VICTORY CAPITAL
2019 ANNUAL REPORT
15935 La Cantera Parkway // San Antonio, TX, 78256 // www.vcm.com
David C. Brown
Chairman and Chief Executive Officer
To Our Fellow Shareholders,
Victory Capital’s growth and progress in 2019
was truly transformational for our clients,
shareholders and employees. We significantly
increased our size, scale, and asset class,
product, channel and client diversification,
while generating record financial results for
our shareholders and investing in our platform
for the future.
Assets under management grew 188% to
$151.8 billion year over year, and we achieved
long-term net inflows of $1.8 billion during a
year in which net outflows were the norm for
most active managers.
Victory Capital is a growth company in an
industry where most firms are struggling to
maintain the status quo. The progress that we
made in 2019, amid the continued challenges
facing our industry, provides clear evidence
that our next-generation, integrated business
model is driving superior results.
EXECUTING ON OUR COMMITMENTS
When we became a public company in
February 2018, we laid out five clear commit-
ments to investors. I am proud to report that
we have successfully executed against all
of those objectives while continuing to “raise
the bar” for what we can and will achieve in
the future.
Make accretive acquisitions. The successful
acquisition of the USAA Asset Management
Company in July 2019 marked our first ac-
quisition as a public company and our fourth
acquisition since our management buyout
in 2013.
Increase scale. The acquisition, combined
with organic growth across our platform, has
significantly increased both our size and scale.
As a larger organization, we have enhanced
operating efficiencies while continuing to
invest in areas that are critical to the long-term
success of our platform, such as technology,
operations, client service, and support for our
Investment Franchises.
Diversify our asset mix. We have significantly
diversified our product offerings across asset
classes, including broadening our fixed income
capabilities and introducing specialized solu-
tions offerings, such as target date funds
and active fixed income ETFs. We now have
a product platform that reduces potential
AUM volatility and is better positioned to
weather market turbulence.
Broaden our distribution platform. Our dis-
tribution capabilities continue to grow
and today include a direct investor channel.
Additionally, we continue to see meaningful
expansion in the number of our products
available through intermediary and retirement
platforms as well as on their recommend-
ed lists. We also had some significant wins
in 2019 with clients to whom we provide sub-
advisory investment services.
Become the industry’s acquirer of choice.
Our growth and evolution as an organization
demonstrate the strength of our integrated
platform as well as our ability to successfully
execute against our long-term strategic vision,
which includes organic growth and growth
through acquisitions.
i
Superior Business Model
Our unique business model combines investment-
boutique-like qualities with the benefits of a fully
integrated, centralized operating and distribution
platform. Traditional multi-boutiques tend to face
issues such as lack of control from partial owner-
ship, operating complexity and redundancies, and,
in some cases, lack of real scale. We share none of
these challenges. Victory Capital is a single Registered
Investment Advisor, and our Investment Franchises
and Solutions Platform are not separate entities but
part of our company and our platform. This provides
effective and efficient oversight while also allowing
each Franchise to remain completely autonomous in its
investment process. Additionally, our Franchise revenue-
sharing model reduces complexity, we have no sig-
nificant operating redundancies, and our product
offerings are at sufficient scale.
Importantly, the efficiencies that are derived from
our model enable us to make long-term strategic
investments in our business. As a result, we contin-
ued in 2019 to make great strides in enhancing our
investment support, technology, client servicing,
product and distribution capabilities to support
profitable growth.
We have started referring to the combination of these
favorable attributes around our operating model and
infrastructure as our VictoryEdge.
2019 Financial Results
Victory Capital posted record financial results for
2019. Revenue rose by 48% during the year, and
adjusted net income with tax benefit increased 60%
to $2.63 per diluted share. Adjusted EBITDA margin
also set a record high of 46.8% in the fourth quarter
of 2019—an 890-basis-point increase from the fourth
quarter of 2018. We also achieved positive net flows
during the full-year period.
We remained committed to our disciplined capital
management strategy. We ended the year with $952
million of debt, down significantly from $1.1 billion on
July 1 at the close of the USAA Asset Management
Company acquisition. Our net debt/run-rate EBITDA
ratio at the end of the year declined to 2.3x. Subse-
Victory Capital has moved its headquarters to San Antonio, and we
are now proud to call Texas home!
quently, we further reduced debt to $914 million as
of the time of this writing. In January 2020, we an-
nounced the repricing of our existing term loan. The
repricing lowered the interest rate spread by 75 basis
points, from 3.25 percent over LIBOR to 2.50 percent
over LIBOR, while maintaining the current maturity and
structure of the term loan. Our strong financial perfor-
mance allowed us to execute the repricing, which will
result in annualized interest savings of approximately
$7 million at these debt levels.
In September 2019 we introduced a quarterly cash
dividend, which exemplifies the confidence we have
in the strength and durability of our business and
underscores our commitment to enhancing share-
holder value. It also adds another ancillary component
to our capital allocation strategy while maintaining a
primary focus on creating the capital flexibility needed
to participate in the consolidation of our industry. We
returned $23 million to shareholders during 2019
through share repurchases and dividends.
Finally, we made exceptional progress in the second
half of the year in integrating the business we acquired
from USAA and ended 2019 well ahead of schedule
on the achievement of our previously disclosed net
cost synergies. As we move through 2020, we are now
pivoting to realizing the growth opportunities within
The progress that we made in 2019, amid the
continued challenges facing our industry, provides
clear evidence that our next-generation, integrated
business model is driving superior results.
ii
our direct channel and selling the acquired products
through our traditional distribution channels.
Investment Excellence
Driving strong investment results for our clients is the
core of our business commitment, and we believe we
are among the leaders in our industry in delivering
investment excellence.
We are honored to have received notable industry
recognition for our investment performance results.
Victory Capital has been ranked among the top 25
best fund families by Barron’s for six consecutive
years. In the 2019 “Top Fund Families” rankings, we
were honored to earn seventh place over five years,
which underscores our strong long-term track record.
We are very proud of the work that our Investment
Franchises and Solutions Platform are doing for our
clients, and it provides further evidence of the power
of our unique platform. More specifically, because our
investment professionals are supported by a central-
ized operating and distribution platform, they are able to
dedicate primarily all their time and energy to delivering
superior investment results.
Serving Our Communities
Victory Capital is a client-centric organization, and
delivering exceptional service
is foundational to
our culture. Giving back to the communities in
which we live and work is an important part of our
service commitment.
In our new San Antonio headquarters, our initial focus
has been on partnering with The Children’s Hospital
of San Antonio to serve children with serious medical
conditions and their families. In 2019, we partnered
with the hospital to provide support in two unique and
specific ways:
1. Providing emotional care for children with
serious medical conditions by creating a fun
and memorable experience at the San Antonio
Spurs home games.
2. Providing “care packages” to families with infants
in the hospital’s Neonatal Intensive Care Unit.
Our partnership with The Children’s Hospital has not
only made a difference to the children we touched,
but it has provided joy and inspiration to our employees.
Our work with the hospital is just one example of our
service commitment. Another area of focus is financial
readiness for the military. Financial readiness, or the
understanding of the basic concepts needed to achieve
short- and long-term savings goals, is a critical compo-
nent of overall financial success. We have made a
significant financial and resource commitment to
Driving strong investment
results for our clients is
the core of our business
commitment, and we believe
we are among the leaders
in our industry in delivering
investment excellence.
developing a financial readiness program for members
of the military and their families. The program design
is focused on providing educational content and re-
sources that specifically address financial challenges
faced by military families, such as transitioning from
service to civilian life. It also includes supporting non-
profit organizations that provide financial readiness
resources to the military community.
We also offer matching gift benefits and paid time
off for military and community service to all our
employees. And, many of our offices have their
own giving and service programs unique to their
local communities.
Strategic Vision for the Future
Our tremendous progress in 2019 clearly demonstrates
the power of our model, our strong execution skills and
our commitment to delivering value for our share-
holders. However, we are also keenly aware that the
current landscape for asset managers presents both
David Brown (right) at The Children’s Hospital delivering the first set
of Spurs basketball tickets to a patient.
iii
Our employees have elected to invest approximately $182
million of their own money in our products, which helps to
ensure that our interests are aligned with those of our clients.
We will continue to grow organically by leveraging
our diverse product platform and strong distribution
capabilities across all our business channels. We
also remain committed to pursuing inorganic growth
through acquisitions. Our integrated platform, which
combines focus, operating scale and investment-
boutique-like qualities, makes us a compelling acquirer
for investment firms in today’s environment.
Looking ahead, we are confident that we are very well
positioned to continue to provide excellent investment
results, exceptional service and innovative solutions.
We also remain committed to fostering a strong cul-
ture of ownership. Our employees have elected to
invest approximately $182 million of their own money
in our products, which helps to ensure that our inter-
ests are aligned with those of our clients.* A significant
number of our employees also have ownership in
our company, which is a key factor in attracting and
retaining top talent and ensuring we maintain our
ownership culture.
On behalf of all our employees, I would like to thank
our clients for the trust and confidence they have
placed in us.
significant challenges and opportunities. We recognize
that to continue to win in today’s hyper-competitive
investment management environment, we need to
continually evolve, adapt and change our business
and our thinking. This is critical to our success in an
industry that is facing strong headwinds, coupled with
a rapidly evolving technology
landscape that has
dramatically changed the way buyers interact with sell-
ers of investment management products.
With this in mind, we are making important invest-
ments
in four key
strategic areas:
in both time and resources
1. Using data to inform strategy and drive decisions in
all aspects of our business.
2. Elevating our digital/social platforms to better
serve clients and increase brand recognition.
3. Evolving our distribution capabilities to address
changing buyer behaviors.
4. Continuing our disciplined approach to financial
execution.
We believe our ability to execute against these four
strategic priorities will define how we operate and serve
our clients in the future.
Sincerely,
David Brown
Chairman and Chief Executive Officer
*As of December 31, 2019.
This letter contains references to adjusted EBITDA margin and
adjusted net income per share, which are non-GAAP financial
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 addition to,
but not as a substitute for, the information prepared in accordance
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 on page 58.
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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.
Victory Capital means Victory Capital Management
Inc., the
investment manager of the USAA Mutual Funds. USAA Mutual
Funds are distributed by Victory Capital Advisers, Inc., a broker
dealer registered with FINRA and an affiliate of Victory Capital.
Victory Capital and its affiliates are not affiliated with United Services
Automobile Association or its affiliates. USAA and the USAA logo
are registered trademarks and the USAA Investments logo is a
trademark of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
Victory Funds are distributed by Victory Capital Advisers, Inc.
(VCA). VictoryShares ETFs are distributed by Foreside Fund
Services, LLC. Victory Capital Management Inc. (VCM) is the
adviser to VictoryShares ETFs and Victory Funds. VCM and VCA
are affiliated. They are not affiliated with Foreside Fund Services, LLC.
Barron’s ranked Victory Capital 17th out of 55 firms for the one-
year period ended December 31, 2019. It was ranked 7th out of
52 firms for the five-year period and 10th out of 45 firms for the
10-year period ended December 31, 2019. It was ranked 9th out
of 57 firms 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
vi
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
ability to
information and cyber security
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.
forward-looking statements are based on numerous
Such
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 press release 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.
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
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 2019 were general
equity, 35.4%; mixed asset, 21.1%; world equity, 17%; taxable bond,
21.8%; and tax-exempt bond, 4.6%.
The category weightings for the five-year results were general equity,
36.9%; mixed asset, 19.7%; world equity, 17.2%; taxable bond, 21.7%;
and tax-exempt bond, 4.6%. For the 10-year list, they were general
equity, 37.6%; mixed asset, 20.1%; world equity, 17.5; taxable bond,
20%; and tax-exempt bond, 4.7%.
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 35.4%, general equity’s overall
weighting in Lipper’s universe. So it would be 37.5 times 0.354, which
equals 13.28. 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 Top Fund Families of 2019,” February 14, 2020.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
(cid:4) 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)
15935 La Cantera Parkway, San Antonio, Texas
(Address of principal executive offices)
32-0402956
(I.R.S. Employer
Identification No.)
78256
(Zip Code)
(216) 898-2400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $0.01 Par Value
Trading Symbol(s)
VCTR
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No (cid:3)
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:4) No (cid:3)
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:3) No (cid:4)
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:3) No (cid:4)
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
Non-accelerated filer
(cid:4)
(cid:4)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:3)
(cid:4)
(cid:3)
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:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No (cid:3)
Aggregate market value of Class A common stock held by non-affiliates of the registrant as of June 28, 2019 was $258 million.
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, 2020 was 16,636,811 and 51,256,188, respectively.
Portions of the registrant’s proxy statement related to its 2020 Annual Stockholders’ Meeting to be filed within 120 days of the end of the fiscal year
ended December 31, 2019, are incorporated by reference into Part III hereof. Except with respect to information specifically incorporated by reference in this
Annual Report on Form 10-K, the registrant’s proxy statement is not deemed to be filed as part hereof.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
TABLE OF CONTENTS
PART I
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
PART II
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
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities law.
The forward-looking statements may include, without limitation, statements concerning our current expectations,
estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact.
Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words
and phrases such as “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,”
“assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar phrases.
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. Such forward-looking
statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.
Many factors mentioned in “Item 1A. Risk Factors” will be important in determining future results. Should one or more
of these risks or assumptions materialize, or should the underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. You are advised, however, to consult any further disclosures
we make on related subjects in the quarterly, periodic and annual reports we file with the United States Securities and
Exchange Commission (the “SEC”). 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.
The following text is qualified in its entirety by reference to the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this Annual Report on Form 10-K. Unless the context
otherwise requires, references in this Annual Report to “we,” “our,” “us,” “Victory” or the “Company” shall mean
Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries. All references to years,
unless otherwise noted, refer to our fiscal year which ends on December 31.
NOTE REGARDING THIRD-PARTY INFORMATION
This Annual Report on Form 10-K includes certain market and industry data and forecasts related thereto that we rely on
and refer to. 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.
ITEM 1.
BUSINESS.
Overview – We are a diversified global asset management firm with $151.8 billion in assets under management
(“AUM”) as of December 31, 2019. The Company operates a next-generation business model combining boutique
investment qualities with the benefits of a fully integrated, centralized operating and distribution platform.
Victory Capital provides specialized investment strategies to institutions, intermediaries, retirement platforms and
individual investors. With nine autonomous Investment Franchises and a Solutions Platform, Victory Capital offers a
wide array of investment styles and investment vehicles including, actively managed mutual funds, separately managed
accounts, rules-based and active exchange traded funds (“ETFs”), multi-asset class strategies, custom-designed solutions
and a 529 College Savings Plan. As of December 31, 2019, our Franchises and our Solutions Platform collectively
managed a diversified set of 116 investment strategies for a wide range of institutional and retail clients and direct
members.
Our design logos and the marks “Victory Capital,” “Victory Capital Management,” “Victory Capital Advisers,” “Victory
Funds,” “VictoryShares,” “CEMP,” “CEMP Volatility Weighted Indexes,” “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,” “Trivalent Investments,” “USAA Investments” and “USAA Mutual Funds” are owned or licensed for a period
of time 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.
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Table of Contents
Franchises – 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 model creates a supportive environment in which our investment professionals, for the most part
unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence.
Victory Capital Management Inc. (“VCM”), is a single registered investment advisor (“RIA”), employs all of our U.S.
investment professionals across our Franchises, which are not separate legal entities.
Solutions – 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,
technology, legal, human resources, compliance and finance. Our integrated model aims to “centralize, not standardize”.
We believe by providing our Franchises with control over their selection of, and everyday use of, 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.
Business Attributes – In addition to our integrated business model, we believe there are four main attributes that
differentiate us from other publicly traded investment management firms;
1) We have constructed a set of distinct investment approaches to generate alpha over a full market cycle
through security selection and portfolio construction. We believe our strategies and our approach will drive
our future growth.
2) We have a track record of successfully sourcing, executing and integrating strategic acquisitions and
making these acquisitions financially attractive by integrating the acquired entity onto our centralized
operating platform. In addition, we have been able to expand the distribution for the products of the
acquired entities through our centralized distribution platform.
3) We have a diversified business that offers a suite of active products and hybrid rules-based products across
a wide range of asset classes and distinct investment approaches, to a broad and diverse group of
institutional, retail intermediary and direct clients. We offer our 116 investment strategies through nine
Franchises and our Solutions Platform, with no Franchise accounting for more than 28% of total AUM as
of December 31, 2019. 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.
4) We foster a culture that encourages long-term thinking through promoting meaningful employee
ownership. We have a high degree of employee ownership, with approximately 87% of our employees
beneficially owning approximately 23% of our shares as of December 31, 2019. Many of such employees
have purchased their equity interests in our firm. In addition, as of December 31, 2019 our current and
former employees have collectively invested $182 million in products we manage, directly aligning their
investment outcomes with those of our clients.
USAA AMCO Acquisition – Victory’s transformative acquisition of the USAA Mutual Fund Business increased AUM
by $81.1 billion and significantly impacted our financial results for the six and twelve months ended December 31, 2019.
The acquisition not only increased assets under management and revenue, but also introduced additional personnel
expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer
services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that the Company did
not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company entered into a credit
agreement (the “2019 Credit Agreement”), dated July 1, 2019, and obtained a seven-year term loan in an aggregate
principal amount of $1.1 billion. All indebtedness outstanding under the Company’s previous credit agreement was
repaid and terminated as of July 1, 2019.
The USAA AMCO Acquisition expanded and diversified our investment platform, particularly in the fixed income and
solutions asset classes, and increased our size and scale. Additional products added to our investments platform include
target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-
manager equity funds. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs.
Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a certain
period of time and the opportunity to offer its products to USAA members through a direct member channel. In addition,
we have entered into a referral agreement with USAA for members that are interested in investing in USAA Funds or
USAA 529 College Savings Plan.
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Total consideration for the USAA AMCO Acquisition was $950.1 million, comprising of $851.3 million of cash paid at
closing and $98.8 million as the estimated fair value of contingent consideration as of the acquisition date. A maximum
of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of
USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the
closing date. As of December 31, 2019, the estimated fair value of the contingent consideration was $118.7 million.
Refer to Note 4, Acquisitions, to the audited consolidated financial statements for further discussion on the USAA
AMCO Acquisition, as well as Note 11, Debt, for further discussion on the 2019 Credit Agreement.
Acquisition Strategy – Since our management-led buyout with Crestview Partners II GP, L.P. (“Crestview GP”) from
KeyCorp in August 2013, we have completed four acquisitions and grown our AUM from $17.9 billion to $151.8 billion
as of December 31, 2019. 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 strategic 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, optimize our operating platform, and
advance our technology resources.
We believe, based on our successful acquisition track record, 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 industry.
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.
We believe our deliberate repositioning of our business through acquisitions has equipped us with more compelling
investment strategies in more competitive asset classes, providing us with a next generation investment management
platform. We continually evaluate and make investments to improve our operating platform. For example, in 2017 we
acquired a minority interest in Cerebellum Capital LLC (“Cerebellum”), an investment management firm specializing in
machine learning. During 2019, we divested this investment, realizing a gain and retained rights to utilize the technology
on our platform.
We offer our clients an array of equity, fixed income and solutions strategies that encompass a diverse spectrum of
market capitalization segments, investment styles and approaches. We believe that these strategies are positioned to
attract positive net flows and maintain stable fee rates over the long term.
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As outlined below, our business is diversified on multiple fronts, including by asset class, Franchise and Solutions
Platform, and investment vehicle.
Asset Class
Franchise/Platform
Money Market
8%
U.S. Small Cap
Equity
11%
U.S. Mid Cap
Equity
17%
Fixed Income
25%
Global / Non-
U.S. Equity
8%
Other
1%
Solutions
21%
Solutions
36%
RS Global
<1%
RS Value
2%
RS Growth
6%
Sycamore
16%
USAA Investments
28%
Munder
2%
NewBridge
1%
Trivalent
2%
Integrity
4%
INCORE
4%
U.S. Large Cap
Equity
9%
AUM by Investment Vehicle
AUM by Investment Vehicle
Separate Accounts
and Other Vehicles
19%
ETFs
3%
Mutual Funds
78%
Data as of December 31, 2019.
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 two Franchises (Trivalent and Sophus) focused on Emerging Markets within global/non-U.S. equity, each with
a different investment approach. Trivalent’s investment team 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 investment approaches, each Franchise has a different
return profile for investors in different market environments while having exposure to their desired asset classes.
Our multi-channel distribution capabilities provide another degree of diversification, with approximately 49% of our
AUM from the direct member channel clients, 26% institutional clients and 25% from retail clients as of December 31,
2019. Within these channels, clients are further diversified among intermediary (broker dealer and RIAs) platforms, sub
advisory relationships, corporate and public entities, insurance companies, 529 college saving plan participants, Taft-
Hartley plans, endowments and family offices. We believe this broad diversification of customers has a stabilizing effect
on revenue, as various types of investors have unique demand patterns and respond differently to trends and market
cycles.
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, a significant number 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 USAA AMCO Acquisition, RS Acquisition and the Munder Acquisition. We
believe the opportunity to own equity in a well-diversified investment management 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. 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, Franchies’ Chief Investment Officers (the “CIOs”) and sales leaders are highly
experienced in the industry, each bringing significant expertise to his or her role, having tenures on average of 20 years
or more.
Competitive Strengths – We believe we have significant competitive strengths that position us for sustained growth
over the long term.
Integrated Model Providing Investment Boutique Autonomy, Centralized Distribution, Marketing and Support Functions
to Investment Franchises – We believe our integrated model allows us to achieve the benefits from both the scale of
large managers and the focus of boutique 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 efficiently sell their
products to institutional investors, retirement plans, brokerages, wealth managers and direct clients, which can be
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 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 strategic
acquirer 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 model is compelling for potential acquisition prospects. 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 investment performance. By offering a platform on which
Franchises can focus on their core competencies, grow their client base 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. For example, in the USAA AMCO Acquisition, which closed on July 1, 2019, we successfully achieved net
annual expense synergies of $117 million for the year ended December 31, 2019, which represents approximately 28%
of USAA Adviser’s expenses in 2018. We expect to realize an additional $3 million in annual expense synergies during
2020. We incurred $27 million of one-time expenses in 2019, and expect to incur additional one-time expenses totaling
$23 million in 2020, to achieve those synergies.
We will seek to continue to augment our next generation investment management platform by focusing on acquisition
candidates that make our investment platform better, that expand our distribution capabilities, that optimize our
operating platform and achieve our integration and synergy expectations.
Portfolio of Investment Strategies with Potential for Outperformance – In assembling our portfolio of Franchises, we
have selected investment managers offering strategies in 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 certain of our asset classes.
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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. mid cap equities, which accounted for approximately 17% of total
AUM as of December 31, 2019, 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 of AUM and revenue stability.
We believe our AUM is well diversified at the Franchise level, with no Franchise accounting for more than 28% of total
AUM. 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 and the number of
Franchises, 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 direct-member, institutional, and retail clients, with 49%, 26%
and 25% of our AUM as of December 31, 2019 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,
separately managed account (“SMA”) products, unified managed account (“UMA”) products, common trust funds
(“CTFs”) 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 client
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 demand and
typically command commensurate 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. Moreover, by managing these quantitative strategies on our
integrated platform, we can earn higher than our firm-wide average margins on these products.
Because we largely outsource our middle- and back-office functions, as well as technology support, we have relatively
minimal capital expenditure requirements. Our integrated platform allows us the ability to make investments that benefit
each Franchise and our Solutions Platform. 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.
We have identified three primary net income growth drivers; (i) we grow our AUM organically through inflows into our
strategies and the market appreciation of those strategies; (ii) we have a proven ability to grow strategic and synergistic
acquisitions; and (iii) we have constructed a scalable and efficient platform.
Economic and Structural Alignment of Interests Promotes Ownership Culture – Through our revenue share
compensation model for our Franchises and broad employee ownership, we have structurally aligned our employees’
interests with those of our clients and other shareholders and have created an ownership culture that encourages
employees to act in the best interests of clients and our Company shareholders, 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. As of December
31, 2019, our employees beneficially owned approximately 23% of our shares. In addition to being aligned with our
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financial success through their equity ownership, our current and former employees collectively have invested
approximately $182 million in products we manage as of December 31, 2019.
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 over
the long term. We intend to continue to supplement our growth through disciplined acquisitions. 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 expectations, expand
our distribution capabilities and optimize our operating platform. One of our key advantages in a competitive sales
process is our ability to provide access to new distribution channels. Our centralized distribution and marketing platform
drives organic growth at our acquired Franchises both by opening new distribution channels, and penetrating deeper into
existing ones, 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 our existing Franchises. We
primarily do this by providing them with access to our operations platform, technology, centralized distribution and
marketing. 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 client base, with the ability to offer their strategies in
multiple investment vehicles to meet clients’ needs.
