our common
stock through its beneficial ownership of our Class B common stock and 64.6% of the total voting power of our outstanding
common stock and unvested restricted stock as of December 31, 2018. As a result, Crestview GP has the ability to elect a
majority of the members of our board of directors and thereby control our policies and operations, including the
appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any,
on our common stock (including the Class A common stock), the incurrence of debt by us, amendments to our amended
and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary
transactions. Crestview GP will also be able to determine the outcome of all matters requiring shareholder approval and
will be able to cause or prevent a change in control of us or a change in the composition of our board of directors and could
preclude any acquisition of us. This concentration of voting control could deprive other shareholders of an opportunity to
receive a premium for shares of their Class A common stock as part of a sale of us and ultimately might affect the market
price of our Class A common stock. Further, the interests of Crestview GP may not in all cases be aligned with other
shareholders’ interests.
In addition, Crestview GP may have an interest in pursuing acquisitions, divestitures and other transactions that,
in its judgment, could enhance its investment, even though such transactions might involve risks to other shareholders.
For example, Crestview GP could cause us to make acquisitions that increase our indebtedness or cause us to sell
revenue-generating assets. Crestview GP is in the business of making investments in companies and may from time to
time acquire and hold interests in businesses that compete directly or indirectly with us. Our amended and restated
certificate of incorporation provides that none of Crestview GP or Reverence Capital or any of their respective affiliates
will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business
activities or lines of business in which we operate. Crestview GP or Reverence Capital also may pursue acquisition
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opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be
available to us, which could have an adverse effect on our growth prospects.
Future sales of shares by shareholders could cause our stock price to decline.
Sales of substantial amounts of our Class A common stock in the public market, or the perception that these sales
could occur, could cause the market price of our Class A common stock to decline. As of February 28, 2019, 14,555,975
shares of our Class A common stock and 52,940,026 shares of our Class B common stock, which are convertible, at the
option of the holder, into an equal number of shares of Class A common stock, are outstanding. Of these shares, all of the
shares of Class A common stock is freely tradable without restriction under the Securities Act, unless purchased by our
“affiliates,” as that term is defined in Rule 144 under the Securities Act. The 52,940,026 shares of our Class B common
stock held by Crestview GP, Reverence Capital, our directors and officers and other existing shareholders, are “restricted
securities” within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market
only if they are registered under the Securities Act or are sold pursuant to an exemption from registration under Rule 144
or Rule 701 under the Securities Act.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into
common stock in connection with a financing, acquisition or employee arrangement, or in certain other circumstances.
Any of these issuances could result in substantial dilution to our existing shareholders and could cause the trading price of
our Class A common stock to decline.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our Class A common stock will depend in part on the research and reports that securities
or industry analysts publish about us or our business. If there is no coverage of us by securities or industry analysts, the
trading price for our shares could be negatively impacted. In the event we obtain securities or industry analyst coverage
and if one or more of these analysts downgrades our shares or publishes misleading or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, demand for our shares could decrease, which could cause our stock price or trading volume to
decline.
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure
requirements applicable to emerging growth companies could make our Class A common stock less attractive to
investors.
We are an “emerging growth company,” as defined in the JOBS Act, enacted in April 2012, and, for as long as
we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting
requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding
executive compensation (including Chief Executive Officer pay ratio disclosure) in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. As an emerging growth company, we
have elected to use the extended transition period for complying with new or revised accounting standards until those
standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be
comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised
accounting standards that are applicable to public companies.
We may take advantage of these exemptions until such time that we are no longer an emerging growth company.
Accordingly, the information contained herein may be different than the information provided by other public companies.
We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our annual gross revenues are at least $1.07 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if, among other things, the market value of
our common equity securities held by non-affiliates exceeds $700 million as of the last business day of our most recently
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completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in nonconvertible debt
securities during the preceding three-year period.
We cannot predict whether investors will find our Class A common stock less attractive if we choose to rely on
one or more of the exemptions described above. If investors find our Class A common stock less attractive as a result of
any decisions to reduce future disclosure, there may be a less active trading market for our Class A common stock and our
stock price may be more volatile.
The requirements of being a public company may strain our resources and distract our management, which could make
it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
Prior to February 2018, we operated as a private company and had not been subject to the same financial and
other reporting and corporate governance requirements of a public company. As a public company, we are now required
to file annual, quarterly and other reports with the SEC. We need to prepare and timely file financial statements that comply
with SEC reporting requirements. We also are subject to other reporting and corporate governance requirements under the
listing standards of NASDAQ and the Sarbanes-Oxley Act, which impose significant compliance costs and obligations
upon us. Being a public company requires a significant commitment of additional resources and management oversight,
which add to operating costs. These changes place significant additional demands on our finance and accounting staff,
which may not have prior public company experience or experience working for a newly public company, and on our
financial accounting and information systems, and we may need to, in the future, hire additional accounting and financial
staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses
associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor
relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent
fees and listing fees, as well as other expenses. As a public company, we are required, among other things, to:
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prepare and file periodic reports, and distribute other shareholder communications, in compliance with the
federal securities laws and the NASDAQ rules;
define and expand the roles and the duties of our board of directors and its committees;
institute more comprehensive compliance, investor relations and internal audit functions; and
evaluate and maintain our system of internal control over financial reporting, and report on management’s
assessment thereof, in compliance with rules and regulations of the SEC and the PCAOB.
In particular, the Sarbanes-Oxley Act requires us to document and test the effectiveness of our internal control
over financial reporting in accordance with an established internal control framework, and to report on our conclusions as
to the effectiveness of our internal controls. Currently we choose to utilize the exemption pursuant to Section 404(b) of
the Sarbanes-Oxley Act for “emerging growth companies” whereby our independent registered public accounting firm is
not required to provide an attestation report on the effectiveness of our internal control over financial reporting. As
described in the previous risk factor, we could potentially qualify as an emerging growth company until December 31,
2023. In addition, we are required under the Exchange Act to maintain disclosure controls and procedures and internal
control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered
in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are
unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the
reliability of our financial statements. This could result in a decrease in the value of our Class A common stock. Failure to
comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC or other
regulatory authorities.
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Failure to maintain effective internal control over financial reporting could have a material adverse effect on our
business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act and related SEC rules require that we perform an annual management
assessment of the design and effectiveness of our internal control over financial reporting. Our assessment concluded that
our internal control over financial reporting was effective as of December 31, 2018; however, there can be no assurance
that we will be able to maintain the adequacy of our internal control over financial reporting, as such standards are
modified, supplemented or amended from time to time in future periods. Accordingly, we cannot assure that we will be
able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial
reports and is important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud,
our business and operating results could be harmed, investors could lose confidence in our reported financial information,
and the trading price of our Class A common stock could drop significantly.
We do not currently intend to pay regular cash dividends on our common stock.
We have no current plans to declare and pay any cash dividends. We currently intend to retain all our future
earnings, if any, to fund our growth. Therefore, the success of an investment in our Class A common stock will depend
upon any future appreciation in its value. There is no guarantee that our Class A common stock will appreciate in value or
even maintain the price at which our shareholders have purchased their shares.
Future offerings of debt or equity securities may rank senior to our Class A common stock.
If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is
likely that they will be governed by an indenture or other instrument containing covenants restricting our operating
flexibility. We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities. We may also
issue preferred equity, which will have superior rights relative to our common stock, including with respect to voting and
liquidation.
Furthermore, if our future access to public markets is limited or our performance decreases, we may need to carry
out a private placement or public offering of our Class A common stock at a lower price than the price at which investors
purchased their shares.
Because our decision to issue debt, preferred or other equity or equity-linked securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, holders of our Class A common stock will bear the risk of our future offerings reducing
the market price of our Class A common stock and diluting the value of their shareholdings in us.
We are a “controlled company” within the meaning of the rules of NASDAQ, and, as a result, we will qualify for, and
intend to rely on, exemptions from certain corporate governance requirements.
Crestview GP controls a majority of the voting power of our common stock. As a result, we are a “controlled
company” under NASDAQ’s corporate governance listing standards. As a controlled company, we are exempt from the
obligation to comply with certain corporate governance requirements, including the requirements:
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that a majority of our board of directors consist of independent directors, as defined under the rules of
NASDAQ;
that we have a corporate governance and nominating committee that is composed entirely of independent
directors with a written charter addressing the committee’s purpose and responsibilities; and
that we have a compensation committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities.
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We do not intend to take advantage of these exemptions once Crestview GP no longer controls a majority of our
voting power. These exemptions do not modify the independence requirements for our audit committee.
Provisions in our charter documents could discourage a takeover that shareholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us
difficult, even if such events would be beneficial to the interests of our shareholders. Among other things, these provisions:
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permit our board of directors to establish the number of directors and fill any vacancies and newly created
directorships;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a
shareholder rights plan;
provide that our board of directors is expressly authorized to amend or repeal any provision of our bylaws;
restrict the forum for certain litigation against us to Delaware;
establish advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted upon by shareholders at annual shareholder meetings;
provide for a dual-class common stock structure pursuant to which holders of our Class B common stock
will have ten votes per share compared to the one vote per share of our Class A common stock and thereby
will have the ability to control the outcome of matters requiring shareholder approval;
establish a classified board of directors with three classes of directors and the removal of directors only for
cause;
require that actions to be taken by our shareholders be taken only at an annual or special meeting of our
shareholders, and not by written consent, once Crestview GP owns 50% or less of the voting power of our
outstanding capital stock;
establish certain limitations on convening special shareholder meetings; and
restrict business combinations with interested shareholders.
These provisions may delay or prevent attempts by our shareholders to replace members of our management by
making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing
the members of our management. Anti-takeover provisions could depress the price of our Class A common stock by acting
to delay or prevent a change in control of us.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is
the exclusive forum for substantially all disputes between us and our shareholders, which could limit our shareholders’
ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a
breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation
Law, our amended and restated certificate of incorporation or our amended and restated bylaws or any action asserting a
claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a shareholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other
employees and may discourage these types of lawsuits.
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Risks Relating to the USAA AMCO Acquisition and the Harvest Acquisition
In the third quarter of 2018, the Company entered into the Harvest Purchase Agreement and the Harvest Commitment
Letter. Subsequently, in the fourth quarter of 2018, the Company entered into the USAA Stock Purchase Agreement and
the USAA AMCO Credit Facilities Commitment Letter related to the USAA AMCO Acquisition (together with the
Harvest Acquisition, the “Acquisitions”, and each an “Acquisition”). See Notes 3 and 10 to the audited consolidated
financial statements. Risk factors related to each of the Acquisitions are discussed below.
Risks and uncertainties associated with the Acquisitions may adversely affect our business, financial performance
and stock price.
The Acquisitions may involve a number of risks, including those known and unknown, and contingent liabilities.
• The Acquisitions may impose additional demands on our staff that could strain our operational resources and
require expenditure of substantial legal, consulting and/or accounting fees.
• The Acquisitions require us to spend significant cash to consummate each Acquisition and the Harvest
Acquisition requires us to issue additional shares of common stock to consummate the Harvest Acquisition,
which will result in additional debt leverage and dilution of ownership.
• We may spend additional time and money on facilitating either or both Acquisitions that otherwise would be
spent on the development and expansion of our existing business.
• The process of integrating operations of Harvest and/or the USAA Acquired Companies could cause an
interruption of, or loss of momentum in, the activities of our business.
• The diversion of management's attention and any delays or difficulties encountered in connection with either
or both Acquisitions could have an adverse effect on our business.
The Acquisitions are subject to closing conditions, including certain conditions that may not be satisfied, and they may
not be completed on a timely basis, or at all. Failure to complete either Acquisition could have material and adverse
effects on the Company.
Harvest Purchase Agreement
On September 21, 2018, the Company entered into the Harvest Purchase Agreement, whereby the Company has
agreed to purchase 100% of the equity interests of Harvest. The completion of the Harvest Acquisition is subject to a
number of closing conditions, including (1) the receipt of consents representing revenues of at least 80% of a baseline
revenue amount, (2) the expiration or termination of the applicable waiting period under the HSR Act, which termination
was received on November 6, 2018, (3) the absence of any material adverse effect (as defined in the Harvest Purchase
Agreement) on the business of Harvest and its subsidiaries or the business of the Company, (4) the two Harvest principals
not having resigned (or given notice of resignation) and each performing his respective duties under certain employment
documentation and (5) other customary closing conditions. In addition, either Harvest or we may terminate the Harvest
Purchase Agreement if the Harvest Acquisition has not been completed by June 11, 2019.
USAA Stock Purchase Agreement
On November 6, 2018, the Company entered into the USAA Stock Purchase Agreement, whereby the Company
agreed to purchase 100% of the outstanding common stock of the USAA Acquired Companies. The completion of the
USAA AMCO Acquisition is subject to a number of closing conditions, including (1) the receipt of consents representing
revenues of at least 75% of the run rate threshold, (2) the expiration or termination of the applicable waiting period under
the HSR Act, which termination was received on December 3, 2018, (3) the absence of any material adverse effect (as
defined in the USAA Stock Purchase Agreement) on the business of the USAA Acquired Companies and (4) other
customary closing conditions. In addition, either USAA Capital Corporation, parent of the USAA Acquired Companies,
or we may terminate the USAA Stock Purchase Agreement if the USAA AMCO Acquisition has not been completed by
August 3, 2019.
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If either Acquisition is not completed on a timely basis or at all, our ongoing business may be adversely affected.
Additionally, in the event either Acquisition is not completed, the Company will be subject to a number of risks without
realizing any of the benefits of having completed either Acquisition, including the following:
• We will be required to pay our costs relating to the Acquisition(s), such as legal, accounting and financial
advisory fees;
• We could be exposed to increased litigation;
• Time and resources committed by our management to matters relating to the Acquisitions could otherwise have
been devoted to pursuing other beneficial opportunities; and
• The market price of our securities could decline to the extent that the current market price reflects a market
assumption that one or both Acquisitions will not be completed, or to the extent that either Acquisition is
fundamental to our business strategy.
We may not realize the benefits we expect from either Acquisition because of integration difficulties and other
challenges.
The success of the Acquisitions will depend in large part on the success of integrating the personnel, operations,
strategies, technologies and other components of the businesses following the completion of the Acquisition(s). The
Company may fail to realize some or all of the anticipated benefits of the Acquisitions if the integration process takes
longer than expected or is more costly than expected. The failure of the Company to meet the challenges involved in
successfully integrating the operations of Harvest and the USAA Acquired Companies or to otherwise realize any of the
anticipated benefits of either Acquisition could impair the operations of the Company. In addition, the Company anticipates
that the overall integration of Harvest and the USAA Acquired Companies will be a time-consuming and expensive process
that, without proper planning and effective and timely implementation, could significantly disrupt the Company’s business.
Potential difficulties the combined business may encounter in the integration process include the following:
• The integration of personnel, operations, strategies, technologies and support services;
• The disruption of ongoing businesses and distraction of their respective personnel from ongoing business
concerns;
• The retention of the existing clients and the retention or transition of vendors;
• The retention of key intermediary distribution relationships;
• The integration of corporate cultures and maintenance of employee morale;
• The retention of key employees;
• The creation of uniform standards, controls, procedures, policies and information systems;
• The reduction of the costs associated with combining operations;
• The consolidation and rationalization of information technology platforms and administrative infrastructures;
and
• Potential unknown liabilities associated with the Acquisitions.
The anticipated benefits and synergies include the elimination of duplicative personnel, realization of efficiencies in
consolidating duplicative corporate, business support functions and amortization of purchased intangibles for tax purposes.
However, these anticipated benefits and synergies assume a successful integration and are based on projections, which are
inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits and synergies may not
be achieved.
Uncertainty regarding the completion of the Acquisitions may cause their clients to withdraw assets under management
or to decline to place additional assets under management, or may cause their potential clients to delay or defer
decisions concerning the Acquisitions.
Withdrawal of clients and loss of AUM resulting from uncertainty concerning the Harvest Acquisition
The Harvest Acquisition will happen only if stated conditions are met, including, among others, the receipt of a
baseline level of required consents from the Harvest clients. Many of the conditions are beyond the control of the Company.
49
In addition, both Harvest and the Company have rights to terminate the purchase agreement under various circumstances.
As a result, there may be uncertainty regarding the completion of the Harvest Acquisition. This uncertainty, along with
potential Harvest client uncertainty regarding how the acquisition could affect the services offered by Harvest, may cause
their clients to withdraw assets under management or to decline to place additional assets under management, and may
cause potential Harvest clients to delay or defer decisions concerning entering into a relationship with Harvest, which
could negatively impact revenues and earnings of Harvest.
Withdrawal of clients and loss of AUM resulting from uncertainty concerning the USAA AMCO Acquisition
Under the U.S. Investment Company Act of 1940, as amended, or the “1940 Act”, the investment advisory
agreements between each mutual fund (a “USAA mutual fund”) in the USAA Mutual Funds Trust, an open-end
management investment company registered under the 1940 Act, and each ETF (a “USAA ETF”) in the USAA ETF Trust,
also an open-end management investment company registered under the 1940 Act, on the one hand, and USAA Asset
Management Company, on the other hand, will terminate automatically in the event USAA Asset Management Company
undergoes a change of control as recognized under the 1940 Act. Consummation of the USAA AMCO Acquisition will
constitute such a change of control. The continuation of the investment advisory relationship by each USAA mutual fund
and USAA ETF (either, a “USAA fund”) with either the Company or USAA Asset Management Company following the
consummation of the USAA AMCO Acquisition requires the approval of both the board of trustees, which was received
on January 15, 2019, and the shareholders of the applicable USAA fund. The continuation of the investment advisory
relationship may be through the approval of a new investment advisory agreement between the USAA fund and the
Company (or, in the alternative, USAA Asset Management Company) or, in the case of the USAA ETFs, the reorganization
of the ETF into a successor ETF organized as a new series of Victory Portfolios II, an existing open-end management
investment company, to be advised by the Company. If either the board of trustees or shareholders of a USAA fund do not
approve such new investment advisory agreement or reorganization, and the parties to the USAA AMCO Acquisition
proceed to close the USAA AMCO Acquisition, then the existing investment advisory agreement between such USAA
fund and USAA Asset Management Company will terminate automatically and the board of trustees of such USAA fund
may take further action as it deems to be in the best interests of such USAA fund. That may include approval of an interim
advisory agreement with the Company or USAA Asset Management Company that would go into effect to permit
additional time to solicit the required shareholder approval. The termination of any investment advisory agreement relating
to a material portion of assets under management or the redemption of a material portion of assets from the USAA Funds
would have an adverse impact on USAA Asset Management Company’s results of operations and financial condition as
well as any anticipated benefits from the USAA AMCO Acquisition.
The increase in indebtedness of the Acquisitions may expose us to material risks.
As of December 31, 2018, we had $280.0 million of outstanding term loans under the Existing Credit Agreement.
In connection with the Acquisitions, we expect to incur a substantial amount of additional indebtedness. In connection
with the USAA AMCO Acquisition, we have obtained the USAA AMCO Credit Facilities Commitment Letter providing
for up to $1.395 billion of new indebtedness to refinance all indebtedness outstanding under the Existing Credit Agreement,
finance the Acquisitions and pay related fees and expenses. Our ability to make scheduled payments on or refinance our
debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic
and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control.
Following the closing of the Acquisitions, the Company, including the combined businesses, may be unable to maintain a
level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on
our indebtedness.
The incurrence of indebtedness contemplated by the Acquisitions will subject us to financial and operating
covenants, which may limit our flexibility in responding to our business needs. If we are not able to maintain compliance
with stated financial covenants or if we breach other covenants in any debt agreement, whether related to the Harvest
Facility, the USAA AMCO Credit Facilities or otherwise, we could be in default under such debt agreement. Such a default
could allow our creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness
to which a cross-acceleration or cross-default provision applies.
Our overall leverage and terms of our debt facilities could, among other things:
50
• Make it more difficult to satisfy our obligations under the terms of our indebtedness, including the new debt
facility;
• Limit our ability to refinance our indebtedness on terms acceptable to us or at all;
• Limit our flexibility to plan for and adjust to changing business and market conditions and increase our
vulnerability to general adverse economic and industry conditions;
• Require us to dedicate a substantial portion of our cash flows to make interest and principal payments on our
debt, thereby limiting the availability of our cash flow to fund future acquisitions, working capital, business
activities, and other general corporate requirements; and/or
• Limit our ability to obtain additional financing for working capital, to fund growth or for general corporate
purposes, even when necessary to maintain adequate liquidity, particularly if any ratings assigned to our debt
facilities by rating organizations were revised downward.
The pending USAA AMCO Acquisition is expected to accelerate the timing of when we cease to be an emerging growth
company, resulting in increased reporting and disclosure requirements.
We are an emerging growth company and, for as long as we continue to be an emerging growth company, we
may choose to continue to take advantage of exemptions from various reporting requirements applicable to other public
companies but not to “emerging growth companies,” including, but not limited to, not being required to have our
independent registered public accounting firm audit our internal control over financial reporting under Section 404 and
taking advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards. We will cease to be an emerging growth company upon the earliest of: (i) the end of
the fiscal year following the fifth anniversary of our IPO, (ii) the first fiscal year after our annual gross revenues are $1.07
billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in
non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our Class A common stock
held by non-affiliates is at least $700 million as of the end of the second quarter of that fiscal year. The USAA AMCO
Acquisition, if consummated, is expected to accelerate the timing of when we cease to be an emerging growth company
to a period shorter than the fifth anniversary of our IPO. Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting
obligations. If we are unable to conclude that we have effective internal control over financial reporting, investors could
lose confidence in the reliability of our financial statements. See “Risk Factors-Risks Relating to Our Capital Structure-
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure
requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.”
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The Company leases its principal executive offices, which are located in Brooklyn, OH. In the United States, the
Company also leases office space in New York, NY; Birmingham, MI; Boston, MA; Brentwood, TN; Rocky River, OH;
Cincinnati, OH; Denver, CO; Des Moines, IA; and San Francisco, CA. Outside the United States, the Company leases
office space in Singapore, Hong Kong and London. The Company believes its existing facilities are adequate to meet its
current and future business requirements.
Item 3. Legal Proceedings
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of
business. The Company is not currently a party to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable
51
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.
Shares of the Company’s Class A common stock are listed and trade on NASDAQ under the symbol “VCTR”.
As of February 28, 2019, there were approximately 14,555,975 shareholders of record of the Company’s Class A common
stock and 52,940,026 shareholders of record of the Company’s Class B common stock. These figures do not reflect persons
who held shares of Class A common stock in nominee or “street name” accounts through brokers.
Performance Graph
The following graph shows a comparison from February 8, 2018 (the date our Class A common stock commenced
trading on NASDAQ) through December 31, 2018 of the cumulative total return of our Class A common stock, the
Standard & Poor’s 500 Stock Index (S&P 500 Index) and a peer group comprised of Affiliated Managers Group, Inc.,
Artisan Partners Asset Management Inc., BrightSphere Investment Group plc, Eaton Vance Corp., Legg Mason, Inc. and
Virtus Investment Partners, Inc. The graph assumes that $100 was invested at the market close on February 8, 2018 in our
Class A common stock, the S&P 500 Index and the peer group and assumes reinvestment of any dividends. The stock
price performance of the following graph is not necessarily indicative of future stock price performance.
Stock Performance Graph
$120
$110
$100
$90
$80
$70
$60
2/8/2018
4/8/2018
6/8/2018
8/8/2018
10/8/2018
12/8/2018
VCTR
S&P 500
Peer Set
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The following table sets out information regarding purchases of equity securities by the Company for the three
months ended December 31, 2018.
Total Number of
Shares of Class A
Common Stock
Period
October 1-31, 2018 . . . . . . . .
November 1-30, 2018 . . . . . .
December 1-31, 2018 . . . . . .
Total . . . . . . . . . . . . . . . . . .
Purchased
259,693 $
101,884
137,001
498,578 $
Total Number of Shares Approximate Dollar Value
That May Yet Be Purchased
Average Price
Paid Per Share
of Class A
Common Stock
of Class A Common
Stock Purchased as Part of
Publicly Announced
Plans or Programs
8.33
9.84
9.76
9.03
259,693 $
101,884
137,001
498,578
52
Under Outstanding
Plans or Programs
(in millions) (1)
9.3
8.3
7.0
(1)
On May 22, 2018, our Board of Directors authorized a $15.0 million share repurchase program which expires on
December 31, 2019. We repurchased 498,578 of Class A common stock under this program through a 10b5-1
trading plan at an average cost of $9.03 during the three months ended December 31, 2018. As of December 31,
2018, $7.0 million remained available to repurchase shares under this program. See Note 13 to the audited
consolidated financial statements for more information on the share repurchase program.
Dividend Policy
We do not currently pay cash dividends on our common stock. Any future determinations relating to our dividend
policies is limited by the terms of our indebtedness and will be made at the discretion of our board of directors, which will
depend on conditions then existing, including our financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of directors may deem relevant.
Recent Sales of Unregistered Securities
On January 1, 2018, the Company granted to its employees options to purchase an aggregate of 357,256 shares
of its common stock under its 2013 Plan at an exercise price of $14.27 per share.
On January 1, 2018, the Company granted to its employees an aggregate of 1,678,743 shares of restricted stock
under its 2013 Plan.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any
public offering, and the registrant believes that transactions were exempt from the registration requirements of the
Securities Act of 1933 in reliance on Section 4(2) thereof, and the rules and regulations promulgated thereunder, or Rule
701 thereunder, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in such
transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments
issued in such transactions. If applicable, the recipients of securities were accredited or sophisticated and either received
adequate information about the registrant or had access, through relationships with the registrant, to such information.
Item 6. Selected Financial Data
The following tables set forth our historical consolidated financial data as of and for the periods indicated. The
selected consolidated financial data for the years ended, and as of, December 31, 2018, 2017, 2016 and 2015 have been
derived from our audited consolidated financial statements and the notes thereto included elsewhere in this report. Our
historical operating results are not necessarily indicative of future operating results.
53
The following data should be read together with our consolidated financial statements and the related notes
thereto, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included elsewhere in this report.
2018
(in thousands, except per share data as noted)
GAAP Statement of Operations Data:
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 352,683
60,729
Fund administration and distribution fees . . . . . . . . . . . . . . .
413,412
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,519
(29,608)
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,911
Income/(loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
63,704
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . $
27.7 %
$
0.96
$
0.90
Year Ended December 31,
2017
2016
2015
$ 343,811
65,818
409,629
$ 90,168
(51,710)
38,458
25,826
$ 248,482
49,401
297,883
$ 24,485
(33,556)
(9,071)
(6,071)
201,553
39,210
240,763
$ 33,220
(25,998)
7,222
3,800
22.0 %
$
0.47
$
0.43
8.2 %
$
$
(0.12)
(0.12)
13.8 %
0.08
0.08
Year Ended December 31,
(in thousands)
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 801,511 $ 792,622 $ 850,951 $ 620,389
311,898
Total debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
370,960
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
249,429
483,225
561,439
231,183
268,857
345,963
455,548
418,528
519,953
330,998
2015
2018
2016
2017
(1)
Balance at December 31, 2018 is shown net of unamortized loan discount and debt issuance costs in the amount
of $11.1 million. The gross principal amount of outstanding term loans under the Existing Credit Agreement was
$280.0 million.