Our next generation integrated 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 look for ways to invest in our operations, to achieve
greater economies of scale and provide better services to our Franchises. We continue to expand our distribution
capabilities as well, demonstrated by the USAA AMCO Acquisition. We continually look to the future, and as a result,
our infrastructure investments can range from the immediate to the long term.
We believe there is significant growth potential in solutions products. 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, thematic 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 acquisition of the Compass Efficient Model
Portfolios, LLC (the “CEMP Acquisition”) in 2015, our ETF products have grown from less than $200 million in AUM
to approximately $5.4 billion in AUM as of December 31, 2019.
Our Franchises – As of December 31, 2019, we had our nine Franchises diversified across investment approaches, with
no Franchise accounting for more than 28% of total 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.
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 $6.4 billion in AUM as of December 31, 2019. INCORE’s investment team consists of 12 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
$5.3 billion in AUM as of December 31, 2019. Integrity’s investment team consists of 12 professionals with an average
industry experience of approximately 20 years.
Munder Capital Management – Munder Capital Management has an experienced
team utilizing a
“Growth-at-a-Reasonable-Price” (GARP) 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
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managed $2.6 billion in AUM as of December 31, 2019. Munder’s investment team consists of nine professionals with
an average industry experience of approximately 27 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 usually holds between 25 and 35 securities. NewBridge is based in New York, NY and managed
$1.2 billion in AUM as of December 31, 2019. NewBridge’s investment team consists of six professionals with an
average industry experience of approximately 23 years.
RS Investments – RS Investments is made up of three distinct investment teams: (i) RS Value, (ii) RS Growth and (iii)
RS Global. 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 Global 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 $12.2 billion in AUM as of
December 31, 2019. RS Investments’ three investment teams consist of 19 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 $2.0 billion in AUM as of December 31, 2019. Sophus’ investment
team consists of 10 professionals with an average industry experience of approximately 18 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 $23.7 billion
in AUM as of December 31, 2019. Sycamore’s investment team consists of 9 professionals with an average industry
experience of approximately 16 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’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 $3.5 billion in AUM as of December 31, 2019. Trivalent’s
investment team consists of seven professionals with an average industry experience of approximately 23 years.
USAA Investments – USAA Investments joined Victory with the USAA AMCO Acquisition on July 1, 2019. USAA’s
investment team utilizes a rigorous process rooted in a team-oriented approach among portfolio managers, research
analysts and traders. Their taxable and tax exempt portfolios are built bond by bond using a fundamental, bottoms up and
yield-focused analysis. USAA Investments is based in San Antonio, TX and managed $42.6 billion in AUM as of
December 31, 2019. USAA’s investment team consists of 34 professionals with an average industry experience of
approximately 22 years.
Solutions Platform
Our Solutions Platform consists of multi-asset, multi-manager, quantitative, rules-based, factor-based, and customized
portfolios. These strategies are designed to achieve specific return characteristics, including thematic- and impact-
investing outcomes. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual
funds, ETFs and active fixed income ETFs under our VictoryShares ETF brand. Like our Franchises, our Solutions
Platform is operationally integrated and supported by our centralized distribution, marketing and operational support
functions. Our Solutions Platform managed $52.2 billion in AUM as of December 31, 2019. Solutions Platform team
consists of 14 professionals with an average industry experience of approximately 16 years.
Our Products and Investment Performance
As of December 31, 2019, our nine Franchises and Solutions Platform offered 116 investment strategies with the
majority consisting of fixed income, U.S. small- and mid-cap equities, global/non-U.S. equities and solutions. These
asset classes collectively comprised 91% of our $151.8 billion of total AUM, and 90% of $140.2 billion of long-term
AUM, as of December 31, 2019.
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Product Mix – Our investment strategies are offered through open-end mutual funds, SMAs, UMAs, ETFs, CTFs and
wrap separate account programs. Our product mix could expand, 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.
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, 2019, 71% of our strategies by AUM had returns in excess
of their respective benchmarks over a ten-year period, 60% over a five-year period and 64% over a three-year period. On
an equal-weighted basis, 66% of our strategies have outperformed their benchmarks over a ten-year period, 53% over a
five-year period and 51% 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.
The table below sets forth our 10 largest strategies by AUM as of December 31, 2019 and their average annual total
returns compared to their respective benchmark index over the one-, three-, five- and 10-year periods ended
December 31, 2019. These strategies represented approximately 42% of our total AUM as of December 31, 2019.
Strategy/Benchmark Index
Sycamore Mid Cap Value...................................
Russell Midcap Value.........................................
Excess Return ...............................................
Sycamore Small Cap Value ................................
Russell 2000 Value .............................................
Excess Return ...............................................
USAA Income ....................................................
Bloomberg Barclays US Aggregate....................
Excess Return ...............................................
Integrity Small Cap Value Equity.......................
Russell 2000 Value .............................................
Excess Return ...............................................
RS Mid Cap Growth ...........................................
Russell Midcap Growth ......................................
Excess Return ...............................................
RS Small Cap Growth ........................................
Russell 2000 Growth ..........................................
Excess Return ...............................................
USAA Intermediate-Term Bond.........................
Bloomberg Barclays US Aggregate....................
Excess Return ...............................................
USAA Tax Exempt Intermediate-Term..............
Bloomberg Barclays Municipal Bond ................
Excess Return ...............................................
USAA S&P Index Member ................................
S&P 500..............................................................
Excess Return ...............................................
USAA International ............................................
MSCI EAFE........................................................
Excess Return ...............................................
1 year
3 years
5 years
10 years
11.07 %
8.10 %
2.97 %
10.20 %
4.77 %
5.43 %
5.53 %
4.03 %
1.50 %
5.21 %
4.77 %
0.44 %
14.07 %
17.36 %
(3.29)%
21.42 %
12.49 %
8.93 %
5.86 %
4.03 %
1.83 %
5.17 %
4.72 %
0.45 %
15.27 %
15.27 %
— %
11.77 %
9.56 %
2.21 %
11.18 %
7.62 %
3.56 %
12.05 %
6.99 %
5.06 %
4.44 %
3.05 %
1.39 %
6.71 %
6.99 %
(0.28)%
9.99 %
11.60 %
(1.61)%
13.21 %
9.34 %
3.87 %
4.60 %
3.05 %
1.55 %
3.72 %
3.53 %
0.19 %
11.70 %
11.70 %
— %
7.87 %
5.67 %
2.20 %
13.95 %
12.41 %
1.54 %
13.94 %
10.56 %
3.38 %
5.28 %
3.75 %
1.53 %
12.31 %
10.56 %
1.75 %
14.45 %
14.24 %
0.21 %
16.56 %
13.01 %
3.55 %
6.40 %
3.75 %
2.65 %
4.75 %
4.34 %
0.41 %
13.56 %
13.56 %
— %
7.70 %
5.50 %
2.20 %
29.56 %
27.06 %
2.50 %
28.01 %
22.39 %
5.62 %
11.65 %
8.72 %
2.93 %
24.29 %
22.39 %
1.90 %
29.64 %
35.47 %
(5.83)%
39.73 %
28.48 %
11.25 %
11.73 %
8.72 %
3.01 %
7.55 %
7.54 %
0.01 %
31.51 %
31.49 %
0.02 %
24.10 %
22.01 %
2.09 %
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Our products have consistently won awards for performance with six consecutive years of ranking in Barron’s 25 Top
Fund Families ratings, coming in 7th for the five-year period ended December 31, 2019, 10th for the 10-year period ended
December 31, 2019 and 17th overall on a one-year basis for 2019.
In addition, a significant percentage of our mutual fund assets have strong Morningstar ratings. As of December 31,
2019, 44 Victory & USAA Funds and ETFs had four or five star overall ratings. On an AUM-weighted basis, 68% of
our fund AUM had an overall rating of four or five stars by Morningstar. Over a three-year and five-year basis, 63% and
64% of our fund AUM achieved four or five star ratings, respectively.
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, portfolio construction, and client service. In
addition, we believe it provides our Franchises with the benefits of operating at scale, providing them with access to a
larger number of clients as well as a more streamlined cost structure. As of December 31, 2019, we had 92 employees in
management and support functions, 116 sales and marketing professionals and 150 investment professionals.
Our centralized distribution and marketing functions lead the sales effort for our institutional, retail intermediary, and
direct member channels. Our sales teams are staffed with accomplished professionals that are given specific training on
how to position each of our strategies. Our distribution teams have historically focused on developing strategic long-term
relationships with institutional consultants and retail and retirement 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.
Direct Member Channel – We have a referral agreement in place with USAA to ensure all USAA members (the
“Members”) interested in investing directly in a USAA Mutual Fund or the USAA 529 college savings plan, or
interacting with us otherwise, are promptly directed to us, either by phone or online. At our direct member channel call
center, we have 120 sales and service professionals focused on assisting the Members. They provide Members with
account servicing, portfolio reviews, college planning assistance and investment guidance at no cost to the Member.
Many of our call center professionals are Financial Industry Regulatory Authority (“FINRA”) licensed and joined us
from USAA, so they are familiar with and understand the Members’ investment needs.
Institutional Sales – Our institutional sales team attracts and builds relationships with institutional clients, a wide range
of 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. 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, 2019, 67% of our retail AUM was through intermediaries, while 33% 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. We have several products on the research recommended/model portfolios top U.S.
intermediary platforms. We also have several products on the recommended list of the top retirement platforms.
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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.
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, technology, 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 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 sub-transfer agent, 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 industry-leading 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, which include
separate accounts, mutual funds, wrap accounts, UMAs, CTFs and ETFs, in the traditional institutional segments,
intermediary and retirement distribution, and direct client channels. 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 strong performance track records. We compete with other
investment management firms for client assets based on the following primary factors: (i) our investment performance
track record of delivering alpha; (ii) the specialized nature of our investment strategies; (iii) fees charged; (iv) access to
distribution channels; (v) client service; and (vi) 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: (i) the strength of our distribution relationships; (ii) the value we add through centralized distribution, marketing
and operations platforms; (iii) the investment autonomy Franchises retain post acquisition; (iv) the tenure and continuity
of our management and investment professionals; and (v) 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, refer to “Risk Factors—Risks Related to Our Industry—The
investment management industry is intensely competitive.”
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Employees
As of December 31, 2019, we had 358 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 Victory Capital Advisers
(“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 and the mutual fund series of the Victory Portfolios II (collectively, the “Victory Funds”), a
family of open-end mutual funds, the VictoryShares (the Company’s ETF brand), as well as the USAA Mutual Fund
Business, which includes the USAA Mutual Fund Trust, a family of open-end mutual funds (the “USAA Funds”).
Additionally, VCM employs all of the Company’s United States 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
and USAA Funds. VCTA is registered with the SEC as a transfer agent for the USAA Funds.
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.
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, USAA 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; our 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.
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For the year ended December 31, 2019, 80% 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, USAA
Funds, VictoryShares and the investment portfolios of the Victory Funds, USAA 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. Refer to “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.”
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.
SEC Transfer Agent Registration - Victory Capital Transfer Agency, Inc. is a SEC-registered transfer agent. Our
registered transfer agent is subject to the 1934 Act and the rules and regulations promulgated thereunder. These laws and
regulations generally grant the SEC and other supervisory bodies broad administrative powers to address non-
compliance with regulatory requirements. Sanctions that may be imposed for non-compliance with these requirements
include the suspension of individual employees, limitations on engaging in certain activities for specified periods of time
or for specified types of clients, the revocation of registrations, other censures and significant fines.
ERISA-Related Regulation – We are a fiduciary under Employee Retirement Income Security Act (“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 Commodity Futures Trading Commission (the “CFTC”) as a commodity
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.
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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 consist of 14 professionals as of December 31, 2019. 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
effective to prevent all losses. Refer to “Item 1A. 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, refer to “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 SEC. Our
SEC filings are available to the public from the SEC’s public internet site at https://www.sec.gov.
We maintain a public internet site at ir.vcm.com 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, our Corporate
Responsibility Statement, 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.
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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 new or existing investors, such as we have done for two mutual funds managed by the
Sycamore Capital Franchise which had an aggregate of $18.1 billion in AUM as of December 31, 2019.
• 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, pandemics (such as the Coronavirus), 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 as well as fund
administration and accounting, agreements with the Victory Funds, USAA Funds and VictoryShares and transfer agency
agreements with the USAA Funds, all of which are terminable by clients or our funds’ boards upon short notice or no
notice.
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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. We maintain a
long history of renewing these agreements. 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.
Similarly, our fund administration, accounting, and transfer agency agreements are subject to annual fund board
approval.
These investment advisory and other 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.
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, 2019, we generated
approximately 83% of our total revenues from mutual funds and other pooled investment vehicles that we advise
(including our proprietary mutual funds, or the Victory Funds, USAA 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
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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 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
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 may support our money market funds to maintain their stable net asset values, or other products we manage,
which could affect our revenues or operating results.
Approximately 7.6% of our AUM as of December 31, 2019, consisted of assets in money market funds. Money market
funds seek to preserve a stable net asset value. Market conditions could lead to severe liquidity or security pricing issues,
which could impact the NAV of money market funds. If the NAV of a money market fund managed by our asset
managers were to fall below its stable net asset value, we would likely experience significant redemptions in AUM and
reputational harm, which could have a material adverse effect on our revenues or net income. If a money market fund's
stable NAV comes under pressure, we may elect, to provide credit, liquidity, or other support to the fund. We may also
elect to provide similar or other support, including by providing liquidity to a fund, to other products we manage for any
number of reasons. If we elect to provide support, we could incur losses from the support we provide and incur
additional costs, including financing costs, in connection with the support. These losses and additional costs could be
material and could adversely affect our earnings. In addition, certain proposed regulatory reforms could adversely impact
the operating results of our money market funds.
The phase out of LIBOR may have a negative impact on our funds and may require significant operational work.
The Financial Conduct Authority (“FCA”), which regulates the administrator of the London Interbank Offered Rate
(“LIBOR”) has announced that it will no longer compel panel banks to submit rates for LIBOR after year-end 2021. As a
result, sterling LIBOR and certain other indices which are utilized as benchmarks may no longer be published. The
expected phase-out of LIBOR could negatively impact our net interest revenue and require significant operational work.
Certain securities in our investment portfolio and the floating rate loans that our strategies may hold reference LIBOR as
the benchmark rate to determine the applicable interest rate or payment amount. If LIBOR is discontinued after 2021 as
expected, there will be uncertainty or differences in the calculation of the applicable interest rate or payment amount
depending on the terms of the governing instruments and there will be significant work required to transition using the
new benchmark rates and implement necessary changes to our systems. Regulators and industry working groups have
suggested alternative reference rates, but global consensus is lacking. This could result in different financial performance
for previously booked transactions and may impact our existing transaction data, products, systems, operations, and
pricing processes. The transition away from LIBOR may lead to increased volatility and illiquidity in markets that are
tied to LIBOR, reduced values of LIBOR-related investments, and reduced effectiveness of hedging strategies. The
calculation of interest rates under the replacement benchmarks could also impact our net interest revenue. In addition,
LIBOR may perform differently during the phase-out period than in the past which could result in lower interest
payments and a reduction in the value of certain securities in our investment portfolio.
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We depend primarily on third parties to market Victory Funds, USAA Funds and VictoryShares.
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, USAA 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.
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 and the board of the USAA Funds, 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
and USAA 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, 2019, 35% of our institutional separate and CTF 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.
Direct investor channel
The direct channel serves existing individual investors who invest in our USAA Funds. Our broker-dealer subsidiary has
a distribution team comprised of a dedicated client-facing sales team who recognize the importance of tailoring services
to the needs of our individual investors through active management and the concept of suitability of new offerings as
well as ensuring that existing products remain suited to the clients to which they are marketed. We provide investment
advice and recommendations to investors to aid them in their decision making. Our sales teams’ recommendations may
not fulfill regulatory requirements as a result of their failing to collect sufficient information about a customer or failing
to understand the customer’s needs or risk tolerances. Risks associated with providing investment advice and
recommendations also include those arising from how we disclose and address possible conflicts of interest, inadequate
due diligence, inadequate disclosure, human error and fraud. In addition, new regulations, such as the SEC's Regulation
Best Interest, will impose heightened conduct standards and requirements when we provide recommendations to retail
investors. To the extent that we fail to satisfy regulatory requirements, fail to know our customers, improperly advise
our customers, or risks associated with advisory services otherwise materialize, we could be found liable for losses
suffered by such customers, or could be subject to regulatory fines, and penalties, any of which could harm our
reputation and business.
We may be subject to claims of lack of suitability. If individual investors who invest in the USAA Funds suffer losses on
their investment mandates, they may seek compensation from us on the basis of allegations that the USAA Funds were
not suitable for such clients or that the fund prospectuses or other marketing materials contained material errors or were
misleading. Despite the controls relating to disclosure in fund prospectuses and marketing materials, it is possible that
such action may be successful, which in turn could adversely affect the business, financial condition and results of
operations. Any claim for lack of suitability may also result in regulatory investigation, censure and/or fine and may
damage our reputation.
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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 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, transfer agent and sub 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.
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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.
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 $151.8 billion as of December 31, 2019, 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.
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A significant proportion of our existing AUM is managed in long-only investments.
As of December 31, 2019, approximately 67% 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 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, 2019, approximately 28% 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.
As of December 31, 2019, approximately 33% of our total AUM was invested in U.S. taxable and tax-exempt fixed-
income and money market securities. While fixed-income is typically considered less volatile than the equity markets, it
does exhibit different types of risks such as interest rate risk, credit risk, and over-the-counter liquidity risk. Also,
retention of fixed income AUM 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. Money market securities are about 8% of total AUM and are considered a low risk
asset category.
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.
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
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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.
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,
litigation (whether substantiated or not), 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.
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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
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, USAA 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, the USAA Funds and VictoryShares,
including providing personnel to the Victory Funds, the USAA Funds and VictoryShares to serve as directors and
officers, the preparation or supervision of the preparation of the Victory Funds’, USAA 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’, USAA Funds’ and VictoryShares’
accounting services provider in the calculation of the funds’ net asset values, supervision of the preparation of the
Victory Funds’, USAA 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 USAA Funds’, Victory Funds’ and VictoryShares’ other service providers,
VCTA acting as transfer agent to the USAA Funds and VCA acting as a distributor for the Victory Funds and USAA
Funds. If we make a mistake in the provision of those services, the Victory Funds, USAA Funds or VictoryShares could
incur costs for which we might be liable. In addition, if it were determined that the Victory Funds, USAA 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, USAA Funds’ and VictoryShares, we also provide a limited range of services,
in addition to investment management services, to sub-advised mutual funds.
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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 the Undertakings Collective Investment in Transferable
Securities (the “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.
Failure to implement effective information and cyber security policies, procedures and capabilities could disrupt
operations and cause financial losses.
We electronically receive, process, store and transmit sensitive information of our clients including personal data, such
as without limitation names and addresses, social security numbers, driver's license numbers, such information is
necessary to support our clients’ investment transactions. The uninterrupted operation of our information systems, as
well as the confidentiality of the customer information that resides on such systems, is critical to our successful
operation. Bad actors may attempt to harm us by gaining access to confidential or proprietary client information, often
with the intent of stealing from or defrauding us or our clients. In some cases, they seek to disrupt our ability to conduct
our business, including by destroying information maintained by us. For that reason, cybersecurity is one of the principal
operational risks we face as a provider of financial services and 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.
As a provider of financial services, we are bound by the disclosure limitations and if we fail to comply with these
regulations and industry security requirements, we could be exposed to damages from legal actions from clients,
governmental proceedings, governmental notice requirements, and the imposition of fines or prohibitions on the services
we provide. 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.
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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. If more restrictive privacy laws, rules
or industry security requirements are adopted in the future on the Federal or State level, or by a specific industry body,
they could have an adverse impact on us through increased costs or business restrictions.
Any inability to prevent security or privacy breaches, or the perception that such breaches may occur, could cause our
existing clients to lose confidence in our systems and terminate their agreements with us, inhibit our ability to attract
new clients, result in increasing regulation, or bring about other adverse consequences from the government agencies
that regulate our business.
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, 2019, approximately 8% 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
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 and Sophus 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 one Ireland-domiciled UCITS, the Victory Sophus Emerging Markets
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.
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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 (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, or results of operations. 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.
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”. After several extensions to this period, the UK left the EU on January 31, 2020 (the “Exit Day”). EU laws
continue to apply in the UK for a transitional period following Exit Day until December 31, 2020 under the withdrawal
agreement between the UK and the EU. In any event, the UK has undertaken a process of “on-shoring” all EU
legislation, pursuant to which there appears, at this stage, to be no policy changes to EU law. However, the uncertainty
as to the timing and nature of the UK’s exit and future relationship with the EU has resulted in market and currency
volatility, and there are potentially major implications for business and issuers. 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, 2019, we had $952.0 million of outstanding term loans under the 2019 Credit Agreement. In 2019,
we repaid $148.0 million of the outstanding term loans under the 2019 Credit Agreement and subsequent to December
31, 2019, we repaid an additional $38.0 million. 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 2019 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 2019 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 2019 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.
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Subsequent to December 31, 2019, we entered into the First Amendment to the Credit Agreement (the “First
Amendment”) dated as of July 1, 2019 with other loan parties thereto, Barclays Bank PLC, as administrative agent, and
the Royal Bank of Canada as fronting bank, and the lenders party thereto which amends the 2019 Credit Agreement.
Pursuant to The First Amendment, effective January 17, 2020, the Company refinanced the existing term loans (the
“Existing Term Loans”) with replacement term loans in an aggregate principal amount of $952.0 million (the “Repriced
Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including
the same maturity date of June 2026, except that the Repriced Term Loans provide for a reduced applicable margin on
the LIBOR of 75 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to
3.25% under the Existing Term Loans.
Potential impairment of goodwill and intangible assets could reduce our assets.
As of December 31, 2019, our goodwill and intangible assets totaled $1.6 billion. 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.
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
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.
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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 revenue base. Consequently, either event could have either a temporary or permanent
negative impact on our results of operations.
Failure to properly address conflicts of interest could harm our reputation, business and results of operations.
As we have expanded the scope of our businesses and our client base, we must continue to address conflicts between our
interests and those of our clients. In addition, the SEC and other regulators have increased their scrutiny of potential
conflicts of interest. We have procedures and controls that are reasonably designed to address these issues. However,
appropriately dealing with conflicts of interest is complex and difficult and if we fail, or appear to fail, to deal
appropriately with conflicts of interest, we could face reputational damage, litigation or regulatory proceedings or
penalties, any of which may adversely affect our revenues or net income.
Insurance may not be available on a cost-effective basis to protect us from liability.
We face the inherent risk of liability related to litigation from clients, third-party vendors or others and actions taken by
regulatory agencies. To help protect against these potential liabilities, we purchase insurance in amounts, and against
risks, that we consider appropriate, where such insurance is available at prices, we deem acceptable. There can be no
assurance, however, that a claim or claims will be covered by insurance or, if covered, will not exceed the limits of
available insurance coverage, that any insurer will remain solvent and will meet its obligations to provide us with
coverage or that insurance coverage will continue to be available with sufficient limits at a reasonable cost. Insurance
costs are impacted by market conditions and the risk profile of the insured and may increase significantly over relatively
short periods. In addition, certain insurance coverage may not be available or may only be available at prohibitive costs.
Renewals of insurance policies may expose us to additional costs through higher premiums or the assumption of higher
deductibles or co-insurance liability.
Certain liabilities resulting from acquisitions are estimated and could lead to a material impact on earnings.
Through our acquisition activities, we may record liabilities for future contingent earnout payments that are to be settled
in cash. The fair value of these liabilities is assessed on a quarterly basis and changes in assumptions used to determine
the amount of the liability could lead to an adjustment that may have a material impact, favorable or unfavorable, 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 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.
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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 programs for ETFs and open-end funds. In addition, more recently the SEC has also adopted the following
rules, many of which are currently in an implementation period, which will increase our public reporting and disclosure
requirements, which could be costly and may impede the Company’s growth.
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Standards of Conduct Rulemaking: In June 2019, the SEC adopted a package of rulemakings and interpretations,
including Regulation Best Interest and the new Form CRS Relationship Summary (“Form CRS”) which are intended to
improve the retail investor experience and provide greater clarity and transparency regarding retail investors’
relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the broker-dealer standard
of conduct beyond existing suitability obligations and requires compliance with disclosure, care, conflict of interest and
compliance obligations. Form CRS requires broker-dealers and registered investment advisers to provide a brief
relationship summary to retail investors, including (i) the types of client and customer relationships and services we
offer, (ii) the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and
services, (iii) whether we and any of our financial professionals currently have reportable legal or disciplinary history;
and (iv) how to obtain additional information. The rulemakings and interpretations could increase Victory’s disclosure
obligations, impact distribution arrangements and create compliance and operational challenges for Victory’s
distribution partners. The Department of Labor has also indicated it intends to propose a standards of conduct rule in
2020.