On July 29, 2016, we acquired RS Investments, an SEC registered investment adviser, and RS Investments’
wholly owned subsidiaries. Our financial results for the year ended December 31, 2016 reflect five months of
post-acquisition RS Investments operations and significant acquisition-related and restructuring and integration costs
related to this transaction.
In the year ended December 31, 2018, we completed our IPO and used the proceeds to refinance the debt. In
the years ended December 31, 2017 and 2015, we made special distributions to shareholders and incurred incremental debt
to fund these payments. In the year ended December 31, 2016, we incurred incremental debt to partially finance the
acquisition of RS Investments. See Note 10 to the audited consolidated financial statements included elsewhere in this
report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and our
consolidated financial statements and related notes thereto included elsewhere in this report. In addition to historical
information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that
could cause actual results to differ materially from management’s expectations. Factors that could cause such differences
are discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors.” We are not undertaking any
obligation to update any forward-looking statements or other statements we may make in the following discussion or
elsewhere in this document even though these statements may be affected by events or circumstances occurring after the
forward-looking statements or other statements were made. Therefore, no reader of this document should rely on these
statements being current as of any time other than the date of this report.
54
Overview
Our Business
We are an investment management firm operating a next generation, integrated multi-boutique model with $52.8
billion in AUM as of December 31, 2018. Our differentiated model features a scalable operating platform that provides
centralized distribution, marketing and operations infrastructure to our select group of Franchises and Solutions Platform.
Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver
and consist of investment management, fund administration and distribution fees.
Our Franchises are operationally integrated, but are separately branded and make investment decisions
independently from one another within guidelines established by their respective investment mandates. Our integrated
multi-boutique model creates a supportive environment in which our investment professionals, largely unencumbered by
administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of
our U.S. investment professionals across our Franchises, which are not separate legal entities.
Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily
rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and
VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and
supported by our centralized distribution, marketing and operational support functions.
We sell our products through our centralized distribution model with 88 professionals across both our institutional
and retail distribution channels and marketing organization. Our institutional sales team focuses on cultivating
relationships with institutional consultants, who account for the majority of the institutional market, as well as asset
allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including
broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee
programs and access to our investment models through UMAs.
We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August
2013 to $52.8 billion at December 31, 2018. We attribute this growth to our success in sourcing acquisitions and evolving
them into organic growers, generating strong investment returns, and developing retail and institutional distribution
channels with deep penetration.
Agreement to Acquire Harvest Volatility Management and USAA Asset Management
On September 21, 2018, we entered into an agreement to purchase 100% of the equity interests of Harvest
Volatility Management (“Harvest”) for (i) $255 million in cash paid at the closing of the transaction ( the “Harvest
Closing”) (ii) 1,565,370 shares of the Company’s Class B common stock, which equated to $15 million based on a volume-
weighted average price per share of $9.5824 at September 21, 2018 to be paid at the Harvest Closing, (iii) $30.75 million
in Class B common stock, issued in four equal installments at the end of each of the first four quarters following the
Harvest Closing, and (iv) contingent earn-out payments based on the net revenue of the Harvest business in calendar years
2021, 2022 and 2023. Harvest is a leader in derivative asset management, specializing in yield enhancement overlay, risk
reduction, alternative beta and absolute return strategies. Harvest offers a suite of value-added investment strategies for
client portfolios that are designed to provide investors with risk-managed sources of income, absolute return and varying
levels of market exposure. The acquisition will expand our Solutions Platform by adding a historically strong organic
grower to our platform and will further diversify our AUM into strategies that are managed to be neutral to changing
market cycles.
On November 6, 2018, we entered into an agreement to acquire the USAA Acquired Companies and their Mutual
Fund and ETF businesses and USAA 529 College Savings Plan for (i) $850 million in cash at the closing of the transaction
and (ii) contingent payments based on annual revenue in each of the first four years following the closing. The USAA
Acquired Companies have proven expertise in managing fixed income, global multi-asset and equity strategies through
both internal investment teams and external subadvisors. The acquisition will diversify our AUM, expand our investment
55
capabilities, increase our size and scale and introduce a new and unique direct-member distribution channel to our existing
distribution platform.
The Harvest and USAA Acquired Companies acquisitions are expected to close in the second quarter of 2019
and will be financed through a combination of debt, cash on the balance sheet and, in the case of Harvest, Victory equity.
We have committed debt financing for both transactions with Barclays and RBC who have agreed to arrange and syndicate
a new seven-year senior secured first lien term loan in an aggregate principal amount of up to $1.395 billion and a new
five-year senior secured first lien revolving facility in an aggregate principal amount of up to $100 million. See Note 10
to the audited consolidated financial statements for more information on the debt financing. See Note 3 for more details
on the Harvest and USAA Acquired Companies acquisitions. See “Risk Factors – Risks Relating to the USAA AMCO
Acquisition and the Harvest Acquisition.”
Highlights for 2018
2018 business and financial highlights included:
• Our Franchises and Solutions Platform had strong investment performance. As of December 31, 2018, 23 of
our mutual funds and ETFs have overall Morningstar ratings of four or five stars and 65% of our fund AUM
was rated four or five stars overall by Morningstar. As of December 31, 2018, 57% of our strategies by AUM
had investment returns in excess of their respective benchmarks over a one-year period, 68% over a three-
year period, 74% over a five-year period and 88% over a ten-year period. On an equal-weighted basis, 59%
of our strategies have outperformed their benchmarks over a one-year period, 59% over a three-year period,
63% over a five-year period and 75% over a ten-year period.
• The industry recognized us for our achievements. For the fourth consecutive year, Victory has been ranked
in the top 10 in their AUM category for Institutional Brand Awareness by eVestment. Victory ranked 6th
among managers with $50-$100 billion in 2018, 4th among managers with $50-$100 billion in 2017 and 2016
and 1st among managers with $25-$50 billion in 2015.
• Total revenue for the year ended December 31, 2018 was $413.4 million compared to $409.6 million for
the year ended December 31, 2017.
• Net income was $63.7 million for the year ended December 31, 2018 compared $25.8 million for the year
ended December 31, 2017.
• Adjusted EBITDA was $160.2 million or 38.7% for the year ended December 31, 2018 compared to
$149.1 million or 36.4% for the year ended December 31, 2017. See “—Supplemental Non-GAAP Financial
Information” for more information about how we calculate Adjusted EBITDA and a reconciliation of net
income to Adjusted EBITDA.
• Adjusted Net Income was $102.3 million for the year ended December 31, 2018 compared to $62.0 million
for the year ended December 31, 2017. See “—Supplemental Non-GAAP Financial Information” for more
information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net
Income.
• On February 12, 2018, we issued 11,700,000 shares of Class A common stock in the IPO at a price of $13.00
per share for net proceeds of $143.0 million after deducting underwriting discounts. Net proceeds received
from the IPO and the Credit Agreement of $143.0 million and $355.9 million, respectively, were used
concurrent with the closing of the IPO, together with $0.8 million of cash on hand, to repay the $499.7 million
of outstanding term loans under the 2014 Credit Agreement. On March 13, 2018, the Company issued an
additional 1,110,860 shares of Class A common stock pursuant to the underwriters’ exercise of their option
for net proceeds of $13.5 million after deducting underwriting discounts. The net proceeds from the
56
underwriters’ exercise of their option and operating cash flow were used to pay down $80.0 million of the
Existing Credit Agreement in 2018 to bring the balance to $280.0 million at December 31, 2018 resulting in
a net debt to Adjusted EBITDA ratio of 1.5x.
• We entered into agreements to purchase Harvest and the USAA Acquired Companies. We expect these
acquisitions will diversify our AUM and investment capabilities, increase our size and scale, introduce a new
and unique USAA direct-member channel to our existing distribution platform.
Key Performance Indicators
When we review our performance we focus on the indicators described below:
2018
($ in millions)
AUM at period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,763
61,390
Average AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,130
Gross flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net flows (excluding Diversified)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,427)
413.4
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue on average AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA Margin(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of goodwill and acquired intangibles(4) . . . . . . . . . . . . . . . . . . . .
102.3
13.3
63.7
160.2
67 bps
38.7 %
Year Ended December 31,
2017
$ 61,771
57,823
16,929
(853)
409.6
2016
$ 54,965
41,756
16,037
2,266
297.9
71 bps
71 bps
25.8
149.1
36.4 %
62.0
19.7
(6.1)
98.1
32.9 %
39.0
16.8
(1)
(2)
(3)
(4)
Total net flows including Diversified were ($2,427), ($1,471), $875 for the years ended December 31, 2018, 2017
and 2016. See “Business—Our Franchises—Munder Capital Management.”
Our management uses Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the
business. These measures eliminate the impact of one-time acquisition, restructuring and integration costs and
demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail
and reconciled to net income/(loss) calculated in accordance with GAAP in “—Supplemental Non-GAAP
Financial Information.”
Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.
Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior
acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill
may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these
assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in
tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide
us with a significant supplemental economic benefit. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax
Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax law by, among other things,
decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The reduction in
the federal corporate income tax rate reduced the tax benefit of goodwill and acquired intangible assets beginning
in 2018.
57
Assets Under Management
Our profitability is largely affected by the level and composition of our AUM (including asset class and
distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will
continue to be, influenced by a number of factors, including:
•
•
•
•
•
•
investment performance, including fluctuations in the financial markets and the quality of our investment
decisions;
client flows into and out of our various strategies and investment vehicles;
industry trends toward products or strategies that we either do or do not offer;
our ability to attract and retain high quality investment, distribution, marketing and management personnel;
our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest
of our clients or conversely to re-open strategies in part or entirely; and
general investor sentiment and confidence.
58
Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class,
distribution channel and vehicle. The chart below sets forth our AUM by Franchise and Solutions as of December 31,
2018:
The following table presents our AUM by asset class as of the dates indicated:
As of December 31,
2018
2017
(in millions)
U.S. Mid Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,019 $ 25,185 $ 20,083 $ 12,401 $ 13,887
5,882
U.S. Small Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,338
Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Large Cap Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,906
1,474
Global / Non-U.S. Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
450
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,763 $ 61,771 $ 54,965 $ 33,111 $ 35,936
15,308
7,551
4,789
4,105
3,028
1,419
386
12,948
6,836
3,759
4,610
3,767
469
355
14,090
7,726
5,921
3,460
1,575
1,882
229
6,500
5,058
5,763
2,114
953
—
322
2016(1)
2015(2)
2014(3)
(1)
Includes the impact of the RS Acquisition, which closed on July 29, 2016, and increased our AUM by
$16.7 billion.
59
(2)
(3)
Includes the impact of the CEMP Acquisition, which closed on April 30, 2015, and increased our AUM by
$1.0 billion.
Includes the impact of the Munder Acquisition, which closed on October 31, 2014, and increased our AUM by
$18.1 billion.
The following table summarizes our asset flows by asset class for the periods indicated:
U.S. Mid
Cap
Equity
U.S.
Small
Cap
Equity
Fixed
Income
(in millions)
Year Ended
December 31, 2018
U.S.
Large
Cap
Equity(1)
Global /
Non-U.S.
Equity
Solutions Commodity Other
Total
Beginning AUM . . . . . . . . . . $ 25,185 $ 15,308 $ 7,551 $ 4,789 $ 4,105 $ 3,028 $ 1,419 $ 386 $ 61,771
244
184 14,130
(709) (137) (16,557)
(2,427)
47
(465)
(8)
(52)
(1)
2,488 1,713
259
(848) (1,003)
(588)
(589) 1,485 1,125
40
Gross client cash inflows . .
4,530
Gross client cash outflows . (7,207)
Net client cash flows . . . . . . . (2,677)
Net transfers . . . . . . . . . . . . .
(4)
Market appreciation /
3,198
1,514
(3,762) (2,303)
(789)
7
(564)
(4)
14
(8)
(depreciation) . . . . . . . . . . . (2,485)
(1,792)
Ending AUM . . . . . . . . . . . . . $ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $
Year Ended
(426)
(455)
(972)
67
(484)
(6,573)
(26)
469 $ 355 $ 52,763
December 31, 2017
Gross client cash inflows . .
8,622
Gross client cash outflows . (7,299)
Beginning AUM . . . . . . . . . . $ 20,083 $ 14,090 $ 7,726 $ 5,921 $ 3,460 $ 1,575 $ 1,882 $ 229 $ 54,965
305
116 16,929
(778) (113) (18,400)
(1,471)
(473)
(95)
—
3,613
(4,722) (2,240) (1,702) (1,333)
(462) (1,472)
(7)
(101)
924 1,342
(213)
(410) 1,129
(28)
1,323 (1,109)
—
3
57
1,777
230
(18)
1
Net client cash flows . . . . . . .
Net transfers . . . . . . . . . . . . .
Market appreciation /
(depreciation) . . . . . . . . . . .
8,372
Ending AUM . . . . . . . . . . . . . $ 25,185 $ 15,308 $ 7,551 $ 4,789 $ 4,105 $ 3,028 $ 1,419 $ 386 $ 61,771
Year Ended
2,327
3,778
1,073
347
352
388
96
10
December 31, 2016
Beginning AUM(2) . . . . . . . . $ 12,396 $ 6,500 $ 5,058 $ 5,763 $ 2,114 $ 953 $
169
691
(500)
(491)
201
(330)
283 2,110
Gross client cash inflows . .
8,965
Gross client cash outflows . (5,898) (3,341) (2,400) (1,962)
3,067
(761) (1,686)
5,360 3,323 2,087
2,658
276 1,021
(537)
484
852
— $ 327 $ 33,111
12 16,037
(34) (15,162)
(22)
875
(87) 16,587
3,263 1,639
(78)
Net client cash flows . . . . . . .
Net transfers(3) . . . . . . . . . . .
Market appreciation /
(depreciation) . . . . . . . . . . .
4,393
Ending AUM . . . . . . . . . . . . . $ 20,083 $ 14,090 $ 7,726 $ 5,921 $ 3,460 $ 1,575 $ 1,882 $ 229 $ 54,965
2,307
1,961
(243)
102
139
107
11
9
(1)
(2)
(3)
Includes Diversified. See “Business—Our Franchises—Munder Capital Management.”
Reflects transfer of $5.0 million in assets from U.S. mid cap equity to Other effective January 1, 2016.
Includes the impact of the RS Acquisition, which closed on July 29, 2016, and increased our AUM by
$16.7 billion.
In connection with the retirement of our two CIOs at Diversified, we made the strategic decision to exit this
Franchise and move the remaining AUM into our Munder Franchise, which was completed as of May 15, 2017. The
60
following table presents the impact of Diversified on net client cash flows for the periods indicated. Given this decision,
we believe this presentation is a better representation of our business on a going-forward basis.
(in millions)
Net client cash flows—Total Company . . . . . . . . . . . . . . . . . . . . $ (2,427) $ (1,471) $
Net client cash flows—Diversified . . . . . . . . . . . . . . . . . . . . . . .
—
Net client cash flows—Total Company excluding Diversified . . $ (2,427) $
875
(618) (1,391)
(853) $ 2,266
2016
2018
Year Ended December 31,
2017
The following table presents our AUM by distribution channel as of the dates indicated:
2018
As of December 31,
2017
2016
(in millions)
Institutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,731
23,032
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total AUM(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,763
Amount
% of total Amount
% of total Amount
56 % $ 35,695
44 % 26,076
100 % $ 61,771
58 % $ 30,360
42 % 24,605
100 % $ 54,965
% of total
55 %
45 %
100 %
(1)
The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.
The following table summarizes our asset flows by vehicle for the periods indicated:
Mutual Funds(1) ETFs
Separate
Accounts and
Other
Vehicles(2)
Total
(in millions)
Year Ended December 31, 2018
Beginning AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross client cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross client cash outflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net client cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market appreciation / (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . .
Ending AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2017
Beginning AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross client cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross client cash outflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net client cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market appreciation / (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . .
Ending AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2016
Beginning AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross client cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross client cash outflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net client cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market appreciation / (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . .
Ending AUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
37,967 $ 2,250 $ 21,555 $ 61,771
14,130
9,629
(16,557)
(12,781)
(2,427)
(3,152)
(8)
(11)
(4,312)
(6,573)
30,492 $ 2,956 $ 19,315 $ 52,763
1,401
(341)
1,060
—
(354)
3,100
(3,435)
(335)
3
(1,907)
33,975 $
11,922
(13,259)
(1,337)
(98)
5,427
906 $ 20,085 $ 54,965
16,929
3,896
(18,400)
(5,121)
(1,471)
(1,225)
(95)
3
8,372
2,692
37,967 $ 2,250 $ 21,555 $ 61,771
1,111
(20)
1,091
—
253
17,103 $
10,388
(9,703)
685
13,043
3,144
33,975 $
353 $ 15,655 $ 33,111
16,037
5,112
536
(15,162)
(5,397)
(61)
(285)
475
875
16,587
3,543
—
4,393
1,171
77
906 $ 20,085 $ 54,965
(1)
Includes institutional and retail share classes and Variable Insurance Products or VIP funds.
61
(2)
(3)
Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.
Includes the impact of the RS Acquisition, which closed on July 29, 2016, and increased our AUM by
$16.7 billion.
At December 31, 2018, our total AUM was $52.8 billion, a decrease of $9.0 billion, or 15%, compared to
$61.8 billion at December 31, 2017. The change in AUM during the year ended December 31, 2018 reflects net market
depreciation of ($6.6) billion and net outflows of ($2.4) billion. The net outflows were primarily a result of ($2.7) billion
net outflows of our U.S. mid cap equity strategies, ($0.8) billion of our fixed income strategies, ($0.6) billion of our U.S.
large cap equity strategies, ($0.6) billion of our U.S. small cap equity strategies and ($0.5) billion in our commodity
strategies, which were partially offset by $1.5 billion of net inflows in our global / non-U.S. equity strategies and $1.1
billion in our Solutions Platform.
At December 31, 2017, our total AUM was $61.8 billion, an increase of $6.8 billion, or 12% compared to
$55.0 billion at December 31, 2016. The change in AUM during the year ended December 31, 2017 reflects net market
appreciation of $8.4 billion, net outflows of ($1.5) billion and a ($0.1) billion reduction primarily related to mutual fund
liquidation. Excluding the impact of outflows from Diversified, net outflows would have been ($0.9) billion for the period.
The net outflows were primarily a result of ($1.5) billion net outflows in our U.S. large cap equity strategies, ($1.1) billion
in our U.S. small cap equity strategies, ($0.5) billion in our commodity strategies, ($0.4) billion in our global / non-U.S.
equity strategies and ($0.4) billion in our fixed income strategies, which were partially offset by $1.3 billion of net inflows
in our U.S. mid cap equity strategies and $1.1 billion in our Solutions Platform.
At December 31, 2016, our total AUM was $55.0 billion, an increase of $21.9 billion, or 66%, compared to
$33.1 billion at December 31, 2015. In addition to the RS Acquisition, which accounted for an increase in AUM of
$16.7 billion as of the closing on July 29, 2016, the change in AUM during the year ended December 31, 2016 reflects net
market appreciation of $4.4 billion and net inflows of $0.9 billion. Excluding the impact of outflows from Diversified, net
inflows would have been $2.3 billion in 2016. The net inflows were primarily a result of $3.1 billion of net inflows in our
U.S. mid cap equity strategies, $0.5 billion in our global / non-U.S. equity strategies and $0.2 billion in Solutions, which
were largely offset by ($1.7) billion net outflows in our U.S. large cap equity strategies, ($0.8) billion in our fixed income
strategies and ($0.3) billion in our commodity strategies.
GAAP Results of Operations
Our GAAP revenues principally consist of:
i.
ii.
Investment management fees, which are based on our overall weighted average fee rate charged to our
clients and our level of AUM; and
Fund administration and distribution fees, which are asset-based fees earned from open-end mutual
funds for administration and distribution services.
Investment Management Fees
Investment management fees are earned from managing clients’ assets. Our investment management fee revenue
fluctuates based on a number of factors, including the total value of our AUM, the composition of AUM across investment
strategies and vehicles, changes in the investment management fee rates on our products and the extent to which we enter
into fee arrangements that differ from our standard fee schedule. Investment management fees are earned based on
a percentage of AUM as delineated in the respective investment management agreements. Approximately 87% of our
investment management fees are calculated based on daily average AUM with the remainder calculated based on monthly
average AUM or point in time AUM.
62
Fund Administration and Distribution Fees
Fund administration fees are asset-based fees earned from open-end funds for administration services. Fund
administration fees fluctuate based on the level of average open-end AUM and the fee rates charged for these services.
Fund distribution fees are asset-based fees earned from open-end funds for distribution services. Fund distribution
fees fluctuate based on the level of average open-end AUM and the composition of those assets across share classes that
pay varying levels of fund distribution fees.
Our GAAP expenses principally consist of:
i.
ii.
iii.
iv.
v.
Personnel compensation and benefits;
Distribution and other asset-based expenses;
General and administrative expenses;
Depreciation and amortization charges; and
Acquisition-related costs and restructuring / integration costs.
Personnel Compensation and Benefits
Personnel compensation and benefits is our most significant category of expense. Personnel compensation and
benefits consists of (i) salaries, payroll related taxes and employee benefits, (ii) incentive compensation, (iii) sales-based
compensation, (iv) compensation expense related to equity awards granted to employees and (v) acquisition-related
compensation in the form of cash retention bonuses.
Incentive compensation is the largest component of the total compensation of our employees. The aggregate
amount of cash incentive compensation is funded by a pool that is based on a percentage of total Company earnings (before
taking into account incentive compensation). This incentive pool is used to pay the investment teams a percentage of the
revenue earned by their respective Franchise on a quarterly basis. This incentive pool is also used to pay incentive
compensation to senior management and other non-investment employees on an annual basis. Incentive compensation
paid to senior management and to other non-investment employees is discretionary and subjectively determined based on
Company and individual performance and the total amount of the incentive compensation pool.
Distribution and Other Asset-based Expenses
Distribution and other asset-based expenses consists of (i) broker-dealer distribution fees and platform
distribution fees, (ii) fund expense reimbursements to affiliates and (iii) sub-administration, sub-advisory and
middle-office expenses.
Broker-dealer distribution fees are paid by VCA as the broker-dealer for the Victory Funds to third-party
distributors. The Victory Funds pay VCA for distribution services and VCA, in turn, pays third-party distributors.
Platform distribution fees are paid by VCM as the investment adviser to the Victory Funds. Platform distribution
fees are paid to financial advisors, retirement plan providers and intermediaries for servicing and administering accounts
invested in shares of the Victory Funds. Distribution fees typically vary based on the level of AUM and the composition
of those assets across share classes.
Fund expense reimbursements result from VCM, as investment adviser for the Victory Funds and VictoryShares,
agreeing to cap the annual operating expenses for certain share classes of the Victory Funds and VictoryShares. VCM has
contractually agreed to reimburse the Victory Funds and VictoryShares for expenses in excess of these caps but may
63
recoup these reimbursements for a period of time if the applicable Fund’s share class expenses and/or VictoryShares ETF
expenses fall below the cap.
Sub-administration, sub-advisory and middle-office expenses consist of fees paid to our sub-administrator of the
Victory Funds and VictoryShares, fees paid to sub-advisers on certain Victory Funds and fees paid to vendors to which
we outsource middle-office functions.
• VCM acts as the administrator to the Victory Funds and VictoryShares. VCM has hired a sub-administrator,
the fees for which are captured in sub-administration expense. As administrator, VCM supervises the
operations of the Victory Funds and VictoryShares, including the services provided by the sub-administrator.
The sub-administrator is paid through a contractual arrangement based on a percentage of the average fund
AUM.
• VCM, as the investment adviser for the Victory Funds, has hired unaffiliated sub-advisers to manage funds
for which we do not have in-house capabilities. The fees paid to the sub-advisers are contractual based on
a percentage of assets that they manage.
• We have outsourced middle-office operations to achieve a scalable operational infrastructure that utilizes a
variable-cost model. We have selected to partner with top-tier vendors who perform trade operations,
portfolio accounting and performance measurement with oversight from our operations team. The fees paid
to these vendors are variable and structured based on the number of accounts, assets and specific services
performed.
General and Administrative Expenses
General and administrative expenses primarily consist of investment research and technology costs, professional
and marketing fees, travel, rent and insurance expenses.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of the depreciation of property and equipment as well
as the amortization of acquired intangibles that have a definite life. These intangibles include customer relationships,
investment advisory contracts, intellectual property and non-compete clauses acquired in connection with a business or
asset acquisition. Both depreciation and amortization are recorded ratably over the assets’ useful lives.
Acquisition-Related Costs
Acquisition-related costs include legal fees, advisory services, mutual fund proxy voting costs and other one-time
expenses related to acquisitions.
Restructuring and Integration Costs
Restructuring and integration costs include costs incurred in connection with business combinations, asset
purchases and changes in business strategy. These include severance related expenses related to one-time benefit
arrangements, contract termination and other costs to integrate investment platforms, products and personnel into existing
systems, processes and service provider arrangements and restructure the business to capture operating expense synergies.
Other non-operating items of income and expense consist of:
i.
ii.
Interest income and other income/(expense);
Interest expense and other financing costs;
64
iii.
iv.
Loss on debt extinguishment; and
Income tax (expense)/benefit.
Interest Income and Other Income/(Expense)
Interest income and other income/(expense) consists primarily of interest income, gains / losses on investments,
dividend income on investments and income /expense associated with an other receivable recorded in connection with an
acquisition.
Interest Expense and Other Financing Costs
Interest expense and other financing costs consists primarily of interest expense attributable to long-term debt.
See “—Liquidity and Capital Resources” for more information.
Loss on Debt Extinguishment
Loss on debt extinguishment consists of the write-off of unamortized debt issuance costs and unamortized debt
discount as a result of debt refinancing.
Income Tax (Expense)/Benefit
The provision for income taxes includes U.S. federal, state and local taxes, and following the RS Acquisition in
2016, foreign income taxes payable by certain of our subsidiaries. The effective tax rate is primarily driven by state and
local taxes and permanent differences related to meals and entertainment. The portion of the effective income tax rate
attributable to state and local income taxes varies from year to year depending on amounts of income apportioned to each
jurisdiction, whether we file income tax returns on a unitary or separate return basis and with changes in tax laws. On
December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income tax law by,
among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018.
65
Our GAAP results of operations were as follows for the years ended December 31, 2018 and 2017.
(in thousands, except for shares)
Revenue
Year Ended December 31,
Change
2018
2017
Amount
%
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . $
Fund administration and distribution fees . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,683 $
60,729
413,412
343,811 $
65,818
409,629
8,872
(5,089)
3,783
3 %
(8)%
1 %
Expenses
Personnel compensation and benefits . . . . . . . . . . . . . . . . $
Distribution and other asset-based expenses . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Change in value of consideration payable for
acquisition of business . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and integration costs . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
145,880 $
94,680
30,005
23,277
144,111 $
103,439
33,996
29,910
(37)
4,346
742
298,893
(294)
2,094
6,205
319,461
1,769
(8,759)
(3,991)
(6,633)
257
2,252
(5,463)
(20,568)
1 %
(8)%
(12)%
(22)%
87 %
108 %
(88)%
(6)%
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
114,519
90,168
24,351
27 %
Other income (expense)
Interest income and other income/(expense) . . . . . . . . . . $
Interest expense and other financing costs . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . .
(2,856) $
(20,694)
(6,058)
(29,608)
(2,913) $
(48,467)
(330)
(51,710)
57
27,773
(5,728)
22,102
2 %
57 %
(1,736)%
43 %
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
84,911
38,458
46,453
121 %
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,207)
(12,632)
(8,575)
(68)%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63,704 $
25,826 $
37,878
147 %
Earnings per share of common stock
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.96 $
0.90 $
0.47 $
0.43 $
0.49
0.47
104 %
108 %
Weighted average number of shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,295,240
70,510,536
54,930,852
59,577,348
11,364,388
10,933,188
21 %
18 %
Dividends declared per share of common stock . . . . . . . $
— $
2.42 $
(2.42)
n/m
Investment Management Fees
Investment management fees increased $8.9 million, or 3%, for the year ended December 31, 2018 compared to
the year ended December 31, 2017 due to an increase in average AUM year over year, partially offset by a decrease in the
realized fee rate due to asset mix shift. Average AUM increased by $3.6 billion to $61.4 billion for the year ended
December 31, 2018 from $57.8 billion for the year ended December 31, 2017. The weighted average fee rate for the year
ended December 31, 2018 was 67.3 basis points, a decrease of 3.5 basis points compared to the year ended December 31,
2017 due to asset mix shift.
66
Fund Administration and Distribution Fees
Fund administration and distribution fees totaled $60.7 million for the year ended December 31, 2018, a decrease
of $5.1 million, or 8%, when compared to the year ended December 31, 2017, due to a decrease in fund distribution fees
partially offset by an increase in fund administration fees.
Fund distribution fees were $37.3 million for the year ended December 31, 2018, compared to $43.5 million for
the year ended December 31, 2017. While mutual fund daily average AUM grew by $0.8 billion from $36.2 billion for the
year ended December 31, 2017 to $37.0 billion for the year ended December 31, 2018, the mix of assets shifted to fewer
12b-1 paying share classes.
Fund administration fees were $23.4 million for the year ended December 31, 2018, compared to $22.3 million
for year ended December 31, 2017, due to higher mutual fund and ETF average daily assets.
Personnel Compensation and Benefits
The following table presents the components of GAAP compensation expense for the year ended December 31,
2018 and 2017:
Year Ended December 31,
(in thousands)
Salaries, payroll related taxes and employee benefits . . . . . . . . . . . $
Incentive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales-based compensation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related cash retention compensation . . . . . . . . . . . . . . .
2017
49,745
65,984
15,051
11,752
1,579
Total personnel compensation and benefits expense . . . . . . . . $ 145,880 $ 144,111
2018
45,820 $
71,273
13,549
15,238
—
(1)
(2)
Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on
gross and net client cash flows and revenue earned on sales.
Share-based compensation typically vests over several years based on service and the achievement of specific
business and financial targets. The value of share-based compensation is recognized as compensation expense
over the vesting period.
Personnel compensation and benefits was $145.9 million for the year ended December 31, 2018, an increase of
$1.8 million, or 1%, from $144.1 million for the year ended December 31, 2017. Salaries, payroll related taxes and
employee benefits was $45.8 million for the year ended December 31, 2018, a decrease of $3.9 million, or 8%, from
$49.7 million for the year ended December 31, 2017. This decrease was primarily due to a difference in the mark-to-
market of the deferred compensation plan liability year over year. Incentive compensation was $71.3 million for the year
ended December 31, 2018, an increase of $5.3 million, or 8%, from $66.0 million for the year ended December 31, 2017,
due to higher pre-incentive compensation earnings. Sales-based compensation was $13.5 million for the year ended
December 31, 2018, a decrease of $1.6 million, or 11%, from $15.1 million for the year ended December 31, 2017, as a
result of lower gross flows. Share-based compensation was $15.2 million for the year ended December 31, 2018, an
increase of $3.4 million, or 29%, from $11.8 million for the year ended December 31, 2017, due to the share-based
compensation related to the IPO and pre-existing awards that are still being expensed. There was no acquisition-related
cash retention compensation during the year ended December 31, 2018.
67
Distribution and Other Asset-based Expenses
Broker-dealer and platform distribution expenses along with fund expense reimbursements, sub-administration,
sub-advisory and middle-office expenses are based on AUM. The following table presents the components of distribution
and other asset-based expenses for the year ended December 31, 2018 and 2017:
Year Ended December 31,
(in thousands)
Broker-dealer distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Platform distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund expense reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle-office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distribution and other asset-based expenses . . . . . . . . . . . $
2018
34,423 $
27,177
12,902
6,763
6,452
6,963
2017
40,521
29,701
11,896
5,754
8,352
7,215
94,680 $ 103,439
Distribution and other asset-based expenses are primarily based on percentages of AUM and decreased by
$8.7 million, or 8%, to $94.7 million for the years ended December 31, 2018, from $103.4 million for the year ended
December 31, 2017. Broker-dealer distribution fees and platform distribution fees decreased due to the mix of mutual fund
assets and share classes. Asset-based expenses associated with sub-administration and fund expense reimbursements
increased year over year due to the increase in fund AUM partially offset by operational efficiencies. The decrease in sub-
advisory expense is a result of a decline in the assets included under our two sub-advisory relationships. Middle-office
expense decreased year over year due to operational efficiencies partially offset by the increase in AUM.
General and Administrative Expenses
General and administrative expenses decreased by $4.0 million, or 12%, to $30.0 million for the year ended
December 31, 2018, from $34.0 million for the year ended December 31, 2017, driven by operational efficiencies.
Depreciation and Amortization
Depreciation and amortization decreased by $6.6 million, or 22%, to $23.3 million for the year ended
December 31, 2018, from $29.9 million for the year ended December 31, 2017, primarily due to lower amortization as
certain intangible assets acquired in connection with the management-led buyout with Crestview GP reached the end of
their useful lives.
Acquisition-Related Costs
Acquisition-related costs increased by $2.2 million, or 105%, to $4.3 million for the year ended December 31,
2018, from $2.1 million for the year ended December 31, 2017, primarily due to costs incurred related to the Harvest and
USAA Acquired Companies transactions.
Restructuring and Integration Costs
Restructuring and integration costs decreased by $5.5 million, or 89%, to $0.7 million for the year ended
December 31, 2018, from $6.2 million for the year ended December 31, 2017, primarily due to costs incurred in 2017 for
contract breakage and asset write-offs associated with the integration of RS Investments.
Loss on Debt Extinguishment
Loss on debt extinguishment increased $5.8 million to $6.1 million for the year ended December 31, 2018, from
$0.3 million for the year ended December 31, 2017, due to the write-off of unamortized debt issuance costs and
unamortized debt discount as a result of the 2018 debt refinancing.
68
Interest Expense and Other Financing Costs
Interest expense and other financing costs decreased by $27.8 million, or 57%, to $20.7 million for the year ended
December 31, 2018, from $48.5 million for the year ended December 31, 2017 as a result of refinancing activities and debt
pre-payment. See Note 10 to the audited consolidated financial statements for further discussion.
Income Tax Expense
Income tax expense increased $8.6 million, or 68%, to $21.2 million for the year ended December 31, 2018, from
$12.6 million for the year ended December 31, 2017 as a result of higher pre-tax income and a one-time credit to income
tax expense in 2017 as a result of the remeasurement of our U.S. net deferred taxes required by the Tax Act partially offset
by a reduction in our effective tax rate in 2018 due to the Tax Act. See Note 9 to the audited consolidated financial
statements.
69
Our GAAP results of operations were as follows for the years ended December 31, 2017 and 2016.
(in thousands, except for shares)
Revenue
Year Ended December 31,
Change
2017
2016
Amount
%
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fund administration and distribution fees . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
343,811 $
65,818
409,629
248,482 $
49,401
297,883
95,329
16,417
111,746
38 %
33 %
38 %
Expenses
Personnel compensation and benefits . . . . . . . . . . . . . . . . . . .
Distribution and other asset-based expenses . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Change in value of consideration payable for acquisition
of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and integration costs . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,111
103,439
33,996
29,910
(294)
2,094
6,205
319,461
122,615
77,497
26,628
30,405
(378)
6,619
10,012
273,398
21,496
25,942
7,368
(495)
18 %
33 %
28 %
(2) %
84
(4,525)
(3,807)
46,063
22 %
(68) %
(38) %
17 %
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,168
24,485
65,683 268 %
Other income (expense)
Interest income and other income/(expense) . . . . . . . . . . . . .
Interest expense and other financing costs . . . . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . . . . .
(2,913)
(48,467)
(330)
(51,710)
1,086
(34,642)
—
(33,556)
(3,999) n/m
(13,825)
(40) %
(330) n/m
(18,154) (54) %
Income/(loss) before income tax (expense)/benefit . . . . . . . .
38,458
(9,071)
47,529 n/m
Income tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,632)
3,000
(15,632) n/m
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
25,826 $
(6,071) $
31,897 n/m
Earnings (loss) per share of common stock
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.47 $
0.43 $
(0.12) $
(0.12) $
0.59 n/m
0.55 n/m
Weighted average number of shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,930,852
59,577,348
50,017,712
50,017,712
4,913,140
9,559,636
10 %
19 %
Dividends declared per share of common stock . . . . . . . . . . $
2.42 $
— $
2.42 n/m
Investment Management Fees
Investment management fees increased $95.3 million, or 38%, for the year ended December 31, 2017 compared
to the year ended December 31, 2016 due to an increase in average AUM year over year. Average AUM increased by
$16.0 billion to $57.8 billion for the year ended December 31, 2017 from $41.8 billion for the year ended December 31,
2016.
70
Fund Administration and Distribution Fees
Fund administration and distribution fees totaled $65.8 million for the year ended December 31, 2017, an increase
of $16.4 million, or 33%, when compared to the year ended December 31, 2016, due to an increase in open-end mutual
fund AUM. Open-end mutual fund daily average AUM grew by $12.0 billion from $24.2 billion for the year ended
December 31, 2016 to $36.2 billion for the year ended December 31, 2017 due primarily to the RS Acquisition (which
was completed in July 2016 and included $13.2 billion of open-end mutual fund AUM at the date of acquisition). The
increase in fees due to higher average AUM was partially offset by a reduction in the fee rate earned for administrative
services. The administrative fee schedule is tiered such that the average fee rate earned declines as AUM increase.
Personnel Compensation and Benefits
The following table presents the components of GAAP compensation expense for the years ended December 31,
2017 and 2016:
Year Ended December 31,
(in thousands)
Salaries, payroll related taxes and employee benefits . . . . . . . . . . . $
Incentive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales-based compensation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and transaction-related compensation . . . . . . . . . . . . . .
2016
42,963
51,738
12,693
8,827
6,394
Total personnel compensation and benefits expense . . . . . . . . $ 144,111 $ 122,615
2017
49,745 $
65,984
15,051
11,752
1,579
(1)
(2)
Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on
gross client cash flows and revenue earned on sales.
Share-based compensation typically vests over several years based on service and the achievement of specific
financial and business targets. The value of share-based compensation is recognized as compensation expense
over the vesting period.
Personnel compensation and benefits was $144.1 million for the year ended December 31, 2017, an increase of
$21.5 million, or 18%, from $122.6 million for the year ended December 31, 2016. Salaries, payroll related taxes and
employee benefits was $49.7 million for the year ended December 31, 2017, an increase of $6.7 million, or 16%, from
$43.0 million for the year ended December 31, 2016. This increase reflects the effect of increased headcount due to the
RS Acquisition as well as new hires and annual salary increases. Incentive compensation was $66.0 million for the year
ended December 31, 2017, an increase of $14.3 million, or 28%, from $51.7 million for the year ended December 31,
2016, due to higher pre-incentive compensation earnings and the effect of the RS Acquisition. Sales-based compensation
was $15.0 million for the year ended December 31, 2017, an increase of $2.3 million, or 18%, from $12.7 million for the
year ended December 31, 2016, as a result of higher gross flows and revenue. Share-based compensation was $11.8 million
for the year ended December 31, 2017, an increase of $3.0 million, or 34%, from $8.8 million for the year ended December
31, 2016, due to the share-based compensation awarded to RS Investments employees in connection with the RS
Acquisition and pre-existing awards that are still being expensed. Acquisition and transaction-related compensation was
$1.6 million for the year ended December 31, 2017, a decrease of $4.8 million from $6.4 million for the year ended
December 31, 2016, due to cash retention payments made in 2016 to former RS Investments employees in connection with
the RS Acquisition and the impact of certain one-time compensation costs related to the integration of the RS Investments
business onto our platform.
71
Distribution and Other Asset-based Expenses
Broker-dealer and platform distribution expenses along with fund expense reimbursements, sub-administration,
sub-advisory and middle-office expenses are based on AUM. The following table presents the components of distribution
and other asset-based expenses for the year ended December 31, 2017 and 2016:
Year Ended December 31,
(in thousands)
Broker-dealer distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Platform distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund expense reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle-office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
40,521 $
29,701
11,896
5,754
8,352
7,215
Total distribution and other asset-based expenses . . . . . . . . . . . $ 103,439 $
2016
30,983
19,705
10,342
5,509
4,365
6,593
77,497
Distribution and other asset-based expenses are primarily based on percentages of AUM and increased by $25.9
million, or 33%, to $103.4 million for the year ended December 31, 2017, from $77.5 million for the year ended December
31, 2016, due to higher average open-end mutual fund AUM and an increase in the cost of third-party distribution. Asset-
based expenses associated with fund reimbursements, sub-administration and middle-office outsourcing have increased
year over year due to the increase in AUM as a result of the RS Acquisition and market appreciation. The increase in sub-
advisory expenses is a result of the RS Acquisition, which included two sub-advisory relationships (Park Avenue and
SailingStone).
General and Administrative Expenses
General and administrative expenses increased by $7.4 million, or 28%, to $34.0 million for the year ended
December 31, 2017, from $26.6 million for the year ended December 31, 2016, driven by systems and data costs related
to incremental Franchises and additional risk tools as well as database development and marketing costs for new products
and ETFs. In addition, included in general and administrative expenses for the year ended December 31, 2017 was $2.1
million of costs related to debt modification as a result of the incremental term loan borrowing of $125 million in February
2017 and the repricing of the term loan in August 2017.
Depreciation and Amortization
Depreciation and amortization decreased by $0.5 million, or 2%, to $29.9 million for the year ended December
31, 2017, from $30.4 million for the year ended December 31, 2016, primarily due lower amortization of certain intangible
assets acquired in connection with the management-led buyout with Crestview GP from KeyCorp that were fully amortized
in 2017 partially offset by higher intangible asset amortization as a result of the RS Acquisition.
Acquisition-Related Costs
Acquisition-related costs decreased by $4.5 million to $2.1 million for the year ended December 31, 2017, from
$6.6 million for the year ended December 31, 2016, due to the RS Acquisition costs incurred in the earlier period.
Restructuring and Integration Costs
Restructuring and integration costs decreased by $3.8 million to $6.2 million for the year ended December 31,
2017, from $10.0 million for the year ended December 31, 2016, due to costs related to the RS Acquisition which occurred
in the third quarter of 2016. Included in the $6.2 million for the year ended December 31, 2017 were $3.0 million of loss
on disposal of assets, $2.0 million of contract breakage, $0.6 million of severance and $0.6 million of other.
72
Interest Expense and Other Financing Costs
Interest expense and other financing costs increased by $13.9 million, or 40%, to $48.5 million for the year ended
December 31, 2017, from $34.6 million for the year ended December 31, 2016. This increase was primarily due to
incremental term loans incurred under the 2014 Credit Agreement in the amounts of $135.0 million and $125.0 million in
July 2016 and February 2017, respectively. We used the proceeds of the incremental term loans to fund the RS Acquisition
and associated transaction costs and to pay a dividend to our shareholders. On August 1, 2017, the 2014 Credit Agreement
was amended to refinance all existing term loans outstanding, effective as of that date, reducing the spread above LIBOR
from 7.50% to 5.25%.
Income Tax (Expense)/Benefit
The provision for income taxes for the year ended December 31, 2017 and 2016 comprises federal and state taxes
and, in addition, for the year ended December 31, 2017, foreign income taxes. The difference between our effective tax
rate and the statutory federal rate of 35% are state, local and foreign income taxes and non-deductible expenses.
On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income
tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1,
2018. As a result of the reduction in the corporate income tax rate, we were required to remeasure our U.S. net deferred
taxes at December 31, 2017. The impact of the remeasurement resulted in a one-time credit to income tax expense of $2.4
million for the three months and year ended December 31, 2017.
Effects of Inflation
For the years ended December 31, 2018, 2017 and 2016, inflation did not have a material effect on our
consolidated results of operations. Inflationary pressures can result in increases to our cost structure, especially to the
extent that large expense components such as compensation are impacted. To the degree that these expense increases are
not recoverable or cannot be counterbalanced through price increases due to the competitive environment, our profitability
could be negatively impacted. In addition, the value of the fixed income assets that we manage may be negatively impacted
when inflationary expectations result in a rising interest rate environment. Declines in the values of AUM could lead to
reduced revenues as investment management fees are generally earned as a percentage of AUM.
Supplemental Non-GAAP Financial Information
Our management uses non-GAAP performance measures to evaluate the underlying operations of our business.
Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP
measures that we believe distort the economic value of our organization and we believe that many investors use this
information when assessing the financial performance of companies in the investment management industry. We have
included these non-GAAP measures to provide investors with the same financial metrics used by management to assess
the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net
Income.
73
The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the
periods indicated:
Year Ended December 31,
2017
2018
2016
(in thousands)
Reconciliation of non-GAAP financial measures:
Net income/(loss) (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,704 $ 25,826 $
Income tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income/(loss) before tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,911 $ 38,458 $
(6,071)
3,000
(9,071)
31,286
3,156
1,137
27,250
8,827
23,025
2,749
1,181
—
8,534
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,168 $ 149,088 $ 98,074
Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other business taxes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition-related intangibles(4) . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, restructuring and exit costs(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-IPO governance expenses(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on equity method investments(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation in excess of expected levels due to acquisitions(10) . . . . . . . . .
20,173
2,956
1,505
20,321
15,238
6,389
7,807
138
730
—
44,330
3,561
1,887
26,349
11,752
15,041
6,035
1,248
427
—
(21,207)
(12,632)
(in thousands)
Reconciliation of non-GAAP financial measures:
Net income/(loss) (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,704 $ 25,826 $ (6,071)
Adjustments to reflect the operating performance of the Company:
2016
2018
Year Ended December 31,
2017
i. Other business taxes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii. Amortization of acquisition-related intangibles(4) . . . . . . . . . . . . . . . . .
iii. Share-based compensation(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iv. Acquisition, restructuring and exit costs(6) . . . . . . . . . . . . . . . . . . . . . . .
v. Debt issuance costs(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
vi. Pre-IPO governance expenses(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
vii. Compensation in excess of expected levels due to acquisitions(10) . . . .
Tax effect of above adjustments(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
viii. Remeasurement of net deferred taxes(12) . . . . . . . . . . . . . . . . . . . . . . . .
1,137
27,250
8,827
23,025
2,749
1,181
8,534
(27,627)
—
Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 102,253 $ 62,038 $ 39,005
Tax benefit of goodwill and acquired intangibles(13) . . . . . . . . . . . . . . . . . . . . . . . .
16,786
1,505
20,321
15,238
6,389
7,807
138
—
(12,849)
—
1,887
26,349
11,752
15,041
6,035
1,248
—
(23,678)
(2,422)
19,691
13,278
(1)
(2)
(3)
(4)
(5)
We add back interest paid on debt and other financing costs, net of interest income; interest expense is included
in “Interest expense and other financing costs” in our consolidated financial statements while interest income is
shown in “Interest income and other income” in our consolidated financial statements.
We add back depreciation on property and equipment; included in “Depreciation and amortization” in our
consolidated financial statements.
We add back other business taxes; other business taxes are included in “General and administrative” in our
consolidated financial statements.
We add back amortization of acquisition-related intangibles; included in “Depreciation and amortization” in our
consolidated financial statements.
We add back the expense associated with share-based compensation associated with equity issued from pools
that were created in connection with the management-led buyout with Crestview GP from KeyCorp, the Munder
74
Acquisition and the RS Acquisition and as a result of IPO-related equity grants; included in “Personnel
compensation and benefits” in our consolidated financial statements.
(6)
We add back direct incremental costs of acquisitions and the IPO, including expenses associated with third-party
advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early
termination costs, loss on other receivable recorded in connection with an acquisition, and severance, retention
and transaction incentive compensation. Severance, retention and transaction incentive compensation is included
in “Personnel compensation and benefits” in our consolidated financial statements, loss on other receivable
recorded in connection with an acquisition is included in “Interest income and other income/(expense),” costs
associated with professional services incurred in connection with IPO readiness are included in “General and
administrative”; all other incremental costs are included in “Restructuring and integration costs” or
“Acquisition-related costs.”
(in thousands)
Restructuring and integration costs . . . . . . . . . . .
Interest income and other income/(expense) . . . .
General and administrative . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . .
Personnel compensation and benefits . . . . . . . . .
$
2018
$
Year Ended December 31,
2017
6,205
4,429
732
2,094
1,580
$
742
998
303
4,346
—
2016
10,012
—
—
6,619
6,394
(7)
(8)
(9)
(10)
We add back debt issuance costs; included in “Interest expense and other financing costs”, Loss on debt
extinguishment” and “General and administrative” in our consolidated financial statements. See “—Liquidity and
Capital Resources” for more information.
We add back pre-IPO governance expenses paid to Crestview and Reverence Capital, included in “General and
administrative” in our consolidated financial statements. These payments terminated as of the completion of the
IPO.
We adjust for earnings/losses on equity method investments, included in “Interest income and other
income/(expenses)” in our consolidated financial statements.
Our compensation committee, together with our CEO, establishes a target percentage of our pre-bonus EBITDA
to be allocated to employees as annual cash incentive compensation. If, as a result of a significant acquisition, we
pay annual cash incentive compensation that is a greater percentage of pre-bonus EBITDA than our
target percentage, we add back the amount of the annual incentive cash compensation in excess of the
target percentage. In 2016, as a result of the RS Acquisition, we paid incentive cash compensation at a
greater percentage of pre-bonus EBITDA than our target percentage. We paid incentive cash compensation in
2016 at levels we considered appropriate taking into account the RS Acquisition (including the size of our
Company post-acquisition) without the benefit of a full year of those earnings and before expense synergies were
fully realized. We also paid incentive cash compensation on duplicative headcount while the integration of the
RS Investments platform was being completed; included in “Personnel compensation and benefits” in our
consolidated financial statements.
(11)
For the year ended December 31, 2018, reflects income taxes of 25% applied to the sum of line items i. to vii.;
25% represents statutory federal income tax rate of 21% plus an estimate for state, local and foreign income taxes.
For the years ended December 31, 2017 and December 31, 2016, reflects income taxes of 38% applied to the sum
of line items i. to vii.; 38% represents statutory federal income tax rate of 35% plus an estimate for state, local
and foreign income taxes.
(12)
On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income
tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective
75
January 1, 2018. As a result of the reduction in the corporate income tax rate, we were required to remeasure our
U.S. net deferred taxes at December 31, 2017. The impact of the remeasurement was a one-time credit to income
tax expense of $2.4 million for the year ended December 31, 2017.
(13)
Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior
acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill
may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these
assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in
tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide
us with a significant supplemental economic benefit.
Effective January 1, 2018, the impact of the Tax Act lowered our combined statutory federal income tax rate plus
an estimate for state, local and foreign income taxes from approximately 38% to 25% thus lowering our income
tax expense beginning in calendar year 2018. The reduction in our combined statutory federal income tax rate
plus an estimate for state, local and foreign income taxes from approximately 38% to 25% also reduced the tax
benefit of goodwill and acquired intangible assets beginning in 2018.
Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared
in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar
terms are used to identify these measures.
Liquidity and Capital Resources
Our primary uses of cash relate to repayment of our debt obligations, funding of acquisitions and working capital
needs and are expected to be met primarily through cash generated from our operations. The following table shows our
liquidity position as of December 31, 2018 and 2017.
Year Ended December 31,
(in thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,491 $ 12,921
55,917
Accounts and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undrawn commitment on revolving credit facility . . . . . . . . . . . . . . . . .
25,000
Accounts and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(51,301)
44,120
100,000
(50,578)
2018
2017
We manage our cash balances in order to fund our day-to-day operations and invest excess cash into money
market funds and other short-term investments. Our accounts receivable consist primarily of investment management fees
that have been earned but not yet received from clients. Included in other receivables are amounts due under a contract
with a third party acquired in connection with the RS Acquisition, income and other taxes receivable and amounts
receivable from the funds. We perform a review of our receivables on a monthly basis to access collectability.
We maintained a $100.0 million revolving credit facility at December 31, 2018, which had $100.0 million
undrawn as of December 31, 2018. See Note 10 to the audited consolidated financial statements for further discussion.
Debt Refinancing
On February 12, 2018, concurrently with the closing of the IPO, we entered into the Existing Credit Agreement
under which we received seven-year term loans in an original aggregate principal amount of $360.0 million and established
a five-year revolving credit facility (which was unfunded as of closing) with aggregate commitments of $50.0 million. On
May 3, 2018, the Company signed an amendment to the Existing Credit Agreement increasing the revolving credit facility
from $50.0 million to $100.0 million. See Note 10 to the audited consolidated financial statements for further discussion.
The Company repaid $37.0 million, $23.0 million and $20.0 million of the outstanding term loans under the
Existing Credit Agreement in the first quarter, second quarter and third quarter of 2018, respectively for a total of $80.0
76
million repaid during the year ended December 31, 2018. See Note 10 to the audited consolidated financial statements for
further discussion.