SEC Guidance on Proxy Voting Responsibilities of Investment Advisors: In August 2019, the SEC published guidance to
assist investment advisers with their proxy voting responsibilities under the Advisers Act. The guidance confirmed that
investment advisers’ fiduciary duties of care and loyalty to their clients apply to proxy voting and encouraged advisors
with voting authority to review their policies and procedures in detail and consider whether more analysis may be
required under certain circumstances, including when a proxy advisory firm’s services are retained. This guidance could
impact voting arrangements between Victory and its clients, and lead to additional compliance, operational and
disclosure obligations for Victory.
SEC ETF Rule: In September 2019, the SEC adopted rule 6c-11 under the Investment Company Act of 1940 (the
“Investment Company Act”) known as the “ETF Rule”. The ETF Rule will allow ETFs that satisfy certain conditions to
operate without first obtaining individual exemptive relief from the SEC. The ETF Rule is designed to create a clear and
consistent regulatory framework for most ETFs operating today and will impact all ETFs registered under the
Investment Company Act The ETF Rule and related form amendments became effective in December 2019. The form
amendments will have a transition period of one year following the effective date. In addition, the ETF Rule rescinds,
one year after its effective date, the existing exemptive relief for all eligible ETFs.
SEC Derivatives Rule for US Registered Funds: In November 2019, the SEC proposed a rule designed to enhance the
regulation of the use of derivatives by registered investment companies, including mutual funds (other than money
market funds), ETFs and closed-end funds, as well as business development companies. The proposed rule would
permit such funds to use derivatives, such as forwards, futures, swaps and written options, that create future payment
obligations, provided that the funds comply with certain conditions including adopting a derivatives risk management
program and complying with a limit on the amount of leverage-related risk that a fund may obtain, based on value-at-
risk. If adopted without change, the proposed rule would increase disclosure and compliance obligations and may
impact certain funds’ usage of derivatives in their investment strategy.
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. Refer to “Regulatory Environment and Compliance.”
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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:
•
•
•
•
•
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.
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:
•
•
•
•
•
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;
•
•
•
•
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;
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•
•
•
•
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.
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 96.5% of the total voting power of our outstanding common stock
and the unvested restricted stock as of December 31, 2019. 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 50.8% of our common stock
through its beneficial ownership of our Class B common stock and 62.6% of the total voting power of our outstanding
common stock and unvested restricted stock as of December 31, 2019. 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.
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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
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, 2020, 16,636,811
shares of our Class A common stock and 51,256,188 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 Jumpstart Our Business Start-ups Act, or 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.
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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 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:
•
•
•
•
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.
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, 2019; 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.
Our ability to pay regular dividends is subject to our Board’s discretion and Delaware law.
We intend to pay dividends to holders of our Class A common stock as described in “Dividend Policy.” Our board of
directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of
dividends entirely. In making decisions regarding our quarterly dividends, we consider general economic and business
conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and
operating results, working capital requirements and anticipated cash needs, contractual restrictions (including under the
terms of our 2019 Credit Agreement) and legal, tax, regulatory and such other factors as we may deem relevant.
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:
•
•
•
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:
•
•
•
•
•
•
•
•
•
•
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
We may not realize the benefits we expect from the USAA AMCO Acquisition because of integration difficulties and
other challenges.
The success of the USAA AMCO Acquisition 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 the USAA Acquired Companies or to otherwise realize
any of the anticipated benefits of either Acquisition could impair the operations of the Company. 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;
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
infrastructures; and
Potential unknown liabilities;
information
technology platforms and administrative
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.
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The 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 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. Refer to “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 San Antonio, TX. In the United States, the
Company also leases office space in Brooklyn, OH; New York, NY; Birmingham, MI; Boston, MA; 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
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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
December 31, 2019, there were approximately 2,000 beneficial shareholders of the Company’s Class A common stock
and 104 beneficial shareholders of the Company’s Class B common stock.
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, 2019 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.
$200
$180
$160
$140
$120
$100
$80
$60
$40
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/
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VCTR
SP500
Peer Set
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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, 2019.
Total
Number of
Shares
of Class A
Common
Stock
Purchased
Average
Price
Paid Per
Share
of Class A
Common
Stock
Total
Number of
Shares
of Class A
Common
Stock
Purchased
as Part of
Publicly
Announced
Plans
or Programs
Approximate
Dollar Value
That May
Yet Be
Purchased
Under
Outstanding
Plans or
Programs
(in millions)
146,930 $
80,570
65,230
292,730 $
15.29
18.33
20.85
17.37
146,930 $
80,570
65,230
292,730
11.3
9.8
8.5
Period
October 1-31, 2019 .........................
November 1-30, 2019 .....................
December 1-31, 2019......................
Total..........................................
(1)
The share repurchase program authorized in 2018 for $15.0 million of the Company’s Class A common stock was completed in September
2019. In August 2019, the Company’s Board of Directors authorized the Company to repurchase up to an additional $15.0 million of the
Company’s Class A common stock in the open market or in privately negotiated transactions. We repurchased 292,730 of Class A common
stock under this program through a 10b5-1 trading plan at an average cost of $17.37 during the three months ended December 31, 2019. As
of December 31, 2019, approximately $8.5 million remained available to repurchase shares under this program. Refer to Note 15, Share-
Based Compensation, to the audited consolidated financial statements for further information on the share repurchase program.
Dividend Policy
In August 2019, the Company announced the initiation of quarterly cash dividends and paid the first quarterly dividends
in September and December 2019. Holders of restricted stock awards on the Company’s class A and class B common
stock that are unvested at the time quarterly dividends are declared are entitled to be paid these dividends as and when
the restricted stock vests. Potential future dividend payments will be at the sole discretion of our board of directors and
will depend upon then-existing conditions, including capital requirements to execute our growth strategy, results of
operations, financial condition, projected cash flow, and terms associated with our current credit facility or any future
financing.
ITEM 6.
SELECTED FINANCIAL DATA.
The following tables set forth our historical consolidated financial data as of and for the periods indicated. The selected
consolidated financial data for the years ended, and as of, December 31, 2019, 2018, 2017, 2016 and 2015 have been
derived from our audited consolidated financial statements and the notes thereto included elsewhere in this report. Our
historical operating results are not necessarily indicative of future operating results.
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The following data should be read together with our consolidated financial statements and the related notes thereto,
as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included elsewhere in this report.
Year Ended December 31,
2019
2018
2017
2016
($ in thousands, except per share data as noted)
GAAP Statement of Operations Data:
Investment management fees .................................... $ 466,802 $ 352,683
201,553
60,729
Fund administration and distribution fees................. 145,571
39,210
240,763
413,412
Total revenue............................................................. 612,373
Income from operations ............................................ $ 164,620 $ 114,519 $ 90,168 $ 24,485 $ 33,220
(25,998)
Other expense............................................................ (43,932)
7,222
Income (loss) before income taxes............................ 120,688
3,800
Net income (loss) ...................................................... 92,491
GAAP operating margin ...........................................
Basic earnings (loss) per share.................................. $
Diluted earnings (loss) per share............................... $
343,811
65,818
409,629
248,482
49,401
297,883
(33,556)
(9,071)
(6,071)
(51,710)
38,458
25,826
(29,608)
84,911
63,704
8.2 %
(0.12) $
(0.12) $
22.0 %
0.47 $
0.43 $
27.7 %
0.96 $
0.90 $
26.9 %
1.37 $
1.26 $
13.8 %
0.08
0.08
2015
($ in thousands)
Balance Sheet Data:
Total assets.................................................................. $ 1,753,309 $ 801,511 $ 792,622 $ 850,951 $ 620,389
Total debt(1) ............................................................... 924,539 268,857 483,225 418,528 311,898
Total liabilities ............................................................ 1,215,438 345,963 561,439 519,953 370,960
Total equity................................................................. 537,871 455,548 231,183 330,998 249,429
2018
2016
2019
2015
Year Ended December 31,
2017
(1)
Balance at December 31, 2019 is shown net of unamortized loan discount and debt issuance costs in the amount of $27.5
million. The gross principal amount of outstanding term loans under the 2019 Credit Agreement was $952.0 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.
On July 1, 2019, we completed the USAA AMCO Acquisition. Our financial results for the year ended December 31,
2019 reflect six months of post-acquisition USAA AMCO operations and significant acquisition-related and
restructuring and integration costs related to this transaction. Refer to Note 4, Acquisitions, to the to the audited
consolidated financial statements for further information on the USAA AMCO Acquisition.
In the year ended December 31, 2018, we completed our IPO and used the proceeds to refinance the debt, then
outstanding. 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 years ended December 31, 2016 and 2019, we incurred incremental debt
to partially finance the acquisitions of RS Investments and USAA AMCO, respectively. Refer to Note 11, Debt, to the to
the audited consolidated financial statements for further information on debt.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to, and 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 and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ
materially from management’s expectations. Please refer to the sections of this report entitled “Forward-Looking
Statements” and “Risk Factors.”
Overview
Our Business – We are a diversified global asset management firm with $151.8 billion in assets under management as
of December 31, 2019. The Company operates a next-generation business model combining boutique investment
qualities with the benefits of a fully integrated, centralized operating and distribution platform.
We provide specialized investment strategies to institutions, intermediaries, retirement platforms and individual
investors. With nine autonomous Investment Franchises and a Solutions Platform, Victory Capital offers a wide array of
investment styles and investment vehicles including, actively managed mutual funds, separately managed accounts,
rules-based and active ETFs, multi-asset class strategies, custom-designed solutions and a 529 College Savings Plan.
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.
Franchises – 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
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.
Solutions – 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 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, thematic and
targeted factor exposure.
Professionals within our institutional, retail and direct member distribution channels and marketing organization sell our
products through our centralized distribution model. 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. Our direct member channel serves the investment needs of clients including USAA
members and military community.
We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013
to $151.8 billion at December 31, 2019. We attribute this growth to our success in sourcing acquisitions and evolving
them into organic growers, generating strong investment returns, and developing institutional, retail, and direct client
distribution channels with deep penetration.
USAA AMCO Acquisition – Effective July 1, 2019, the Company completed the USAA AMCO Acquisition, a
transformative acquisition that increased AUM by $81.1 billion and significantly impacted our financial results for the
year ended December 31, 2019. The acquisition not only increased AUM and revenue, but also introduced additional
personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to
a transfer services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that the
Company did not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company
entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate
principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and
terminated as of July 1, 2019.
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The USAA AMCO Acquisition expands and diversifies our investment platform, particularly in the fixed income and
solutions asset classes, and increases our size and scale. Additional products added to our investments platform include
target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-
manager equity funds. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs.
Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a period of
time and the opportunity to offer its products to USAA members through a direct member channel. In addition, we have
entered into a referral agreement with USAA for members that are interested in investing in USAA Funds or USAA 529
College Savings Plan.
Total consideration for the USAA AMCO Acquisition was $950.1 million, comprising of $851.3 million of cash paid at
closing and $98.8 million as the estimated fair value of contingent consideration as of the acquisition date. A maximum
of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of
USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the
closing date.
The estimated fair value of contingent consideration arrangements as of December 31, 2019 were $118.7 million and
consist of the USAA AMCO earn-out payment liability, which is included in consideration payable for acquisition of
business in the Consolidated Balance Sheets. Refer to Note 4, Acquisitions, to the audited consolidated financial
statements for further details on the USAA AMCO Acquisition.
Business Highlights in 2019
Assets under management:
• AUM at December 31, 2019 grew by $99.1 billion, or approximately 188%, to $151.8 billion from $52.8
billion at December 31, 2018, primarily driven by $81.1 billion of acquired assets. We generated $32.1
billion in gross flows and $1.9 billion in positive net inflows for the year ended December 31, 2019,
compared to $14.1 billion in gross flows and $2.4 billion of negative net outflows for the same period in
2018. We experienced $16.1 billion in market appreciation for the year ended December 31, 2019
compared to $6.6 billion in market depreciation for the same period in 2018.
•
In 2019, our VictoryShares ETF platform exceeded the $5.0 billion AUM milestone.
• We were ranked 7th in “Barron’s Top Fund Families” for the five-year period and 10th for the 10-year
period ended December 31, 2019. We ranked 17th overall on a one-year basis for 2019.
Investment performance:
•
Legacy Victory Capital: 25 of our Legacy Victory Capital mutual funds and ETFs had overall
Morningstar ratings of four or five stars and 74% of our fund and ETF AUM were rated four or five stars
overall by Morningstar. 77% of our strategies by AUM had investment returns in excess of their respective
benchmarks over a one-year period, 79% over a three-year period, 73% over a five-year period and 92%
over a ten-year period. On an equal-weighted basis, 48% of our strategies have outperformed their
respective benchmarks over a one-year period, 63% over a three-year period, 62% over a five-year period
and 82% over a ten-year period.
• USAA Fixed Income: 11 of our USAA Fixed Income mutual funds and ETFs had overall Morningstar
ratings of four or five stars and 96% of our fund and ETF AUM were rated four or five stars overall by
Morningstar. 85% of our strategies by AUM had investment returns in excess of their respective
benchmarks over a one-year period, 85% over a three-year period, 88% over a five-year period and 95%
over a ten-year period. On an equal-weighted basis, 71% of our strategies have outperformed their
respective benchmarks over a one-year period, 67% over a three-year period, 83% over a five-year period
and 91% over a ten-year period.
•
Total Victory Capital: 44 of our Total Victory Capital mutual funds and ETFs had overall Morningstar
ratings of four or five stars and 68% of our fund and ETF AUM were rated four or five stars overall by
Morningstar. 67% of our strategies by AUM had investment returns in excess of their respective
benchmarks over a one-year period, 64% over a three-year period, 60% over a five-year period and 71%
over a ten-year period. On an equal-weighted basis, 43% of our strategies have outperformed their
respective benchmarks over a one-year period, 51% over a three-year period, 53% over a five-year period
and 66% over a ten-year period.
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Financial highlights:
•
•
Total revenue for the year ended December 31, 2019 was $612.4 million compared to $413.4 million for
the year ended December 31, 2018. Net income was $92.5 million and $63.7 million, respectively, for the
year ended December 31, 2019 and 2018.
Earnings per diluted share were $1.26 for the year ended December 31, 2019 compared to $0.90 for the
same period in 2018. Adjusted net income with tax benefit per diluted share was $2.63 and $1.64,
respectively, for the year ended December 31, 2019 and 2018. Refer to “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.
• Adjusted EBITDA was $268.8 million or 43.9% for the year ended December 31, 2019 compared to
$160.2 million or 38.7% for the year ended December 31, 2018. Refer to “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 $172.8 million for the year ended December 31, 2019 compared to
$102.3 million for the year ended December 31, 2018. Refer to “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.
•
Subsequent to December 31, 2019, the Company repriced its term loan reducing the interest rate by 75
basis points for an estimated annual interest rate expense savings of approximately $7.0 million, or 13.5%.
Key Performance Indicators
The following table presents the key performance indicators we focus on when reviewing our results:
2019
($ in millions, except for basis points and percentages)
AUM at period end ........................................................................... $ 151,832
Average AUM................................................................................... 102,719
Gross flows ....................................................................................... 32,112
Net flows (excluding Diversified)(1).................................................. 1,860
Total revenue..................................................................................... 612.4
Revenue on average AUM ................................................................
59.6 bps 67.3 bps 70.8 bps
92.5
Net income ........................................................................................
Adjusted EBITDA(2).......................................................................... 268.8
Adjusted EBITDA margin(2)(3) ..........................................................
Adjusted Net Income(3) ..................................................................... 172.8
Tax benefit of goodwill and acquired intangibles(4)..........................
20.3
2017
$ 61,771
57,823
16,929
(853)
409.6
Year Ended December 31,
2018
$ 52,763
61,390
14,130
(2,427)
413.4
43.9 % 38.7 % 36.4 %
25.8
149.1
63.7
160.2
62.0
19.7
102.3
13.3
(1)
(2)
(3)
(4)
Total net flows including Diversified Equity Management (“Diversified”) were ($1,860), ($2,427) and ($1,471) for the years ended
December 31, 2019, 2018, and 2017, respectively. Assets managed by Diversified were transferred to Munder on May 15, 2017.
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 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 intangible assets 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 (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. The reduction in the federal corporate income tax rate reduced the tax benefit
of goodwill and acquired intangible assets beginning in 2018.
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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; (i) investment performance, including fluctuations in the financial
markets and the quality of our investment decisions; (ii) client flows into and out of our various strategies and
investment vehicles; (iii) industry trends toward products or strategies that we either do or do not offer; (iv) our ability to
attract and retain high quality investment, distribution, marketing and management personnel; (v) 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 (vi) general investor sentiment and confidence. Our goal is to establish and
maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle.
Valuation of Assets Under Management
The fair value of assets under management of the Victory Funds, USAA Funds and VictoryShares 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.
AUM by Asset Class – the following table presents our AUM by asset class as of the dates indicated:
As of December 31,
(in millions)
Fixed Income...................................
Solutions..........................................
U.S. Mid Cap Equity .......................
U.S. Small Cap Equity ....................
U.S. Large Cap Equity ....................
Global / Non-U.S. Equity................
Other................................................
Total Long-Term Assets..........
Money Market .................................
Total ..........................................
2018
2019(1)
2016(2) 2015(3)
2017
$ 37,973 $ 6,836 $ 7,551 $ 7,726 $ 5,058
31,649 3,767 3,028 1,575
953
26,347 20,019 25,185 20,083 12,401
17,346 12,948 15,308 14,090 6,500
14,091 3,759 4,789 5,921 5,763
12,603 4,610 4,105 3,460 2,114
322
$ 140,245 $ 52,763 $ 61,771 $ 54,966 $ 33,111
11,587 — — — —
$ 151,832 $ 52,763 $ 61,771 $ 54,966 $ 33,111
824 1,805 2,111
236
(1)
(2)
(3)
Includes the impact of the USAA AMCO Acquisition, which closed on July 1, 2019, increasing our AUM by $81.1 billion inclusive of
managed portfolio assets invested through USAA’s brokerage business. We did not acquire the USAA brokerage business. As of December
31, 2019, these managed portfolio assets totaled $9.9 billion.
Includes the impact of the RS Acquisition, which closed on July 29, 2016, and increased our AUM by $16.7 billion.
Includes the impact of the CEMP Acquisition, which closed on April 30, 2015, and increased our AUM by $1.0 billion.
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Asset Flows by Asset Class – the following table summarizes our asset flows by asset class for the periods indicated:
U.S.
U.S. Mid Small
Cap
Equity Income Equity Equity Solutions Other Long-term Market
U.S.
Large
Cap
Global /
Non-U.S.
Total
Fixed
Cap
Money
Equity
(in millions)
Year Ended
December 31, 2019
Gross client cash
inflows .............................. $ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $ 823 $ 52,763 $ — $ 52,763
Total
480 1,457 5,696 171 23,293 8,820 32,112
Gross client cash
inflows ................................ 5,663 3,338 6,489
Gross client cash
outflows .............................. (6,663) (4,194) (4,186) (1,419) (1,538) (3,079) (375) (21,453) (8,800) (30,252)
20 1,860
Net client cash flows ............. (1,000)
Market appreciation /
(depreciation)......................... 5,511 3,728 1,158 1,263 1,609 2,739
85 16,065
Net transfers .......................... 1,817 1,526 27,677 10,007 6,465 22,525 (356) 69,662 11,482 81,143
Ending AUM ......................... $ 26,347 $ 17,346 $ 37,973 $ 14,091 $ 12,603 $ 31,649 $ 236 $ 140,245 $ 11,587 $ 151,832
Year Ended
December 31, 2018
Beginning AUM .................... $ 25,185 $ 15,308 $ 7,551 $ 4,789 $ 4,105 $ 3,028 $ 1,805 $ 61,771 $ — $ 61,771
(81) 2,617 (204) 1,840
(29) 15,980
(856) 2,303
(939)
259 2,488 1,713 428 14,130 — 14,130
Gross client cash
inflows ................................ 4,530 3,198 1,514
Gross client cash
outflows .............................. (7,207) (3,762) (2,303)
(789)
(848) (1,003)
(588) (846) (16,557) — (16,557)
(589) 1,485 1,125 (418) (2,427) — (2,427)
(564)
Net client cash flows ............. (2,677)
Market appreciation /
(426) (510) (6,573) — (6,573)
(depreciation)......................... (2,485) (1,792)
Net transfers ..........................
(8)
(4)
Ending AUM ......................... $ 20,019 $ 12,948 $ 6,836 $ 3,759 $ 4,610 $ 3,767 $ 824 $ 52,763 $ — $ 52,763
Year Ended
December 31, 2017
Beginning AUM .................... $ 20,083 $ 14,090 $ 7,726 $ 5,921 $ 3,460 $ 1,575 $ 2,111 $ 54,965 $ — $ 54,965
(455)
14
(972)
(8)
(8) —
67
7
(53)
40
(4)
Gross client cash
inflows ................................ 8,622 3,613 1,777
Gross client cash
outflows .............................. (7,299) (4,722) (2,240) (1,702) (1,333)
230
Net client cash flows ............. 1,323 (1,109)
Market appreciation /
352 106 8,372 — 8,372
(depreciation)......................... 3,778 2,327
(95)
(28)
1 —
Net transfers ..........................
Ending AUM ......................... $ 25,185 $ 15,308 $ 7,551 $ 4,789 $ 4,105 $ 3,028 $ 1,805 $ 61,771 $ — $ 61,771
347 1,073
(18)
(462) (1,472)
388
(101)
(95) —
57
(7)
(213) (891) (18,400) — (18,400)
(410) 1,129 (470) (1,471) — (1,471)
924 1,342 421 16,929 — 16,929
AUM by Distribution Channel – the following table presents our AUM by distribution channel as of the dates
indicated:
2019
As of December 31,
2018
2017
(in millions)
Member............................................................ $ 74,118
Institutional...................................................... 39,851
Retail................................................................ 37,863
Total AUM(1).............................................. $ 151,832
Amount
% of total Amount % of total Amount % of total
49 %$ —
26 % 29,731
25 % 23,032
100 %$ 52,763
— %$ —
56 % 35,695
44 % 26,076
100 %$ 61,771
— %
58 %
42 %
100 %
(1)
The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.
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Table of Contents
Assets Flows by Vehicle – the following table summarizes our asset flows by vehicle for the periods indicated:
Separate
Accounts and
Other
Mutual Funds(1) ETFs(2) Vehicles(3) Total
(in millions)
Year Ended December 31, 2019
Beginning AUM..................................................................... $
Gross client cash inflows ....................................................
Gross client cash outflows ..................................................
Net client cash flows..............................................................
Market appreciation / (depreciation)......................................
Net transfers ...........................................................................
Ending AUM.......................................................................... $
Year Ended December 31, 2018
Beginning AUM..................................................................... $
Gross client cash inflows ....................................................
Gross client cash outflows ..................................................
Net client cash flows..............................................................
Market appreciation / (depreciation)......................................
Net transfers ...........................................................................
Ending AUM.......................................................................... $
Year Ended December 31, 2017
Beginning AUM..................................................................... $
Gross client cash inflows ....................................................
Gross client cash outflows ..................................................
Net client cash flows..............................................................
Market appreciation / (depreciation)......................................
Net transfers ...........................................................................
Ending AUM.......................................................................... $
30,492 $ 2,956 $ 19,315 $ 52,763
9,709 32,112
21,560 843
(4,099) (30,252)
(25,239) (914)
5,610 1,860
(3,679)
(71)
4,531 16,065
10,990 544
(441) 81,143
80,802 782
118,605 $ 4,213 $ 29,014 $ 151,832
9,629 1,401
(12,781) (341)
(3,152) 1,060
(4,312) (354)
(11) —
37,967 $ 2,250 $ 21,555 $ 61,771
3,100 14,130
(3,435) (16,557)
(335) (2,427)
(1,907) (6,573)
(8)
30,492 $ 2,956 $ 19,315 $ 52,763
3
33,975 $ 906 $ 20,085 $ 54,965
3,896 16,929
11,922 1,111
(5,121) (18,400)
(20)
(13,259)
(1,225) (1,471)
(1,337) 1,091
2,692 8,372
5,427 253
(95)
(98) —
37,967 $ 2,250 $ 21,555 $ 61,771
3
(1)
(2)
(3)
Includes institutional and retail share classes and Variable Insurance Products or VIP funds.