The Harvest Commitment Letter
In connection with entering into the Harvest Purchase Agreement, on September 21, 2018, the Company entered
into the Harvest Commitment Letter with Royal Bank of Canada (“RBC”) and Barclays Bank PLC (“Barclays”), pursuant
to which RBC and Barclays have committed to provide, and have agreed to arrange and syndicate, an incremental senior
secured term loan facility under the Existing Credit Agreement in an initial aggregate principal amount of up to $265
million (the “Harvest Facility”). The proceeds of the Harvest Facility, together with cash on the Company’s balance sheet
at Harvest Closing, will be used by the Company to fund a portion of the Harvest Purchase Price and to pay fees and
expenses incurred in connection with the Harvest Acquisition and the Harvest Facility, unless the Company finances the
Harvest Acquisition with proceeds from the USAA AMCO Term Loan Facility described below. The availability of the
Harvest Facility is subject to the satisfaction of certain customary conditions precedent. Neither the closing of the Harvest
Facility, nor the receipt of any other financing, is a condition to the Harvest Closing. If the Company finances the Harvest
Acquisition with proceeds from the USAA AMCO Term Loan Facility, it will not borrow under the Harvest Commitment
Letter or enter into the Harvest Facility.
USAA AMCO Credit Facilities Commitment Letter
In connection with entering into the USAA Stock Purchase Agreement, on November 6, 2018 the Company
entered into the USAA AMCO Credit Facilities Commitment Letter with Barclays and RBC, pursuant to which Barclays
and RBC have committed to provide, and have agreed to arrange and syndicate, a new seven-year senior secured first lien
term loan facility (the “USAA AMCO Term Loan Facility”) in an aggregate principal amount of up to $1.395 billion and
a new five-year senior secured first lien revolving credit facility (together with the USAA AMCO Term Loan Facility, the
“USAA AMCO Credit Facilities”) in an aggregate principal amount of up to $100 million. Proceeds from the USAA
AMCO Term Loan Facility, together with cash on the Company’s balance sheet, will be used to refinance in full all debt
outstanding under the Company’s Existing Credit Agreement, finance the USAA AMCO Acquisition and finance the
above mentioned Harvest Acquisition, thus effectively replacing the Harvest Commitment Letter.
Capital Requirements
VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act,
which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that
have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to
transfer cash to their parents. VCA and our non-U.S. subsidiaries were in compliance with these requirements as of and
for the years ended December 31, 2018, 2017 and 2016.
Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
(in thousands)
Net cash provided by operating activities . . . . . . . . . . . . $ 134,345 $ 96,169 $ 39,540
(210,082)
Net cash used in investing activities . . . . . . . . . . . . . . . .
171,839
Net cash (used in) provided by financing activities . . . .
(11,549)
(84,161)
(8,532)
(91,273)
2018
2016
Year Ended December 31,
2017
Year Ended December 31, 2018 and 2017
Operating activities provided net cash of $134.3 million and $96.2 million for the years ended December 31, 2018
and 2017, respectively. The $38.1 million increase in net cash provided by operating activities was primarily due to growth
in the business and lower interest expense as a result of refinancing activities and pre-payments.
Investing activities consist primarily of purchases and sales of property and equipment, the purchases and sales
of trading securities related to our deferred compensation plan and other investing activities related to our business
77
operations. Investing activities used net cash of $11.5 million and $8.5 million for the years ended December 31, 2018 and
2017, respectively. The $3.0 million increase in the net cash used in investing activities was primarily due to additional
equity investments made in Cerebellum Capital during the year ended December 31, 2018.
Financing activities consist primarily of proceeds received or paid from the issuance or repurchase of equity,
debt-related activity and dividend payments to our shareholders. For the year ended December 31, 2018, financing
activities included, but were not limited to, the generation of net IPO proceeds of $156.5 million: $143.0 million received
at the closing of the IPO and $13.5 million received at the subsequent closing of the underwriters’ exercise of their option,
the incurrence of $360.0 million of term loans under the Existing Credit Agreement, the repayment of $499.7 million of
term loans under the 2014 Credit Agreement and the repayment of long-term debt under the Existing Credit Agreement of
$80.0 million. For the year ended December 31, 2017, financing activities included, but were not limited to, the incurrence
of $125.0 million of incremental term loans under the 2014 Credit Agreement, the payment of a dividend to shareholders
in the amount of $135.2 million and the repayment of long-term debt in the amount of $63.9 million. Financing activities
used net cash of $84.2 million and $91.3 million for the year ended December 31, 2018 and 2017, respectively.
Year Ended December 31, 2017 and 2016
Operating activities provided net cash of $96.2 million and $39.5 million for the years ended December 31, 2017
and 2016, respectively. The $56.7 million increase in net cash provided by operating activities was primarily due to the
impact of the RS Acquisition on our earnings.
Investing activities consist primarily of acquisitions and sales of property and equipment, as well as the purchase
and sales of trading securities related to our deferred compensation plan. Investing activities used net cash of $8.5 million
and $210.1 million for the years ended December 31, 2017 and 2016, respectively. The $201.6 million decrease in the net
cash used in investing activities was primarily due to the RS Acquisition in August 2016.
Financing activities consist primarily of dividend payments to our shareholders, proceeds received or paid from
the issuance or repurchase of equity and debt-related activity. For the year ended December 31, 2017, financing activities
included, but were not limited to, the incurrence of $125.0 million of incremental term loans under the 2014 Credit
Agreement, the payment of a dividend to shareholders in the amount of $135.2 million and the repayment of long-term
debt in the amount of $63.9 million. For the year ended December 31, 2016, financing activities included, but were not
limited to, the incurrence of $135 million in incremental term loans under the 2014 Credit Agreement and the issuance of
$88.3 million of equity, both in connection with the RS Acquisition, and the repayment of long-term debt in the amount
of $21.0 million. Financing activities used net cash of $91.3 million for the year ended December 31, 2017. Financing
activities generated net cash of $171.8 million for the year ended December 31, 2016.
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2018:
Payments Due
(in thousands)
Principal payments on borrowings(1) . . . . . . . . . . . . . . . . . $ 280,000 $
Interest payable(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEMP deferred consideration . . . . . . . . . . . . . . . . . . . . . .
Less Than One to
Three to More Than
One Year Three Years Five Years Five Years
— $ 280,000
— $
16,348
1,314
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395,669 $ 25,930 $ 38,282 $ 33,795 $ 297,662
30,768
7,514
—
29,957
3,838
—
15,688
4,404
5,838
92,761
17,070
5,838
— $
Total
(1)
The total principal payments on borrowings reflects the gross amount of principal outstanding on the term loans
under the Existing Credit Agreement as of December 31, 2018. The repayment of $80.0 million of the outstanding
term loans under the Existing Credit Agreement in 2018 has satisfied the annual amortization of 1% per annum
through 2024.
78
(2)
The total interest payable reflects the interest due on the principal amount of the term loans outstanding under the
Existing Credit Agreement as of December 31, 2018 using the 5.55% interest rate in effect on that date.
Off-Balance Sheet Arrangements
In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards
that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted
stock vests. These amounts are not recorded as a liability until and unless the awards vest in accordance with their
respective agreements.
As of December 31, 2018, the cash bonuses and distributions related to the February 2017 and December 2017
dividends on restricted shares and options that are expected to vest in the future totaled $1.8 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. In preparing the financial
statements, we are required to make estimates, judgments and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. We continually evaluate the accounting policies and estimates
we use to prepare our consolidated financial statements. In general, our estimates are based on historical experience,
information from third-party valuation professionals and various other assumptions that we believe to be reasonable under
the facts and circumstances. Actual results may differ from our estimates and those differences may be material. Of the
significant accounting policies described in Note 2 to the audited consolidated financial statements included in this report,
we believe the following policies involve a higher degree of judgment and complexity.
Indefinite-lived Intangible Assets
The accounting for indefinite-lived intangible assets requires significant estimates and judgment in several areas:
(1) valuation in connection with the initial purchase price allocation; (2) ongoing evaluation for impairment; and
(3) reconsideration of an asset’s useful life. The process of determining the fair value of identifiable intangible assets at
the date of acquisition utilizes an income approach and requires significant estimates and judgment as to expectations for
earnings on the related managed assets acquired, redemption rates, growth rates from sales efforts, the effects of market
conditions and a discount rate. The process for estimating the fair value of acquired trade names considers comparable
royalty rates and projected revenue streams. We typically utilize an independent valuation expert to assist with these
valuations. Because the advisory and distribution contracts are with the funds, renewable annually and have a history of
being renewed, industry practice under GAAP is to consider the contract lives to be indefinite and, as a result, not
amortizable. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1 using a qualitative
approach which requires the weighing of positive and negative evidence collected through the consideration of various
factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. We consider
macroeconomic and entity-specific factors, including changes to legal, regulatory or contractual provisions of the
renewable advisory and distribution contracts, the effects of obsolescence, demand, competition and other economic
factors that could impact the funds’ projected performance and the existence or expectation of significant changes in the
level and mix of managed assets. In addition, we consider whether events or circumstances indicate that a change in the
useful life may have occurred. Indicators of a possible change in useful life monitored by us generally include changes in
the use of the asset, a significant decline in the level of managed assets and significant reductions in underlying operating
cash flows. If actual changes in the underlying managed assets or other conditions, such as redemption rates or changes to
contractual provisions, indicate that it is more likely than not that the asset is impaired, or if the estimated useful life is
reduced, we estimate the fair value of the intangible asset. The process of estimating the fair value of the intangible asset
requires us to estimate the level and mix of managed assets, considering future redemption rates, growth rates, market
appreciation/depreciation and a discount rate. If the carrying value of the intangible asset exceeds its fair value, we
recognize an impairment charge equal to that excess.
79
Definite-Lived Intangible Assets
Definite-lived intangible assets are primarily comprised of customer relationships. These assets have definite
lives given the underlying advisory contracts are between the Company and an institutional customer or the underlying
advisory contract with the fund does not have a sufficient history of annual renewal to support an indefinite useful life.
We monitor the useful lives of definite-lived intangible assets and revise the useful lives, if necessary, based on the
circumstances. We review historical and projected attrition rates and other events that may influence our projections of the
future economic benefit that we will derive from these relationships. Significant judgment is required to estimate the period
during which these assets will contribute to our cash flows and the pattern over which these assets will be consumed. A
change in the remaining useful life of any of these assets could have a significant impact on our amortization expense. All
amortization expense is calculated on a straight-line basis. We periodically evaluate the remaining useful lives and carrying
values of the definite-lived intangible assets to determine whether events and circumstances indicate that a change in the
useful life or impairment in value may have occurred. Indicators of impairment monitored by us include a decline in the
level of managed assets, changes to contractual provisions underlying certain intangible assets and reductions in underlying
operating cash flows. If there is an indication of a change in the useful life or impairment in value of the definite-lived
intangible assets, we compare the carrying value of the asset to the projected undiscounted cash flows expected to be
generated from the underlying asset over its remaining useful life to determine whether impairment has occurred. If the
carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to its fair value determined by
discounting the projected cash flows.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the fair value of identified net assets
and liabilities acquired. We have determined that we have only one reporting unit for purposes of assessing the carrying
value of goodwill. Goodwill impairment testing is performed at the reporting unit level annually or whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. We complete our annual goodwill
impairment assessment as of October 1. For purposes of this assessment, we consider various qualitative factors, including
but not limited to, AUM levels and flows, market performance of our products compared to peers, turnover of key
personnel, projected operating results and the implied fair value of our business based on recent transactions. If we
conclude based on the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less
than its carrying amount, we compare the fair value of the reporting unit to its carrying value. If we determine that the fair
value of the reporting unit is less than the carrying value, we measure the amount of impairment loss, if any, by comparing
the implied fair value of goodwill to its recorded value. On October 1, 2018, we qualitatively determined that it was more
likely than not that the fair value of our reporting unit was greater than its carrying value.
Income Taxes
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. We measure
our deferred tax assets and liabilities based on enacted tax rates and projected state apportionment percentages for the years
in which the differences are expected to reverse. Our primary deferred tax assets relate to intangible asset amortization,
share-based compensation, acquisition-related costs, restructuring costs, deferred compensation and operating loss
carryforwards. We regularly assess the recoverability of our deferred tax assets, considering all available positive and
negative evidence, including the results of recent operations and the timing, level and character of projected future taxable
income. These estimates are projected through the life of the related deferred tax assets based on assumptions that we
believe to be reasonable and consistent with demonstrated operating results. Based on this analysis and sensitivities of
future operating results, we have concluded that it is more likely than not that the recorded deferred tax assets will be
realized. Changes in future operating results not currently forecasted may have a significant impact on the realization of
deferred tax assets. On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate
income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective
January 1, 2018. As a result of the reduction in the corporate income tax rate, we were required to remeasure our U.S. net
deferred taxes at December 31, 2017. The impact of the remeasurement resulted in a one-time credit to income tax expense
of $2.4 million for the three months and year ended December 31, 2017. Effective January 1, 2018, the impact of the Tax
Act lowered our combined statutory federal income tax rate plus an estimate for state, local and foreign income taxes from
80
approximately 38% to 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our
combined statutory federal income tax rate plus an estimate for state, local and foreign income taxes from approximately
38% to 25% also reduced the tax benefit of goodwill and acquired intangible assets beginning in 2018.
Share-Based Compensation
We have share-based compensation arrangements covering directors, senior management, investment
professionals and other employees. We calculate share-based compensation using the fair value of the awards on the grant
date. Our share-based compensation arrangements include restricted stock and options which vest based on service,
performance and market conditions. We recognize expense on a straight-line basis over the requisite service period for
service based awards and on an accelerated basis for awards that vest based on performance and market conditions. Share-
based compensation expense is adjusted for actual forfeitures in the period the forfeiture occurs. We estimate the fair value
of stock option awards using the Black-Scholes option pricing model. The Black-Scholes model requires us to make
assumptions about the volatility of our stock and the expected life of our stock options. In measuring expected volatility,
we consider the historical volatility of the common stock of several public peer companies adjusted for differing levels of
leverage, and following the IPO, we also consider the volatility of the Company’s common stock for the post-IPO period.
The fair value of restricted share awards with service based vesting conditions and performance based vesting conditions
is based on the market price of our stock on the date of grant. The fair value of restricted share awards subject to market
conditions is estimated based on a probability-weighted expected value analysis. The most subjective assumptions in the
determination of the fair value of share-based awards and share-based compensation expense recognized is the estimated
fair value of our stock on the date of grant and derived service period for non-service based awards. We have historically
considered the implied fair value of our stock based on periodic transactions with third parties, as well as an annual
valuation of our Company performed by an independent third-party. Following the IPO, we established a policy of
considering the closing sale price of our Class A common stock as quoted on NASDAQ on the date of grant for purposes
of determining fair value of such awards.
Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk
Market Risk
Substantially all of our revenues are derived from investment management, fund administration and distribution
fees, which are based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result
of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our
clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower
risk, which could cause our revenues and net income to decline further.
The value of our AUM was $52.8 billion at December 31, 2018. A 10% increase or decrease in the value of our
AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized
increase or decrease in our revenues of approximately $35.4 million at our weighted-average fee rate of 67 basis points
for the year ended December 31, 2018. Because of declining fee rates from larger relationships and differences in our fee
rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of
our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material
negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total
AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds, to which we provide
a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or
decrease in our revenues of approximately $44.3 million at the Victory Funds’ aggregate weighted-average fee rate of 84
basis points. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate
increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease
in our revenues of approximately $23.2 million at the weighted-average fee rate across all of our institutional separate
accounts of 44 basis points for the year ended December 31, 2018.
As is customary in the investment management industry, clients invest in particular strategies to gain exposure to
certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients
invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may
81
implement their own risk management program or procedures. We have not adopted a corporate-level risk management
policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the
market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and
currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular
risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance
sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result
in a reduction in our revenues.
Exchange Rate Risk
A portion of the accounts that we advise hold investments that are denominated in currencies other than the
U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of that AUM will
decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each
investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the
portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non-U.S.
currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s
exposure to non-U.S. currency.
We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 9%
of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of
any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair
value of our AUM by $474.9 million, which would cause an annualized increase or decrease in revenues of approximately
$3.2 million at our weighted-average fee rate for the business of 67 basis points for the year December 31, 2018.
We operate in several foreign countries and incur operating expenses associated with these operations. In addition,
we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe
foreign currency fluctuations materially affect our results of operations.
Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. At December 31, 2018, we were exposed to interest rate risk as a result of the amounts
outstanding under the Existing Credit Agreement.
82
Item 8. Financial Information and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Victory Capital Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Victory Capital Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income
(loss), changes in stockholders’ equity, cash flows, for each of the three years in the period ended December 31, 2018, and
the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2018, in conformity with U.S. generally accepted accounting principles.
Basis for the Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Cleveland, Ohio
March 15, 2019
83
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except for shares)
December 31, December 31,
2018
2017
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment management fees receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund administration and distribution fees receivable . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
51,491 $
37,980
3,153
2,987
2,664
601
12,719
8,780
284,108
387,679
9,349
801,511 $
Liabilities and stockholders' equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation plan liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration payable for acquisition of business . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
607 $
30,228
19,743
12,719
5,838
6,212
1,759
268,857
345,963
12,921
42,264
3,925
9,728
5,441
677
10,659
8,844
284,108
408,000
6,055
792,622
327
29,305
21,669
10,659
9,856
4,068
2,330
483,225
561,439
Stockholders' equity:
Common stock, $0.01 par value per share: 2018 - no shares authorized,
issued and outstanding; 2017 - 78,837,300 shares authorized, 57,182,730
issued and 55,118,673 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock, $0.01 par value per share: 2018 - 400,000,000
shares authorized, 15,280,833 shares issued and 14,424,558 shares
outstanding; 2017 - no shares authorized, issued and outstanding . . . . . . . . . . .
Class B common stock, $0.01 par value per share: 2018 - 200,000,000
shares authorized, 55,284,408 shares issued and 53,137,428 shares
outstanding; 2017 - no shares authorized, issued and outstanding . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A treasury stock, at cost: 2018 - 856,275 shares; 2017 - no shares . . . . . . .
Class B treasury stock, at cost: 2018 - 2,146,980 shares; 2017 - 2,064,057
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(21,719)
(86)
(119,709)
455,548
801,511 $
The accompanying notes are an integral part of the consolidated financial statements.
84
—
572
153
—
553
604,401
(8,045)
—
435,334
—
(20,899)
64
(183,888)
231,183
792,622
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except for shares)
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Revenue
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fund administration and distribution fees . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,683 $
60,729
413,412
343,811 $
65,818
409,629
248,482
49,401
297,883
Expenses
Personnel compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution and other asset-based expenses . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in value of consideration payable for acquisition of business .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145,880
94,680
30,005
23,277
(37)
4,346
742
298,893
144,111
103,439
33,996
29,910
(294)
2,094
6,205
319,461
122,615
77,497
26,628
30,405
(378)
6,619
10,012
273,398
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114,519
90,168
24,485
Other income (expense)
Interest income and other income/(expense) . . . . . . . . . . . . . . . . . . . . .
Interest expense and other financing costs . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,856)
(20,694)
(6,058)
(29,608)
(2,913)
(48,467)
(330)
(51,710)
1,086
(34,642)
—
(33,556)
Income/(loss) before income tax (expense)/benefit . . . . . . . . . . . . . . . .
84,911
38,458
(9,071)
Income tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,207)
(12,632)
3,000
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63,704 $
25,826 $
(6,071)
Earnings (loss) per share of common stock
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.96 $
0.90 $
0.47 $
0.43 $
(0.12)
(0.12)
Weighted average number of shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,295,240
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,510,536
54,930,852
59,577,348
50,017,712
50,017,712
Dividends declared per share of common stock . . . . . . . . . . . . . . . . . . $
— $
2.42 $
—
The accompanying notes are an integral part of the consolidated financial statements.
85
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended
Year Ended
December 31, December 31, December 31,
Year Ended
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
63,704 $
2017
25,826 $
2016
(6,071)
Other comprehensive income/(loss), net of tax
Net unrealized income/(loss) on available-for-sale securities . . . . . . . . . . . .
Net unrealized income on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain/(loss) on foreign currency translation . . . . . . . . . . . . . .
Total other comprehensive income/(loss), net of tax. . . . . . . . . . . . . . . .
(110)
—
(40)
(150)
64
462
75
601
18
49
(62)
5
Comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63,554 $
26,427 $
(6,066)
The accompanying notes are an integral part of the consolidated financial statements.
86
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except for shares)
Common Stock
Treasury Stock
Paid-In Comprehensive Retained
Class A Class BPre-IPO Class A Class B Pre-IPO Capital Income (Loss) Deficit
Total
Additional
Accumulated
Other
Balance, December 31, 2015 . . . . . . . . . . . . $
Issuance of common stock . . . . . . . . . . . . .
Equity issuance costs . . . . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . .
Common stock repurchased . . . . . . . . . . . .
Equity awards modified to liabilities . . . . . .
Other comprehensive income . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . .
Dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2016 . . . . . . . . . . . . $
Issuance of common stock . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . .
Common stock repurchased . . . . . . . . . . . .
Equity awards modified to liabilities . . . . . .
Other comprehensive income . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . .
Dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits realized on share-based
compensation . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . $
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
471 $
92
—
2
—
—
—
—
—
—
565 $
3
4
—
—
—
—
—
—
—
—
— $
—
—
—
572 $
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
— $
94,429
(210)
(2)
—
(2,316)
—
8,520
—
—
— $ (3,992) $ 321,326 $
—
—
—
—
—
—
— (12,253)
—
—
—
—
—
—
—
—
—
—
— $ (16,245) $ 421,747 $
—
—
—
—
—
—
—
3,190
(4)
—
(1,553)
—
11,693
—
—
—
(4,654)
—
—
—
—
—
—
—
— $ (20,899) $ 435,334 $
261
—
—
—
—
—
Issuance of Class A common stock, net of
underwriter discount . . . . . . . . . . . . . . .
Class A common stock offering costs . . . . .
Redesignation of common stock . . . . . . . .
Share conversion - Class B to A . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . .
Shares withheld related to net settlement
of equity awards . . . . . . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . .
Exercise of options . . . . . . . . . . . . . . . . . .
Shares issued under 2018 ESPP . . . . . . . . .
Fractional shares retired . . . . . . . . . . . . . .
Cumulative effect adjustment for adoption
128
—
—
25
—
—
—
572
(25)
—
—
—
(572)
—
—
—
—
—
—
— (20,899)
—
—
—
(8,045)
—
—
20,899
—
—
156,421
(4,553)
—
—
—
—
—
—
—
—
—
2
4
—
—
—
—
—
—
—
—
—
—
—
—
(820)
—
—
—
—
—
—
—
—
—
—
(2)
1,248
26
(2)
—
—
—
—
—
5
—
—
—
(542) $ (67,834) $ 249,429
94,521
—
(210)
—
—
—
(12,253)
—
(2,316)
—
5
—
8,520
—
(627)
(627)
(6,071)
(6,071)
(537) $ (74,532) $ 330,998
3,193
—
(4,654)
(1,553)
601
11,693
(135,171)
—
—
—
—
—
—
(135,171)
—
—
—
—
601
—
—
261
—
(11)
—
—
25,826
64 $ (183,888) $ 231,183
—
(11)
25,826
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
156,549
(4,553)
—
—
(8,045)
(820)
—
1,252
26
(2)
of ASU 2016-09 . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . .
Dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
Balance, December 31, 2018 . . . . . . . . . . . . $ 153 $ 553 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ (8,045)$ (21,719) $
—
—
—
—
—
— $ 604,401 $
512
—
15,417
—
—
1,818
—
(150)
(150)
15,417
—
(831)
—
63,704
—
(86) $ (119,709) $ 455,548
1,306
—
—
(831)
63,704
87
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except for shares) (continued)
Shares of Common Stock
Class B
Class A
Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . . . . .
Equity awards modified to liabilities . . . . . . . . . . . . . .
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . . . . . . . . . .
Equity awards modified to liabilities . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . .
Issuance of Class A common stock . . . . . . . . . . . . . . .
Redesignation of common stock . . . . . . . . . . . . . . . .
Share conversion - Class B to A . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted share grants . . . . . . . . . . . . . . . .
Exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued under 2018 ESPP . . . . . . . . . . . . . . . . .
Fractional shares retired . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . .
–
–
–
–
–
–
–
–
–
–
12,810,860
–
2,467,192
–
–
–
2,781
–
15,280,833
–
–
–
–
–
–
–
–
–
–
–
57,184,766
(2,467,192)
–
215,594
351,503
–
(263)
55,284,408
Pre-IPO
47,066,744
9,206,095
259,988
–
(27,506)
56,505,321
296,363
389,106
(8,060)
57,182,730
–
(57,184,766)
–
–
2,036
–
–
–
–
Shares of Treasury Stock
Class A
–
–
–
–
–
–
–
–
–
–
–
–
–
(856,275)
–
–
–
–
(856,275)
Class B
–
–
–
–
–
–
–
–
–
–
–
(2,064,057)
–
(82,923)
–
–
–
–
(2,146,980)
Pre-IPO
(499,478)
–
–
(1,220,051)
–
(1,719,529)
–
(344,528)
–
(2,064,057)
–
2,064,057
–
–
–
–
–
–
–
The accompanying notes are an integral part of the consolidated financial statements.
88
Victory Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
63,704
$
25,826
$
(6,071)
Year Ended
2018
Year Ended
2017
Year Ended
2016
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs and derivative and accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based and deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of contingent consideration obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized depreciation (appreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Investment management fees receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund administration and distribution fees receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation plan liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal of property and equipment due to restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and sale of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of business, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Issuance of common stock, net of costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Class A common stock, net of underwriter discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Class A common stock deferred offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of taxes related to net share settlement of equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Class A common stock under 2018 ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of equity awards modified to liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits on share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from draw on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of draw on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of promissory note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of consideration for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes of foreign exchange rate on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental cash flow information
4,116
23,277
2,875
17,346
(37)
998
2,872
730
6,058
4,284
772
5,640
(215)
57
278
931
261
(48)
446
134,345
(2,546)
—
(7,704)
2,772
(71)
—
(4,000)
—
—
(11,549)
—
(8,178)
156,549
(4,287)
1,250
(510)
26
—
—
359,100
—
—
(2,508)
(579,750)
(575)
(831)
(4,447)
(84,161)
(65)
38,570
12,921
51,491
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,530
17,993
Supplemental disclosure of non-cash items
11,191
29,910
6,606
17,179
(294)
4,429
(620)
427
330
1,333
679
21,456
(1,231)
79
(3,550)
(10,607)
(5,701)
(181)
(1,092)
96,169
(5,105)
3,006
(9,567)
5,166
(111)
79
(2,000)
—
—
(8,532)
3,193
(4,654)
—
—
—
—
—
(1,836)
261
125,000
—
(3,500)
(1,733)
(63,877)
(575)
(135,171)
(8,381)
(91,273)
116
(3,520)
16,441
12,921
41,489
758
(3,080)
30,405
4,792
12,022
(378)
—
(394)
—
—
(4,411)
(895)
98
1,304
(7)
2,299
2,178
3,520
(17)
(1,825)
39,540
(1,164)
12
(4,991)
2,585
(355)
1,290
(3,025)
(21)
(204,413)
(210,082)
89,259
(10,529)
—
—
—
—
—
(4,632)
—
129,975
3,500
—
(5,854)
(21,013)
(479)
(627)
(7,761)
171,839
—
1,297
15,144
16,441
29,393
495
$
$
$
$
Promissory note issued for repurchase of common stock and equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1,724
The accompanying notes are an integral part of the consolidated financial statements.
89
Victory Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2018, 2017 and 2016
1. Organization and Nature of Business
Victory Capital Holdings, Inc., a Delaware corporation (along with its wholly-owned subsidiaries, collectively
referred to as “the Company”) was formed on February 13, 2013 for the purpose of acquiring Victory Capital Management
Inc. (“VCM”) and Victory Capital Advisers, Inc. (“VCA”), which occurred on August 1, 2013.
VCM is a registered investment adviser managing assets through open-end mutual funds, separately managed
accounts, unified management accounts, ETFs, collective trust funds, wrap separate account programs and UCITs. VCM
also provides mutual fund administrative services for the Victory Portfolios, Victory Variable Insurance Funds, Victory
Institutional Funds and the mutual fund series of the Victory Portfolios II (collectively, “the Victory Funds”), a family of
open-end mutual funds, and the VictoryShares (the Company’s ETF brand). VCM additionally employs all of the
Company’s U.S. investment professionals across its Franchises and Solutions, which are not separate legal entities. VCM’s
three wholly-owned subsidiaries include RS Investment Management (Singapore) Pte. Ltd., RS Investments (Hong Kong)
Limited, and RS Investments (UK) Limited.
VCA is registered with the SEC as an introducing broker-dealer and serves as distributor and underwriter for the
Victory Funds.
On September 21, 2018, the Company entered into the Harvest Purchase Agreement, whereby the Company
agreed to purchase 100% of the equity interests of Harvest, an asset management company specializing in yield
enhancement overlay, risk reduction, alternative beta and absolute return investment strategies. The Harvest Acquisition
is expected to close in the second quarter of 2019 and is subject to the receipt of a specified level of client consents,
termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the “HSR Act”), which termination was received on November 6, 2018, and other closing conditions.
On November 6, 2018, the Company entered into the USAA Stock Purchase Agreement, whereby the Company
agreed to purchase 100% of the outstanding common stock of USAA Asset Management Company (“AMCO”) and USAA
Transfer Agency Company d/b/a USAA Shareholder Account Services (the “USAA Acquired Companies”). The USAA
AMCO Acquisition includes AMCO’s mutual fund and ETF businesses and the USAA 529 College Savings Plan. Upon
the closing of the USAA AMCO Acquisition, Victory will have the rights to offer products and services using the USAA
brand and AMCO’s investment teams will continue serving the investment needs of the military community and their
families. The USAA AMCO Acquisition is expected to close around the end of the second quarter of 2019 and is subject
to, among other things, the receipt of a specified level of client consents, the expiration or termination of the applicable
waiting period under the HSR Act, the absence of any material adverse effect as defined in the USAA Stock Purchase
Agreement on the business of the USAA Acquired Companies, and other customary closing conditions.
Changes in Capital Structure
On February 12, 2018, the Company completed the initial public offering (“IPO”) of its Class A common stock,
which trades on NASDAQ under the symbol “VCTR”. The Company issued 11,700,000 shares of Class A common stock
at a price of $13.00 per share at the closing of the IPO. On March 13, 2018, the Company issued an additional 1,110,860
shares of Class A common stock pursuant to the underwriters’ exercise of their option. The net proceeds totaled $156.5
million: $143.0 million received at the closing of the IPO and $13.5 million received at the subsequent closing of the
underwriters’ exercise of their option, after deducting in each case underwriting discounts.
In connection with the IPO, the following transactions were completed:
90
• The Company’s certificate of incorporation was amended and restated to, among other things, provide
for Class A common stock and Class B common stock, specify voting rights for the Class A common
stock and Class B common stock, establish a classified board of directors and adopt the 2018 Stock
Incentive Plan and 2018 Employee Stock Purchase Plan.
• All shares of common stock outstanding prior to the IPO were immediately converted into Class B
common stock at a one-to-one ratio.
• A substantial majority of the Company’s employee stockholders entered into an Employee Shareholders’
Agreement, pursuant to which they granted an irrevocable voting proxy with respect to the shares of the
Company’s common stock they acquired from the Company, and any shares they may acquire from or
be granted by the Company in the future, to the Employee Shareholders Committee. The current
members of the Employee Shareholders Committee are the Chief Executive Officer, the President, Chief
Financial Officer and Chief Administrative Officer and the President, Investment Franchises.
On February 12, 2018, concurrently with the closing of the IPO, the Company entered into a credit agreement
(the “Existing Credit Agreement”) under which the Company received seven-year term loans in an original aggregate
principal amount of $360.0 million and established a five-year revolving credit facility (which was unfunded as of closing)
with original aggregate commitments of $50.0 million.
Net proceeds received from the IPO and the Existing Credit Agreement together with cash on hand were used to
repay all indebtedness outstanding under the credit agreement dated as of October 31, 2014 (as amended) (the “2014 Credit
Agreement”) on February 12, 2018.
On May 3, 2018, the Existing Credit Agreement was amended to increase aggregate commitments for the
revolving credit facility from $50.0 million to $100.0 million.
On September 21, 2018, in connection with executing the Harvest Purchase Agreement, the Company entered
into the Harvest Commitment Letter for an incremental senior secured term loan facility under the Existing Credit
Agreement.
On November 6, 2018, in connection with executing the USAA Stock Purchase Agreement, the Company entered
into the USAA AMCO Credit Facilities Commitment Letter.
See Note 3 to the audited consolidated financial statements for additional information on the Harvest Purchase
Agreement and USAA Stock Purchase Agreement and Note 10 for additional information on the Company’s current debt
structure, the Harvest Commitment Letter and USAA AMCO Credit Facilities Commitment Letter.
2. Significant Accounting Policies
Basis of Presentation
The Company prepares its consolidated financial statements on the accrual basis of accounting in accordance
with accounting principles generally accepted in the United States of America (GAAP).
All dollar amounts, except per share data in the text and tables herein, are stated in thousands unless otherwise
indicated.
Retroactive Adjustments for Common Stock Split
The Company's Board of Directors and stockholders approved a 175.194 for 1 stock split of the Company's
common stock on February 1, 2018. All common share and common per share amounts in the consolidated financial
91
statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this stock split (see
Notes 13, 14 and 17).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
The Company evaluates entities in which it invests and investment funds that it sponsors to determine whether
the Company has a controlling financial interest in these entities and is required to consolidate them. A controlling financial
interest generally exists if 1) the Company holds greater than 50% voting interest in entities controlled through voting
interests or if 2) the Company has the ability to direct significant activities of a fund not controlled through voting interests
(a variable interest entity or VIE) and the obligation to absorb losses of and/or the right to receive benefits from the VIE
that could potentially be significant to the VIE.
The Company's involvement with non-consolidated sponsored investment funds that are considered VIEs include
providing investment advisory services, fund administration and distribution services and/or holding a minority interest.
At December 31, 2018, 2017 and 2016, the Company's investments in and maximum risk of loss related to unconsolidated
sponsored VIE investment funds totaled $12.9 million, $10.9 million and $5.6 million respectively which are included in
available-for-sale securities and trading securities in the consolidated balance sheets. The Company has not provided
financial support to these entities outside the ordinary course of business, which includes assuming operating expenses of
funds for competitive or contractual reasons through fee waivers and fund expense reimbursements. The Company does
not consolidate the sponsored investment funds in which it had an equity investment as it holds a minority interest, does
not direct significant activities of these funds and does not have the right to receive benefits nor the obligation to absorb
losses that could potentially be significant to these funds.
During 2018, the Company’s involvement with other non-consolidated VIEs included an equity method
investment and put and call option arrangements with Cerebellum. The put and call option arrangements ended in the first
quarter of 2018. The Company’s maximum risk of loss associated with Cerebellum totaled $9.0 million and $6.0 million
at December 31, 2018 and December 31, 2017, respectively, which includes the $9.0 million investment at
December 31, 2018 and as of December 31, 2017, $5.0 million investment and $1.0 million exposure under the put option
for the purchase of additional equity. See Note 12.
The Company applies the equity method of accounting to investments where it does not hold a controlling equity
interest but has the ability to exercise significant influence over operating and financial matters. In the event that
management identifies an other than temporary decline in the estimated fair value of an equity method investment to an
amount below its carrying value, the investment is written down to its estimated fair value.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may
ultimately differ from those estimates and the differences may be material.
Revenue Recognition
Investment Management Fees
Investment management fees are accrued as earned and are calculated as a contractual percentage of assets under
management and advisement (AUM) and vary as levels of AUM change from inflows, outflows and market movement
and with number of days in a reporting period. Any investment management fees collected in advance are deferred and
recognized as income over the period earned.
92
Waivers of investment management fees from affiliated funds are included in investment management fees in the
consolidated statements of operations. In 2018, 2017 and 2016, the amount of waivers of investment management fees
from affiliated funds was immaterial.
Performance-based investment management fees, which includes fees payable under fulcrum fee arrangements,
are accrued only when the performance period is complete, the amount of revenue is no longer subject to adjustment and
collectability is reasonably assured. Performance-based investment management fees are recorded in investment
management fees in the consolidated statements of operations. In 2018 and 2017, the Company recognized $1.9 million
and $1.2 million of performance-based investment management fees, respectively. In 2016 the Company recognized an
immaterial amount of performance-based investment management fees.
Fund Administration Fees
Fund administration fees are accrued on a monthly basis and are determined based on the contractual rate applied
to average daily net assets of the Victory Funds for which administration services are provided. The Company is the
primary obligor and has the ability to select the service provider and establish pricing and therefore, records fund
administration fees and expenses on a gross basis.
The fair value of AUM of the Victory Funds is primarily determined using quoted market prices or independent
third-party pricing services or broker price quotes. In limited circumstances, a quotation or price evaluation is not readily
available from a pricing service. In these cases, pricing is determined by management based on a prescribed valuation
process that has been approved by the directors/trustees of the sponsored products. The same prescribed valuation process
is used to price securities in separate accounts and other vehicles for which a quotation or price evaluation is not readily
available from a pricing service. For the periods presented, a de minimis amount of the AUM was priced in this manner.
Fund Distribution Fees
The Company’s introducing broker-dealer VCA adopted ASU 2014-09 on January 1, 2018 and updated the
following policies.
(a) Revenue Recognition
VCA receives compensation for sales and sales-related services promised under distribution contracts with the
Victory Funds. There are no direct costs incurred to obtain these contracts. Direct costs incurred to fulfill services under
the distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares.
Revenue is measured in an amount that reflects the consideration to which VCA expects to be entitled in exchange
for providing distribution services. Distribution fees are generally calculated as a percentage of average net assets in the
Victory Funds. VCA’s performance obligation is satisfied when control of the services is transferred to customers, which
is upon investor subscription or redemption.
Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration,
and is subject to factors outside of VCA’s control including investor behavior and activity and market volatility and is
recognized as these uncertainties are resolved.
VCA may recognize distribution fee revenue in the current period that pertains to performance obligations
satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved.
VCA has contractual arrangements with third parties to provide certain distribution services. Management
considers whether VCA is acting as the principal service provider or as an agent to determine whether its revenue should
be recorded based on the gross amount payable by the Victory Funds or net of payments to third-party service providers,
respectively. VCA is considered a principal service provider if it controls the service that is transferred to the customer.
VCA is considered an agent when it arranges for the service to be provided by another party and does not control the
service. Substantially all of VCA’s revenue is recorded gross of payments made to third parties.
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VCA’s distribution fee revenue totaled $37.3 million, $43.5 million and $32.7 million for the years ended
December 31, 2018, 2017 and 2016, respectively, and is recorded in fund administration and distribution fees on the
consolidated statements of operations.
(b) Prepaid C Share Commissions
VCA may pay upfront sales commissions to dealers and institutions that sell Class C shares of the participating
Victory Funds at the time of such sale. Upfront sales commission payments with respect to Class C shares equal 1.00% of
the purchase price of the Class C shares sold by the dealer or institution. When VCA makes an upfront payment to a dealer
or institution for the sale of Class C shares, VCA capitalizes the cost of such payment, which is recorded in prepaid
expenses on the consolidated balance sheets, and amortizes the cost over a 12 month period, the estimated period of benefit.
Distribution and Other Asset-Based Expenses
Distribution and other asset-based expenses include broker dealer distribution, platform distribution,
sub-administration, and sub-advisory expenses. These expenses are accrued on a monthly basis and are generally
calculated as a percentage of AUM and vary as levels of AUM change from inflows, outflows and market movement and
with the number of days in the month.
Also included in distribution and other asset-based expenses are middle office expenses. Middle office expenses
are accrued on a monthly basis and vary with changes in mutual fund, institutional and wrap separate account AUM levels,
the number of accounts and volume of account transaction activity.
Restructuring and Integration Costs
In connection with business combinations, asset purchases and changes in business strategy, the Company incurs
costs integrating investment platforms, products and personnel into existing systems, processes and service provider
arrangements and restructuring the business to capture operating expense synergies. In the case of business combinations,
these costs are incurred after the closing date.
These costs include severance-related expenses related to one-time benefit arrangements and contract termination
costs. A liability for restructuring costs is recognized only after management has developed a formal plan to which it has
committed. The costs included in the restructuring liability are those costs that are either incremental or incurred as a direct
result of the plan, or are the result of a continuing contractual obligation with no continuing economic benefit to the
Company, or a penalty incurred to cancel the contractual obligation. Severance expense is recorded when management
has committed to a plan for a reduction in workforce, the plan has been communicated to employees and it is unlikely that
there will be significant changes to the plan.
Contract termination liabilities are recorded for contract termination costs when the Company terminates a
contract or stops using the product or service covered by the contract. Contract termination liabilities are recognized and
measured at fair value. Contract termination costs are recorded in restructuring and integration costs in the consolidated
statements of operations. A rollforward of restructuring and integration liabilities for 2018, 2017 and 2016 appears below.
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(in millions)
Liability balance, beginning of period . . . . . . . . . . . . . . . . . . $
Severance expense
2018
2017
2016
0.1 $
7.4 $
5.0
RS Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
0.7
0.5
0.3
Contract termination expense
RS Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and integration costs . . . . . . . . . . . . . . . . . . . .
Settlement of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability balance, end of period . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability balance, end of period . . . . . . . . . . . . . . . . . . . . . $
—
—
0.7
(0.7)
0.1 $
0.1 $
—
0.1 $
5.0
0.4
6.2
(13.5)
0.1 $
0.1 $
—
0.1 $
7.4
—
2.4
0.2
10.0
(7.6)
7.4
6.9
0.5
7.4
Cash and Cash Equivalents
Cash and cash equivalents consist of cash at banks, money market accounts and funds and short-term liquid
investments with original maturities of three months or less at the time of purchase. For the Company and certain
subsidiaries, cash deposits at a financial institution may exceed Federal Deposit Insurance Corporation insurance limits.
Investments
Available-For-Sale Securities
Available-for-sale securities include investments in affiliated mutual funds and are recorded in available-for-sale
securities in the consolidated balance sheets. Investments in available-for-sale securities are carried at fair value. Changes
in fair value are recognized as a component of other comprehensive income/(loss) until the securities are sold. Unrealized
holdings gains or losses (to the extent such losses are considered temporary) are reported net of deferred tax as a separate
component of accumulated other comprehensive income/(loss) until realized. Upon disposition, the gain or loss on the
security is reclassified from other comprehensive income/(loss) to other income/(expense) in the consolidated statements
of operations. The cost of securities sold is determined using the specific identification method. Dividend income is
accrued on the declaration date and is included in other income in the consolidated statements of operations. Transactions
are recorded on a trade-date basis.
The Company periodically reviews each individual security that is in an unrealized loss position to determine if
the impairment is other-than-temporary. Factors that are considered in determining whether other-than-temporary declines
in value have occurred include the severity and duration of the unrealized loss and the Company's ability and intent to hold
the security for a length of time sufficient to allow for recovery of such unrealized losses. Impairment charges are recorded
in other income (expense) in the consolidated statements of operations. No impairments were recognized as a result of
such review in the years ended December 31, 2018, 2017 and 2016.
Trading Securities
Trading securities include investments in affiliated and third party mutual funds held in a rabbi trust under a
deferred compensation plan. Trading securities are recorded at fair value in the consolidated balance sheets. Changes in
value in trading securities are recognized by the Company in other income/(expense) in the consolidated statements of
operations.
The Company's available-for-sale and trading securities are valued through the use of quoted market prices
available in an active market, which is the net asset value of the funds.
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Derivative Financial Instruments
The Company evaluates financial instruments and other contracts to determine if the arrangement meets the
characteristics of a derivative under ASC 815 and the criteria to use hedge accounting.
Hedging instruments
Derivatives are recorded as other assets and other liabilities on the balance sheet and are measured at fair value.
To qualify for hedge accounting, the derivative must be deemed to be highly effective in offsetting the designated changes
in the hedged item. If the Company's derivatives qualify as cash flow hedges, the effective portion of fluctuations in the
fair value of the derivatives are recorded in accumulated other comprehensive income/(loss) and reclassified, as
adjustments to interest expense, as the underlying hedged item impacts the consolidated statements of operations.
The change in fair value of the ineffective portion of the derivative, if any, is recognized immediately in the
consolidated statements of operations. If a cash flow hedge is terminated or is no longer considered to be effective, hedge
accounting is discontinued prospectively. If the derivative continues to exist, future changes in fair value are accounted
for in the consolidated statements of operations unless the derivative is re-designated in a new qualifying hedge
relationship.
For the period from December 2014 to December 2017, the Company used interest rate cap derivatives to manage
interest rate risk related to a portion of its long-term debt. The Company assessed ongoing effectiveness for these interest
rate cap derivatives, which were designated as cash flow hedges, based on total changes in the cap's cash flows and by
reviewing whether there had been any changes in the critical terms of the cap or transaction being hedged or any adverse
changes in the counterparty's credit. No hedge ineffectiveness was recorded in the years ended December 31, 2017 and
2016. The Company’s interest rate cap derivatives expired on December 31, 2017.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the related assets, generally three to ten years.
Improvements to leased property are amortized on a straight-line basis over the lesser of the useful life of the improvements
or the term of the applicable lease. When assets are sold or retired, the related cost and accumulated depreciation are
removed from the respective accounts and any resulting gain or loss is included in other income (expense) in the
consolidated statements of operations. Gains and losses resulting from the sale or disposal of assets as part of a restructuring
plan are included in restructuring and integration costs in the consolidated statements of operations. The cost of repairs
and maintenance are expensed as incurred. Equipment and leasehold improvements are tested for impairment whenever
changes in facts or circumstances indicate that the carrying amount of an asset may not be recoverable.
Segment Reporting
The Company operates in one business segment that provides investment management services and products to
institutional and intermediary clients. The Company's determination that it has one operating segment is based on the fact
that the Chief Operating Decision Maker reviews the Company's financial performance on an aggregate level.
Goodwill
Goodwill represents the excess cost of the acquisition over the fair value of net assets acquired in a business
combination. For goodwill impairment testing purposes, the Company has determined that there is only one reporting unit.
The Company tests goodwill for impairment on an annual basis, or more frequently if facts and circumstances
indicate that goodwill may be impaired. Factors that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results, significant changes in the Company's use of
the acquired assets in a business combination or strategy for the Company's overall business, and significant negative
industry or economic trends. The Company conducts the annual impairment assessment as of October 1st. The Company
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uses a qualitative approach to test for potential impairment of goodwill. If, after considering various factors, management
determines that it is more likely than not that goodwill is impaired, a two-step process to test for and measure impairment
is performed which begins with an estimation of the fair value of the Company by considering discounted cash flows. The
assumptions used to estimate fair value include management's estimates of future growth rates, operating cash flows,
discount rates and terminal value. These assumptions and estimates can change in future periods based on market
movement and factors impacting the expected business performance. Changes in assumptions or estimates could materially
affect the determination of the fair value of the Company. If the present value of future expected cash flows falls below
the recorded book value of equity, the Company's goodwill would be considered impaired.
Intangible Assets
Intangible assets acquired by the Company outside of a business combination are initially recognized and
measured based on the Company's cost to acquire the intangible assets. If a group of assets is acquired, the cost is allocated
to individual assets based on their relative fair value. Intangible assets acquired in a business combination are initially
recognized and measured at fair value. In valuing these assets, the Company makes assumptions regarding useful lives
and projected growth rates, and significant judgment is required.
Definite-lived intangible assets represent the value of acquired customer relationships in institutional separate
accounts, collective funds, intermediary wrap separate account (wrap SMA) and unified managed account/model (UMA)
programs. Definite-lived intangible assets also include intellectual property, advisory contracts that do not have a sufficient
history of annual renewal, definite-lived trade name assets and non-competition agreements.
The Company amortizes definite-lived identifiable intangible assets on a straight-line basis over a period that is
shorter than the asset's economic life as the pattern of economic benefit cannot be reliably determined. Management
periodically evaluates the remaining useful lives and carrying values of the intangible assets to determine whether events
and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of
impairment monitored by management include a decline in the level of managed assets, changes to contractual provisions
underlying certain intangible assets and reductions in underlying operating cash flows. Should there be an indication of a
change in the useful life or impairment in value of the definite-lived intangible assets, the Company compares the carrying
value of the asset to the projected undiscounted cash flows expected to be generated from the underlying asset over its
remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the
undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows. The Company
writes off the cost and accumulated amortization balances for all fully amortized intangible assets.
Indefinite-lived intangible assets include trade names and contracts for advisory and distribution services where
the Company expects to, and has the ability to continue to manage these funds indefinitely, the contracts have annual
renewal provisions, and there is a high likelihood of continued renewal based on historical experience. Trade names are
considered indefinite-lived intangible assets when they are expected to generate cash flows indefinitely.
Indefinite-lived intangible assets are reviewed for impairment annually as of October 1st using a qualitative
approach which requires that positive and negative evidence collected as a result of considering various factors be weighed
in order to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. In addition,
periodically management reconsiders whether events or circumstances indicate that a change in the useful life may have
occurred.
Indicators of a possible change in useful life monitored by management include a significant decline in the level
of managed assets, changes to legal, regulatory or contractual provisions of the renewable investment advisory contracts
and reductions in underlying operating cash flows. The Company estimates the fair value of the indefinite-lived intangible
asset and compares it to the book value of the asset to determine whether an impairment charge is necessary. Impairment
is indicated when the carrying value of the intangible asset exceeds its fair value.
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Investment Management Fees Receivable and Fund Administration and Distribution Fees Receivable
Investment management fees receivable include investment management fees due from the Victory Funds and
VictoryShares and investment management fees due from non-affiliated parties. Fund administration and distribution fees
receivable include fund administration and fund distribution fees due from the Victory Funds and VictoryShares.
Provision for credit losses on these receivables is made in amounts required to maintain an adequate allowance
to cover anticipated losses. All investment management fees receivable and fund administration and distribution fees
receivable were determined to be collectible as of December 31, 2018, 2017 and 2016, and accordingly, no reserve for
credit losses and no provision for credit losses were recognized as of and for the years ended December 31, 2018, 2017
and 2016.
Other Receivables
Other receivables primarily include income and other taxes receivable and amounts due to the Company under a
contract with a third party acquired in the RS Acquisition. All amounts included in other receivables were determined to
be collectible as of December 31, 2018, 2017 and 2016.
Share-Based Compensation
Compensation expense related to share-based payments is measured at the grant date based on the fair value of
the award. The fair value of each option granted is estimated using the Black-Scholes option valuation model. The
Black-Scholes option valuation model incorporates assumptions as to dividend yield, expected volatility, an appropriate
risk-free interest rate and the expected life of the option. The fair value of restricted share awards with service based
vesting conditions and performance based vesting conditions is based on the market price of our stock on the date of grant.
The fair value of restricted share awards subject to market conditions is estimated based on a probability-weighted expected
value analysis. Compensation expense is recognized on a straight-line basis over the total vesting period of the award for
the service portion of restricted share awards and stock option awards. Compensation expense is recognized on an
accelerated basis over the derived service period for awards that vest based on market conditions and on an accelerated
basis over the requisite service period for awards with performance conditions if it is probable that the performance
conditions will be satisfied. Compensation expense is adjusted for actual forfeitures in the period the forfeiture occurs.
The corresponding credit for restricted share and stock option compensation expense is recorded to additional paid in
capital.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of shares of the Company’s
common stock, Class A common stock and Class B common stock outstanding during the period. Diluted earnings per
share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares
of all classes of the Company’s common stock. The Company had vested and unvested stock options and unvested
restricted stock grants outstanding during the periods presented and applies the treasury stock method to these securities
in its calculation of diluted earnings per share. The treasury stock method assumes that the proceeds of exercise are used
to purchase common stock at the average market price for the period. The Company does not have any participating
securities that would require the use of the two-class method of computing earnings per share.
Deferred Financing Fees
The costs of obtaining term loan financing are capitalized in long-term debt in the consolidated balance sheets
and amortized to interest expense and other financing costs in the consolidated statements of operations over the term of
the respective financing using the effective interest method. The costs of obtaining revolving line of credit financing are
capitalized in other assets in the consolidated balance sheets and amortized to interest expense and other financing costs
in the consolidated statements of operations on a straight-line basis over the term of the facility.
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Debt Modification
Gains and losses on debt modifications that are considered extinguishments are recognized in current earnings.
Debt modifications that are not considered extinguishments are accounted for prospectively through yield adjustments,
based on the revised terms. Legal fees and other costs incurred with third parties that are directly related to debt
modifications are expensed as incurred and generally are included in general and administrative expense in the
consolidated statements of operations. In 2018, the Company expensed $1.9 million in costs related to debt modifications
upon entering into the Existing Credit Agreement. In 2017, the Company expensed $1.2 million in costs related to debt
modifications upon the issuance of Incremental Term Loan 3 to fund the 2017 Special Dividend and an additional $1.0
million in costs related to debt modifications upon the 2017 Debt Refinancing. During 2016, the Company expensed
$0.8 million in costs related to debt modifications upon the issuance of Incremental Term Loan 2 to finance the RSIM
acquisition, which were included in acquisition-related costs in the consolidated statements of operations. The analysis as
to whether a modification of debt is an extinguishment or modification is performed on a creditor-by-creditor basis. See
Note 10 for information on debt refinancings and modifications.
Leases
The Company currently leases office space and equipment under various leasing arrangements. As these leases
expire, it can be expected that in the normal course of business they will be renewed or replaced. Leases are classified as
either capital leases or operating leases, as appropriate. Lease agreements that are classified as operating leases may contain
renewal options, rent escalation clauses or other inducements provided by the landlord. Rent expense is accrued to
recognize lease escalation provisions and inducements provided by the landlord, if any, on a straight-line basis over the
lease term commencing when the Company obtains the right to control the use of the leased property. Rent expense is
included in general and administrative expense in the consolidated statements of operations.