Excludes assets managed for other proprietary product (i.e. funds of funds) in order to adjust for double counting.
Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.
December 31, 2019 AUM – Our total AUM at December 31, 2019 was $151.8 billion, an increase of $99.1 billion, or
187.8%, compared to $52.8 billion at December 31, 2018. The change in AUM during 2019 reflects $81.1 billion of
acquired assets, $1.9 billion of positive net inflows, as well as $16.1 billion in positive market movement. Short-term
money market assets accounted for $11.6 billion, or 7.6% of the total AUM at December 31, 2019.
The net inflows were driven by $2.6 billion in our Solutions Platform and $2.3 billion in our fixed income strategies,
partially offset by net outflows of $1.0 billion in our U.S. mid cap equity strategies, $0.9 billion in our U.S. large cap
equity strategies, $0.9 billion in our U.S. small cap equity strategies, $0.2 billion in other and $0.1 billion in our
global/non-U.S equity strategies.
December 31, 2018 AUM – Our total AUM at December 31, 2018 was $52.8 billion, a decrease of $9.0 billion, or
14.6%, compared to $61.8 billion at December 31, 2017, reflected by $2.4 billion of negative net outflows and $6.6
billion in negative market movement.
The net outflows were primarily a result of $2.7 billion in our U.S. mid cap equity strategies, $0.8 billion in our fixed
income strategies, $0.6 billion in our U.S. large cap equity strategies, $0.6 billion in our U.S. small cap equity strategies
and $0.4 billion in our other strategies, partially offset by net inflows of $1.5 billion in our global equity strategies and
$1.1 billion in our Solutions Platform.
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December 31, 2017 AUM – Our total AUM at December 31, 2017 was $61.8 billion, an increase of $6.8 billion, or
12.3%, compared to $55.0 billion at December 31, 2016. The change in AUM reflects $1.5 billion of negative net
outflows and $8.4 billion in positive market movement.
The net outflows were primarily a result of $1.5 billion in our U.S. large cap equity strategies, $1.1 billion in our U.S.
small cap equity strategies, $0.5 billion in our other strategies, $0.4 billion in our global equity strategies and $0.4 billion
in our fixed income strategies, partially offset by net inflows of $1.3 billion in our U.S. mid cap equity strategies and
$1.1 billion in our Solutions Platform.
GAAP Results of Operations
Our GAAP revenues principally consist of; (i) investment management fees, which are based on our overall weighted
average fee rate charged to our clients and our level of AUM and (ii) fund administration and distribution fees, which are
asset-based fees earned from open-end mutual funds for administration and distribution services. Fund administration
and fund distribution fees also include fund transfer agent fees (related to the USAA Funds), which are based on a
contractual rate applied to average AUM or the number of accounts in these funds.
The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent
and distribution services. Management considers whether we are acting as the principal service provider or as an agent to
determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to
third-party service providers, respectively. Victory is considered a principal service provider if we control the service
that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by
another party and do not control the service.
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. Our investment management fees are calculated based on daily average AUM, monthly average AUM or
point in time AUM.
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 fund 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 fund AUM and the composition of those assets across share classes that
pay varying levels of fund distribution fees.
The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the
primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to
select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses
are recorded on a gross basis. VCA has contractual arrangements with third parties to provide certain distribution
services. VCA is the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to
select the service provider and establish pricing. Substantially all of VCA’s revenue is recorded gross of payments made
to third parties.
Fund transfer agent fees are earned for providing mutual fund shareholder services. Transfer agent fees fluctuate based
on the level of average AUM and the number of accounts in the USAA Funds.
The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. We are the
primary obligor under the transfer agency contracts with the USAA Funds and have the ability to select the service
provider and establish pricing. As a result, fund transfer agent fees and sub-transfer agent expenses are recorded on a
gross basis.
GAAP Expenses
Our GAAP expenses principally consist of; (i) personnel compensation and benefits; (ii) distribution and other
asset-based expenses; (iii) general and administrative expenses; (iv) depreciation and amortization charges; and (v)
acquisition-related expenses comprising of changes in the fair value of contingent acquisition payments and restructuring
and acquisition costs.
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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 directors 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-transfer agent, sub-advisory expenses and middle-office expenses.
Broker-dealer distribution fees are paid by VCA as the broker-dealer for the Victory Funds and USAA Funds to
third-party distributors. The Victory Funds and USAA 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 and USAA 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 and USAA Funds. Distribution fees typically vary based
on the level of AUM and the composition of those assets across share classes.
Fund expense reimbursements (contra revenue) result from VCM, as investment adviser for the Victory Funds,
VictoryShares and USAA Funds, agreeing to cap the annual operating expenses for certain share classes of the Victory
Funds, USAA Funds and VictoryShares. VCM has contractually agreed to reimburse the Victory Funds, USAA Funds
and VictoryShares for expenses in excess of these caps but may 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-transfer agent, sub-advisory and middle-office expenses consist of fees paid to our
sub-administrators of the Victory Funds, VictoryShares and USAA Funds, fees paid to our sub-transfer agent for the
USAA Funds, fees paid to sub-advisers on certain Victory Funds and USAA Funds and fees paid to vendors to which we
outsource middle-office functions.
• VCM acts as the administrator to the Victory Funds, VictoryShares and USAA Funds. 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, VictoryShares and USAA Funds, including the services
provided by the sub-administrators. The sub-administrators are paid through a contractual arrangement
based on a percentage of the average fund AUM.
• VCTA acts as the transfer agent to the USAA Funds. VCTA has hired a sub-transfer agent, the fees for
which are captured in sub-administration expense. As transfer agent, VCTA oversees the services provided
by the sub-transfer agent. The sub-transfer agent is paid through a contractual arrangement based on a
percentage of average fund AUM.
• VCM, as the investment adviser for the Victory Funds and USAA 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.
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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, including the increase in the fair value of contingent acquisition payments, asset purchases and
changes in business strategy. These include severance 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 restructuring the business to capture operating expense synergies.
Other non-operating items of income and expense consist of; (i) interest income and other income (expense); (ii) interest
expense and other financing costs; (iii) loss on debt extinguishment; and (iv) 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 and dividend income on investments.
Interest Expense and Other Financing Costs – Interest expense and other financing costs consists primarily of interest
expense attributable to long-term debt. Refer to “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 and the acceleration of the paydown of debt principal.
Income Tax Expense – The provision for income taxes includes U.S. federal, state and local taxes, and 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 and 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 following table presents our GAAP results of operations for the years ended December 31, 2019, 2018 and 2017.
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Year Ended
December 31,
2019
Year Ended
Year Ended
December 31,
December 31,
2018
2017
Revenue
Investment management fees ........................................... $
Fund administration and distribution fees ........................
Total revenue .............................................................
466,802
145,571
612,373
$
$
352,683
60,729
413,412
343,811
65,818
409,629
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 ..........................................
Income from operations ......................................................
179,809
146,622
46,568
23,873
19,886
22,317
8,678
447,753
164,620
Other income (expense)
Interest income and other income (expense) ....................
Interest expense and other financing costs .......................
Loss on debt extinguishment ............................................
Total other expense, net............................................
6,829
(40,901)
(9,860)
(43,932)
145,880
94,680
30,005
23,277
(37)
4,346
742
298,893
114,519
(2,856)
(20,694)
(6,058)
(29,608)
144,111
103,439
33,996
29,910
(294)
2,094
6,205
319,461
90,168
(2,913)
(48,467)
(330)
(51,710)
Income before income taxes ................................................
120,688
84,911
38,458
Income tax expense ..............................................................
(28,197)
(21,207)
(12,632)
Net income ............................................................................ $
92,491
$
63,704
$
25,826
Earnings per share of common stock
Basic ................................................................................. $
Diluted .............................................................................. $
1.37
1.26
$
$
0.96
0.90
$
$
0.47
0.43
Weighted average number of shares outstanding
Basic .................................................................................
Diluted ..............................................................................
67,616
73,466
66,295
70,511
54,931
59,577
Dividends declared per share of common stock................ $
0.10
$
—
$
2.42
Investment Management Fees
2019 compared to 2018 – Investment management fees increased $114.1 million, or 32.4%, to $466.8 million in 2019
from $352.7 million in 2018 due to an increase in average AUM year over year, partially offset by a decrease in the
realized fee rate due to a shift in asset mix. Average AUM was $102.7 billion in 2019 compared to $61.4 billion in 2018,
mostly attributable to the acquired assets in the USAA AMCO Acquisition.
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The Company adopted Accounting Standards Update (“ASU”) 2014-09 on January 1, 2019. Mutual fund and ETF
waivers and expense reimbursements are recorded as a reduction to investment management fees under the new standard
($18.7 million in 2019). The comparative periods have not been restated and continue to be reported under the legacy
guidance, as permitted by the Financial Accounting Standards Board (the “FASB”).
2018 compared to 2017 – Investment management fees increased $8.9 million, or 2.5%, to $352.7 million in 2018 from
$343.8 million in 2017 due to the same factors related to average AUM and shift in asset mix as discussed above in the
“2019 compared to 2018” section. Average AUM was $61.4 billion in 2018 compared to $57.8 billion in 2017.
Fund Administration and Distribution Fees
2019 compared to 2018 – Fund administration and distribution fees totaled $145.6 million in 2019, an increase of $84.8
million, or 139.7%, from $60.7 million in 2018. Fund administration fees increased by $48.7 million, or 210.2%, due to
an increase in average AUM year over year, mostly attributable to the USAA AMCO Acquisition and the addition of
$42.8 million in transfer agent fees with the USAA Funds, partially offset by a reduction in fund distribution fees due to
a shift in the mix of assets to lower 12b-1 paying share classes. Transfer agent fees represent a new revenue stream for
VCTA in accordance with a contract with the USAA Funds.
2018 compared to 2017 – Fund administration and distribution fees totaled $60.7 million in 2018, a decrease of $5.1
million, or 7.7%, from $65.8 million in 2017, due to a decrease in fund distribution fees partially offset by an increase in
fund administration fees. The decrease in fund distribution fees was due to a shift in the mix of assets to lower 12b-1
paying share classes, partially offset by an increase in average AUM in 2018. The increase in fund administration fees
was 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, 2019,
2018 and 2017:
(in thousands)
Salaries, payroll related taxes and employee benefits........... $
Incentive compensation.........................................................
Sales-based compensation(1).............................................................................
Equity awards granted to employees and directors(2)............
Acquisition and transaction-related compensation ...............
Total personnel compensation and benefits expense..... $
Year Ended December 31,
2018
2017
2019
62,298 $
85,614
13,973
16,303
1,621
179,809 $
45,820 $
71,273
13,549
15,238
—
145,880 $
49,745
65,984
15,051
11,752
1,579
144,111
(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.
2019 compared to 2018 – Personnel compensation and benefits were $179.8 million in 2019, an increase of $33.9
million, or 23.3%, from $145.9 million in 2018 primarily attributable to an increase in headcount due to the USAA
AMCO Acquisition, as well as a year over year increase in deferred compensation plan liabilities from favorable market
action. The increase in incentive compensation was due to higher pre-incentive compensation earnings while
performance award vestings in 2019 contributed to the increase in share-based compensation. The Company incurred
$1.6 million in acquisition and transaction-related compensation expense in 2019 with no such expense incurred during
the previous year.
2018 compared to 2017 – Personnel compensation and benefits increased by $1.8 million, 1.2%, to $145.9 million in
2018 from $144.1 million in 2017. The slight increase was due to an increase in incentive compensation, partially offset
by a year over year decrease in deferred compensation plan liabilities from unfavorable market action. Share-based
compensation increased in 2018 due to the IPO and pre-existing awards, while sales-based compensation decreased as a
result of lower gross flows.
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Distribution and Other Asset-based Expenses
The following table presents the components of distribution and other asset-based expenses for the year ended
December 31, 2019, 2018 and 2017:
(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 ........ $
Year Ended December 31,
2018
2017
2019
27,753 $
90,706
—
11,115
8,399
8,649
146,622 $
34,423 $
27,177
12,902
6,763
6,452
6,963
94,680 $
40,521
29,701
11,896
5,754
8,352
7,215
103,439
2019 compared to 2018 – Distribution and other asset-based expenses are primarily based on AUM. Distribution and
other asset-based expenses were $146.6 million in 2019, an increase of $51.9 million, or 54.9%, from $94.7 million in
2018, primarily due to the USAA AMCO Acquisition. The acquisition introduced new operating expenses that the
Company did not incur prior to the acquisition, such as platform distribution costs paid to third parties and USAA, sub-
transfer agent service costs and 529 College Savings Plan expenses.
Fund expense reimbursements declined by $12.9 million due to the change in the classification of such reimbursements
with the adoption of ASU 2014-09 on January 1, 2019. Mutual fund and ETF waivers and expense reimbursements are
recorded as a reduction to investment management fees under ASU 2014-09, whereas under legacy revenue recognition
guidance these were recorded as a distribution and other asset-based expense. The comparative periods have not been
restated and continue to be reported under the legacy guidance, as permitted by the FASB. Broker-dealer distribution
fees decreased due to the shift in the mix of assets to lower and non 12b-1 paying share classes.
2018 compared to 2017 – Distribution and other asset-based expenses decreased by $8.8 million, or 8.5%, to
$94.7 million in 2018, from $103.4 million in 2017. Broker-dealer distribution fees and platform distribution fees
decreased due to the mix of mutual fund assets and share classes.
General and Administrative Expenses
2019 compared to 2018 – General and administrative expenses were $46.6 million in 2019 compared to $30.0 million
in 2018. The increase of $16.6 million, or 55.2%, was primarily due to the addition of transition service agreement costs
related to the USAA AMCO Acquisition, as well as one-time debt repricing expenses related to the 2019 Credit
Agreement.
2018 compared to 2017 – General and administrative expenses decreased by $4.0 million, or 11.7%, to $30.0 million in
2018, from $34.0 million in 2017, driven by operational efficiencies.
Depreciation and Amortization
2019 compared to 2018 – Depreciation and amortization increased by $0.6 million, or 2.6%, to $23.9 million in 2019,
from $23.3 million in 2018, due to the addition of definite-lived intangible assets acquired in connection with the USAA
AMCO Acquisition, partially offset by definite-lived assets acquired in connection with the CEMP Acquisition and the
management-led buyout with Crestview GP becoming fully amortized in 2018.
2018 compared to 2017 – Depreciation and amortization decreased to $23.3 million in 2018, from $29.9 million in
2017, primarily due to certain definite-lived intangible assets acquired in connection with the management-led buyout
with Crestview GP becoming fully amortized in 2018.
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Acquisition-Related Costs
2019 compared to 2018 – Acquisition-related costs were $22.3 million and $4.3 million, respectively, in 2019 and
2018, with the increase primarily due to the USAA AMCO Acquisition which closed on July 1, 2019. The acquisition-
related expenses include various transaction costs such as legal and filing fees and other professional fees. On April 22,
2019, the Company and Harvest Volatility Management, LLC (“Harvest”) entered into an agreement to mutually
terminate the purchase agreement entered into on September 21, 2018. Neither the Company nor Harvest was
responsible for any termination fee to the other party as a result of the termination.
2018 compared to 2017 – Acquisition-related costs increased by $2.2 million, or 107.5%, to $4.3 million in 2018, from
$2.1 million in 2017, primarily due to costs incurred related to the USAA AMCO Acquisition and Harvest.
Restructuring and Integration Costs
2019 compared to 2018 – Restructuring and integration costs were $8.7 million and $0.7 million, respectively, in 2019
and 2018, with the increase due to severance costs and integration and conversion costs related to the USAA AMCO
Acquisition.
2018 compared to 2017 – Restructuring and integration costs decreased by $5.5 million, or 88.0%, to $0.7 million in
2018, from $6.2 million in 2017, primarily due to costs incurred in 2017 for contract breakage and asset write-offs
associated with the integration of RS Investment Management Co. LLC (“RS Investments”).
Interest Income and Other Income (Expense)
2019 compared to 2018 – Interest income and other income (expense) was income of $6.8 million in 2019, compared to
expense of $2.9 million in 2018. The increase was collectively due to a (i) gain on sale of an equity method investment
in Cerebellum of $2.9 million, (ii) higher yields on our cash invested in money market accounts and (iii) net unrealized
gains on deferred compensation plan investments.
2018 compared to 2017 – Interest income and other income (expense) was expense of $2.9 million in both 2018 and
2017, and mainly consisted of net unrealized losses on deferred compensation plan investments.
Interest Expense and Other Financing Costs
2019 compared to 2018 – Interest expense and other financing costs increased by $20.2 million, or 97.6%, to $40.9
million in 2019, from $20.7 million in 2018 due to the Company entering into the 2019 Credit Agreement, dated July 1,
2019, in conjunction with the USAA AMCO Acquisition. All indebtedness outstanding under the previous credit
agreement was repaid and terminated as of July 1, 2019. Refer to Note 11, Debt, to the audited financial statements for
further details on the 2019 Credit Agreement.
2018 compared to 2017 – Interest expense and other financing costs decreased by $20.8 million, or 57.3%, to $20.7
million in 2018, from $48.5 million in 2017 as a result of refinancing activities and the paydown of debt principal.
Loss on Debt Extinguishment
2019 compared to 2018 – Loss on debt extinguishment was $9.9 million in 2019. The Company wrote-off unamortized
debt issuance costs and unamortized debt discount due to (i) the termination of the previous credit agreement, dated
February 2018 ($5.5 million) and (ii) accelerating the paydown of debt principal under the 2019 Credit Agreement ($4.4
million). The Company also paid down $148.0 million of debt in 2019 under the 2019 Credit Agreement. Refer to Note
11, Debt, to the audited financial statements for further details on the 2019 Credit Agreement. The Company incurred a
$6.1 million loss on debt extinguishment in 2018 due to the termination of a previous credit agreement, dated October
2014.
2018 compared to 2017 – Loss on debt extinguishment was $6.1 million in 2018 as discussed above in the “2019
compared to 2018” section. The Company incurred a $0.3 million loss on debt extinguishment in 2017 due to the
repricing of a previous term loan.
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Income Tax Expense
2019 compared to 2018 – Our effective tax rate was 23.4% and 25.0% in 2019 and 2018, respectively. The decrease in
the effective tax rate was primarily due to higher excess tax benefits on share-based compensation net of expense related
to recognizing a liability for unrecorded tax benefits. Refer to Note 10, Income Taxes, to the audited financial statements
for further details on income taxes.
2018 compared to 2017 – Our effective tax rate was 25.0% and 32.8% in 2018 and 2017, respectively, with the year
over year decrease due to a reduction in our effective tax rate in 2018 related to the Tax Act.
Effects of Inflation
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
We report our financial results in accordance with GAAP. Our management uses non-GAAP performance measures to
evaluate the underlying operations of our business. 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. 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. Specifically, we make use of the non-GAAP financial measures “Adjusted
EBITDA” and “Adjusted Net Income.”
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.
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The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods
indicated:
Year Ended December 31,
2018
2017
2019
(28,197) (21,207)
(in thousands)
Reconciliation of non-GAAP financial measures:
Net income (GAAP) ............................................................................ $ 92,491 $ 63,704 $ 25,826
Income tax expense ...............................................................................
(12,632)
Income before income taxes ............................................................... $ 120,688 $ 84,911 $ 38,458
44,330
40,706 20,173
2,995 2,956 3,561
1,887
1,484 1,505
26,349
20,878 20,321
11,752
14,849 15,238
15,041
56,751 6,389
6,035
13,119 7,807
1,248
138
—
427
730
(2,683)
Adjusted EBITDA............................................................................... $ 268,787 $ 160,168 $ 149,088
Interest expense(1) ...............................................................................
Depreciation(2) ....................................................................................
Other business taxes(3) ........................................................................
Amortization of acquisition-related intangible assets(4) .....................
Share-based compensation(5) ..............................................................
Acquisition, restructuring and exit costs(6) .........................................
Debt issuance costs(7)..........................................................................
Pre-IPO governance expenses(8) .........................................................
(Earnings) losses from equity method investments(9).........................
(in thousands)
Reconciliation of non-GAAP financial measures:
Net income (GAAP) ............................................................................ $ 92,491 $ 63,704 $ 25,826
Adjustments to reflect the operating performance of the Company:
2017
2019
Year Ended December 31,
2018
i. Other business taxes(3) ..............................................................
ii. Amortization of acquisition-related intangible assets(4) ...........
iii. Share-based compensation(5)....................................................
iv. Acquisition, restructuring and exit costs(6) ...............................
v. Debt issuance costs(7)................................................................
vi. Pre-IPO governance expenses(8)...............................................
Tax effect of above adjustments(10) ....................................................
viii. Remeasurement of net deferred taxes (11) ...........................
1,887
26,349
11,752
15,041
6,035
1,248
(23,678)
(2,422)
Adjusted Net Income .......................................................................... $ 172,802 $ 102,254 $ 62,038
Tax benefit of goodwill and acquired intangibles(12) ............................ $ 20,324 $ 13,278 $ 19,691
1,484
20,878
14,849
56,751
13,119
—
(26,770)
—
1,505
20,321
15,238
6,389
7,807
138
(12,849)
—
Adjustments made to GAAP Net Income to calculate Adjusted EBITDA and Adjusted Net Income, as applicable, are:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Adding back interest paid on debt and other financing costs, net of interest income.
Adding back depreciation on property and equipment.
Adding back other business taxes.
Adding back amortization expense on acquisition-related intangible assets.
Adding back share-based compensation associated with equity awards issued from pools created in connection with the management-led
buyout and various acquisitions and as a result of equity grants related to the initial public offering of our Class A common stock (the
“IPO”).
Adding back direct incremental costs of acquisitions and the IPO, including restructuring costs.
Adding back debt issuance cost expense.
Adding back pre-IPO governance expenses paid to the Company’s private equity partners that terminated as of the completion of the IPO
Adjusting for (earnings) losses on equity method investments.
(10)
Subtracting an estimate of income tax expense applied to the sum of the adjustments above.
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(11)
(12)
Remeasurement of our U.S. net deferred taxes resulting in a one-time income tax expense of $2.4 million in 2017 due to the Tax Act
enacted on December 22, 2017.
Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from 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.
The following table presents the components of acquisition, restructuring and exit costs for the periods indicated:
(in thousands)
Acquisition-related costs........................................................................ $ 22,317 $ 4,346 $ 2,094
Change in value of consideration payable for acquisition of business ..
—
6,205
Restructuring and integration costs........................................................
733
General and administrative ....................................................................
1,580
Personnel compensation and benefits ....................................................
4,429
Interest income and other income ..........................................................
Total acquisition, restructuring and exit costs ............................... $ 56,751 $ 6,389 $ 15,041
19,886
8,678
4,249
1,621
—
—
742
303
—
998
2019
2017
Year Ended December 31,
2018
Liquidity and Capital Resources
Sources and Uses of Cash – We generate strong cash flows from operations that allow us to meet our cash
requirements. Our primary uses of cash include (i) repayment of our debt obligations, (ii) funding of acquisitions, (iii)
payment of contingent consideration for previous acquisitions, and (iv) working capital needs. Cash flows from
operations also allow us to meet certain other cash requirements such as quarterly cash dividends and the repurchase of
our Class A common stock. We believe we have sufficient liquidity and capital resources to continue to paydown our
debt obligations as well as to continue focusing on acquisition candidates that increase our size, scale, asset class and
client diversification.
The following table presents our liquidity position as of December 31, 2019 and 2018:
(in thousands)
Cash and cash equivalents(1) ............................................ $
Accounts and other receivables(2) ....................................
Undrawn commitment on revolving credit facility(3) ......
Accounts and other payables(4) ........................................
December 31,
2019
37,121 $
95,093
100,000
(144,045)
December 31,
2018
51,491
44,120
100,000
(50,578)
(1)
(2)
(3)
(4)
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 receivables consist primarily of investment management, fund administrative and distribution fees that have been earned but
not yet received from clients. We perform a review of our receivables on a monthly basis to access collectability.
Revolving credit facility of $100.0 million at December 31, 2019 and 2018, which had $100.0 million undrawn as of both periods.
Accounts and other payables consist primarily of various payables related to operations, transaction costs and interest payable on the term
loan, as well as accrued compensation and benefits. Transaction costs consist of non-recurring transaction costs of $8.5 million and
restructuring and integration costs of $3.0 million.
Excludes long-term debt, net due to the Company satisfying the required principal amortization of 1.00% per annum through the term loan,
June 2026.
As previously noted, the USAA AMCO Acquisition introduced additional personnel expenses and new and additional operating expenses
such as expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that
the Company did not incur prior to the acquisition.