Treasury Stock
Acquisitions of treasury stock are recorded at cost. Treasury stock held is reported as a deduction from
stockholders' equity in the consolidated balance sheets. At the date of subsequent reissue, the treasury stock account is
reduced by the cost of such stock on a specific-identification basis. Additional paid-in capital from treasury stock
transactions is increased as the Company reissues treasury stock for more than the cost of the shares. If the Company issues
treasury stock for less than its cost, additional paid-in capital from treasury stock transactions is reduced to no less than
zero. Once this account is at zero, any further required reductions are recorded to retained deficit in the consolidated
balance sheets.
Foreign Currency Transactions
The financial statements of RSSI, RSHK and RSUK, which operate outside of the United States (U.S.), are
measured using the local currency as the functional currency. Adjustments to translate those statements into U.S. dollars
are recorded in other comprehensive income/(loss) (OCI), which were immaterial in amount at December 31, 2018, 2017
and 2016.
Transactions denominated in currencies other than the functional currency are recorded using the exchange rate
on the date of the transaction. Exchange differences arising on the settlement of financial assets and liabilities are recorded
in other income/(expense) in the consolidated statements of operations. Foreign exchange gains and losses for the years
ended December 31, 2018, 2017 and 2016 were immaterial.
Income Taxes
Income taxes are accounted for using the assets and liability method as required by ASC 740, Income Taxes (ASC
740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax liabilities are generally attributable to
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indefinite-lived intangible assets and depreciation. Deferred tax assets are generally attributable to definite-lived intangible
assets, stock compensation, deferred compensation and federal, state and foreign loss carryforwards and the benefit of
uncertain tax positions. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
The Company assesses whether a valuation allowance should be established against its deferred income tax assets
based on consideration of all available evidence, both positive and negative, using a more likely than not standard. The
assessment considers, among other matters, the nature, frequency and severity of recent operating results, forecasts of
future profitability, the duration of statutory carry back and carry forward periods and the Company's experience with tax
attributes expiring unused. Changes in circumstance could cause the Company to revalue its deferred tax balances with
the resulting change impacting the consolidated statements of operations in the period of the change.
The Company records income tax liabilities pursuant to ASC 740, which prescribes the recognition and
measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition,
classification of interest and penalties, accounting in interim periods, disclosure and transition. For tax positions meeting
a "more-likely-than-not" threshold, the amount recognized in the financial statements is the largest amount of benefit
greater than 50% likely of being sustained. The more-likely-than-not threshold must continue to be met in each reporting
period to support continued recognition of the benefit. The Company's accounting policy with respect to interest and
penalties related to tax uncertainties is to classify these amounts as income taxes.
Certain income tax effects of the Tax Cuts and Jobs Act enacted in December 2017 ("Tax Act") were reflected in
the Company’s financial results in accordance with Staff Accounting Bulletin No. 118 (SAB 118), which provides SEC
staff guidance regarding the application of ASC Topic 740 in the reporting period in which the Tax Act became law. See
also Note 9 for further detail.
Loss Contingencies
The Company continuously reviews any investor, client, employee or vendor complaints and pending or
threatened litigation. The Company evaluates the likelihood that a loss contingency exists under the criteria of applicable
accounting standards through consultation with legal counsel and records a loss contingency, inclusive of legal costs, if
the contingency is probable and reasonably estimable at the date of the financial statements.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting and allocates the
purchase price to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition.
The fair values are determined in accordance with the guidance in ASC 820 based on valuations performed by the
Company and independent valuation specialists.
Contingent and Deferred Payment Arrangements
The Company periodically enters into contingent and/or deferred payment arrangements in connection with its
business combinations. Liabilities under contingent and deferred payment arrangements are recorded in consideration
payable for acquisition of business in the consolidated balance sheets. In contingent payment arrangements, the Company
agrees to pay additional consideration to the sellers based on future performance, such as future net revenue levels. The
Company estimates the fair value of these potential future obligations at the time a business combination is consummated
and records a liability in the consolidated balance sheet at estimated fair value. In deferred payment arrangements, the
Company records a liability in the consolidated balance sheet for the estimated fair value, which is the present value, of
the future payments as of the acquisition date.
If the Company's expected payments under contingent payment obligations subsequently change, the obligation
is reduced or increased in the current period resulting in a gain or loss, respectively. Gains and losses resulting from
changes to expected payments under contingent payment obligations are reflected in change in value of consideration
payable for acquisition of business in the consolidated statements of operations.
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The Company accretes deferred payment obligations to their expected payment amounts over the period covered
by the arrangement. Accretion expense related to deferred payment obligations is reflected in interest expense and other
financing costs in the consolidated statements of operations and totaled $0.5 million, $0.6 million and $0.7 million in 2018,
2017 and 2016, respectively.
Equity Award Modifications
When changes are made to the terms of an equity award that result in a change in the fair value of the equity
award immediately before and after the change, the Company applies modification accounting, treating the change as an
exchange of the original award for a new award. The calculation of the incremental value associated with the modified
award is based on the excess of the fair value of the modified award over the fair value of the original award measured
immediately before its terms are modified.
Reclassifications
Certain reclassification adjustments have been made to conform prior periods’ consolidated financial statements
and notes to the consolidated financial statements to the current year presentation for comparative purposes. This includes
the presentation of treasury stock as Class B treasury stock at December 31, 2017 on the consolidated balance sheets.
Adoption of New Accounting Standards
ASU 2016-09 Compensation – Stock Compensation (Topic 718) was issued by the FASB in March 2016 to reduce
the cost and complexity of reporting on employee share-based payments and to address the tax reporting, forfeitures, and
expected term related to equity awards. ASU 2016-09 eliminates the requirement that excess tax benefits be realized
through a reduction in income taxes payable before the benefits can be recognized.
The Company adopted ASU 2016-09 on January 1, 2018 using a modified retrospective transition method. A
one-time credit to retained earnings of $1.3 million was recorded as the cumulative-effect adjustment for excess tax
benefits not previously recognized and to adjust compensation cost on equity awards outstanding at January 1, 2018 as if
the Company had previously accounted for forfeitures as they occurred.
With the adoption of ASU 2016-09, the Company now recognizes the income tax effects of share-based
compensation in income tax expense, which may cause significant fluctuations in the reported amount of income tax
expense in the consolidated statements of operations and the effective tax rate as restricted shares vest and stock options
are exercised. In addition, upon adoption of ASU 2016-09, the Company made the election to account for forfeitures of
equity awards as they occur. The Company elected to adopt the amendment related to the cash flow presentation of excess
tax benefits prospectively and prior periods have not been adjusted.
ASU 2017-09 was issued by the FASB in May 2017 to clarify when changes in the terms or conditions of a share-
based payment award qualify for accounting treatment as a modification. The Company adopted ASU 2017-09 on
January 1, 2018 and will apply the new guidance prospectively to awards modified after January 1, 2018. The adoption
had no significant impact on the Company’s consolidated financial statements for the year ended December 31, 2018.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606, as amended),
which supersedes existing revenue recognition guidance. ASU 2014-09 and all subsequent amendments related to ASU
2014-09 (the “new revenue guidance") requires the following steps when recognizing revenue: 1) identify the contract
with the customer 2) identify performance obligations in the contract 3) determine the transaction price 4) allocate the
transaction price to the performance obligations in the contract and 5) recognize revenue when or as performance
obligations are satisfied. The new revenue guidance requires additional disclosures related to the nature, amount, timing
and uncertainty of revenue from customer contracts. ASU 2014-09 may be adopted by using one of two methods 1)
retrospective application to each prior reporting period presented or 2) a modified retrospective approach, requiring the
standard be applied only to the most current period presented, with the cumulative effect of initially applying the standard
101
recognized at the date of initial application. The new revenue guidance is effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that reporting period, for non-emerging growth companies, and
for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period,
for the Company.
The Company's implementation assessment included the identification of revenue within the scope of the
guidance, as well as the review of terms and conditions of a sample of revenue contracts covering a broad range of vehicles
and products. The Company adopted ASU 2014-09 effective January 1, 2019, using the modified retrospective approach,
and no cumulative effect adjustment was required to be recorded. The Company determined that the new guidance did not
have a material impact on the timing of recognition of the Company’s revenue. The most significant impact from adopting
the new guidance was a change to a net presentation of certain fund expense reimbursements which were previously
presented on a gross basis. These fund expense reimbursements totaled $12.9 million in 2018 and were recorded in
distribution and other asset-based expenses in the consolidated statements of operations. Effective January 1, 2019, fund
expense reimbursements are recorded in investment management fees on the consolidated statements of operations.
The Company’s introducing broker-dealer VCA adopted the new revenue guidance effective January 1, 2018.
VCA receives compensation for sales and sales-related services promised under distribution contracts with the Victory
Funds. There are no direct costs incurred to obtain these contracts. Direct costs incurred to fulfill services under the
distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares. There was no
change to how VCA records revenue from contracts with customers and accounts for costs incurred to fulfill services
under distribution contracts from adoption of the new revenue guidance.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities". This update requires equity securities to be measured at fair value and
changes in the fair value of equity securities to be recognized in net income. The update is effective for fiscal years
beginning after December 15, 2017 for non-emerging growth companies and for fiscal years beginning after December 31,
2018 for the Company. The Company adopted ASU 2016-01 on January 1, 2019, and the adoption had an immaterial
impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is amended by
ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20, which FASB issued in January 2018, July 2018, July 2018
and December 2018, respectively (collectively, the amended ASU 2016-02). The amended ASU 2016-02 requires lessees
to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term,
and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and presentation of
expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. The amended
ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases.
The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to
the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The amended
ASU 2016-02 also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty
of cash flows arising from leases. A modified retrospective transition approach is used when adopting the
amended ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. The
amended ASU will be effective for fiscal years beginning after December 15, 2018 for non-emerging growth companies
and for fiscal years beginning after December 15, 2019 for the Company. The Company is currently evaluating the impact
on its financial statements of adopting this standard.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments".
The update provides guidance on certain cash flow statement classifications that were previously unclear or lacked specific
guidance. The classifications addressed in the update include debt extinguishment costs, contingent consideration
payments made after a business combination, and distributions received from equity method investees. The update is
effective for fiscal years beginning after December 15, 2017 for non-emerging growth companies and for fiscal years
beginning after December 15, 2018 for the Company. The Company is in the process of analyzing how the new rules will
impact financial reporting.
102
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and other (Topic 350), Simplifying the
Test for Goodwill Impairment”. The standard eliminates Step 2 from the goodwill impairment test. Under the amended
guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. The new
guidance is effective for the Company’s fiscal year that begins after December 15, 2020 and requires a prospective
approach to adoption. Early adoption is permitted for interim or annual goodwill impairment tests. Upon adoption, the
new guidance will impact the Company’s consolidated financial statements and related disclosures only in the event there
is goodwill impairment.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income". ASU 2018-02 allows companies to reclassify tax effects stranded in accumulated other
comprehensive income/(loss) as a result of tax reform to retained earnings/(deficit). The guidance is effective for the
Company’s fiscal year beginning January 1, 2019. Early adoption is permitted. The Company adopted ASU 2018-02 on
January 1, 2019, and the adoption had an immaterial impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05 incorporating guidance from SEC Staff Accounting Bulletin
(SAB) 118 into Accounting Standards Codification 740 on income taxes. SAB 118 addresses situations where companies
are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the
period of enactment. See Note 9 for more information on the Company’s accounting for the income tax effects of the Tax
Act.
On October 4, 2018, as part of Rule 3-04 of Regulation S-X, the SEC published amended rules requiring an
analysis of changes in stockholders’ equity for the current and comparative quarter and year to date periods in financial
statements included in quarterly reports on Form 10-Q. The new rule took effect on November 5, 2018. To provide
transition relief, the SEC’s Division of Corporation Finance issued a Compliance and Disclosure Interpretation stating that
the SEC staff will not object if a filer’s first presentation of the changes in stockholders’ equity is included in its Form 10-
Q for the quarter that begins after the effective date of the amendments. The Company will begin including an analysis of
changes in stockholders’ equity for the current and comparative quarter in its financial statements included on Form 10-Q
for the quarter ending March 31, 2019.
3. Acquisitions
CEMP Acquisition
Consideration for the CEMP Acquisition included a total of $10.7 million in base payments and a total of
$3.1 million in earn-out payments to be made to sellers following each of the first four anniversaries of the closing date.
Each annual base payment is fixed in amount, with the amounts increasing over the four-year period. The earn-out
payments are calculated as a fixed percentage of the net revenue earned by the Company on the CEMP business over the
twelve-month period ending on each of the first four anniversaries of the CEMP closing date.
The acquisition date fair value of the base payment liability was determined by discounting the four required
annual payments by the Company's pre-tax cost of debt. The liability is being accreted to the amount of cash to be paid in
the future.
The Company paid sellers a total of $4.4 million, $2.7 million and $1.3 million in base payments and earn out
payments in 2018, 2017 and 2016. The final base payment and earn-out payment will be paid by the third quarter of 2019.
As of December 31, 2018, 2017 and 2016, the earn-out liability was valued at $0.7 million, $1.2 million and
$1.5 million, respectively, and total consideration payable to sellers for the CEMP Acquisition was $5.8 million and $9.9
million, respectively, which is recorded in consideration payable for acquisition of business on the consolidated balance
sheets.
103
RS Acquisition
At the time of the RS Acquisition, which closed on July 29, 2016, the Company recorded a $25.6 million
receivable for cash flows expected to be received from a third party under an agreement signed by RS Investments with
that party for the transfer of certain separate accounts in 2014. Pursuant to this agreement, Victory was entitled to receive
earn-out payments from the buyer in the form of revenue share on the transferred separate accounts through December 31,
2018.
The Company assessed the collectability of the receivable on a periodic basis. During 2018 and 2017, the
Company recorded losses of $1.0 million and $4.4 million, respectively, recorded in interest income and other
income/(expense) in the consolidated statements of operations and in loss on other receivable in the consolidated statement
of cash flows, to write down this receivable to the estimated fair value of the remaining cash flows expected to be received
under the earn-out arrangement.
The Company collected $6.6 million and $10.3 million of this receivable in 2018 and 2017, respectively. At
December 31, 2018 and 2017, the receivable totaled $0.9 million and $8.4 million, respectively, which is recorded in other
receivables in the consolidated balance sheets. In January 2019, the Company collected the final amount due on this
receivable of $0.9 million.
The Company’s consolidated financial statements for 2016 include RS Investments’ operating results from the
date of acquisition through December 31, 2016. Pro forma unaudited revenue and net loss for 2016, giving effect to the
Company’s acquisition of RS Investments as if the acquisition had occurred on January 1, 2015, was $381.1 million and
$22.1 million, respectively.
The historical consolidated financial information of the Company and RS Investments for 2016 were adjusted to
give effect to pro forma events that were directly attributable to the transaction, factually supportable and expected to have
continuing impact on the combined results. The pro forma unaudited revenue and net loss amounts for 2016 were
calculated after adjusting the results of RS Investments to reflect additional interest expense and income taxes as well as
intangible asset amortization that would have been charged assuming the fair value adjustments had been applied on
January 1, 2015. In addition, the Company’s and RS Investments’ results were adjusted to remove incentive compensation,
legal fees and mutual fund proxy costs directly attributable to the acquisition.
For the period from July 30, 2016 to December 31, 2016, RS Investments’ revenue was $53.4 million. Net income
attributable to RS Investments for this period is impractical to determine as the Company did not prepare discrete financial
information at that level.
Harvest Acquisition
On September 21, 2018, the Company entered into the Harvest Purchase Agreement, whereby the Company has
agreed to purchase 100% of the equity interests of Harvest, an asset management company specializing in yield
enhancement overlay, risk reduction, alternative beta and absolute return investment strategies. The Harvest Acquisition
is expected to close in the second quarter of 2019 and is subject to the receipt of a specified level of client consents,
termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the “HSR Act”), which termination was received on November 6, 2018, and other closing conditions.
Harvest Purchase Agreement
Subject to the adjustments described below, the aggregate purchase price (the “Harvest Purchase Price”) to be
paid by the Company for Harvest is (i) $255 million in cash paid at the closing of the transaction (the “Harvest Closing”),
(ii) 1,565,370 shares of the Company’s Class B common stock, which equated to $15 million based on a volume-weighted
average price per share of $9.5824 at September 21, 2018, to be paid at the Harvest Closing, (iii) $30.75 million in Class
B Common Stock, issued in four equal installments at the end of each of the first four quarters following the Harvest
Closing, and (iv) contingent earn-out payments based on the net revenue (as calculated under the Harvest Purchase
Agreement) of the Harvest business in calendar years 2021, 2022 and 2023. The shares of Class B Common Stock included
104
in the Harvest Purchase Price will be issued at a volume-weighted average price per share as defined in the Harvest
Purchase Agreement. The net revenue targets that must be achieved by the Harvest business in order for the maximum
earnout to be paid are predicated on more than 30% of annual revenue growth by the Harvest business for the five years
following the Harvest Closing. A maximum of $100 million in earnout payments is achievable for each of calendar years
2021, 2022 and 2023, with such maximum number subject to certain adjustments. To receive any earnout for a given
calendar year, the Harvest business must achieve a minimum of $51 million in net revenue for such calendar year, and to
achieve the maximum earnout, the Harvest business must achieve at least $112 million in net revenue for calendar year
2021, $145.7 million in net revenue for calendar year 2022, and $189.4 million in net revenue for calendar year 2023,
subject to certain “catch-up” provisions.
The Harvest Purchase Agreement provides that the Harvest Purchase Price will be reduced if Harvest does not
obtain client consents relating to the assignment of Harvest investment advisory contracts representing revenues equal to
at least 95% of a baseline revenue amount. The Harvest Purchase Price is subject to adjustments for working capital and
debt, unpaid transaction expenses, accrued bonuses and commissions and other specified pre-closing Harvest liabilities
relating to the Harvest Closing. The Harvest Purchase Price is also subject to a customary post-closing adjustment and
true-up payment for consents obtained in the ninety days following the Harvest Closing. Adjustments to the Harvest
Purchase Price will reduce both the cash and equity portions of the Harvest Purchase Price.
The Harvest Purchase Agreement contains customary termination rights for the Company and Harvest, including
in the event the Harvest Acquisition is not consummated on or before June 11, 2019.
USAA AMCO Acquisition
On November 6, 2018, the Company entered into the USAA Stock Purchase Agreement, whereby the Company
agreed to purchase 100% of the outstanding common stock of the USAA Acquired Companies. The USAA AMCO
Acquisition includes AMCO’s mutual fund and ETF businesses and the USAA 529 College Savings Plan. Upon the closing
of the USAA AMCO Acquisition, Victory will have the rights to offer products and services using the USAA brand and
AMCO’s investment teams will continue serving the investment needs of the military community and their families.
USAA Stock Purchase Agreement
Subject to the adjustments described below and in the USAA Stock Purchase Agreement, the aggregate purchase
price (the “USAA Stock Purchase Price”) to be paid by the Company for the shares of the USAA Acquired Companies is
(i) $850 million in cash (the “Base Purchase Price”) paid at the closing of the USAA AMCO Acquisition (the “USAA
Closing”) and (ii) contingent payments based on AMCO’s annual revenue as calculated under the USAA Stock Purchase
Agreement attributable to all “non-managed money”-related assets under management in each of the first four years
following the USAA Closing. A maximum of $150 million ($37.5 million per year) in contingent payments in respect of
“non-managed money”-related assets is achievable over the four-year period. To receive any contingent payment in respect
of “non-managed money”-related assets for a given year, annual revenue from “non-managed money”-related assets must
be at least 80% of the revenue run-rate as calculated under the USAA Stock Purchase Agreement of AMCO’s “non-
managed money”-related assets under management as of the Closing, and to achieve the maximum contingent payment
for a given year, such annual revenue must total at least 100% of that Closing revenue run-rate. Annual contingent
payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the
USAA Stock Purchase Agreement.
The USAA Stock Purchase Agreement provides that the Base Purchase Price will be reduced if AMCO does not
obtain client consents (“Consents”) related to the assignment of AMCO’s investment advisory contracts representing
revenues equal to at least 95% of a baseline revenue amount (the “Run Rate Threshold”). The Base Purchase Price is
subject to working capital and debt adjustments as well as reductions for certain unpaid transaction expenses, accrued
bonuses and commissions and other specified liabilities of AMCO, in each case as of immediately prior to Closing. The
Base Purchase Price is also subject to a customary post-Closing adjustment, as well as a true-up payment in respect of
Consents obtained in the 180 days following the USAA Closing.
The USAA AMCO Acquisition is expected to close around the end of the second quarter of 2019 and is subject
to, among other things, the receipt of a specified level of Consents, the expiration or termination of the applicable waiting
105
period under the HSR Act, which termination was received on December 3, 2018, the absence of any material adverse
effect as defined in the USAA Stock Purchase Agreement on the business of the USAA Acquired Companies, and other
customary closing conditions.
The USAA Stock Purchase Agreement contains customary termination rights for the Company and USAA
Capital Corporation, parent of the USAA Acquired Companies, including in the event the USAA AMCO Acquisition is
not consummated on or before August 3, 2019.
Acquisition-related costs
Costs related to acquisitions are summarized below and include legal and filing fees, advisory services, mutual
fund proxy voting costs and other one-time expenses related to the transactions. These costs were expensed in 2018, 2017
and 2016 and are included in acquisition-related costs in the consolidated statements of operations.
(in millions)
RS Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
USAA AMCO Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . .
Harvest Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4. Fair Value Measurements
Acquisition-related costs
2017
2018
2016
— $
3.1
1.1
0.1
4.3 $
0.4 $
—
—
1.7
2.1 $
6.4
—
—
0.2
6.6
The Company determines the fair value of certain financial and nonfinancial assets and liabilities. Fair value is
determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value determinations utilize a valuation hierarchy based upon
the transparency of inputs used in the valuation of an asset or liability.
Classification within the fair value hierarchy contains three levels:
• Level 1—Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active
markets.
• Level 2—Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active,
quoted market prices for similar assets and liabilities in active markets and other observable inputs directly
or indirectly related to the asset or liability being measured.
• Level 3—Valuation inputs are unobservable and significant to the fair value measurement. These inputs
reflect management's own assumptions about the assumptions a market participant would use in pricing the
asset or liability.
The table below shows assets measured at fair value on a recurring basis:
As of December 31, 2018
(in thousands)
Financial Liabilities
Contingent Consideration Arrangements . . . . . . . . . $ (716) $
Total Financial Liabilities . . . . . . . . . . . . . . . . . . . . $ (716) $
Total
Level 1 Level 2 Level 3
— $
— $
— $ (716)
— $ (716)
106
(in thousands)
Financial Assets
Contingent Consideration Arrangements . . . . . . . . . $ (1,195) $
Total Financial Liabilities . . . . . . . . . . . . . . . . . . . . $ (1,195) $
Total
As of December 31, 2017
Level 1 Level 2 Level 3
— $
— $
— $ (1,195)
— $ (1,195)
Contingent consideration arrangements at December 31, 2018 and 2017 consist of the CEMP earn-out payment
liability, which is included in consideration payable for acquisition of business in the consolidated balance sheets. Level 3
inputs were utilized to determine fair value, or the present value of the expected future settlement, of the contingent
consideration arrangement (see Note 3). Changes in the fair value of the liability, realized or unrealized, are recorded in
earnings and are included in change in value of consideration payable for acquisition of business in the consolidated
statements of operations.
Significant unobservable inputs used in the fair value calculation for this obligation include discount rates and
growth assumptions.
Four scenarios were used in formulating the growth rate assumptions with varying levels of revenue growth and
were probability-weighted. An increase to the discount rate would result in a lower fair value, while an increase to growth
rate assumptions would result in a higher fair value.
(in thousands)
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
CEMP change in fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEMP year 2 earn-out payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
CEMP change in fair value measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEMP year 3 earn-out payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent
Consideration
Arrangements
(1,523)
294
34
(1,195)
37
442
(716)
There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy
for the years ended December 31, 2018 and 2017. The Company recognizes transfers at the end of the reporting period.
The net carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates fair
value due to the short-term nature of these assets and liabilities. The fair value of the Company's long-term debt at
December 31, 2018 is considered to be its carrying amount as Company entered into the Existing Credit Agreement in
February 2018 (see Note 10). Level 2 inputs are utilized to determine the fair value of the Company's long-term debt.
The fair value of investments measured using the net asset value practical expedient at December 31, 2018 and
2017 totaled $13.3 million and $11.3 million respectively.
5. Related-Party Transactions
The Company considers certain funds that it manages, including the Victory Funds, the VictoryShares and the
Victory Collective Funds, to be related parties as a result of the Company's advisory relationship.
The Company receives investment management, administrative, distribution and compliance fees in accordance
with contracts that VCM and VCA have with the Victory Funds. The Company also receives investment management fees
from the VictoryShares and Victory Collective Funds under VCM's advisory contracts with these funds and administrative
fees under VCM’s administration contracts with the VictoryShares.
107
Under the terms of monitoring agreements with affiliates of two shareholders of the Company, the Company paid
fees for monitoring services, which are included in general and administrative expense in the consolidated statements of
operations. These monitoring agreements terminated upon the completion of the IPO.
Balances and transactions involving related parties are included in the consolidated balance sheets and
consolidated statements of operations are summarized below. Included in receivables (fund administration and distribution
fees) are amounts due from the Victory Funds for compliance services and expense reimbursements. Included in fund
administration and distribution fees are amounts earned for compliance services. Realized gains and losses on investments
in the Victory Funds classified as available-for-sale securities are included in interest income and other income/(expense)
in the consolidated statements of operation. Included in the other liabilities in the consolidated balance sheets is the
remaining amount payable for a promissory note the Company issued in March 2016 for $1.7 million for amounts due
upon repurchase of Company common stock from a shareholder.
(in thousands)
Related party assets
As of December 31,
2017
2018
Receivables (investment management fees) . . . . . . . . . . . . . . . . . . . . $ 19,612 $ 23,027
3,925
Receivables (fund administration and distribution fees) . . . . . . . . . .
677
Investments (Available-for-sale securities, fair value) . . . . . . . . . . .
10,248
Investments (Trading securities, at fair value) . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,709 $ 37,877
3,153
601
12,343
Related party liabilities
Accounts payable and accrued expenses (fund reimbursements) . . . $
Other liabilities (promissory note) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,300 $
96
2,396 $
1,155
671
1,826
(in thousands)
Related party revenue
Investment management fees . . . . . . . . . . . . . . . . . . . .
Fund administration and distribution fees . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related party expense
Distribution and other asset-based expenses (fund
reimbursements) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31,
2017
2016
2018
$ 261,538 $ 254,318 $ 171,112
49,401
$ 322,267 $ 320,136 $ 220,513
60,729
65,818
$ 12,902 $ 11,896 $ 10,342
1,150
$ 13,037 $ 13,099 $ 11,492
1,203
135
Related party other income (expense)
Interest expense and other income/(expense) . . . . . . .