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2019 Credit Agreement – In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019
Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1
billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1,
2019. In 2019, the Company repaid $148.0 million of the outstanding term loans under the 2019 Credit Agreement, and
subsequent to December 31, 2019, the Company has repaid an additional $38.0 million. As of December 31, 2019, we
were in compliance with our financial performance covenant. Refer to Note 4, Acquisitions, to the audited consolidated
financial statements for further details on the USAA AMCO Acquisition, as well as Note 11, Debt, for further
information on the 2019 Credit Agreement.
The First Amendment – Subsequent to December 31, 2019, the Company entered into the First Amendment dated as of
July 1, 2019 with other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada
as fronting bank, and the lenders party thereto which amends the 2019 Credit Agreement.
Pursuant to the The First Amendment, effective January 17, 2020, the Company refinanced the Existing Term Loans
with the Repriced Term Loans in an aggregate principal amount of $952.0 million. The Repriced Term Loans provide
for substantially the same terms as the Existing Term Loans, including the same maturity date of June 2026, except that
the Repriced Term Loans provide for a reduced applicable margin on the LIBOR of 75 basis points. The applicable
margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term Loans.
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, 2019, 2018 and 2017.
Cash Flows – the following table is derived from our Consolidated Statements of Cash Flows for the year ended
December 31, 2019, 2018 and 2017.
(in thousands)
Net cash provided by operating activities ............. $ 227,384 $ 134,345 $ 96,169
Net cash used in investing activities ..................... (849,812) (11,549) (8,532)
Net cash provided by (used in) financing
activities ................................................................
608,016 (84,161) (91,273)
2019
2017
Year Ended December 31,
2018
Operating Activities
2019 compared to 2018 – Cash provided by operating activities was $227.4 million in 2019, compared to $134.3
million in 2018. The $93.0 million net increase in cash provided by operating activities was primarily due to a $48.2
million net increase in working capital as a result of timing of accrued expenses and compensation and a $28.8 million
increase in net income, as well as adjustments for certain non-cash items which contributed $16.1 million to the increase
in cash provided by operating activities.
The USAA AMCO Acquisition increased revenue and introduced new operating expenses that the Company did not
incur prior to the acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs,
529 College Savings Plan expenses, and direct member channel expenses.
2018 compared to 2017 – Cash provided by operating activities was $134.3 million in 2018, compared to $96.2 million
in 2017. The $38.2 million net increase in cash provided by operating activities was mostly attributable to a $37.9
million increase in net income due to growth in the business and lower interest expense as a result of refinancing
activities and pre-payments.
Investing Activities
2019 compared to 2018 – Cash used in investing activities increased by $838.3 million to $849.8 million in 2019, from
$11.5 million in 2018. The increase was primarily due to $851.3 million paid in cash at the July 1, 2019 closing of the
USAA AMCO Acquisition, partially offset by $10.6 million in proceeds from the Company selling 100% of its equity
investment in Cerebellum.
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2018 compared to 2017 – Cash used in investing activities was $11.5 million in 2018, compared to $8.5 million in
2017. The $3.0 million net increase in cash used in investing activities was primarily due to additional equity
investments made in Cerebellum in 2018.
Financing Activities
2019 compared to 2018 – Cash provided by financing activities was $608.0 million in 2019 and consisted of $1,069.0
million of net proceeds from the 2019 Credit Agreement, partially offset by the repayment and termination of the
previous credit agreement (dated February 2018) of $280.0 million and repayment of long-term debt under the 2019
Credit Agreement in the third and fourth quarter of 2019 of $148.0 million. The repurchase of our Class A common
stock and payment of dividends contributed $15.5 million and $7.4 million, respectively, in cash used in financing
activities during 2019.
Cash used in financing activities was $84.2 million in 2018 and consisted of the repayment of $499.7 million of term
loans under a previous credit agreement (dated October 2014) and the repayment of long-term debt under a previous
credit agreement (dated February 2018) of $80.0 million, partially offset by $360.0 million of net proceeds from a
previous credit agreement (dated February 2018) and the generation of $156.5 million of net IPO proceeds.
2018 compared to 2017 – Cash used in financing activities was $84.2 million in 2018 as discussed above in the “2019
compared to 2018” section. Cash used in financing activities was $91.2 million in 2017 and consisted of the payment of
a dividend to shareholders of $135.2 million, the repayment of long-term debt under a previous credit agreement (dated
October 2014) of $63.9 million, partially offset by $125.0 million of net proceeds from a previous credit agreement
(dated October 2014).
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2019:
(in thousands)
Principal payments on borrowings(1) ................... $ 952,000 $
Interest payable(1)(2)..............................................
Contingent consideration payable for
acquisition(3).........................................................
Lease obligations(4) ..............................................
118,700
22,974
335,570
Total
Total ................................................................. $ 1,429,244 $
Payments Due
2020
2021-2022
2025 and
2023-2024 Thereafter
— $
— $
51,626
103,252
103,252
— $ 952,000
77,439
—
29,675
6,442
3,408
87,743 $ 171,234 $ 137,419 $ 1,032,847
29,675
4,492
59,350
8,632
(1)
(2)
(3)
(4)
The total principal payments on borrowings reflects the gross amount of principal outstanding on the term loans under the 2019 Credit
Agreement as of December 31, 2019. The Company has satisfied the required principal amortization of 1.00% per annum through the term
of the loan, June 2026. Subsequent to December 31, 2019, the Company has repaid an additional $38.0 million of principal outstanding on
the term loans under the 2019 Credit Agreement.
The total interest payable reflects the interest obligation over the life of the loans calculated based on the principal amount of the term loans
outstanding under the 2019 Credit Agreement as of December 31, 2019 using the 5.34863% interest rate in effect on that date.
The Company entered into the First Amendment to the Credit Agreement on January 17, 2020. Pursuant to the First Amendment, the
Company refinanced the Existing Term Loans with Repriced Term Loans in an aggregate principal amount of $952.0 million. The Repriced
Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points (2.50% compared to 3.25%), for an estimated annual
interest rate expense savings of approximately $7.0 million, or 13.5%.
Represents the fair value of the contingent consideration that is estimated to be paid over the next four years resulting from the USAA
AMCO Acquisition. A maximum of $150.0 million ($37.5 million per year) in contingent payments is potentially payable to the sellers.
Operating leases include the minimum rent commitments under non-cancelable operating leases, net of cash expected to be received under
the sub-lease.
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. Holders of stock options that were unvested at the time the December 2017 dividend was declared are
entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest. These
amounts are not recorded as a liability until and unless the awards vest in accordance with their respective agreements.
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The Company announced the initiation of quarterly cash dividends in August 2019 and paid a quarterly dividend in
September and December 2019. Holders of restricted stock awards that are unvested at the time the quarterly dividends
are declared are entitled to be paid these dividends as and when the restricted stock vests.
As of December 31, 2019, the cash bonuses and distributions related to dividends on restricted shares and options that
are expected to vest in the future totaled $1.3 million.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with GAAP is based on the selection and
application of accounting policies that require us to make significant estimates and assumptions that in certain
circumstances affect amounts reported in the audited consolidated financial statements. In preparing these financial
statements, our estimates and judgements are based on historical experience, information from third-party valuation
professionals and various other assumptions, giving due consideration to materiality. We consider the accounting
policies discussed below to be critical to the understanding of our consolidated financial statements. Actual results could
differ from our estimates and assumptions, and any such difference could be material to our consolidated financial
statements. Significant accounting policies are described more fully in Note 2, Significant Accounting Policies, to the
audited consolidated financial statements.
Business Combinations – We recognize and measure identifiable assets acquired and liabilities assumed in business
combinations as of the acquisition date at fair value. 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.
We recognize and measure contingent consideration liabilities at fair value as of the acquisition date using an option
pricing model and Monte Carlo simulation. These valuations require significant estimates and judgments related to
projected revenue growth rates, adjustments for market-based risk, volatility and discount rates. The fair value of
contingent consideration liabilities is remeasured at each reporting period, typically using the same methodology used to
determine the acquisition date fair value. Any change in the fair value estimate subsequent to the acquisition date is
recorded in the earnings of that period.
Goodwill and Indefinite-lived Intangible Assets – The accounting for goodwill and indefinite-lived intangible assets
requires significant estimates and judgment in the ongoing evaluation for impairment, and for indefinite-lived intangible
assets, reconsideration of an asset’s useful life. Changes in these assumptions or estimates could materially affect the
determination of the fair value of goodwill and indefinite-lived intangible assets.
Goodwill and 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 the asset is impaired.
For goodwill, we consider the Company’s performance 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, market cap and significant industry or economic trends. 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 a quantitative assessment to estimate the fair value of the
Company. The assumptions used to estimate fair value for goodwill include management's estimates of future growth
rates, operating cash flows, discount rates and terminal value.
Because the advisory, distribution and transfer agent 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. For these fund contracts as well as the trade name indefinite-lived intangible assets, we consider (i)
macroeconomic and entity-specific factors, including changes to legal, regulatory or contractual provisions of the
renewable advisory and distribution contracts, (ii) the effects of obsolescence, demand, competition and other economic
factors that could impact the funds’ projected performance and (iii) the existence or expectation of significant changes in
the level and mix of managed assets.
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In addition, for indefinite-lived intangible assets, we consider whether events or circumstances continue to support an
indefinite useful life. Indicators monitored by us that may indicate an indefinite useful life is no longer supported
generally include (i) changes in the use of the asset, (ii) a significant decline in the level of managed assets and (iii)
significant reductions in underlying operating cash flows.
Indefinite-lived intangible assets are combined into a single unit of accounting for purposes of testing impairment if they
operate as a single asset and represent as a group the highest and best use of the assets. 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 perform a
quantitative approach to 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.
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 $151.8 billion at December 31, 2019. 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 $91.1 million at our weighted-average fee rate of 60 basis points
for the year ended December 31, 2019. 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 $103.2 million at the Victory Funds’ aggregate weighted-average
fee rate of 68 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 $59.2 million at the weighted-average fee rate across all of our
institutional separate accounts of 39 basis points for the year ended December 31, 2019.
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
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.
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We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 8% 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 $1.2 billion, which would cause an annualized increase or decrease in revenues of approximately
$7.3 million at our weighted-average fee rate for the business of 60 basis points for the year December 31, 2019.
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, 2019, we were exposed to interest rate risk as a
result of the amounts outstanding under the 2019 Credit Agreement.
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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, 2019 and 2018, the related consolidated statements of operations, comprehensive income
(loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31,
2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2019, 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 audits 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 13, 2020
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for shares)
December 31, 2019
December 31, 2018
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 ............................................................................................ $
Liabilities and stockholders' equity
Accounts payable.............................................................................. $
Accrued compensation and benefits .................................................
Accrued expenses .............................................................................
Consideration payable for acquisition of business ...........................
Deferred compensation plan liability................................................
Deferred tax liability, net ..................................................................
Other liabilities .................................................................................
Long-term debt, net...........................................................................
Total liabilities ......................................................................................
Stockholders' equity
Class A common stock, $0.01 par value per share: 2019 -
400,000,000 shares authorized, 18,099,772 shares issued and
16,414,617 shares outstanding; 2018 - 400,000,000 shares
authorized, 15,280,833 shares issued and 14,424,558 shares
outstanding........................................................................................
Class B common stock, $0.01 par value per share: 2019 -
200,000,000 shares authorized, 53,937,394 shares issued and
51,281,512 shares outstanding; 2018 - 200,000,000 shares
authorized, 55,284,408 shares issued and 53,137,428 shares
outstanding........................................................................................
Additional paid-in capital .................................................................
Class A treasury stock, at cost: 2019 - 1,685,155 shares; 2018 -
856,275 shares ..................................................................................
Class B treasury stock, at cost: 2019 - 2,655,882 shares; 2018 -
2,146,980 shares ...............................................................................
Accumulated other comprehensive loss ...........................................
Retained deficit .................................................................................
Total stockholders' equity ...................................................................
Total liabilities and stockholders' equity ........................................... $
37,121 $
74,321
19,313
1,459
4,852
771
18,305
13,240
404,750
1,175,471
3,706
1,753,309 $
271 $
54,842
88,932
118,700
18,305
5,486
4,363
924,539
1,215,438
51,491
37,980
3,153
2,987
2,664
601
12,719
8,780
284,108
387,679
9,349
801,511
607
30,228
19,743
5,838
12,719
6,212
1,759
268,857
345,963
181
153
539
624,766
(21,524)
(31,386)
—
(34,705)
537,871
1,753,309 $
553
604,401
(8,045)
(21,719)
(86)
(119,709)
455,548
801,511
The accompanying notes are an integral part of the consolidated financial statements.
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for shares)
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Revenue
Investment management fees .......................................................$
Fund administration and distribution fees....................................
Total revenue ........................................................................
$
466,802
145,571
612,373
$
352,683
60,729
413,412
343,811
65,818
409,629
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......................................................
Income from operations ..................................................................
Other income (expense)
Interest income and other income (expense)................................
Interest expense and other financing costs...................................
Loss on debt extinguishment........................................................
Total other expense, net .......................................................
179,809
146,622
46,568
23,873
19,886
22,317
8,678
447,753
164,620
6,829
(40,901)
(9,860)
(43,932)
145,880
94,680
30,005
23,277
(37)
4,346
742
298,893
114,519
(2,856)
(20,694)
(6,058)
(29,608)
144,111
103,439
33,996
29,910
(294)
2,094
6,205
319,461
90,168
(2,913)
(48,467)
(330)
(51,710)
Income before income taxes............................................................
120,688
84,911
38,458
Income tax expense..........................................................................
(28,197)
(21,207)
(12,632)
Net income........................................................................................$
92,491
$
63,704
$
25,826
Earnings per share of common stock
Basic.............................................................................................$
Diluted..........................................................................................$
1.37
1.26
$
$
0.96
0.90
$
$
0.47
0.43
Weighted average number of shares outstanding
Basic.............................................................................................
Diluted..........................................................................................
67,616
73,466
66,295
70,511
54,931
59,577
Dividends declared per share of common stock ...........................$
0.10
$
—
$
2.42
The accompanying notes are an integral part of the consolidated financial statements.
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Net income................................................................................... $
92,491
$
63,704
$
25,826
Other comprehensive income (loss), net of tax
Net unrealized (loss) gain on available-for-sale securities .....
Net unrealized gain on cash flow hedges ...............................
Net unrealized gain (loss) on foreign currency translation.....
Total other comprehensive income (loss), net of tax ....
—
—
24
24
(110)
—
(40)
(150)
64
462
75
601
Comprehensive income.............................................................. $
92,515
$
63,554
$
26,427
The accompanying notes are an integral part of the consolidated financial statements.
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
Treasury Stock
Accumulated
Additional
Other
Paid-In Comprehensive Retained
Balance, December 31, 2016 ............. $ — $ — $
565 $ — $
— $ (16,245 ) $ 421,747 $
(537 ) $ (74,532 ) $ 330,998
Class A Class B Pre-IPO Class A Class B Pre-IPO Capital
Income (Loss) Deficit
Total
3 —
Issuance of common stock............ — —
Vesting of restricted share grants . — —
4 —
Common stock repurchased ......... — — — —
Equity awards modified to
liabilities ....................................... — — — —
Other comprehensive income ....... — — — —
Share-based compensation ........... — — — —
Dividends paid.............................. — — — —
Excess tax benefits realized on
share-based compensation ............ — — — —
Other ............................................. — — — —
Net income.................................... — — — —
572 $ — $
Balance, December 31, 2017 ............. $ — $ — $
—
—
—
—
— (4,654 )
—
—
—
—
—
—
—
—
3,190
(4 )
—
(1,553 )
—
11,693
—
—
—
—
— $ (20,899 ) $ 435,334 $
261
—
—
—
—
—
—
—
—
—
—
—
3,193
—
(4,654 )
(1,553 )
—
—
—
601
601
—
— 11,693
— (135,171 ) (135,171 )
—
(11 )
261
—
—
(11 )
— 25,826 25,826
64 $ (183,888 ) $ 231,183
—
—
156,421
—
— 156,549
—
(572 ) — (20,899 ) 20,899
—
(4,553 )
—
—
—
—
(2 )
1,248
26
(2 )
(820 )
—
—
—
—
—
—
—
—
—
25
—
Issuance of Class A common
stock, net of underwriter
discount......................................... 128 — — —
Class A common stock offering
costs .............................................. — — — —
Redesignation of common stock .. — 572
(25 ) — —
Share conversion - Class B to A...
Repurchase of shares .................... — — — (8,045 )
Shares withheld related to net
settlement of equity awards .......... — — — —
2 — —
Vesting of restricted share grants . —
4 — —
Exercise of options ....................... —
Shares issued under 2018 ESPP ... — — — —
Fractional shares retired ............... — — — —
Cumulative effect adjustment for
adoption of ASU 2016-09 ............ — — — —
Other comprehensive loss............. — — — —
Share-based compensation ........... — — — —
Dividends paid.............................. — — — —
Net income.................................... — — — —
—
—
—
—
—
Balance, December 31, 2018 ............. $ 153 $ 553 $ — $ (8,045 ) $ (21,719 ) $
—
—
28
—
Issuance of shares ......................... — — — —
Share conversion – Class
B to A ...........................................
(28 ) — —
Repurchase of shares .................... — — — (13,479 )
Shares withheld related to net
settlement of equity awards .......... — — — — (9,667 )
—
Vesting of restricted share grants . —
Exercise of options ....................... —
—
Cumulative effect of adoption of
ASU 2016-01 and 2018-02........... — — — —
Other comprehensive income ....... — — — —
Share-based compensation ........... — — — —
Dividends paid.............................. — — — —
Net income.................................... — — — —
—
—
—
—
—
Balance, December 31, 2019 ............. $ 181 $ 539 $ — $ (21,524 ) $ (31,386 ) $
4 — —
10 — —
—
—
—
—
—
—
—
— $ 604,401 $
512
—
15,417
—
—
—
—
—
—
—
—
62
—
—
—
(4 )
4,004
—
—
—
—
—
— $ 624,766 $
—
—
16,303
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,553 )
—
—
(8,045 )
(820 )
—
1,252
26
(2 )
1,818
1,306
—
(150 )
—
(150 )
— 15,417
—
—
(831 )
(831 )
— 63,704 63,704
(86 ) $ (119,709 ) $ 455,548
—
—
62
—
—
—
—
—
—
—
— (13,479 )
—
—
—
(9,667 )
—
4,014
—
(62 )
62
—
24
24
— 16,303
—
—
(7,425 )
(7,425 )
— 92,491 92,491
— $ (34,705 ) $ 537,871
The accompanying notes are an integral part of the consolidated financial statements.
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income........................................................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
92,491
$
63,704
$
25,826
Year Ended
2019
Year Ended
2018
Year Ended
2017
Provision for deferred income taxes ............................................................................................................
Depreciation and amortization.....................................................................................................................
Amortization of deferred financing fees and accretion expense..................................................................
Share-based and deferred compensation......................................................................................................
Change in fair value of contingent consideration obligations .....................................................................
Loss on other receivable ..............................................................................................................................
Unrealized (appreciation) depreciation on investments...............................................................................
Net (gain) 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.....................................................................................................................
Proceeds from sales of trading securities.....................................................................................................
Purchases of available-for-sale securities ....................................................................................................
Proceeds from sales of available-for-sale securities ....................................................................................
Proceeds from (investments in) equity method investment.........................................................................
Acquisition of business ................................................................................................................................
Net cash used in investing activities....................................................................................................................
Cash flows from financing activities
Issuance of common stock, net of costs.......................................................................................................
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..............................................................................................................
Repurchase of 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...........................................................................................................
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 provided by (used in) financing activities.............................................................................................
(745 )
23,873
3,892
22,124
19,886
—
(1,887 )
(2,683 )
9,860
(10,988 )
(11,380 )
322
(2,141 )
(836 )
(336 )
18,700
64,597
(236 )
2,871
227,384
(5,239 )
—
(6,594 )
2,749
(182 )
158
10,572
(851,276 )
(849,812 )
—
62
—
4,014
(15,535 )
(7,659 )
—
—
—
1,088,503
—
(19,820 )
(428,000 )
(96 )
(7,436 )
(6,017 )
608,016
Effect of changes of foreign exchange rate on cash and cash equivalents ..........................................................
42
Net (decrease) increase in cash and cash equivalents..........................................................................................
Cash and cash equivalents, beginning of period..................................................................................................
Cash and cash equivalents, end of period............................................................................................................ $
(14,370 )
51,491
37,121
Supplemental cash flow information
Cash paid for interest ................................................................................................................................... $
Cash paid for income taxes ..........................................................................................................................
23,454
24,634
$
$
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 )
—
156,549
(4,287 )
1,250
(8,178 )
(510 )
26
—
—
359,100
—
(2,508 )
(579,750 )
(575 )
(831 )
(4,447 )
(84,161 )
(65 )
38,570
12,921
51,491
17,530
17,993
$
$
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
The accompanying notes are an integral part of the consolidated financial statements.
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VICTORY CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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” or “Victory”) 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.
On and effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition” or “USAA
AMCO”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc.
(“VCTA”), formally known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services. The
USAA AMCO Acquisition includes USAA’s mutual fund and exchange traded fund (“ETF”) businesses and its 529
College Savings Plan (collectively, the “USAA Mutual Fund Business”). Refer to Note 4, Acquisitions, for further
details on the acquisition.
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 and the
mutual fund series of the Victory Portfolios II (collectively, the “Victory Funds”), a family of open-end mutual funds,
the VictoryShares (the Company’s ETF brand), as well as the USAA Mutual Fund Business, which includes the USAA
Mutual Fund Trust, a family of open-end mutual funds (the “USAA Funds”). Additionally, VCM employs all of the
Company’s United States 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 and USAA Funds. VCTA is
registered with the SEC as a transfer agent for the USAA Funds.
Changes in Capital Structure
On February 12, 2018, the Company completed the initial public offering (“IPO”) of its Class A common stock. 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. All shares of common stock outstanding prior to the IPO were
immediately converted into Class B common stock at a one-to-one ratio.
On February 12, 2018, concurrently with the closing of the IPO, the Company entered into a credit agreement (the “2018
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 2018 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 2018 Credit Agreement was amended to increase aggregate commitments for the revolving credit
facility from $50.0 million to $100.0 million.
On July 1, 2019, concurrent with the USAA AMCO Acquisition, the Company (i) entered into the 2019 Credit
Agreement, (ii) repaid all indebtedness outstanding under the 2018 Credit Agreement and (iii) terminated the 2018
Credit Agreement. The 2019 Credit Agreement was entered into among the Company, as borrower, the lenders from
time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent, pursuant to which the
Company obtained a seven-year term loan in an aggregate principal amount of $1.1 billion and established a five-year
revolving credit facility (which was unfunded as of the closing date) with aggregate commitments of $100.0 million.
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On January 17, 2020, the Company entered into the First Amendment to the 2019 Credit Agreement. Pursuant to the
First Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with replacement term
loans (the “Repriced Term Loans”) in an aggregate principal amount of $952.0 million. The Repriced Term Loans
provide for substantially the same terms as the Existing Term Loans, including the same maturity date of June 2026,
except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The
applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term
Loans.
Refer to Note 4, Acquisitions, for further information on the USAA AMCO Acquisition and Note 11, Debt, for
additional information on the Company’s debt structure.
NOTE 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 statements
and notes thereto have been retroactively adjusted for all periods presented to give effect to this stock split (refer to
Note 14, Equity, Note 15, Share Based Compensation, and Note 18, Earnings Per Share).
Principles of Consolidation
The consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, after
elimination of all significant intercompany transactions and balances. 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.
Our involvement with non-consolidated sponsored investment funds that are considered VIEs include providing
investment advisory services, fund administration, fund compliance, fund transfer agent and fund distribution services
and/or holding a minority interest. At December 31, 2019, 2018 and 2017, the Company's investments in and maximum
risk of loss related to unconsolidated sponsored VIE investment funds totaled $18.7 million, $12.9 million and
$10.9 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. We do not consolidate the sponsored investment funds in which we have an
equity investment as we hold a minority interest, do not direct significant activities of these funds and do not have the
right to receive benefits nor the obligation to absorb losses that could potentially be significant to these funds.
During 2019 and 2018, the Company’s involvement with other non-consolidated VIEs included an equity method
investment and put and call option arrangements with Cerebellum Capital, LLC (“Cerebellum”). The put and call option
arrangements ended in the first quarter of 2018. The Company sold 100% of its equity investment in Cerebellum in the
third quarter of 2019. Refer to Note 13, Equity Method Investment, for further information.
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.
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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
We account for revenue in accordance with Accounting Standards Update (“ASU”) 2019-04, Revenue from Contracts
with Customers, which was adopted on January 1, 2019 using the modified retrospective transition method. The
Company’s revenue includes fees earned from providing investment management services, fund administration services,
fund compliance, fund transfer agent services and fund distribution services.
Revenue is recognized for each distinct performance obligation identified in customer contracts when the performance
obligation has been satisfied by transferring services to a customer either over time or at the point in time when the
customer obtains control of the service. Revenue is recognized in the amount of variable or fixed consideration allocated
to the satisfied performance obligation that Victory expects to be entitled to in exchange for transferring services to a
customer. Variable consideration is included in the transaction price only when it is probable that a significant reversal
of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
For further information on our various streams of revenue, refer to Note 3, Revenue.
Distribution and Other Asset-Based Expenses
Distribution and other asset-based expenses include (i) broker dealer distribution fees, (ii) platform distribution fees, (iii)
sub-administration, third party sub-transfer agent 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.
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.
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.
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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.
Following the adoption of ASU 2016-01 on January 1, 2019, changes in fair value are recognized in 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 our 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, 2019, 2018 and 2017.
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.
Derivative Financial Instruments
From time to time the Company enters into swap contracts for interest rate cap derivatives to manage interest rate risk
related to a portion of its long-term debt, which are designated as cash flow hedges. The Company evaluates financial
instruments and other contracts to determine if the arrangement meets the characteristics of a derivative under ASC 815,
Derivatives and Hedging, and the criteria to use hedge accounting. Our 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, intermediary, retirement platforms and individual investors. Our determination that we had one operating
segment is based on the fact that the Chief Operating Decision Maker reviews the Company's financial performance on
an aggregate level.
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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. We use 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 our fair value. If the present value of future expected cash flows falls below the recorded book value of
equity, our goodwill would be considered impaired.
Intangible Assets
Intangible assets acquired in a business combination are initially recognized and measured at fair value. 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. In valuing these assets, we make 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, lease-related 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, 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 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 fund advisory, distribution and transfer agent
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 continue to support an indefinite useful
life. Indicators monitored by management that may indicate an indefinite useful life is no longer supported 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.
Indefinite-lived intangible assets are combined into a single unit of accounting for purposes of testing impairment if they
operate as a single asset and represent as a group the highest and best use of the assets. If the qualitative approach
indicates that it is more likely than not that an indefinite-lived intangible asset is impaired, 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, USAA Funds
and VictoryShares and investment management fees due from non-affiliated parties. Fund administration and
distribution fees receivable include administration, compliance and distribution fees due from the Victory Funds, USAA
Funds and VictoryShares and transfer agent fees due from the USAA Funds.
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, 2019, 2018 and 2017, and accordingly, no reserve for credit losses
and no provision for credit losses were recognized as of and for the years ended December 31, 2019, 2018 and 2017.
Other Receivables
Other receivables primarily include income and other taxes receivable and were determined to be collectible as of
December 31, 2019, 2018 and 2017.
Share-Based Compensation Arrangements
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.
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.
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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The Company has established a policy of expensing the portion of unamortized debt financing costs associated with
paydowns of principal in excess of required loan amortization payments. Management considers this debt to be partially
settled. Deferred financing costs expensed due to partial settlements of debt are recorded in loss on debt extinguishment
in the Consolidated Statements of Operations.
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. The Company expensed $4.4 million and $1.9 million in costs related to debt modifications in
2019 and 2018 upon entering into the 2019 Credit Agreement and 2018 Credit Agreement, respectively. In 2017, the
Company expensed $2.2 million in costs related to debt modifications and refinancing. The analysis as to whether a
modification of debt is an extinguishment or modification is performed on a creditor-by-creditor basis. Refer to Note 11,
Debt, for further 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 we obtain 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 the Company’s subsidiaries 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), which were immaterial in amount at December 31, 2019, 2018 and
2017.
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, 2019, 2018 and 2017 were immaterial.
Income Taxes
Income taxes are accounted for using the assets and liability method as required by ASC 740, Income Taxes. 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
indefinite-lived intangible assets and depreciation. Deferred tax assets are generally attributable to definite-lived
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intangible assets, stock compensation, deferred compensation 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, 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 circumstances 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, Income Taxes, 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, Income Taxes, in the reporting period in which the Tax Act
became law. Refer to Note 10, Income Taxes.
Loss Contingencies
The Company continuously reviews 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
We account for business combinations under the acquisition method of accounting and allocate 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, Fair Value Measurement, 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 Sheets at estimated fair value. In deferred payment arrangements, the
Company records a liability in the Consolidated Balance Sheets at the time a business combination is consummated for
the present value, which is the estimated fair value, of the future fixed dollar contractual payments.
Contingent payment obligations are remeasured at fair value each reporting date taking into consideration changes in
expected payments, and the change in fair value is recorded in the current period as a gain or loss. Gains and losses
resulting from changes in the fair value of contingent payment obligations are reflected in change in value of
consideration payable for acquisition of business in the Consolidated Statements of Operations.
The Company accretes obligations under deferred payment arrangements 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 $0.2 million, $0.5 million
and $0.6 million in 2019, 2018 and 2017, respectively.
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New Accounting Pronouncements
Accounting Standards Adopted in 2019
• Changes in Stockholders’ Equity for Interim Periods: Effective January 1, 2019, the Company adopted
final SEC rules that extend to interim periods the annual disclosure requirement in Regulation S-X, Rule 3-
04, of presenting the changes in stockholders’ equity for the current and comparative quarter in its
accompanying financial statements.
• Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: Effective
January 1, 2019, the Company adopted ASU 2018-02 which provides the optional election for the
reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Cuts and Jobs Act of 2017. The adoption of ASU 2018-02 resulted in a
reclassification between accumulated other comprehensive income/(loss) and retained earnings of $0.1
million, and had no impact on the Consolidated Statements of Operations.
•
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments: Effective
January 1, 2019, the Company adopted ASU 2016-15 which addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The application of this guidance did not have an
impact on the presentation of our Consolidated Statements of Cash Flows.
• Recognition and Measurement of Financial Assets and Liabilities: Effective January 1, 2019, the
Company adopted ASU 2016-01 which requires equity securities to be measured at fair value with the
changes in fair value recognized in net income. The adoption of ASU 2016-01 did not have a material
impact on our financial condition, results of operations or cash flows.
• Revenue from Contracts with Customers: Effective January 1, 2019, the Company adopted ASU 2014-
09 which requires the evaluation of contracts based on the following five-step model: (i) identify the
contract with the customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and
(v) recognize revenue as each performance obligation is satisfied.
We adopted ASU 2014-09 using the modified retrospective transition method. No cumulative effect
adjustment was required to be recorded and the comparative information has not been restated. We
determined that ASU 2014-09 did not have a material impact on the timing of revenue recognition. The
most significant impact from adoption was a change to the net presentation of certain fund expense
reimbursements which were previously presented on a gross basis. For further discussion on the effects of
the changes in the presentation of fund expense reimbursements, refer to Note 3, Revenue Recognition.
Recently Issued Accounting Standards
•
Subsequent Measurement of Goodwill: In January 2017, the Financial Accounting Standards Board (the
“FASB”) issued ASU 2017-04 which simplifies the test for goodwill impairment. ASU 2017-04 eliminates
the requirement to calculate the implied fair value of goodwill (step two) to measure a goodwill impairment
charge. Goodwill impairment will be based upon the results of step one of the impairment test, which is
defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the
carrying amount of goodwill allocated to that reporting unit. The effective date for calendar-year public
business entities was January 1, 2020. The new guidance will be effective for the Company’s fiscal year
that begins on January 1, 2021 and requires a prospective approach to adoption. Early adoption is permitted
for interim or annual goodwill impairment tests. The impact of this new guidance will depend upon the
performance of our one reporting unit and the market conditions impacting the fair value.
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•
•
Leases: In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (the “New Lease
Standard”) which supersedes previous lease guidance, Accounting Standards Codification (“ASC”) Topic
840. The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability for all
leases (with the exception of short-term leases) on their balance sheet at the commencement date and
recognize expenses on their income statement similar to ASC Topic 840 guidance. In addition, the FASB
issued ASU 2018-11, “Leases Targeted Improvements” which provides a package of practical expedients
for entities to apply upon adoption. The Company is currently assessing and evaluating our portfolio of
active real estate leases and surveying our business for other leases. Additionally, we are analyzing various
lease accounting software solutions to support the new reporting requirements. The effective date for
calendar-year public business entities was January 1, 2019. In November 2019, the FASB deferred the
effective date of the New Lease Standard for private companies and other companies who had not yet been
required to adopt the standard. As a result, the Company will adopt the New Lease Standard on January 1,
2021.
We have approximately $23 million in undiscounted, future minimum cash commitments under net
operating leases at December 31, 2019. The New Lease Standard is expected to result in a gross up on our
Consolidated Balance Sheets and to have no material impact to our Consolidated Statements of Operations,
our liquidity or our debt covenant compliance under our current credit agreement.
Expected Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit
Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 creates a new model for
determining current expected credit losses (“CECL”) on trade and other receivables, net investments in
leases, contract assets and long-term receivables. The CECL impairment model requires companies to
consider the risk of loss even if it is remote and to include forecasts of future economic conditions as well
as information about past events and current conditions. The effective date for calendar-year public
business entities is January 1, 2020. The Company will adopt ASU 2016-13 on January 1, 2021. We are
currently reviewing the effect of this new standard on our consolidated financial statements.
NOTE 3. REVENUE
In accordance with the new revenue recognition standard requirements, the following table disaggregates our revenue by
type and product:
(in thousands)
Investment management fees
Mutual funds (Victory/USAA Funds) ...................................................................
ETFs (VictoryShares) ............................................................................................
Separate accounts and other vehicles.....................................................................
Performance-based fees ............................................................................................
Separate accounts and other vehicles.....................................................................
Total investment management fees..................................................................
Year Ended December 31,
2018
2017
2019
$ 355,969 $ 248,771 $ 246,722
4,936
90,963
8,999
93,043
10,422
99,726
685
1,190
1,870
$ 466,802 $ 352,683 $ 343,811
Fund administration and distribution fees
Administration fees...................................................................................................
Mutual funds (Victory/USAA Funds) ...................................................................
ETFs (VictoryShares) ............................................................................................
Distribution fees........................................................................................................
Mutual funds (Victory/USAA Funds) ...................................................................
Transfer agent fees....................................................................................................
Mutual funds (USAA Funds).................................................................................
Total fund administration and distribution fees ............................................
$ 71,131 $ 22,527 $ 21,820
463
1,317
949
30,356
37,253
43,535
—
42,767
$ 145,571 $ 60,729 $ 65,818
—
Total revenue...........................................................................................................
$ 612,373 $ 413,412 $ 409,629
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Beginning on January 1, 2019, and as a result of adopting ASU 2014-09, fund expense reimbursements are presented as
a reduction of investment management fees. This change in presentation reduced revenue, and operating expenses, by
$18.7 million year for the ended December 31, 2019.
The following table presents balances of receivables:
(in thousands)
Customer receivables
Mutual funds (Victory/USAA Funds) ...........................................................
ETFs (VictoryShares) ....................................................................................
Separate accounts and other vehicles ............................................................
Receivables from contracts with customers.................................................
Non-customer receivables ................................................................................
Total receivables.............................................................................................
Investment management fees receivable..........................................................
Fund administration and distribution fees receivable ......................................
Other receivables..............................................................................................
Total receivables.............................................................................................
December 31, 2019
December 31, 2018
$
$
$
$
64,407
1,391
27,836
93,634
1,459
95,093
74,321
19,313
1,459
95,093
$
$
$
$
21,025
909
19,199
41,133
2,987
44,120
37,980
3,153
2,987
44,120
Revenue
The Company’s revenue includes fees earned from providing;
•
•
•
•
investment management services,
fund administration services,
fund transfer agent services, and
fund distribution services.
Revenue is recognized for each distinct performance obligation identified in customer contracts when the performance
obligation has been satisfied by transferring services to a customer either over time or at the point in time when the
customer obtains control of the service. Revenue is recognized in the amount of variable or fixed consideration allocated
to the satisfied performance obligation that Victory expects to be entitled to in exchange for transferring services to a
customer. Variable consideration is included in the transaction price only when it is probable that a significant reversal
of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Investment management, fund administration and fund distribution fees are generally considered variable consideration
as they are typically calculated as a percentage of AUM. Fund transfer agent fees are also considered variable
consideration as they are calculated as a percentage of AUM or based on the number of accounts in the fund. In such
cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying
investor contributions and redemptions and financial market volatility. These fees are considered constrained and are
excluded from the transaction price until the asset values or number of accounts on which the customer is billed are
calculated and the value of consideration is measurable.
The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent
and distribution services. Management considers whether we are acting as the principal service provider or as an agent to
determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to
third-party service providers, respectively. Victory is considered a principal service provider if we control the service
that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by
another party and do not control the service.
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Investment Management Fees
Investment management fees are received in exchange for investment management services that represent a series of
distinct incremental days of investment management service. Control of investment management services is transferred
to the customers over time as these customers receive and consume the benefits provided by these services. Investment
management fees are calculated as a contractual percentage of AUM and are generally paid in arrears on a monthly or
quarterly basis.
Investment management fees are recognized as revenue using a time-based output method to measure progress. Revenue
is recorded at month end or quarter end when the value of consideration is measured. The amount of investment
management fee revenue varies from one reporting period to another as levels of AUM change (from inflows, outflows
and market movements) and as the number of days in the reporting period change.
The Company may waive certain fees for investment management services provided to the Victory Funds, USAA Funds
and VictoryShares and may subsidize certain share classes of the Victory Funds, USAA Funds and VictoryShares to
ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. These
waivers and reimbursements reduce the transaction price allocated to investment management services and are
recognized as a reduction to investment management fees revenue. The amounts due to the Victory Funds, USAA Funds
and VictoryShares for waivers and expense reimbursements represent consideration payable to customers, which is
recorded in “Accounts payable and accrued expenses” in the Consolidated Balance Sheets, and no distinct services are
received in exchange for these payments.
Performance-based investment management fees, which include fees under performance fee and fulcrum fee
arrangements, are included in the transaction price for providing investment management services. Performance-based
investment management fees are calculated as a percentage of investment performance on a client’s account versus a
specified benchmark or hurdle based on the terms of the contract with the customer. Performance-based investment
management fees are variable consideration and are recognized as revenue when it is probable that a significant reversal
of the cumulative revenue for the contractual performance period will not occur. Performance-based investment
management fees recognized as revenue in the current period may pertain to performance obligations satisfied in prior
periods.
Fund Administration Fees
The Company recognizes fund administration fees as revenue using a time-based output method to measure
progress. Fund administration fees are determined based on the contractual rate applied to average daily net assets of the
Victory Funds, USAA Funds and VictoryShares for which administration services are provided. Revenue is recorded on
a monthly basis when the value of consideration is measured using actual average daily net assets and constraints are
removed.
The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the
primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to
select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses
are recorded on a gross basis.
Fund Transfer Agent Fees
The Company recognizes fund transfer agent fees using a time-based output method to measure progress. Fund transfer
agent fees are determined based on the contractual rate applied to either the average daily net assets of the USAA Funds
for which transfer agent services are provided or number of accounts in the USAA Funds. Revenue is recorded on a
monthly basis when the value of consideration is measured using actual average daily net assets or actual number of
accounts and constraints are removed.
The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. We are the
primary obligor under the transfer agency contracts with the USAA Funds and have the ability to select the service
provider and establish pricing. As a result, fund transfer agent fees and sub-transfer agent expenses are recorded on a
gross basis.
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Fund Distribution Fees
The Company receives compensation for sales and sales-related services promised under distribution contracts with the
Victory Funds and USAA Funds. Revenue is measured in an amount that reflects the consideration to which the
Company 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 and USAA Funds. The Company’s performance obligation is
satisfied at the point in time 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, the
Company 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. The Company’s
distribution fee revenue is recorded in fund administration and distribution fees in the Consolidated Statements of
Operations.
The Company has contractual arrangements with third parties to provide certain distribution services. The Company is
the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to select the service
provider and establish pricing. Substantially all of the Company’s revenue is recorded gross of payments made to third
parties.
Costs Incurred to Obtain or Fulfill Customer Contracts
The Company is required to capitalize certain costs directly related to the acquisition or fulfillment of a contact with a
customer. Victory has not identified any sales-based compensation or similar costs that meet the definition of an
incremental cost to acquire a contract and as such we have no intangible assets related to contract acquisitions.
Direct costs incurred to fulfill services under the Company’s distribution contracts include sales commissions paid to
third party dealers for the sale of Class C Shares. The Company 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 the Company makes an upfront payment to a dealer or institution for the sale of Class C shares, the
Company capitalizes the cost of such payment, which is recorded in “Prepaid expenses” in the Consolidated Balance
Sheets and amortizes the cost over a 12-month period, the estimated period of benefit.
NOTE 4. ACQUISITIONS
USAA AMCO Acquisition
On and effective July 1, 2019, the Company completed the acquisition of USAA Adviser and VCTA (collectively, the
“USAA Acquired Companies”), which includes the USAA Mutual Fund Business, and executed Amendment No. 1 (the
“Amendment”) to the stock purchase agreement (the “Stock Purchase Agreement”). The Amendment amended the Stock
Purchase Agreement entered into on November 6, 2018 between the Company, USAA Investment Corporation, and for
certain limited purposes, USAA Capital Corporation. The assets acquired and liabilities assumed and results of the
USAA Mutual Fund Business are reflected in the consolidated financial statements from the closing date of July 1, 2019.
The USAA AMCO Acquisition expands and diversifies the Company’s investment platform, particularly in the fixed
income and solutions asset classes, and increases the Company’s size and scale. Additional products added to the
investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income
ETFs, sub-advised and multi-manager equity funds. The acquisition also added to the Company’s lineup of asset
allocation portfolios and smart beta equity ETFs and provided the Company the rights to offer products and services
using the USAA brand and the opportunity to offer its products to USAA members through a direct member-channel.
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Purchase Price
The Company purchased 100% of the outstanding common stock of the USAA Acquired Companies. Total
consideration is $950.1 million, comprised of $851.3 million of cash paid at closing (which included restricted cash of
$71.9 million) plus $98.8 million in contingent consideration due to sellers. The purchase price remains subject to
certain customary post-closing adjustments.
A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual
revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years
following the closing. 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 Stock Purchase Agreement) of the USAA Adviser’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 Company accounted for the acquisition in accordance with ASC 805, Business Combinations. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the
date of the USAA AMCO Acquisition. We used an independent valuation specialist to assist with the determination of
fair value for certain of the acquired assets and assumed liabilities disclosed below.
The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $120.6 million was
recorded to goodwill in the audited Consolidated Balance Sheets, all of which is expected to be deductible for tax
purposes. The goodwill arising from the acquisition primarily results from expected future earnings and cash flows, as
well as the expected synergies created by the integration of the USAA Acquired Companies within our organization.
The following table presents the estimated amounts of assets acquired and liabilities assumed as of the acquisition date:
(in thousands)
Cash and cash equivalents ...................................................................................................................... $
Investment management fees receivable ................................................................................................
Fund administration and distribution fees receivable.............................................................................
Other receivables and prepaid expenses .................................................................................................
Property and equipment..........................................................................................................................
Other intangible assets(1).........................................................................................................................
Goodwill .................................................................................................................................................
Accounts payable and accrued expenses ................................................................................................
Accrued compensation and benefits .......................................................................................................
Payable to members and custodians .......................................................................................................
Contingent consideration payable to sellers ...........................................................................................
Cash paid at closing ................................................................................................................................ $
17,473
25,353
4,779
948
1,165
808,670
120,643
(5,575)
(5,907)
(17,473)
(98,800)
851,276
(1)
Includes $750.2 million for indefinite-lived investment advisory contracts, $19.1 million for indefinite-lived transfer agent contracts, $0.8
million for indefinite-lived distribution contracts, $38.2 million for definite-lived trade name assets and $0.4 million for definite-lived lease-
related assets, all of which are recorded in other intangible assets, net on the Consolidated Balance Sheets.
As of December 31, 2019, the purchase price allocation for the USAA AMCO Acquisition is preliminary as customary
post-closing purchase adjustments have not been finalized. The final purchase price allocation may reflect changes to the
preliminary valuations for other receivables and prepaid expenses, accounts payable and accrued expenses and accrued
compensation and benefits for net working capital adjustments. Adjustments will be made, as necessary, during the
measurement period of up to one year after the closing date.
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Contingent Consideration
The acquisition date fair value of contingent consideration payable to sellers was $98.8 million and was estimated using
the real options method. Revenue related to “non-managed money” assets was simulated in a risk-neutral framework to
calculate expected probability-weighted earn out payments, which were then discounted from the expected payment
dates at the relevant cost of debt. Significant assumptions and inputs include the “non-managed money” revenue
projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral
expected growth rate, revenue volatility and discount rate. The projected annual growth rate for “non-managed money”
revenue was approximately 3%. The market price of risk and revenue volatility of approximately 4% and 20%,
respectively, were based on data for comparable companies. As the contingent consideration represents a subordinate,
unsecured claim of the Company, we have assessed a discount rate of approximately 7%, which incorporates
adjustments for credit risk and the subordination of the contingent consideration. Total undiscounted earn out payments
ranged from $119 million to $150 million, the maximum amount payable to sellers.
The fair value of contingent consideration payable to sellers was estimated at $118.7 million at December 31, 2019, an
increase of $19.9 million from the acquisition date, which was recorded in change in value of consideration payable for
acquisition of business in the Consolidated Statements of Operations. The market price of risk and revenue volatility
inputs were similar to those used at the acquisition date valuation. The projected annual growth rate for “non-managed
money” revenue during the earn out period was approximately 4%, and the discount rate was approximately 5%. Total
estimated undiscounted earn out payments ranged from $133 million to $150 million.
USAA Acquired Companies
In 2019, the Company incurred $8.7 million in restructuring and integration costs associated with the USAA AMCO
Acquisition. No USAA AMCO restructuring and integration costs were incurred in 2018 or 2017.
Revenue of the USAA Acquired Companies subsequent to the effective closing date of July 1, 2019 for the six months
ended December 31, 2019, was as follows:
(in millions)
Revenue ...................................................................................................................................... $
Unaudited
Six Months Ended
December 31, 2019
244.5
Net income attributable to the USAA Acquired Companies for the six months ended December 31, 2019 is impractical
to determine as the Company does not prepare discrete financial information at that level.
The Company’s consolidated financial statements for the year ended December 31, 2019 include the operating results of
the USAA Acquired Companies for the period from July 1, 2019 to December 31, 2019. The historical consolidated
financial information of Victory and the USAA Acquired Companies have been adjusted to give effect to unaudited pro
forma events that are directly attributable to the transaction, factually supportable and expected to have continuing
impact on the combined results. These amounts have been calculated after adjusting the results of the USAA Acquired
Companies to reflect additional interest expense, distribution costs, share-based compensation expense, income taxes
and intangible asset amortization that would have been expensed assuming the fair value adjustments had been applied
on January 1, 2018. In addition, Victory’s and the USAA Acquired Companies’ results were adjusted to remove
incentive compensation, legal fees and mutual fund proxy costs directly attributable to the acquisition.
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The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative
purposes only and assume that the acquisition occurred on January 1, 2018. This unaudited information should not be
relied upon as indicative of historical results that would have been obtained if the acquisition had occurred on that date,
nor of the results that may be obtained in the future.
(in thousands, except per share amount)
Unaudited
Twelve Months Ended December 31,
2019
2018
Revenue......................................................................................................... $
Net income ....................................................................................................
851,440 $
114,988
906,844
71,471
Earnings per share of common stock ............................................................
Basic.............................................................................................................. $
Diluted........................................................................................................... $
1.70 $
1.56 $
1.08
1.01
Weighted average number of shares outstanding..........................................
Basic..............................................................................................................
Diluted...........................................................................................................
67,693
73,612
66,295
70,511
Harvest Transaction
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 transaction was 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, and other closing conditions. The Harvest Purchase
Agreement contained customary termination rights for the Company and Harvest.
On April 22, 2019, the Company, Harvest and the Members’ Representative entered into an agreement to mutually
terminate the Harvest Purchase Agreement as of April 22, 2019. Neither Victory nor Harvest was responsible for any
termination fee to the other party as a result of the termination.
CEMP Acquisition
Under the terms of the acquisition of Compass Efficient Model Portfolios, LLC (the “CEMP Acquisition”), we paid cash
related to base payments and contingent earnouts annually following each of the first four anniversaries of the CEMP
Acquisition. Each annual base payment was fixed in amount, with the amounts increasing over the four-year period. The
earn-out payments were 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.