Interest expense and other financing costs
(promissory note) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,834) $
589 $
224
(18)
$ (2,852) $
(39)
550 $
(42)
182
6. Investments
As of December 31, 2018 and 2017, the Company held both available-for-sale securities and trading securities.
Available-for-sale investments consist entirely of seed capital investments in certain Victory sponsored mutual funds.
Trading securities are held under a deferred compensation plan and include Victory sponsored and third party mutual
funds.
108
Available-For-Sale Securities
A summary of the cost and fair value of investments classified as available-for-sale is as follows:
(in thousands)
As of December 31, 2018 . . . . . . . . . . . . . . . . . . . $
As of December 31, 2017 . . . . . . . . . . . . . . . . . . .
666 $
595
Cost
Gains
Gross Unrealized
Fair
(Losses) Value
(71) $
—
601
677
6 $
82
Unrealized gains and losses on available for sale investments are recorded, net of tax, to accumulated other
comprehensive income/(loss).
Upon sale, accrued unrealized gains or losses are reclassed out of accumulated comprehensive income/(loss) (see
Note 19), and realized gains and losses are recognized in the consolidated statements of operations as other income
(expense). Proceeds and realized gains and losses recognized during 2018, 2017 and 2016 are as follows:
Sale
Realized
(in thousands)
For the year ending December 31, 2018 . . . . . . . . . $
For the year ending December 31, 2017 . . . . . . . . .
For the year ending December 31, 2016 . . . . . . . . .
Proceeds
Gains
(Losses)
— $
79
1,290
— $
15
78
—
—
(27)
Trading Securities
A summary of the cost and fair value of investments classified as trading securities is as follows:
(in thousands)
As of December 31, 2018 . . . . . . . . . . . . . . . . . . . $ 14,874 $
As of December 31, 2017 . . . . . . . . . . . . . . . . . . .
9,978
Cost
Gains
Gross Unrealized
Fair
(Losses) Value
5 $ (2,160) $ 12,719
10,659
(269)
950
Unrealized gains and losses on trading securities are recorded in earnings in other income (expense). Sales of
trading investments throughout the year result in realized gains or losses that are recognized in the consolidated statements
of operations as other income (expense). Proceeds and realized gains and losses recognized in 2018, 2017 and 2016 are as
follows:
Sale
Realized
(in thousands)
For the Year Ended December 31, 2018 . . . . . . . . . $
For the Year Ended December 31, 2017 . . . . . . . . .
For the Year Ended December 31, 2016 . . . . . . . . .
Proceeds
Gains
(Losses)
2,772 $
5,166
2,585
37 $
159
64
(73)
(34)
(72)
7. Property and Equipment
Property and equipment consisted of the following as of December 31, 2018 and 2017:
(in thousands)
Equipment, Purchased Software and Implementation Costs . . . . . . . $
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation and Amortization . . . . . . . . . . . . . . . . . . .
Total Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31,
2017
2018
14,685
17,071 $
2,720
3,209
1,501
1,541
18,906
21,821
(10,062)
(13,041)
8,844
8,780 $
109
Depreciation and amortization expense for property and equipment was $3.0 million, $3.6 million, and $3.2
million for the years ended December 31, 2018, 2017, and 2016, respectively.
8. Goodwill and Other Intangible Assets
The table below shows changes in the goodwill balance from December 31, 2017 to December 31, 2018:
(in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,108 $ 284,108
Goodwill recorded in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,108 $ 284,108
—
As of December 31,
2017
2018
There were no impairments to goodwill recognized during the years ended December 31, 2018, 2017 or 2016.
Identifiable Intangible Assets
In the third quarter of 2018, the Company determined that the estimated useful life had changed for the $1.1
million CEMP trade name indefinite-lived intangible asset as a result of rebranding the Company’s proprietary CEMP
volatility weighted indexes as NASDAQ Victory volatility weighted indexes. The Company estimated the fair value of
the trade name intangible asset before updating the useful life and concluded no impairment was present. The Company
began amortizing this intangible asset in July 2018.
A summary of definite-lived intangible assets by type is as follows:
Fund
Customer
Advisory Trade
Relationships Contracts Names
(in thousands)
Gross Book Value—12/31/17. . . . . . . $ 123,200 $ 2,368 $
2017 Accumulated Amortization . . . . (84,309) (2,105)
263 $
2017 Net Book Value—12/31/17 . . . $ 38,891 $
Weighted Average Useful
Intellectual
Property/
Other
Totals
— $
—
— $
7,177 $ 132,745
(6,062) (92,476)
1,115 $ 40,269
Life (years) . . . . . . . . . . . . . . . . . . . .
—
Gross Book Value—12/31/18 . . . . . . $ 123,200 $ 2,368 $ 1,132 $
(283)
2018 Accumulated Amortization . . . . (103,207) (2,368)
2018 Net Book Value—12/31/18 . . . $ 19,993 $
849 $
— $
Weighted Average Useful
0.3
1.6
0.6
1.5
7,177 $ 133,877
(6,940) (112,798)
237 $ 21,079
Life (years) . . . . . . . . . . . . . . . . . . . .
0.8
—
1.5
0.2
0.8
Amortization expense for definite-lived intangible assets for the years ended December 31, 2018, 2017 and 2016,
was $20.3 million, $26.3 million and $27.2 million, respectively, and is recorded in depreciation and amortization within
the consolidated statements of operations. There were no impairments to definite-lived intangible assets recognized in
2018, 2017 or 2016.
110
Estimated amortization expense for definite-lived intangible assets for each of the five succeeding years is as
follows:
(in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Totals
16,114
3,262
1,703
—
—
21,079
A summary of indefinite-lived intangible assets by type is as follows:
(in thousands)
Balance—12/31/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions or Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance—12/31/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions or Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance—12/31/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contracts
342,900 $
—
342,900 $
—
342,900 $
Fund Advisory
and Distribution
Trade
Names
24,832 $
—
24,832 $
(1,132)
23,700 $
Totals
367,732
—
367,732
(1,132)
366,600
There were no impairments to indefinite-lived intangible assets recognized in 2018, 2017 or 2016.
9. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted. The Tax Act significantly revised
the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to
21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company was required to
remeasure its deferred tax assets and deferred tax liabilities on the enactment date using the new rate.
At December 31, 2017, the Company’s accounting for the income tax effects of the Tax Act was not complete,
as it had yet to collect all the necessary data to complete the analysis of the effect of the Tax Act on the underlying deferred
taxes. In 2017, the Company applied the guidance in SAB 118 and recorded a provisional credit to federal tax expense of
$2.4 million from remeasuring deferred tax assets and deferred tax liabilities due to the Tax Act.
As of December 31, 2018, the Company has completed the accounting for the tax effects of the Tax Act, and no
adjustments to the provisional amounts recorded in 2017 were necessary during 2018.
111
The provision for income taxes consists of the following for the years ended December 31, 2018, 2017 and 2016:
(in thousands)
Current tax expense (benefit):
2018
2017
2016
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,130 $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax expense (benefit) . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . $ 21,207 $
3,944
17
17,091
3,577
549
(10)
4,116
640 $
779
22
1,441
(3)
93
(10)
80
9,162
2,010
19
11,191
12,632 $
(2,728)
(388)
36
(3,080)
(3,000)
The effective tax rate for the years ended December 31, 2018, 2017 and 2016 differs from the U.S. federal
statutory rate primarily as a result of certain non-deductible expenses and state and local income taxes, and for 2017, due
to the remeasurement of net deferred tax liabilities upon enactment of the Tax Act.
2018
Federal income tax at U.S. statutory rate . . . . . . . . . . . . . . . . .
State income tax rate, net of federal tax benefit . . . . . . . . . . .
Change of state income tax rate, net of federal tax benefit . .
Excess tax benefits on share-based compensation . . . . . . . . .
Remeasurement of deferred taxes due to Tax Act . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.0 %
4.1 %
0.1 %
(0.5)%
— %
0.2 %
0.1 %
25.0 %
2017
35.0 %
4.0 %
(0.2) %
— %
(6.3) %
0.8 %
(0.4) %
32.9 %
2016
35.0 %
1.2 %
0.5 %
— %
— %
(3.1)%
(0.6)%
33.0 %
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amount used for income tax reporting purposes.
In assessing the realization of deferred tax assets, management considers the reversal of deferred tax liabilities as
well as projections of future taxable income during the periods in which temporary differences are expected to reverse.
Based on the consideration of these facts, the Company believes it is more likely than not that all of its gross deferred tax
assets will be realized in the future, and as a result has not recorded a valuation allowance on these amounts as of
December 31, 2018 and 2017.
112
The components of deferred income tax assets and deferred tax liabilities were as follows at December 31, 2018
and 2017:
(in thousands)
Deferred tax assets
2018
2017
Definite-lived intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,725 $ 16,078
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . .
5,271
4,118
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,738
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,119
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,033
Contingent consideration arrangements . . . . . . . . . . . . . . . . . . . . . . .
273
CEMP goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
468
AMT credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
492
—
Unrealized loss on deferred compensation investments . . . . . . . . . .
Loss on equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,129 $ 31,590
9,041
4,483
3,185
—
962
248
574
—
536
283
92
Deferred tax liabilities
Indefinite-lived intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,302 $ 30,939
2,573
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,239
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEMP base payments interest expense . . . . . . . . . . . . . . . . . . . . . . . .
125
Change in value of consideration payable for acquisition of
1,101
1,282
161
36
business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on deferred compensation investments . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
459
—
—
44,341
(6,212) $
454
175
14
35,658
(4,068)
As of December 31, 2017, for Federal tax purposes, the Company had net operating loss carryforwards of $5.5
million all of which were utilized during the year ended December 31, 2018. As of December 31, 2018, the Company had
no net operating loss carryforwards.
The Company has analyzed its tax positions for all open years (December 31, 2017, 2016, 2015, 2014 and 2013)
and has concluded that no additional provision for income tax is required in the financial statements. The Company did
not record any amounts at December 31, 2018, 2017 or 2016 related to uncertain tax positions or tax contingencies.
10. Debt
2018 Debt Refinancing
On February 12, 2018, concurrently with the closing of the IPO, the Company entered into the Existing Credit
Agreement under which the Company received seven-year term loans in an original aggregate principal amount of
$360.0 million and established a five-year revolving credit facility (which was unfunded as of closing) with original
aggregate commitments of $50.0 million. On May 3, 2018, the Existing Credit Agreement was amended to increase
aggregate commitments for the revolving credit facility from $50.0 million to $100.0 million.
Net proceeds of $355.9 million from the term loans under the Existing Credit Agreement and $143.0 million from
the IPO, as well as cash on hand of $0.8 million, were used to repay all of the indebtedness outstanding under the 2014
Credit Agreement ($499.7 million of term loans) on February 12, 2018. The 2014 Credit Agreement was terminated on
this date.
113
Original issue discount was $0.9 million for the term loans under the Existing Credit Agreement and $0.3 million
for the revolving credit facility under the Existing Credit Agreement. The Company incurred a total of $3.7 million in
arranger fees and other third party costs related to the Existing Credit Agreement: $1.8 million was recorded as debt
issuance costs and $1.9 million was expensed in general and administrative expense in the consolidated statements of
operations as costs related to modified debt. The Company recognized a $6.1 million loss on debt extinguishment, which
consisted of the write-off of $4.2 million in unamortized debt issuance costs and $1.9 million in unamortized debt discount.
In conjunction with the May 3, 2018 amendment to the Existing Credit Agreement, the Company incurred $0.4
million in original issue discount and legal and other fees which were recorded as debt issuance costs in other assets in the
consolidated balance sheets.
The Existing Credit Agreement
Term loans under the Existing Credit Agreement amortize at a rate of 1.00% per annum. Mandatory prepayments
of term loans are required on an annual basis, starting with the year ending December 31, 2019, with a percentage of
annual excess cash flow ranging from 0% to 50% depending on the Company’s first lien leverage ratio. Mandatory
prepayments of term loans are also required with all or a portion of net cash proceeds of certain asset sales, casualty or
condemnation events and with the proceeds of certain incurrences of indebtedness. At any time the Company may
terminate commitments under the revolving credit facility in full or in part or prepay term loans in whole or in part, subject
to the payment of LIBOR breakage fees, if any. Term loans under the Existing Credit Agreement have an interest rate of
LIBOR plus 2.75%.
The Existing Credit Agreement contains customary affirmative and negative covenants, including but not limited
to, covenants that affect the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge
or dissolve, make investments, make distributions and dividends. The Existing Credit Agreement also requires a certain
maximum first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings
under the revolving credit facility exceed 35.0% of the commitments.
Obligations under the Existing Credit Agreement are guaranteed by all of the Company’s domestic subsidiaries
other than VCA (the Guarantors) and are secured by substantially all of the assets of the Company and the Guarantors,
subject in each case to certain customary exceptions.
The components of long-term debt in the consolidated balance sheets at December 31, 2018 and 2017 appear
below.
(in thousands)
2018
2017
Interest Rate
Effective
— $ 499,750
Due October 2021, 6.82% interest rate . . . . . . . . . . . . . . $
—
Due February 2025, 5.55% interest rate . . . . . . . . . . . . . .
499,750
Term loan principal outstanding . . . . . . . . . . . . . . . . .
(11,442)
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . .
Unamortized debt discount . . . . . . . . . . . . . . . . . . . . . . . .
(5,083)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,857 $ 483,225
280,000
280,000
(7,629)
(3,514)
7.73%
6.22%
As of December 31, 2018, the term loans under the Existing Credit Agreement had an interest period of three
months and the interest rate was 5.55% per annum. Including the impact of amortization of debt issuance costs and original
issue discount described herein, the effective yield for term loans under the Existing Credit Agreement as of
December 31, 2018 was 6.22% per annum.
The Company repaid $37.0 million, $23.0 million and $20.0 million of the outstanding term loans under the
Existing Credit Agreement in the first quarter, second quarter and third quarter of 2018, respectively for a total of $80.0
million repaid during the year ended December 31, 2018.
114
Debt issuance costs related to the Term Loans totaled $21.6 million and $19.9 million at December 31, 2018 and
2017 and are reflected net of accumulated amortization and loss on debt extinguishment of $14.0 million and $8.5 million
respectively. Debt issuance costs of $2.0 million and $1.1 million related to the Revolver Commitments are included in
other assets in the consolidated balance sheets and are reflected net of accumulated amortization and loss on debt
extinguishment of $1.2 million and $0.7 million as of December 31, 2018 and 2017, respectively. Debt discount related to
the Term Loans totaled $9.2 million and $8.3 million at December 31, 2018 and 2017 and are reflected net of accumulated
amortization and loss on debt extinguishment of $5.7 million and $3.2 million respectively.
The components of interest expense and other financing costs on the consolidated statements of operations for
the years ended December 31, 2018, 2017 and 2016 appear below.
(in thousands)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,289 $ 41,569 $ 29,544
2,749
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . .
999
Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
327
718
CEMP base payment accretion expense . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
305
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,694 $ 48,467 $ 34,642
3,657
1,544
767
638
292
1,708
700
—
467
530
2018
2017
2016
The Harvest Commitment Letter
In connection with entering into the Harvest Purchase Agreement, on September 21, 2018, the Company entered
into the Harvest Commitment Letter with Royal Bank of Canada (“RBC”) and Barclays Bank PLC (“Barclays”), pursuant
to which RBC and Barclays have committed to provide, and have agreed to arrange and syndicate, an incremental senior
secured term loan facility under the Existing Credit Agreement in an initial aggregate principal amount of up to $265
million (the “Harvest Facility”). The proceeds of the Harvest Facility, together with cash on the Company’s balance sheet
at Harvest Closing, will be used by the Company to fund a portion of the Harvest Purchase Price and to pay fees and
expenses incurred in connection with the Harvest Acquisition and the Harvest Facility, unless the Company finances the
Harvest Acquisition with proceeds from the USAA AMCO Term Loan Facility described below. The availability of the
Harvest Facility is subject to the satisfaction of certain customary conditions precedent. Neither the closing of the Harvest
Facility, nor the receipt of any other financing, is a condition to the Harvest Closing. If the Company finances the Harvest
Acquisition with proceeds from the USAA AMCO Term Loan Facility, it will not borrow under the Harvest Commitment
Letter or enter into the Harvest Facility.
USAA AMCO Credit Facilities Commitment Letter
In connection with entering into the USAA Stock Purchase Agreement, on November 6, 2018, the Company
entered into the USAA AMCO Credit Facilities Commitment Letter with Barclays and RBC, pursuant to which Barclays
and RBC have committed to provide, and have agreed to arrange and syndicate, a new seven-year senior secured first lien
term loan facility (the “USAA AMCO Term Loan Facility”) in an aggregate principal amount of up to $1.395 billion and
a new five-year senior secured first lien revolving credit facility (together with the USAA AMCO Term Loan Facility, the
“USAA AMCO Credit Facilities”) in an aggregate principal amount of up to $100 million. Proceeds from the USAA
AMCO Term Loan Facility, together with cash on the Company’s balance sheet, will be used to refinance in full all debt
outstanding under the Company’s Existing Credit Agreement, finance the USAA AMCO Acquisition and finance the
above mentioned Harvest Acquisition, thus effectively replacing the Harvest Commitment Letter.
115
11. Derivatives
Interest Rate Caps
The interest rate caps that the Company entered into under the terms of the 2014 Credit Agreement expired on
December 31, 2017 as per their original contractual terms. The 2014 Credit Agreement required at least 50% of the initial
principal outstanding of $295 million on the Term Loan to be protected from interest rate fluctuations for a period of at
least two years.
The Company entered into two interest rate caps, one in late 2014 and one in early 2015, to manage interest rate
exposure on 50% of the initial principal outstanding on the Term Loan for a three year period expiring December 31, 2017.
The caps were designated as cash flow hedges of the variability in expected future cash flows on the Term Loan based on
fluctuations in 3-month LIBOR above 1.50%. The caps were considered to be perfectly effective as all critical terms of
the interest rate caps completely match the hedged forecasted interest on the Term Loan. For the year end December 31,
2017, $0.8 million of interest expense was recognized in the consolidated statements of operations. The impact on other
comprehensive income (loss) and earnings for 2016 was immaterial.
12. Equity Method Investment
In December 2016, the Company acquired a 7.6% ownership interest in Cerebellum. Cerebellum is an investment
management firm that develops machine learning-focused technology to invent and manage investment strategies. The
Company’s ownership interest in Cerebellum was 19.6% and 11.9% as of December 31, 2018 and 2017, respectively. As
the Company does not have the ability to direct significant activities of Cerebellum and does not have the right to receive
benefits nor the obligation to absorb losses that could potentially be significant to Cerebellum, the Company does not
consolidate Cerebellum.
Given the level of ownership interest in Cerebellum, the fact that Cerebellum maintains specific ownership
accounts for the investors, which makes Cerebellum more like a limited partnership, and the Company's influence through
assignment of one of eight board positions, the Company accounts for its investment in Cerebellum using the equity
method of accounting.
As of December 31, 2018, the Company's equity investment in Cerebellum totaled $7.9 million, which is net of
$0.7 million and $0.4 million of losses recorded in 2018 and 2017, respectively, under the equity method of accounting.
Losses from equity method investments are recorded in interest income and other income/(expense) in the consolidated
statements of operations. Equity method investments are recorded in other assets in the consolidated balance sheets. The
Company's equity investment in Cerebellum was $4.6 million as of December 31, 2017, which was net of losses of $0.4
million, and was $3.0 million as of December 31, 2016.
13. Equity
Equity Structure
Until the closing of the Company’s IPO on February 12, 2018, the Company had one class of common stock with
a par value of $0.01 per share. Holders of this common stock were entitled to one vote per share.
With the closing of the Company’s IPO, the Company’s authorized capital stock consists of 400,000,000 shares
of Class A common stock, $0.01 par value per share, 200,000,000 shares of Class B common stock, $0.01 par value per
share, and 10,000,000 shares of “blank check” preferred stock, $0.01 par value per share.
The Company incurred offering costs of $4.6 million related to the IPO and underwriter option exercise, of which
$2.9 million of legal, accounting and other costs were included in prepaid expenses in the consolidated balance sheets at
December 31, 2017 and were subsequently reclassified to equity issuance costs upon closing of the IPO. The Company
paid $0.3 million and $4.3 million of these offering costs in 2017 and 2018, respectively.
116
All shares of common stock outstanding, all shares of common stock held as treasury stock and all unvested
restricted shares of common stock outstanding prior to the IPO were redesignated as shares of Class B common stock with
a par value of $0.01 per share upon completion of the IPO. The first shares of Class A common stock were issued in the
IPO; no shares of preferred stock were issued as of December 31, 2018.
The rights of the holders of Class A common stock and Class B common stock are identical, except voting and
conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is
entitled to ten votes. Holders of the Company’s Class A common stock and Class B common stock will generally vote
together as a single class, unless otherwise required by law or the Company’s amended and restated certificate of
incorporation.
Each share of our Class B common stock is convertible into one share of the Company’s Class A common stock
at any time, at the option of the holder, and will convert automatically upon termination of employment by an employee
shareholder and upon transfers (subject to certain exceptions). Shares of our Class B common stock will convert
automatically into shares of our Class A common stock at a one to one ratio upon the date the number of shares of Class
B common stock then outstanding (including unvested restricted shares) is less than 10% of the aggregate number of shares
of Class A common stock and Class B common stock outstanding (including unvested restricted shares).
Share Repurchase Program
On May 22, 2018, the Company’s board of directors authorized the Company to repurchase up to an aggregate
of $15.0 million of the Company’s Class A common stock. These repurchases may be made in privately negotiated
transactions, through block trades, pursuant to open market purchases, or pursuant to any trading plan adopted in
compliance with Rule 10b5-1. The manner, timing, share number and price of the repurchases will be determined by the
Company, subject to market conditions, applicable securities laws, alternative investment opportunities and other factors.
The Company is not required to acquire any particular amount of Class A common stock, and the share repurchase program
may be modified, suspended or terminated at any time.
As of December 31, 2018, a total of 856,275 shares of Class A common stock had been repurchased under the
share repurchase program at a total cost of $8.0 million and an average cost of $9.40 per share, and $7.0 million was
available for future repurchases. The repurchase program expires on December 31, 2019.
14. Share-Based Compensation
Equity Incentive Plans
Until the IPO was completed, equity-based awards were issued to executives, directors and key employees of the
Company under the Victory Capital Holdings, Inc. Equity Incentive Plan (the “2013 Plan”) and the Outside Director Equity
Incentive Plan (the “Director Plan”).
In connection with the IPO, the Company’s board of directors adopted, and the Company’s stockholders
approved, the Victory Capital Holdings, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), and the Victory Capital
Holdings, Inc. 2018 Employee Stock Purchase Plan (the “2018 ESPP”), each of which became effective upon the
completion of the IPO.
The 2018 Plan authorizes the grant of non-qualified stock options, incentive stock options, restricted stock
awards, restricted stock units, stock appreciation rights, performance awards and other awards that may be settled in or
based upon shares of the Company’s Class A common stock or Class B common stock, collectively, the Shares, though
the Company currently intends to grant these awards based upon shares of Class B common stock. As the 2018 Plan took
effect upon completion of the IPO, no further grants will be made under the 2013 Plan.
A total of 3,372,484 shares of either Class A or Class B common stock, or any combination thereof, as determined
by the Compensation Committee are reserved for and available for issuance under the 2018 Plan. Shares underlying awards
that are settled in cash, expire or are canceled, forfeited or otherwise terminated without delivery to a participant will again
117
be available for issuance under the 2018 Plan. Shares withheld or surrendered in connection with the payment of an
exercise price of an award or to satisfy tax withholding will again become available for issuance under the 2018 Plan.
In June 2018, the Compensation Committee of the Company’s board of directors approved the terms and
conditions for the 2018 ESPP offering. A total of 350,388 shares of Class A common stock is available to issue under the
2018 ESPP. The offering runs for eighteen months, from July 1, 2018 to December 31, 2019, and includes three six month
offering periods. Shares of Class A common stock will be purchased at three month calendar intervals at a 5 percent
discount from the market price on the purchase date, which is the last day of each calendar quarter during the offering.
Amounts purchased by an individual may not exceed $25,000 worth of stock in any given calendar year. The 2018 ESPP
is a non-compensatory plan and includes no option features other than employees may change their contributions or
withdraw from the plan once during each six month offering period during a specified time approved by the Company. All
U.S.-based employees may participate in the 2018 ESPP.
As of December 31, 2018, 245,948 restricted share grants and 2,362 stock option awards had been issued under
the 2018 Plan, and 2,781 shares of Class A common stock had been issued under the 2018 ESPP Plan.
All stock option awards are considered non-qualified. For certain stock option awards granted on July 29, 2016,
fifty percent of the shares of common stock subject to each option vest based on service and the remaining fifty percent of
the shares of common stock subject to each option vest upon satisfaction of various performance conditions. For all other
stock option awards granted prior to 2018, sixty percent of the shares of common stock subject to each option vest based
on service; the remaining forty percent of the shares of common stock subject to each option vest upon satisfaction of
various performance conditions.
As of December 31, 2018, stock option awards to purchase an aggregate of 9,070,052 shares of common stock
had been granted and were outstanding, and restricted share awards for 2,997,856 shares of common stock had been
granted and were unvested. As of December 31, 2017, stock option awards to purchase an aggregate of 9,078,728 shares
of common stock and restricted share awards for 1,293,107 shares of common stock had been granted and were
outstanding. As of December 31, 2016, stock option awards to purchase an aggregate of 8,669,475 shares of common
stock and restricted share awards for 1,536,977 shares of common stock had been granted and were outstanding.
Current Year Grants and Activity
On January 1, 2018, the Company issued grants for 1,678,743 restricted shares of common stock and stock option
awards for 357,256 shares of common stock under the 2013 Plan.
Grants for 1,609,857 restricted shares of common stock consisted of time-vested restricted shares (50%) and
restricted shares that vest in three equal installments based on market conditions (achievement of certain share price
targets) (50%). The time-vested portion of the restricted share awards vest over a three to five year period. For the
remaining grants of 68,886 restricted shares of common stock, the shares vest based on service over a four year period.
For the grants of restricted shares with market conditions, the shares vest over the derived service period of three to five
years.
For the stock option awards granted on January 1, 2018, sixty percent of the shares of common stock subject to
each option vest based on service over a four year period; the remaining forty percent of the shares of common stock
subject to each option vest upon satisfaction of various performance conditions.
In the period following the IPO through December 31, 2018, the Company issued grants for 30,834 restricted
shares of common stock that were fully vested on the grant date, grants for 202,883 restricted shares of common stock that
vest over three years and 12,231 restricted shares of common stock that vest over four years. In addition, the Company
issued stock option awards for 2,362 shares of common stock. Fifty percent of the shares of common stock subject to this
option award vest based on service over a three year period; the remaining fifty percent of the shares of common stock
subject to this option award vest upon achievement of certain performance and market conditions.