In the third quarter of 2019, we paid the fourth and final payment of $6.0 million in cash to the sellers. The Company
paid sellers a total of $6.0 million, $4.4 million and $2.7 million, respectively, in base payments and earn out payments
in 2019, 2018 and 2017.
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.
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The following table presents a rollforward of restructuring and integration liabilities:
(in millions)
Liability balance, beginning of period .................................. $
Severance expense ................................................................
USAA AMCO Acquisition ................................................
RS Investments...................................................................
Other...................................................................................
Contract termination expense................................................
RS Investments...................................................................
USAA AMCO Acquisition ................................................
Integration costs ....................................................................
Restructuring and integration costs.......................................
Settlement of liabilities .........................................................
Liability balance, end of period ......................................... $
Accrued expenses.................................................................. $
Other liabilities......................................................................
Liability balance, end of period ......................................... $
2019
2018
2017
0.1
$
0.1
$
6.2
—
—
—
0.2
2.3
8.7
(5.8)
3.0
2.9
0.1
3.0
$
$
$
—
—
0.7
—
—
—
0.7
(0.7)
0.1
0.1
—
0.1
$
$
$
7.4
—
0.5
0.3
5.0
—
0.4
6.2
(13.5)
0.1
0.1
—
0.1
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 2019, 2018 and
2017 and are included in acquisition-related costs in the Consolidated Statements of Operations.
(in thousands)
USAA AMCO....................................................................... $
Harvest ..................................................................................
RS Investments .....................................................................
Other......................................................................................
$
NOTE 5. FAIR VALUE MEASUREMENTS
Acquisition-related costs
2018
2019
21,333 $
895
-
89
22,317 $
3,180 $
1,116
-
50
4,346 $
2017
-
-
355
1,739
2,094
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.
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The following table presents financial liabilities measured at fair value on a recurring basis:
(in thousands)
Contingent consideration arrangements ................. $ (118,700) $
Total
As of December 31, 2019
Level 2
Level 1
- $
Level 3
- $ (118,700)
(in thousands)
Contingent consideration arrangements ................. $
Total
As of December 31, 2018
Level 2
Level 1
Level 3
(716) $
- $
- $
(716)
Contingent consideration arrangements at December 31, 2019 consist of the USAA AMCO earn-out payment liability,
which is included in the consideration payable for acquisition of business in the Consolidated Balance Sheets.
Significant unobservable inputs for the option pricing model used to determine the estimated fair value of the USAA
AMCO Acquisition earn-out payment liability include the “non-managed money” revenue projected growth rate,
revenue volatility, market price of risk and discount rate. An increase in market price of risk, discount rate and revenue
volatility results in a lower fair value for the earn-out payment liability, while an increase in the projected growth rate for
“non-managed money” revenue results in a higher fair value for the earn-out payment liability. Refer to Note 4,
Acquisitions, for further details related to the valuation of contingent consideration payable related to the USAA AMCO
Acquisition.
For the year ended December 31, 2018, contingent consideration arrangements were primarily related to the CEMP
earn-out payment liability, which was 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.
Changes in the fair value of contingent consideration arrangement liabilities are recorded in earnings in change in value
of consideration payable for acquisition of business in the Consolidated Statements of Operations.
The following table presents the balance of the contingent consideration arrangement liabilities at December 31, 2019,
2018 and 2017, respectively.
Contingent
Consideration
Liabilities
(in thousands)
Balance, December 31, 2017 ............................................ $
CEMP change in fair value measurement.....................
CEMP year 3 earn-out payment....................................
Balance, December 31, 2018 ............................................ $
CEMP change in fair value measurement.....................
CEMP year 4 earn-out payment....................................
USAA AMCO estimated liability as of closing date....
USAA AMCO change in fair value measurement........
(1,195)
37
442
(716)
14
702
(98,800)
(19,900)
Balance, December 31, 2019 ............................................ $ (118,700)
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, 2019 and 2018. The Company recognizes transfers at the end of the reporting period.
The net carrying value of accounts receivable and accounts payable approximates fair value due to the short-term nature
of these assets and liabilities. The fair value of our long-term debt at December 31, 2019 is considered to be its carrying
value as the interest rate on the bank debt is variable and approximates current market rates. As a result, Level 2 inputs
are utilized to determine the fair value of our long-term debt.
The fair value of the Company’s money market investment ($10.1 million within cash and cash equivalents), available-
for-sale investments and trading securities are measured using Level 1 inputs, which are the market prices for shares in
these open-end mutual funds.
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NOTE 6. RELATED-PARTY TRANSACTIONS
The Company considers certain funds that it manages, including the Victory Funds, the USAA Funds, the VictoryShares
and collective trust funds that it sponsors (the “Victory Collective Funds”), to be related parties as a result of our
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 and the USAA Funds and has invested a portion of its
balance sheet cash in the USAA Treasury Money Market Fund and earns interest on the amount invested in this fund.
We also receive investment management fees from the VictoryShares and Victory Collective Funds under VCM’s
advisory contracts with these funds and administrative fees from the VictoryShares. In addition, we receive transfer
agent fees in accordance with a contract that VCTA has with the USAA Funds.
In 2018 and 2017, under the terms of monitoring agreements with affiliates of two shareholders of the Company, we
paid fees for monitoring services, which are included in general and administrative in the Consolidated Statements of
Operations. These monitoring agreements terminated upon the completion of the IPO.
The table below presents balances and transactions involving related parties included in the Consolidated Balance Sheets
and Consolidated Statements of Operations.
•
•
•
Included in cash and cash equivalents is cash held in the USAA Treasury Money Market Fund.
Included in receivables (fund administration and distribution fees) are amounts due from the Victory Funds
and USAA Funds for compliance services and amounts due from the USAA Funds for transfer agent
services.
Included in revenue (fund administration and distribution fees) are amounts earned for compliance services
and transfer agent services.
•
Realized and unrealized gains and losses and dividend income on investments in the Victory Funds
classified as available-for-sale securities and investments in the Victory Funds and USAA Funds classified
as trading securities and dividend income on investments in the USAA Treasury Money Market Fund are
recorded in interest income and other income (expense) in the Consolidated Statements of Operations.
• Amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers of investment
management fees and reimbursements of fund operating expenses are included in accounts payable and
accrued expenses in the Consolidated Balance Sheets and represent consideration payable to customers.
•
Included in other liabilities at December 31, 2018 was the remaining amount payable for a promissory note
for amounts due upon repurchase of Company common stock from a shareholder.
(in thousands)
Related party assets
2019
2018
Cash and cash equivalents...................................... $
Receivables (investment management fees) ..........
Receivables (fund administration and distribution
fees)........................................................................
Investments (available-for-sale securities, fair
value)......................................................................
Investments (trading securities, fair value) ............
Total.................................................................. $
10,060 $
47,872
—
19,612
19,313
3,153
771
17,914
95,930 $
601
12,343
35,709
Related party liabilities
Accounts payable and accrued expenses (fund
reimbursements)..................................................... $
Other liabilities (promissory note) .........................
Total.................................................................. $
4,316 $
—
4,316 $
2,300
96
2,396
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(in thousands)
Related party revenue
2019
Year ended December 31,
2018
2017
Investment management fees (1)............................................................ $ 371,807 $ 261,538 $ 254,318
65,818
Fund administration and distribution fees .......................
Total ........................................................................... $ 517,378 $ 322,267 $ 320,136
145,571
60,729
Related party expense
Distribution and other asset-based expenses (fund
reimbursements) (1) .......................................................................................... $
General and administrative ..............................................
Total ........................................................................... $
Related party other income (expense)
Interest income (expense) and other income
(expense).......................................................................... $
Interest expense and other financing costs (promissory
note) .................................................................................
Total ........................................................................... $
— $
—
— $
12,902 $
135
13,037 $
11,896
1,203
13,099
2,693 $
(2,834) $
(1)
2,692 $
(18)
(2,852) $
589
(39)
550
(1)
Effective January 1, 2019, upon the adoption of ASU 2014-09, expense reimbursements have been reclassified to
investment management fees. This change in presentation reduced revenue, and operating expenses, by $18.7 million year
for the ended December 31, 2019.
NOTE 7. INVESTMENTS
As of December 31, 2019 and 2018, the Company held both available-for-sale securities and trading securities.
Available-for-sale investments consist entirely of seed capital investments in certain Victory Funds. Trading securities
are held under a deferred compensation plan and include Victory Funds, USAA Funds and third party mutual funds.
Available-For-Sale Securities
The following table presents a summary of the cost and fair value of investments classified as available-for-sale:
(in thousands)
As of December 31, 2019 ..................................... $
As of December 31, 2018 .....................................
Cost
Gains
(Losses)
Gross Unrealized
Fair
Value
696 $
666
85 $
6
(10) $
(71)
771
601
Following the adoption of ASU 2016-01 on January 1, 2019, unrealized gains and losses on available-for-sale
investments are recorded in net income in other income (expense) in the Consolidated Statements of Operations. In 2018
and 2017, unrealized gains and losses on available-for-sale investments were recorded, net of tax, in accumulated other
comprehensive income (loss). Refer to Note 20, Accumulated Other Income (Loss), for further information on
unrealized gains and losses on available-for-sale investments. Upon sale, accrued unrealized gains or losses were
reclassed out of accumulated comprehensive income (loss). Realized gains and losses are recognized in the Consolidated
Statements of Operations as other income (expense).
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The following table presents proceeds and realized gains and losses recognized during the years ended December 31,
2019, 2018 and 2017:
(in thousands)
For the year ending December 31, 2019 ................. $
For the year ending December 31, 2018 .................
For the year ending December 31, 2017 .................
Sale
Proceeds
Realized
Gains
(Losses)
158 $
—
79
6 $
—
15
—
—
—
Trading Securities
The following table presents a summary of the cost and fair value of investments classified as trading securities:
(in thousands)
As of December 31, 2019 ..................................... $
As of December 31, 2018 .....................................
Cost
18,670 $
14,874
Gross Unrealized
Gains
(Losses)
Fair
Value
733 $
5
(1,098) $
(2,160)
18,305
12,719
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).
The following table presents proceeds and realized gains and losses recognized during the years ended December 31,
2019, 2018 and 2017:
For the year ending December 31, 2019 ................. $
For the year ending December 31, 2018 .................
For the year ending December 31, 2017 .................
2,749 $
2,772
5,166
22 $
37
159
(71)
(73)
(34)
Sale
Proceeds
Realized
Gains
(Losses)
NOTE 8. PROPERTY AND EQUIPMENT
The following table presents property and equipment as of December 31, 2019 and 2018:
(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,
2018
2019
21,548 $
2,854
2,631
27,033
(13,793)
13,240 $
17,071
3,209
1,541
21,821
(13,041)
8,780
Depreciation and amortization expense for property and equipment was $3.0 million, $3.0 million, and $3.6 million for
the years ended December 31, 2019, 2018, and 2017, respectively.
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NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
During 2019, the Company acquired USAA AMCO and recorded $120.6 million in goodwill related to this acquisition
in the Consolidated Balance Sheets. The goodwill arising from the USAA AMCO Acquisition primarily results from
expected future earnings and cash flows, as well as the expected synergies created by the integration of the USAA
Acquired Companies within our organization. The following table presents changes in the goodwill balance from
December 31, 2018 to December 31, 2019:
(in thousands)
As of December 31,
2018
2019
Balance, beginning of period ........................................ $ 284,108 $ 284,108
Goodwill recorded in acquisition..................................
—
Balance, end of period ................................................ $ 404,750 $ 284,108
120,642
There were no impairments to goodwill recognized during the years ended December 31, 2019, 2018 or 2017.
Identifiable Intangible Assets
During 2019, and as part of the USAA AMCO Acquisition, the Company recorded indefinite-lived and definite-lived
intangible assets of $770.1 million and $38.6 million, respectively, primarily related to investment advisory and
administration service contracts and tradenames.
The following table presents a summary of definite-lived intangible assets by type:
Fund
Advisory
Customer
Trade
Relationships Contracts Names
Intellectual
Property/
Other
Totals
(in thousands)
Gross book value - December 31, 2018 ...... $ 123,200 $
Accumulated amortization...........................
Net book value - December 31, 2018.......... $
Weighted average useful life (yrs) ..............
Gross book value - December 31, 2019 ...... $ 123,200 $
Accumulated amortization...........................
Net book value - December 31, 2019.......... $
Weighted average useful life (yrs) ..............
19,993 $
0.8
4,623 $
0.2
(118,577)
(103,207)
2,368 $
(2,368)
— $
—
1,132 $
(283)
849 $
1.5
2,368 $ 39,332 $
(2,368)
(5,607)
— $ 33,725 $
—
3.1
7,177 $ 133,877
(112,798)
(6,940)
237 $ 21,079
0.8
0.2
7,547 $ 172,447
(133,676)
(7,124)
423 $ 38,771
3.4
0.1
Amortization expense for definite-lived intangible assets for the years ended December 31, 2019, 2018 and 2017, was
$20.9 million, $20.3 million and $26.3 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
2019, 2018 or 2017.
The following table presents estimated amortization expense for definite-lived intangible assets for each of the five
succeeding years and thereafter:
2020........................................................................................ $ 12,830
11,271
2021........................................................................................
9,568
2022........................................................................................
4,855
2023........................................................................................
143
2024........................................................................................
Thereafter...............................................................................
104
Total ...................................................................................... $ 38,771
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The following table presents a summary of indefinite-lived intangible assets by type:
Fund
Advisory,
Transfer
Agent and
Distribution
(in thousands)
December 31, 2017 balance .................................... $ 342,900 $
Additions or transfers ..............................................
December 31, 2018 balance .................................... $ 342,900 $
Additions or transfers .............................................. 770,100
December 31, 2019 balance .................................... $ 1,113,000 $
Contracts
—
Trade
Names
24,832 $
(1,132)
23,700 $
—
Totals
367,732
(1,132)
366,600
770,100
23,700 $ 1,136,700
There were no impairments to indefinite-lived intangible assets recognized in 2019, 2018 or 2017.
NOTE 10. INCOME TAXES
The following table presents the provision for income taxes for the years ended December 31, 2019, 2018 and 2017:
(in thousands)
Current tax expense (benefit):
2019
2018
2017
Federal................................................................
State....................................................................
Foreign ...............................................................
Total current tax expense (benefit)..........................
Deferred tax expense (benefit):
$
Federal................................................................
State....................................................................
Foreign ...............................................................
Total deferred tax expense (benefit)........................
Income tax expense ................................................. $
22,234 $
6,656
52
28,942
13,130 $
3,944
17
17,091
(449)
(289)
(7)
(745)
28,197 $
3,577
549
(10)
4,116
21,207 $
640
779
22
1,441
9,162
2,010
19
11,191
12,632
During 2019, the Company recorded a liability for $2.9 million ($2.3 million net of federal benefit) for unrecognized tax
benefits, which included $0.2 million of interest and penalties. As of December 31, 2019, the liability for gross
unrecognized tax benefits and interest and penalties totaled $2.9 million which is included in “Other liabilities” in the
Consolidated Balance Sheets. It is expected that the amount of unrecognized tax benefits will change in the next 12
months; however, we do not expect the change to have a material impact on our consolidated financial statements. We
did not record any amounts in 2018 or 2017 related to uncertain tax positions or tax contingencies.
In December 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted. The Tax Act significantly revised the United
States 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 remeasured its
deferred tax assets and deferred tax liabilities on the enactment date using the new lower 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, we applied the guidance in Staff Accounting Bulletin 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. We
completed the accounting for the tax effects of the Tax Act in 2018, and no adjustments to the provisional amounts
recorded in 2017 were necessary.
The effective tax rate for the years ended December 31, 2019 and 2018 differs from the United States federal statutory
rate primarily as a result of state and local income taxes and excess tax benefits on share-based compensation, and for
2019, expense related to recording an uncertain tax position (“UTP”) liability for unrecognized tax benefits. In 2017, the
effective tax rate differed from the United States federal statutory rate primarily as a result of state and local income
taxes and the remeasurement of net deferred tax liabilities upon enactment of the Tax Act.
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The following table presents the tax rates for the years ended December 31, 2019, 2018 and 2017.
2019
2018
2017
Federal income tax at U.S. statutory rate ......................
State income tax rate, net of federal tax benefit ............
UTP liability ..................................................................
Excess tax benefits on share-based compensation ........
Remeasurement of deferred taxes due to Tax Act.........
Foreign taxes and other .................................................
Income tax expense .......................................................
21.0 %
3.3 %
1.9 %
(2.8)%
— %
— %
23.4 %
21.0 %
4.1 %
— %
(0.5)%
— %
0.4 %
25.0 %
35.0 %
4.0 %
— %
— %
(6.3)%
0.2 %
32.9 %
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, 2019 and 2018.
The following table presents the components of deferred income tax assets and deferred tax liabilities at December 31,
2019 and 2018:
(in thousands)
Deferred tax assets:
Definite-lived intangibles........................................... $
Share-based compensation expense ...........................
Acquisition-related costs............................................
Change in value of consideration payable for
acquisition of business ...............................................
Deferred compensation ..............................................
Restructuring expenses ..............................................
Contingent consideration arrangements.....................
Goodwill.....................................................................
Debt issuance costs ....................................................
Unrealized loss on deferred compensation
investments.................................................................
Loss on equity method investment.............................
Other...........................................................................
Total deferred tax assets ...............................................
Deferred tax liabilities:
Indefinite-lived intangibles ........................................
Debt issuance costs ....................................................
Depreciation ...............................................................
Prepaid expenses ........................................................
CEMP base payments interest expense......................
Change in value of consideration payable for
acquisition of business ...............................................
Total deferred tax liabilities .........................................
Net deferred tax asset/(liability) ................................... $
2019
2018
20,560 $
10,242
7,368
18,725
9,041
4,483
4,366
4,429
3,256
219
982
1,336
85
—
23
52,866
56,365
—
1,801
186
—
—
3,185
962
248
574
—
536
283
92
38,129
41,302
1,101
1,282
161
36
—
58,352
(5,486) $
459
44,341
(6,212)
As of December 31, 2019 and 2018, the Company had no net operating loss carryforwards. As of December 31, 2017,
for federal tax purposes, we had net operating loss carryforwards of $5.5 million all of which were utilized during 2018.
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In the normal course of business, the Company is subject to examination by federal and certain state and local tax
regulators. As of December 31, 2019, U.S. federal income tax returns for 2018 are open and therefore subject to
examination. State and local income tax returns filed are generally subject to examination from 2013 to 2018. We have
analyzed our tax positions for all open years and have concluded that no additional provision for income tax is required
in the consolidated financial statements.
The following table presents the changes in gross unrecognized tax benefits, excluding interest and penalties, for the
years ended December 31, 2019, 2018 and 2017.
(in thousands)
Beginning balance ......................................................... $
Additions for tax positions of prior years ................
Additions based on tax positions related to current
year...........................................................................
Ending balance .............................................................. $
2019
2018
2017
- $
1,703
879
2,582 $
- $
-
-
- $
-
-
-
-
The Company recognized $0.2 million in interest and penalties related to the liability for unrecognized tax benefits in its
income tax provision for the year ended December 31, 2019 ($0 in 2018 and 2017). We believe it is reasonably possible
that substantially all of our $2.6 million in currently remaining unrecognized tax benefits may be recognized within the
next 12 months as a result of settlements with state taxing authorities.
NOTE 11. DEBT
2018 Credit Agreement and Debt Refinancing
On February 12, 2018, concurrently with the closing of the IPO, the Company entered into the 2018 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 original aggregate commitments
of $50.0 million. On May 3, 2018, the 2018 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 2018 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.
Original issue discount was $0.9 million for the term loans under the 2018 Credit Agreement and $0.3 million for the
revolving credit facility under the 2018 Credit Agreement. The Company incurred a total of $3.7 million in arranger fees
and other third party costs related to the 2018 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 2018 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.
2019 Credit Agreement
On July 1, 2019, concurrent with the USAA AMCO Acquisition, the Company (i) entered into the 2019 Credit
Agreement, (ii) repaid all indebtedness outstanding under the 2018 Credit Agreement, and (iii) terminated the 2018
Credit Agreement.
The 2019 Credit Agreement was entered into among Victory, as borrower, the lenders from time to time party thereto
and Barclays Bank PLC, as administrative agent and collateral agent, pursuant to which we obtained a seven-year term
loan in an aggregate principal amount of $1.1 billion and established a five-year revolving credit facility (which was
unfunded as of the closing date) with aggregate commitments of $100.0 million (with a $10.0 million sub-limit for the
issuance of letters of credit). Amounts outstanding under the 2019 Credit Agreement bear interest at an annual rate equal
to, at the option of the Company, either LIBOR (adjusted for reserves) plus a margin of 3.25% or an alternate base rate
plus a margin of 2.25%.
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The obligations of the Company under the 2019 Credit Agreement are guaranteed by the USAA Acquired Companies
and all of our other domestic subsidiaries (other than VCA) (the “Guarantors”) and secured by substantially all of the
assets of the Company and the Guarantors, subject in each case to certain customary exceptions.
The 2019 Credit Agreement contains customary affirmative and negative covenants, including covenants that affect,
among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge
or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and
dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive
agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational
documents, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the 2019 Credit
Agreement contains a financial performance covenant, requiring a 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 thereunder (excluding certain letters of credit), of no greater than 3.80 to 1.00. As of December 31, 2019,
there were no outstanding borrowings under the revolving credit facility and we were in compliance with our financial
performance covenant.
Original issue discount was $11.5 million for the term loans under the 2019 Credit Agreement and $1.5 million for the
revolving credit facility under the 2019 Credit Agreement. The Company incurred a total of $22.8 million in other third
party costs related to the 2019 Credit Agreement and recorded $18.0 million as term loan debt issuance costs, $0.3
million as revolving credit facility debt issuance cost and $4.5 million as expense related to modified debt in general and
administrative in the Consolidated Statements of Operations.
A total of approximately $148.0 million of the outstanding term loans under the 2019 Credit Agreement was repaid in
2019. Subsequent to December 31, 2019, we repaid an additional $38.0 million, for a total principal debt reduction of
approximately $186.0 million since July 1, 2019, thus satisfying the required principal payment of 1.00% of the original
principal amount per year through the term of the loan, June 2026.
During the year ended December 31, 2019, we recognized a $9.9 million loss on debt extinguishment, which consisted
of the write-off of $6.3 million and $3.6 million of unamortized debt issuance costs and debt discount, respectively, due
to the termination of the previous credit agreement and repayments of term loan principal. Debt extinguishment costs
relating to the termination of the 2018 Credit Agreement and repayments of term loan principal under the 2019 Credit
Agreement totaled $5.5 million and $4.4 million, respectively.
2020 Debt Refinancing
On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with
the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting
bank.
Pursuant to the First Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with
replacement term loans in an aggregate principal amount of $952.0 (the “Repriced Term Loans”). The Repriced Term
Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of June
2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The
applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term
Loans.
The following table presents the components of long-term debt in the Consolidated Balance Sheets at December 31,
2019 and 2018.
2019
(in thousands)
Term Loans
$ 280,000
Due February 2025, 5.55% interest rate ................ $
—
—
Due June 2026, 5.35% interest rate ....................... 952,000
952,000
Term loan principal outstanding........................
280,000
(17,230) (7,629)
Unamortized debt issuance costs ...........................
(10,231) (3,514)
Unamortized debt discount ....................................
$ 268,857
Long-term debt..................................................... $ 924,539
2018
Effective
Interest
Rate
6.22%
5.79%
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As of December 31, 2019, the outstanding term loans under the 2019 Credit Agreement had an interest rate of 5.35% 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 2019 Credit Agreement as of December 31, 2019 was 5.79% per annum.
Debt issuance costs related to the Term Loans totaled $39.6 million and $21.6 million at December 31, 2019 and 2018
and are reflected net of accumulated amortization and loss on debt extinguishment of $22.4 million and $14.0 million,
respectively. Debt issuance costs of $3.7 million and $2.0 million related to the revolving credit facility are included in
other assets in the Consolidated Balance Sheets and are reflected net of accumulated amortization and loss on debt
extinguishment of $1.5 million and $1.2 million as of December 31, 2019 and 2018, respectively. Debt discount related
to the Term Loans totaled $20.7 million and $9.2 million at December 31, 2019 and 2018 and is reflected net of
accumulated amortization and loss on debt extinguishment of $10.5 million and $5.7 million, respectively.
The following table presents the components of interest expense and other financing costs on the Consolidated
Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
(in thousands)
Interest expense ................................................................ $
Amortization of debt issuance costs .................................
Amortization of debt discount ..........................................
Interest rate cap expense...................................................
CEMP base payment accretion expense ...........................
Other .................................................................................