118
Activity during the years ended December 31, 2018, 2017 and 2016 related to stock option awards and restricted
stock awards is shown in the tables below.
2018
Avg wtd
Avg wtd
grant-date exercise
fair value price
Units
Shares Subject to Stock Option Awards
Year to Date Ended December 31,
2017
Avg wtd
Avg wtd
grant-date exercise
fair value price
Units
2016
Avg wtd
Avg wtd
grant-date exercise
fair value price
Units
Outstanding
at beginning
of period . . . . . $ 3.66 $ 5.71 9,078,728 $ 3.40 $ 4.90 8,669,475 $ 2.93 $ 3.30 6,530,181
4.27 7.91 2,961,655
(286,793)
3.09 3.70
—
—
6.51 14.25
6.39 14.00
3.56
3.01
6.14 13.52
3.81
3.02
2.45
2.54
774,357
(132,972)
(73,406)
359,618
(16,791)
(351,503)
—
Granted . . . . . . .
Forfeited . . . . . .
Exercised . . . . .
Modified to
liability to be
cash settled . . .
Outstanding
—
—
—
2.61
2.62
(158,726)
2.67 2.74
(535,568)
at end of the
period . . . . . . . $ 3.79 $ 6.12 9,070,052 $ 3.66 $ 5.71 9,078,728 $ 3.40 $ 4.90 8,669,475
Vested . . . . . . . . $ 3.35 $ 4.76 6,653,228 $ 3.17 $ 4.19 5,731,647 $ 2.93 $ 3.43 3,493,018
3.71 5.89 5,176,457
4.49
Unvested . . . . . .
8.31 3,347,081
9.88 2,416,824
5.00
Total intrinsic value of options exercised in 2018 and 2017 was $2.3 million and $0.8 million, respectively
Restricted Stock Awards
For Year Ended December 31,
2017
2018
2016
Avg wtd
Units
fair value
378,769
Unvested at beginning of period . . . . . . . . . . $ 11.82 1,293,107 $ 9.48
833,574
13.52
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(194,115)
7.99
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
8.81
Unvested at end of period . . . . . . . . . . . . . . . . $ 13.17 2,997,856 $ 11.82 1,293,107 $ 9.48 1,018,228
Avg wtd
fair value
1,018,228 $ 5.84
10.27
5.79
—
13.77 1,924,691
(217,630)
10.42
(2,312)
14.27
623,165
(339,701)
(8,585)
Avg wtd
fair value
Units
Units
Director Plan Restricted Stock Awards
For Year Ended December 31,
2017
2016
2018
Unvested at beginning of period . . . . . . . . . . $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested at end of period . . . . . . . . . . . . . . . . $
Avg wtd
Avg wtd
Avg wtd
fair value Units
—
—
—
—
—
fair value Units
5.71
—
49,230 $
—
5.71 (49,230)
—
— $
—
5.71
— $
—
—
—
— $
5.71 114,927
—
(65,697)
—
49,230
—
5.71
—
5.71
fair value Units
Share-based compensation expense for equity awards is measured at the grant date, based on the estimated fair
value of the award, and recognized over the requisite employee service period. Stock option awards have a ten year
contractual life.
For awards granted after the IPO, the Company used the Class A common stock closing price on the grant date
as the grant date fair value of the stock. The fair value of stock option awards was determined using a number of inputs
including expected volatility, which was based on a consideration of the average volatility of companies in the same or
similar lines of business adjusted for differing levels of leverage and the Company’s volatility for the post-IPO period.
119
For restricted share awards granted on March 31, 2017 and July 1, 2017, fifty percent of the shares vest on the
third anniversary of the grant date and the remaining fifty percent vest upon achievement of certain share prices for the
Company's stock. For restricted share awards granted on July 29, 2016 and certain stock option awards granted on July 31,
2017 and July 29, 2016, the restricted shares and the service portion of the stock option awards vest ratably at 20% per year
over a five-year period. The remaining restricted stock awards issued prior to 2018, including restricted stock awards
granted on March 10, 2017, and service portion of all other stock option awards vest ratably at 25% over a four-year period
from date of grant. The performance portion of certain stock option awards granted on July 31, 2017 and July 29, 2016
vest based on achievement of revenue and AUM levels related to specific investment franchises. For all other stock option
awards awarded prior to 2018, the performance portion of the awards vests upon the Company's achievement of certain
revenue, assets under management, and earnings before interest, taxes, depreciation and amortization levels.
The grant date fair value of stock option awards with service and performance conditions is computed using
Black-Scholes option pricing framework. The grant date fair value of stock option awards granted during 2018, 2017 and
upon the Company's RS Acquisition in 2016 was computed using the following assumptions as of the date of the grant:
Stock price at time of grant . . . . . . . . . . . . . . . . . . . . . $
Exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected average years to exit . . . . . . . . . . . . . . . . . . .
January 1, 2018
14.27
14.27
50%
2.27%
5
2017
$ 13.51 $
$ 13.51 $
50%
2.22%
5
July 29, 2016
10.27
10.27
50%
1.10%
5
The Company used both a market approach and income approach to estimate the current stock price used in the
valuation of restricted share and stock option awards in 2017. The market approach considered the then current EBITDA
multiples and price/earnings multiples of comparable public companies. The income approach considered management's
forecast of operating results, a long-term growth rate and a discount rate. The results of the market and income approach
were weighted in developing the estimate of fair value. The current stock price used in the valuation of equity awards
granted on July 29, 2016 with the RS Acquisition was the price per share used for all equity issued on that date.
The expected life of the options granted in 2017 and 2016 was based on the average holding period for a private
equity investment. The risk free interest rate was based on the yield for the U.S. Treasury coupon strip with a maturity
date equal to the expected life of the award. As the Company's common shares were not publicly traded in 2017 and 2016,
the Company calculated expected volatility based on an average volatility of companies in the same or similar lines of
business adjusted for differing levels of leverage.
Award Modifications
2018 and 2017 Modifications
In the third and fourth quarter of 2018 and fourth quarter of 2017, the Company's board of directors approved
modifications to a limited number of stock option awards to revise performance conditions to be achieved for vesting.
These modifications resulted in an adjustment to share-based compensation expense of an immaterial amount.
In the first quarter of 2018, the Company revised the estimate of time it expected to take to achieve the
performance conditions on certain performance-vested restricted share awards. In the fourth quarter of 2018 and 2017, the
Company revised the estimate of the time it was expected to take to achieve performance conditions on certain stock option
awards. Cumulative catch up adjustments were recorded in each case so that the cumulative recognized share-based
compensation cost on the performance options was equal to what would have been recognized had the new estimate been
used since the grant date.
2016 Modifications
On July 29, 2016, the Company's board of directors approved a modification to outstanding options issued on or
after October 31, 2014 and prior to the RSIM acquisition providing that 50% of the performance options were deemed to
120
be vested. As a result of accelerated vesting on these awards, the Company recognized an additional $0.5 million in
expense related to options that vested on July 29, 2016 that the Company had previously not expected to vest. The
incremental expense was calculated using the fair value per unit on the vesting date.
The Company also established a new vesting schedule for all remaining unvested performance options issued
prior to July 29, 2016 to align with the combined company's financial projections. No other terms and conditions for stock
option awards issued prior to July 29, 2016 were modified (i.e. the exercise price per option or term of the option).
The Company considered it probable that both the original and modified performance options would vest and
calculated that the per share option fair value immediately prior to the modification based on current circumstances was
approximately the same as the per share option fair value of the award immediately following the modification.
Share-based compensation expense not yet recognized at July 31, 2016 related to the remaining 50% of the
performance options under awards granted between October 31, 2014 and July 29, 2016 is being recognized over the
period of time it is expected to take to achieve the performance conditions. No cumulative catch up adjustment was
recorded as the period of time expected to take to achieve the performance conditions did not change.
For options granted prior to October 31, 2014, the Company revised the estimate of time it expected to take to
achieve the performance conditions as modified on July 29, 2016 on the remaining unvested options. A cumulative catch
up adjustment was recorded so that the cumulative recognized compensation costs on these performance options was equal
to what would have been recognized had the new estimate been used since the grant date.
Dividend Payments
In February 2017, the Company declared and paid a special dividend (2017 Special Dividend) of $2.19 per share.
Holders of restricted shares that were unvested at the time the 2017 Special Dividend was declared are paid the 2017
Special Dividend when the restricted shares vest. The strike price per share for all stock option awards granted prior to
February 2017 was reduced by $2.19 under the anti-dilution provisions of the stock option grant agreements.
In December 2017, the Company declared a dividend of $0.23 per share (December 2017 Dividend). Holders of
restricted stock awards that were unvested at the time the December 2017 Dividend was declared are paid the December
2017 Dividend when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017
Dividend was declared receive a cash bonus equivalent of $0.23 per share when the stock options vest.
As of December 31, 2018, 2017 and 2016, the amount of cash bonuses and distributions related to all dividends
previously declared on restricted shares and options expected to vest in the future totaled $1.8 million, $2.0 million and
$0.8 million, respectively, which is not recorded as a liability as of the balance sheet date. A liability will be recorded for
these cash bonuses and dividends when the restricted shares and options vest.
Share-based Compensation Expense
The Company recorded $15.2 million of share-based compensation expense related to the 2013 Plan and 2018
Plan in 2018 and $11.8 million and $8.8 million of share-based compensation expense related to the 2013 Plan in 2017
and 2016, respectively, in personnel compensation and benefits expense in the consolidated statements of operations. The
related tax benefits were $3.8 million, $4.6 million and $3.2 million for fiscal years 2018, 2017, and 2016, respectively.
In 2018, the Company did not recognize any share-based compensation expense related to the Director Plan. In
2017 and 2016, the Company recognized Director Plan share-based compensation expense of $0.2 million and
$0.4 million, respectively, which is recorded in general and administrative expense.
As of December 31, 2018, the Company expects to recognize total share-based compensation expense of
$35.8 million over a weighted average period of 2.0 years. The total fair value of restricted share awards vested during
the years ended December 31, 2018, 2017 and 2016 was $2.0 million, $4.6 million and $2.0 million respectively; the fair
value of restricted share awards vested under the Director Plan was $0.7 million in 2017 and 2016. The aggregate intrinsic
121
value of stock options currently exercisable at December 31, 2018, 2017 and 2016 was $36.3 million, $57.8 million and
$35.2 million respectively.
15. Commitments
The Company leases office space and equipment under operating leases expiring at various dates. The Company
has the right to renew or extend the leases under the agreements for certain non-headquarter office spaces. Future
calendar year minimum lease payments under the leases are as follows, all dollars are in thousands:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,404
4,128
3,386
2,442
1,396
1,314
17,070
Rent expense for the years ended December 31, 2018, 2017 and 2016 was $4.6 million, $7.3 million, and
$5.9 million, respectively, and is included in general and administrative expense in the consolidated statements of
operations.
16. Employee Benefit Plans
The Company maintains a defined contribution 401(k) Plan (the 401(k) Plan), covering substantially all
employees who have met the eligibility requirements. The 401(k) Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 and the Economic Growth and Tax Relief Reconciliation Act of 2001. In 2018,
2017 and 2016 the Company recognized expense of $2.5 million, $2.4 million and $1.9 million in employer matched
contributions, respectively.
The Company sponsors a deferred compensation plan for key investment professionals and executives as a means
to reward and motivate them. The Company purchases mutual funds as directed by the plan participants to fund its related
obligations. Such securities are held in a rabbi trust for the participants, and under the terms of the trust agreement, the
assets of the trust are available to satisfy the claims of the Company's general creditors in the event of bankruptcy.
Gains and losses from fluctuations in value of deferred compensation plan investments are included in interest
income and other income (expense) in the consolidated statements of operations and are offset entirely by the
corresponding changes in value of the deferred compensation liability, which are included in personnel compensation and
benefits in the consolidated statements of operations. Investments held under the deferred compensation plan are recorded
as trading securities in the consolidated balance sheets. Components of deferred compensation plan-related expense appear
below.
(in millions)
Employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in value of deferred compensation plan liability . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
3.0 $
0.7
(1.6)
2.1 $
3.1 $
0.8
1.3
5.2 $
1.5
0.7
0.6
2.8
122
17. Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
(in thousands except per share amounts)
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . $
Shares:
Basic: Weighted average number of shares
Year Ended December 31,
2017
25,826 $
2018
63,704 $
2016
(6,071)
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,295,240
54,930,852
50,017,712
Plus: Incremental shares from assumed
conversion of dilutive instruments . . . . . . . .
4,215,296
4,646,496
—
Diluted: Weighted average number of
shares outstanding . . . . . . . . . . . . . . . . . . . . .
70,510,536
59,577,348
50,017,712
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.96 $
0.90 $
0.47 $
0.43 $
(0.12)
(0.12)
For the years ended December 31, 2018, 2017 and 2016, there were 1,738,813, 434,656 and 6,614,274
outstanding instruments, respectively, excluded from the above computations of weighted average shares for diluted EPS
because the effects would be anti-dilutive. Holders of non-vested share-based compensation awards do not have rights to
receive nonforfeitable dividends on the shares covered by the awards.
18. Net Capital Requirements
VCA is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act) administered by the
SEC and FINRA, which requires the maintenance of minimum net capital, as defined, and requires that the ratio of
aggregate indebtedness to net capital, cannot exceed 15 to 1. Net capital and the related net capital requirement may
fluctuate on a daily basis.
At December 31, 2018, VCA had net capital under the Rule 15c3-1 of $2.3 million which was $2.1 million in
excess of its minimum required net capital of $0.2 million. At December 31, 2017, VCA had net capital under Rule 15c3-1
of $2.3 million, which was $2.1 million in excess of its minimum required net capital of $0.2 million. The Company's ratio
of aggregate indebtedness to net capital at December 31, 2018 and 2017 was 1.14 to 1 and 1.55 to 1 respectively.
Capital requirements may limit the amount of cash available for dividend from VCA to the parent company.
VCA's cash and cash equivalents is generally not available for corporate purposes.
123
19. Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive income/(loss) by component for
the years ending December 31, 2018, 2017, and 2016, all dollars are in thousands.
Cumulative
Available-for-sale Cash Flow Translation
Securities (a)
Hedges (b) Adjustment
Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(31) $
(511) $
— $
Other comprehensive income/(loss) before reclassification
and tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments, before tax . . . . . . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income/(loss) . . . . . . . . . .
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income/(loss) before reclassification
and tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments, before tax . . . . . . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income . . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss before reclassification and tax . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments, before tax . . . . . . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive loss . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28
(9)
(2)
1
18
(13) $
(254)
98
327
(122)
49
(462) $
(100)
38
—
—
(62)
(62) $
121
(48)
(15)
6
64
51 $
(147)
37
—
—
(110)
(59) $
(20)
7
767
(292)
462
— $
—
—
—
—
—
— $
122
(47)
—
—
75
13 $
(53)
13
—
—
(40)
(27) $
Total
(542)
(326)
127
325
(121)
5
(537)
223
(88)
752
(286)
601
64
(200)
50
—
—
(150)
(86)
(a)
(b)
Reclassifications out of AOCL related to available-for-sale securities are recorded in interest income and other
income/(expense)
Reclassifications out of AOCL related to cash flow hedges are recorded in interest expense and other financing
costs
20. Selected Quarterly Information (Unaudited)
The following table presents unaudited quarterly financial results for 2018 and 2017, all dollars are in thousands
except per share data as noted. These quarterly results reflect all normal recurring adjustments that management considers
necessary for a fair statement of the results. Revenues and net income can vary significantly from quarter to quarter due
to our business activities and acquisitive nature.
For the Quarters Ended
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
104,964 $ 104,399 $ 108,082 $
74,715
77,696
29,684
27,268
18,675
10,524
March 31, 2018 June 30, 2018 Sep 30, 2018 Dec 31, 2018
95,967
70,210
25,757
13,915
0.21
0.19
76,272
31,810
20,590
0.27 $
0.26 $
0.17 $
0.16 $
0.30 $
0.29 $
124
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
March 31, 2017 June 30, 2017 Sep 30, 2017 Dec 31, 2017
100,661 $ 100,934 $ 102,388 $ 105,646
78,720
81,099
26,926
19,562
11,209
4,413
0.20
0.19
78,147
24,241
7,850
81,495
19,439
2,354
0.14 $
0.13 $
0.04 $
0.04 $
0.08 $
0.08 $
For the Quarters Ended
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Regulations under the Exchange Act require public companies, including us, to maintain “disclosure controls and
procedures,” which are defined in Rule 13a-15(e) and Rule 15d-15(e) to mean a company’s controls and other procedures
that are designed to ensure that information required to be disclosed in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our principal executive officer and principal financial officer or persons performing similar
functions, as appropriate to allow timely decisions regarding required or necessary disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure
controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in evaluating the cost benefit relationship of
possible disclosure controls and procedures.
Based on the evaluation of the effectiveness of the disclosure controls and procedures by our management as of
December 31, 2018, our chief executive officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision of our management, including
our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2018 using the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based
on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting
is effective as of December 31, 2018 to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public
accounting firm with respect to our internal control over financial reporting due to an exemption established by the JOBS
Act for “emerging growth companies.”
125
Changes in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies, including our company, to evaluate any change
in our “internal control over financial reporting” as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the
Exchange Act. In connection with their evaluation of our disclosure controls and procedures, our chief executive officer
and chief financial officer did not identify any change in our internal control over financial reporting during the most recent
fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None
126
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant
to Regulation 14A for the 2019 annual meeting of shareholders.
Item 11. Executive Compensation.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant
to Regulation 14A for the 2019 annual meeting of shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant
to Regulation 14A for the 2019 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant
to Regulation 14A for the 2019 annual meeting of shareholders.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant
to Regulation 14A for the 2019 annual meeting of shareholders.
127
PART IV
Item 15. Exhibits, Financial Statement Schedules
(1)
(2)
(3)
Financial Statements: The information required by this Item is contained in Item 8 of Part II of this
report.
Financial Statement Schedules: None
Exhibits: See Exhibit Index
Item 16. Form 10-K Summary
None
Exhibit No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of the Registrant(1)
Amended and Restated Bylaws of the Registrant(1)
Form of Class A common stock certificate(1)
Form of Class B common stock certificate(1)
Second Amended and Restated Shareholders’ Agreement, dated as of February 12, 2018(1)
Employee Shareholders’ Agreement, dated as of February 12, 2018(1)
Form of Indemnification Agreement(1)
Form of Victory Capital Holdings, Inc. 2018 Stock Incentive Plan(1)
Form of Victory Capital Holdings, Inc. 2018 Employee Stock Purchase Plan(1)
Victory Capital Holdings, Inc. Equity Incentive Plan(1)
Amendment No. 1 to the Victory Capital Holdings, Inc. Equity Incentive Plan(1)
Amendment No. 2 to the Victory Capital Holdings, Inc. Equity Incentive Plan(1)
Amendment No. 3 to the Victory Capital Holdings, Inc. Equity Incentive Plan(1)
Amendment No. 4 to the Victory Capital Holdings, Inc. Equity Incentive Plan(1)
Victory Capital Management Inc. Severance Pay Plan and Summary Plan Description(1)
Victory Capital Holdings, Inc. Bonus Plan(1)
Victory Capital Management Inc. Deferred Compensation Plan(1)
First Amendment to the Victory Capital Management Inc. Deferred Compensation Plan(1)
First Addendum to the Victory Capital Management Inc. Deferred Compensation Plan(1)
Second Amendment to the Victory Capital Management Inc. Deferred Compensation Plan(1)
Form of Stock Option Grant Notice under the Victory Capital Holdings, Inc. Equity Incentive
Plan(1)
10.16
Form of Restricted Shares Grant Notice under the Victory Capital Holdings, Inc. Equity
Incentive Plan(1)
10.17
Form of Stock Option Grant Notice under the Victory Capital Holdings, Inc. 2018 Equity
Incentive Plan(1)
10.18
Form of Restricted Shares Grant Notice under the Victory Capital Holdings, Inc. 2018 Equity
Incentive Plan(1)
10.19
Credit Agreement, dated as of February 12, 2018, among Victory Capital Holdings, Inc., as
borrower, the lenders from time to time party thereto and Royal Bank of Canada, as
administrative agent and collateral agent(2)
128
10.20
Amendment No. 1 to Credit Agreement, dated as of May 3, 2018 among, inter alios, the
Company, the other loan parties party thereto, the lenders party thereto and Royal Bank of
Canada, in its capacities as administrative agent and collateral agent for the secured parties (in
such capacities, the “Administrative Agent”), which amends the Credit Agreement, dated as of
February 12, 2018 among the Company, the lenders from time to time party thereto and the
Administrative Agent(3)
10.21
Employment Agreement by and between Victory Capital Holdings, Inc. and David C. Brown,
dated as of March 20, 2017(1)
10.22
Purchase Agreement, dated September 21, 2018, by and among Victory Capital Holdings, Inc.,
Harvest Volatility Management, LLC, and the other parties listed thereto(4)
10.23
Amended and Restated Commitment Letter, dated as of September 24, 2018, by and among
Royal Bank of Canada, Barclays Bank PLC and Victory Capital Holdings, Inc.(4)
10.24
Stock Purchase Agreement, dated November 6, 2018, by and among the Company, USAA
Investment Corporation and, for certain limited purposes, USAA Capital Corporation(5)
10.25
Commitment Letter, dated as of November 6, 2018, by and among Barclays Bank PLC, Royal
Bank of Canada, and Victory Capital Holdings, Inc.(5)
21.1
23.1
31.1
31.2
32.1
List of Subsidiaries(1)
Consent of Ernst & Young LLP
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following information formatted in XBRL (eXtensible Business Reporting Language): (i)
Audited Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) Audited
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and
2016, (iii) Audited Consolidated Statements of Comprehensive Income for the years ended
December 31, 2018, 2017 and 2016, (iv) Audited Consolidated Statements of Cash Flows for
the years ended December 31, 2018, 2017 and 2016, (v) Audited Consolidated Statements of
Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 and
(vi) Notes to the Audited Consolidated Financial Statements.
(1)
Incorporated by reference on Form S-1 filed on February 6, 2018
(2)
Incorporated by reference on Form 8-K filed on February 15, 2018
(3)
Incorporated by reference on Form 8-K filed on May 8, 2018
(4)
Incorporated by reference on Form 8-K filed on September 27, 2018
(5)
Incorporated by reference on Form 8-K filed on November 9, 2018
129
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 15th day of
March, 2019.
SIGNATURES
VICTORY CAPITAL HOLDINGS, INC.
By: /s/ DAVID C. BROWN
Name: David C. Brown
Title: Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DAVID C. BROWN
David C. Brown
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ MICHAEL D. POLICARPO
Michael D. Policarpo
President, Chief Financial Officer and Chief
Administrative Officer (Principal Financial
Officer and Principal Accounting Officer)
/s/ MILTON R. BERLINSKI
Milton R. Berlinski
/s/ ALEX BINDEROW
Alex Binderow
/s/ LAWRENCE DAVANZO
Lawrence Davanzo
/s/ RICHARD M. DEMARTINI
Richard M. DeMartini
/s/ JAMES B. HAWKES
James B. Hawkes
/s/ ROBERT J. HURST
Robert J. Hurst
/s/ KARIN HIRTLER-GARVEY
Karin Hirtler-Garvey
/s/ ALAN H. RAPPAPORT
Alan H. Rappaport
Director
Director
Director
Director
Director
Director
Director
Director
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-222937)
pertaining to the Victory Capital Holdings, Inc. Equity Incentive Plan, the Victory Capital Holdings, Inc.
2018 Stock Incentive Plan, and the Victory Capital Holdings, Inc. 2018 Employee Stock Purchase Plan of our
report dated March 15, 2019, with respect to the consolidated financial statements of Victory Capital
Holdings, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2018.
Exhibit 23.1
/s/ Ernst & Young LLP
Cleveland, Ohio
March 15, 2019
Exhibit 31.1
I, David C. Brown, certify that:
CERTIFICATIONS
1. I have reviewed this report on Form 10-K of Victory Capital Holdings, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2019
By: /s/ DAVID C. BROWN
David C. Brown
Chief Executive Officer and Chairman
(Principal Executive Officer)
Exhibit 31.2
I, Michael D. Policarpo, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of Victory Capital Holdings, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2019
By: /s/ MICHAEL D. POLICARPO
Michael D. Policarpo
President, Chief Financial Officer and Chief Administrative Officer
(Principal Financial Officer and Principal Accounting Officer)
CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, David C. Brown, Chief Executive Officer of Victory Capital Holdings, Inc. (the “Company”), hereby certify pursuant
to Section 1350 of chapter 63 of title 18 of the United States Code, and Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge: (1) the annual report on Form 10-K of the Company to which this Exhibit is attached
(the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ DAVID C. BROWN
David C. Brown
Chief Executive Officer and Chairman
(Principal Executive Officer)
March 15, 2019
Exhibit 32.2
CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael D. Policarpo, President, Chief Financial Officer and Chief Administrative Officer of Victory Capital
Holdings, Inc. (the “Company”), hereby certify pursuant to Section 1350 of chapter 63 of title 18 of the United States
Code, and Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the annual report on
Form 10-K of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ MICHAEL D. POLICARPO
Michael D. Policarpo
President, Chief Financial Officer and Chief Administrative
Officer
(Principal Financial Officer and Principal Accounting
Officer)
March 15, 2019
(This page has been left blank intentionally.)
BOARD OF DIRECTORS
David C. Brown
Chairman and Chief Executive Officer
Milton R. Berlinski
Director
Alex Binderow
Director
Lawrence Davanzo
Director
Richard M. DeMartini
Director
James B. Hawkes
Director
Karin Hirtler-Garvey
Director
Robert J. Hurst
Director
Alan H. Rappaport
Director
EXECUTIVE OFFICERS
David C. Brown
Chairman and Chief Executive Officer
Michael D. Policarpo
President, Chief Financial Officer and
Chief Administrative Officer
Kelly S. Cliff, CFA, CAIA
President, Investment Franchises
Nina Gupta
Chief Legal Officer
CORPORATE OFFICE
Victory Capital
4900 Tiedeman Road, 4th floor
Brooklyn, OH 44144
INDEPENDENT AUDITORS
Ernst & Young LLP
950 Main Ave.
Cleveland, OH 44113
TRANSFER AGENT
AST Shareholder Services
help@astfinancial.com
800.937.9077 or 718.921.8386
INVESTOR INQUIRIES
Matthew Dennis, CFA
Director, Investor Relations
Phone: 216.898.2412
Email: mdennis@vcm.com
ANNUAL MEETING
OF STOCKHOLDERS
May 1, 2019 // 7:00 a.m. ET
www.virtualshareholdermeeting.com/VCTR2019
4900 Tiedeman Road, 4th floor // Brooklyn, OH 44144 // www.vcm.com