Total............................................................................ $
2019
2018
2017
36,423 $
2,499
1,200
—
193
586
40,901 $
17,289 $
1,708
700
—
467
530
20,694 $
41,569
3,657
1,544
767
638
292
48,467
NOTE 12. DERIVATIVES
From time to time the Company entered into swap contracts for interest rate cap derivatives to manage interest rate risk
related to a portion of its long-term debt, which were designated as cash flow hedges. The Company evaluates financial
instruments and other contracts to determine if the arrangement meets the characteristics of a derivative under ASC 815,
Derivatives and Hedging, and the criteria to use hedge accounting. The Company had no swap contracts for the years
ended December 31, 2018 and 2019. During the year ended December 31, 2017, the Company used interest rate cap
derivatives to manage interest rate risk related to a portion of its long-term debt. $0.8 million of interest expense was
recognized in the Consolidated Statement of Operations for the year ended December 31, 2017 related to that interest
rate cap derivative.
NOTE 13. EQUITY METHOD INVESTMENT
On August 30, 2019, the Company sold 100% of its equity investment in Cerebellum for $10.6 million in cash and
recognized $2.9 million on the gain on sale, which was recorded in interest income and other income (expense) in the
Consolidated Statements of Operations.
For the years ended December 31, 2019 and 2018, losses from equity method investments recorded in interest income
and other income (expense) in the Consolidated Statements of Operations were not material to our consolidated results
of operations.
Equity method investments were recorded in other assets in the Consolidated Balance Sheets. At December 31, 2019, the
Company no longer held an equity investment in Cerebellum, compared to $7.9 million, net of cumulative losses of $1.1
million, as of December 31, 2018.
NOTE 14. EQUITY
Equity Structure
Until the closing of the Company’s IPO on February 12, 2018, we 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.
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With the closing of the Company’s IPO, we authorized capital stock consisting 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 $4.3 million of these offering costs in 2018.
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, 2019.
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 Rollforward
The following tables present the changes in the number of shares of common stock issued and repurchased (in
thousands):
Shares of Common Stock
Class B
Class A
Pre-IPO
Class A
Shares of Treasury Stock
Class B
Pre-IPO
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.................................
Issuance of shares ............................................
Share conversion - Class B to A ......................
Repurchase of shares .......................................
Vesting of restricted share grants ....................
Exercise of options ..........................................
Shares withheld related to net settlement of
equity awards ...................................................
Balance, December 31, 2019.................................
—
—
—
—
—
12,811
—
2,467
—
—
—
3
—
15,281
4
2,815
—
—
—
—
18,100
—
—
—
—
—
—
57,185
(2,467)
—
215
351
—
—
55,284
—
(2,815)
—
522
946
—
53,937
56,505
296
389
(8)
57,182
—
(57,184)
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(856)
—
—
—
—
(856)
—
—
(829)
—
—
—
—
—
—
—
—
(2,064)
—
(83)
—
—
—
—
(2,147)
—
—
—
—
—
—
(1,685)
(509)
(2,656)
(1,720)
—
(344)
—
(2,064)
—
2,064
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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Share Repurchase Program
The share repurchase program authorized in 2018 for $15.0 million of the Company’s Class A common stock was
completed in September 2019. In August 2019, our board of directors authorized us to repurchase up to an additional
$15.0 million of the Company’s Class A common stock in the open market or in privately negotiated transactions. The
amount and timing of the purchases under the new program (“2019 Share Repurchase Program”) will depend on a
number of factors including the price and availability of our shares, trading volume, capital availability, our performance
and general economic and market conditions. The 2019 Share Repurchase Program can be suspended or discontinued at
any time.
As of December 31, 2019, a total of 1,685,155 shares of Class A common stock have been repurchased under the initial
share repurchase program and the 2019 Share Repurchase Program at a total cost of $21.5 million for an average price of
$12.77 per share. As of December 31, 2019, $8.5 million was available for future repurchases. The 2019 Share
Repurchase Program expires on December 31, 2020.
NOTE 15. SHARE-BASED COMPENSATION
Equity Incentive Plans
Until the IPO was completed in 2018, 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 Plan”), 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 our 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 1,928,987 shares outstanding out of 3,372,484 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 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 first offering under the 2018 ESPP Plan. A total of 350,388 shares of Class A common stock was available to issue
under the 2018 ESPP Plan. The first offering ran for eighteen months, from July 1, 2018 to December 31, 2019, and
included three, six month offering periods.
In October 2019, the Compensation Committee of the Company’s board of directors approved the terms and conditions
for a second offering under the 2018 ESPP Plan. The second offering will run for twenty-four months from January 1,
2020 to December 31, 2021 and will include four, six month offering periods.
For both the first and second offerings under the 2018 ESPP Plan, shares of Class A common stock are available for
purchase 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 cannot exceed $25,000
worth of stock in any given calendar year. The 2018 ESPP Plan 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 are eligible to participate in
the 2018 ESPP.
As of December 31, 2019, 1,442,768 restricted share grants and 33,540 stock option awards had been issued under the
2018 Plan, and 6,716 shares of Class A common stock had been issued under the 2018 ESPP Plan.
All stock option awards are considered non-qualified. Shares of common stock subject to stock option awards granted in
2019 vest based on service over a three year period. Sixty percent of the shares of common stock subject to stock option
awards granted prior to 2019 generally 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. 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.
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Table of Contents
As of December 31, 2019, stock option awards to purchase an aggregate of 7,880,167 shares of common stock had been
granted and were outstanding, and restricted share awards for 3,215,619 shares of common stock had been granted and
were unvested. As of December 31, 2018, stock option awards to purchase an aggregate of 9,070,052 shares of common
stock and restricted share awards for 2,997,856 shares of common stock had been granted and were outstanding. 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.
Grant Activity
In 2019, the Company issued grants for 1,196,820 restricted shares of common stock and stock option awards for 31,178
shares of common stock under the 2018 Plan.
The 2019 grants of restricted shares included grants for 18,943 restricted shares of common stock that were fully vested
on the grant date, grants for 1,144,589 restricted shares of common stock that vest over three years and 33,288 restricted
shares of common stock that vest over five years. Shares of common stock subject to the option awards granted in 2019
vest based on service over a three year period.
The following tables presents activity during the years ended December 31, 2019, 2018 and 2017 related to stock option
awards and restricted stock awards.
2019
Shares Subject to Stock Option Awards
Year to Date Ended December 31,
2018
2017
Avg wtd Avg wtd
grant-date exercise
fair value price Units
Avg wtd Avg wtd
grant-date exercise
fair value price Units
Avg wtd Avg wtd
grant-date exercise
fair value price Units
Outstanding at beginning of
period...................................... $ 3.79 $ 6.12 9,070,052 $ 3.66 $ 5.71 9,078,728 $ 3.40 $ 4.90 8,669,475
31,178 6.51 14.25 359,618 6.14 13.52 774,357
Granted ................................... 7.25 17.64
(16,791) 3.02 3.81 (132,972)
Forfeited ................................. 5.01 9.68 (274,774) 6.39 14.00
Exercised ................................ 3.19 4.24 (946,289) 3.01 3.56 (351,503) 2.54 2.45
(73,406)
Modified to liability to be
cash settled ............................. — —
Outstanding at end of the
period...................................... $ 3.83 $ 6.27 7,880,167 $ 3.79 $ 6.12 9,070,052 $ 3.66 $ 5.71 9,078,728
Vested..................................... $ 3.61 $ 5.59 6,724,030 $ 3.35 $ 4.76 6,653,228 $ 3.17 $ 4.19 5,731,647
Unvested................................. 5.10 10.25 1,156,137 5.00 9.88 2,416,824 4.49 8.31 3,347,081
— 2.61 2.62 (158,726)
— — —
Total intrinsic value of stock options exercised in 2019, 2018 and 2017 was $12.8 million, $2.3 million and $0.8 million,
respectively.
Restricted Stock Awards
For Year Ended December 31,
2018
2017
2019
Avg wtd
fair value
Units
Avg wtd
fair value
Units
Avg wtd
fair value
Units
Unvested at beginning of period .............. $ 13.17 2,997,856 $ 11.82 1,293,107 $ 9.48 1,018,228
Granted ..................................................... 16.27 1,196,820 13.77 1,924,691 13.52 623,165
Vested....................................................... 12.83 (521,701) 10.42 (217,630) 7.99 (339,701)
Forfeited ................................................... 13.42 (457,356) 14.27
(8,585)
Unvested at end of period......................... $ 14.29 3,215,619 $ 13.17 2,997,856 $ 11.82 1,293,107
(2,312) 8.81
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Director Plan Restricted Stock Awards
For Year Ended December 31,
2018
2017
2019
Avg wtd
fair value
Units
Avg wtd
fair value
Units
Avg wtd
fair value
Units
Unvested at beginning of period ............... $ — — $ — — $ 5.71 49,230
Granted...................................................... — — — — —
—
Vested........................................................ — — — — 5.71 (49,230)
—
Forfeited .................................................... — — — — —
—
Unvested at end of period ......................... $ — — $ — — $ 5.71
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.
In 2018, prior to the IPO, 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 2018, after the IPO, 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, we 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.
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 our volatility for the post-IPO period.
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 2019, 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 following table presents the grant date fair value of stock option awards
granted during the years ended December 31, 2019, 2018 and 2017 computed using the following assumptions:
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2019
2018
2017
Stock price at time of grant............................. $
Exercise price.................................................. $
Expected volatility ..........................................
Risk free rate...................................................
Expected average years to exit .......................
17.64
17.64
$
$
40%
1.85%
6
14.27
14.27
$
$
50%
2.27%
5
13.51
13.51
50%
2.22%
5
The fair value of stock option awards granted in 2019 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. The expected
term was determined using the simplified method detailed in SEC Staff Accounting Bulletin No. 10.
For awards granted post-IPO in 2018, the Company used the Class A common stock closing price on the grant date as
the grant date fair value of the stock. Prior to the IPO, 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. 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 expected life of the options granted in 2017 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, we 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
In 2018 and 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.
Also in 2018 and 2017, we revised the estimate of time it expected to take to achieve the performance conditions on
certain performance-vested restricted share 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.
Dividend Payments
In February 2017, the Company declared and paid a special dividend (the “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, we 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.
In August 2019, the Company announced the initiation of quarterly cash dividends and paid the first quarterly dividends
in September and December 2019. Holders of restricted stock awards that are unvested at the time the quarterly
dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.
As of December 31, 2019, 2018 and 2017, the amount of cash bonuses and distributions related to dividends previously
declared on restricted shares and options expected to vest in the future totaled $1.3 million, $1.8 million and
$2.0 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.
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Share-based Compensation Expense
In 2019, the Company recorded $16.3 million of share-based compensation expense related to the 2018 Plan. In 2018,
the Company recorded $15.2 million of share-based compensation expense related to the 2013 Plan and 2018 Plan and in
2017, $11.8 million of share-based compensation expense related to the 2013 Plan. Share-based compensation expense
is recorded in personnel compensation and benefits in the Consolidated Statements of Operations. The related tax
benefits were $4.0 million, $3.8 million and $4.6 million for the fiscal years 2019, 2018, and 2017, respectively.
In 2019 and 2018, we did not recognize any share-based compensation expense related to the Director Plan. In 2017, we
recognized Director Plan share-based compensation expense of $0.2 million, which is recorded in general and
administrative expense.
As of December 31, 2019, the Company expects to recognize total share-based compensation expense of $32.6 million
over a weighted average period of 1.7 years. The total fair value of restricted share awards vested during the years ended
December 31, 2019, 2018 and 2017 was $9.7 million, $2.0 million and $4.6 million respectively; the fair value of
restricted share awards vested under the Director Plan was $0.7 million in 2017. The aggregate intrinsic value of stock
options currently exercisable at December 31, 2019, 2018 and 2017 was $103.4 million, $36.3 million and $57.8 million
respectively.
NOTE 16. COMMITMENTS
The Company leases office space and equipment under operating leases expiring at various dates. We have 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 (in thousands):
Gross
Operating
Lease
Commitments
Sub-Leases
Net
Operating
Lease
Commitments
2020.................................................................................. $
2021..................................................................................
2022..................................................................................
2023..................................................................................
2024..................................................................................
Thereafter .........................................................................
Total................................................................................. $
7,148 $
5,251
4,235
3,125
2,258
4,370
26,387 $
706 $
422
432
437
454
962
3,413 $
6,442
4,829
3,803
2,688
1,804
3,408
22,974
Rent expense for the years ended December 31, 2019, 2018 and 2017 was $4.9 million, $4.6 million, and $7.3 million,
respectively, and is included in general and administrative expense in the Consolidated Statements of Operations.
NOTE 17. 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 2019, 2018 and
2017 we recognized expense of $3.3 million, $2.5 million and $2.4 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. We purchase 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 our general creditors in the event of bankruptcy.
In 2019, the Company created a deferred compensation plan for non-employee members of our board of directors (the
“Director DC Plan”) with an effective date of January 1, 2020. Benefits payable under the Director DC Plan will be paid
from our general assets. Amounts contributed under the Director DC Plan and earnings on those amounts will be subject
to the claims of our general creditors.
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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.
The following table presents components of deferred compensation plan-related expense.
(in thousands)
Employee compensation................................................ $
Employer contributions .................................................
Change in value of deferred compensation plan
liability...........................................................................
Total............................................................................... $
2019
2018
2017
2,202 $
1,017
3,011 $
746
3,144
791
2,603
5,822 $
(1,649)
2,108 $
1,267
5,202
NOTE 18. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per share and diluted earnings per share for the years
ended December 31, 2019, 2018 and 2017:
(in thousands, except per share amounts)
Net income.................................................................... $
Shares:
Basic weighted average common shares outstanding ...
Assumed conversion of dilutive instruments ...........
Diluted weighted average common shares
outstanding ....................................................................
Earnings per share ......................................................
Basic:........................................................................ $
Diluted:..................................................................... $
Year Ended December 31,
2018
63,704 $
2019
92,491 $
2017
25,826
67,616
5,850
66,295
4,216
54,931
4,646
73,466
70,511
59,577
1.37 $
1.26 $
0.96 $
0.90 $
0.47
0.43
For the years ended December 31, 2019, 2018 and 2017, there were 821,544, 1,738,813 and 434,656 outstanding
instruments, respectively, excluded from the above computations of weighted average shares for diluted earnings per
share 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.
NOTE 19. 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, 2019, VCA had net capital under the Rule 15c3-1 of $2.0 million which was $1.8 million in excess of
its minimum required net capital of $0.2 million. 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. The Company's ratio
of aggregate indebtedness to net capital at December 31, 2019 and 2018 was 1.26 to 1 and 1.14 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 are generally not available for corporate purposes.
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NOTE 20. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in accumulated other comprehensive income (loss) by component for the years
ending December 31, 2019, 2018, and 2017.
Available-
for-sale
Cumulative
Cash Flow Translation
Securities (a) Hedges (b) Adjustment
Total
(in thousands)
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 ...................................... $
Other comprehensive income before
reclassification and tax............................................
Tax impact.........................................................
Reclassification adjustments, before tax.................
Tax impact.........................................................
Net current period other comprehensive income .........
Cumulative effect of adoption of ASU 2016-01 and
2018-02.........................................................................
Balance, December 31, 2019 ...................................... $
(13) $
(462) $
(62) $
(537)
121
(48)
(15)
6
64
51 $
(147)
37
—
—
(110)
(59) $
—
—
—
—
—
59
— $
(20)
7
767
(292)
462
— $
—
—
—
—
—
— $
—
—
—
—
—
— $
122
(47)
—
—
75
13 $
(53)
13
—
—
(40)
(27) $
32
(8)
—
—
24
3
— $
223
(88)
752
(286)
601
64
(200)
50
—
—
(150)
(86)
32
(8)
—
—
24
62
—
(2)
(3)
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
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NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present select unaudited quarterly financial results for the years ended December 31, 2019 and
2018 (in thousands, except per share amounts). Quarterly earnings per share may not always sum to the full year
amounts due to the averaging of common shares outstanding.
Total revenue........................................................ $
Operating expenses .............................................. $
Income from operations ....................................... $
Net income ........................................................... $
Basic earnings per share ....................................... $
Diluted earnings per share.................................... $
For the Quarters Ended
March 31, 2019 June 30, 2019 Sep 30, 2019 Dec 31, 2019
91,360 $ 214,980 $ 218,554
68,635 $ 159,407 $ 154,357
64,197
22,725 $
37,589
14,383 $
0.56
0.21 $
0.51
0.20 $
87,479 $
65,354 $
22,125 $
14,527 $
0.22 $
0.20 $
55,573 $
25,992 $
0.38 $
0.35 $
Total revenue........................................................ $
Operating expenses .............................................. $
Income from operations ....................................... $
Net income ........................................................... $
Basic earnings per share ....................................... $
Diluted earnings per share.................................... $
For the Quarters Ended
March 31, 2018 June 30, 2018 Sep 30, 2018 Dec 31, 2018
95,967
70,210
25,757
13,915
0.21
0.19
104,964 $ 104,399 $ 108,082 $
76,272 $
74,715 $
77,696 $
31,810 $
29,684 $
27,268 $
20,590 $
18,675 $
10,524 $
0.30 $
0.27 $
0.17 $
0.29 $
0.26 $
0.16 $
NOTE 22. SUBSEQUENT EVENTS
On January 17, 2020, the Company entered into the First Amendment by and among Victory Capital Holdings, Inc.,
Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. The First Amendment
refinanced the existing loan terms with replacement loan terms, which reduced the applicable margin on LIBOR by 75
basis points. Refer to Note 11, Debt, for further information on the First Amendment.
Subsequent to December 31, 2019, we repaid an additional $38.0 million of the outstanding term loans under the 2019
Credit Agreement, for a total debt reduction of $186.0 million since July 1, 2019.
On February 12, 2020, our Board of Directors declared a quarterly cash dividend of $0.05 per share on Victory common
stock. The dividend is payable on March 25, 2020, to stockholders of record on March 10, 2020.
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.
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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, 2019, 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, 2019 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, 2019 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.”
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
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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 2020 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 2020 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 2020 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 2020 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 2020 annual meeting of shareholders.
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PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements: The information required by this Item is contained in Item 8 of Part II of this report.
(2) Financial Statement Schedules: None
(3) 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
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of the Registrant (Filed as Exhibit 3.1 to the
Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Amended and Restated Bylaws of the Registrant (Filed as Exhibit 3.2 to the Company’s Report on
Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Form of Class A common stock certificate (Filed as Exhibit 4.1 to the Company’s Report on Form S-
1/A, File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Form of Class B common stock certificate (Filed as Exhibit 4.2 to the Company’s Report on Form S-
1/A, File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Second Amended and Restated Shareholders’ Agreement, dated as of February 12, 2018 (Filed as
Exhibit 4.3 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018,
and incorporated herein by reference).
Employee Shareholders’ Agreement, dated as of February 12, 2018 (Filed as Exhibit 4.4 to the
Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
4.5*
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange
Act of 1934.
10.1
10.2+
10.3
10.4+
10.5+
Form of Indemnification Agreement (Filed as Exhibit 10.1 to the Company’s Report on Form S-1/A,
File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Form of Victory Capital Holdings, Inc. 2018 Stock Incentive Plan (Filed as Exhibit 10.2 to the
Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Form of Victory Capital Holdings, Inc. 2018 Employee Stock Purchase Plan (Filed as Exhibit 10.3 to
the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Victory Capital Holdings, Inc. Equity Incentive Plan (Filed as Exhibit 10.4 to the Company’s Report
on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Amendment No. 1 to the Victory Capital Holdings, Inc. Equity Incentive Plan (Filed as Exhibit 10.5 to
the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
109
Table of Contents
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19
Amendment No. 2 to the Victory Capital Holdings, Inc. Equity Incentive Plan (Filed as Exhibit 10.6 to
the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Amendment No. 3 to the Victory Capital Holdings, Inc. Equity Incentive Plan (Filed as Exhibit 10.7 to
the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Amendment No. 4 to the Victory Capital Holdings, Inc. Equity Incentive Plan (Filed as Exhibit 10.8 to
the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
Victory Capital Management Inc. Severance Pay Plan and Summary Plan Description (Filed as Exhibit
10.9 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and
incorporated herein by reference).
Victory Capital Holdings, Inc. Bonus Plan (Filed as Exhibit 10.10 to the Company’s Report on Form
S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated herein by reference).
Victory Capital Management Inc. Deferred Compensation Plan (Filed as Exhibit 10.11 to the
Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018, and incorporated
herein by reference).
First Amendment to the Victory Capital Management Inc. Deferred Compensation Plan (Filed as
Exhibit 10.12 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018,
and incorporated herein by reference).
First Addendum to the Victory Capital Management Inc. Deferred Compensation Plan (Filed as
Exhibit 10.13 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018,
and incorporated herein by reference).
Second Amendment to the Victory Capital Management Inc. Deferred Compensation Plan (Filed as
Exhibit 10.14 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February 6, 2018,
and incorporated herein by reference).
Form of Stock Option Grant Notice under the Victory Capital Holdings, Inc. Equity Incentive Plan
(Filed as Exhibit 10.15 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February
6, 2018, and incorporated herein by reference).
Form of Restricted Shares Grant Notice under the Victory Capital Holdings, Inc. Equity Incentive Plan
(Filed as Exhibit 10.16 to the Company’s Report on Form S-1/A, File No. 333-222509, dated February
6, 2018, and incorporated herein by reference).
Form of Stock Option Grant Notice under the Victory Capital Holdings, Inc. 2018 Equity Incentive
Plan (Filed as Exhibit 10.17 to the Company’s Report on Form S-1/A, File No. 333-222509, dated
February 6, 2018, and incorporated herein by reference).
Form of Restricted Shares Grant Notice under the Victory Capital Holdings, Inc. 2018 Equity
Incentive Plan (Filed as Exhibit 10.18 to the Company’s Report on Form S-1/A, File No. 333-222509,
dated February 6, 2018, and incorporated herein by reference).
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 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, File No. 001-38388,
dated February 15, 2018, and incorporated herein by reference).
110
Table of Contents
10.20
10.21+
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29+
10.30+
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 (Filed as Exhibit 10.1 to the
Company’s Report on Form 8-K, File No. 001-38388, dated May 8, 2018, and incorporated herein by
reference).
Employment Agreement by and between Victory Capital Holdings, Inc. and David C. Brown, dated as
of March 20, 2017 (Filed as Exhibit 10.26 to the Company’s Report on Form S-1/A, File No. 333-
222509, dated February 6, 2018, and incorporated herein by reference).
Purchase Agreement, dated September 21, 2018, by and among Victory Capital Holdings, Inc., Harvest
Volatility Management, LLC, and the other parties listed thereto (Filed as Exhibit 2.1 to the
Company’s Report on Form 8-K, File No. 001-38388, dated September 27, 2018, and incorporated
herein by reference).
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. (Filed as Exhibit 10.1 to the
Company’s Report on Form 8-K, File No. 001-38388, dated September 27, 2018, and incorporated
herein by reference).
Stock Purchase Agreement, dated November 6, 2018, by and among the Company, USAA Investment
Corporation and, for certain limited purposes, USAA Capital Corporation (Filed as Exhibit 2.1 to the
Company’s Report on Form 8-K, File No. 001-38388, dated November 6, 2018, and incorporated
herein by reference).
Commitment Letter, dated as of November 6, 2018, by and among Barclays Bank PLC, Royal Bank of
Canada, and Victory Capital Holdings, Inc. (Filed as Exhibit 10.1 to the Company’s Report on Form 8-
K, File No. 001-38388, dated November 6, 2018, and incorporated herein by reference)
Termination of Harvest Commitment Letter dated as of April 22, 2019 by and among Victory Capital
Holdings, Inc. and Harvest Volatility Management, LLC (filed as Exhibit 2.1 to the Company’s Report
on Form 8-K, File No. 001-38388, on April 22, 2019, and incorporated herein by reference).
Amendment No. 1 to the Stock Purchase Agreement with USAA Investment Corporation and USAA
Capital Corporation, dated as of June 28, 2019 (filed as Exhibit 2.2 to the Company’s Report on Form
8-K, File No. 001-38388, on July 1, 2019, and incorporated herein by reference).
2019 Credit Agreement among the Company, the lenders from time to time party thereto and Barclays
Bank PLC, dated as of July 1, 2019 (filed as Exhibit 10.1 to the Company’s Report on Form 8-K, File
No. 001-38388, on July 1, 2019, and incorporated herein by reference).
Third Amendment to the Victory Capital Management Inc. Deferred Compensation Plan, dated as of
July 29, 2019 (filed as Exhibit 10.3 to the Company’s Report on Form 10-Q, File No. 001-38388, on
August 13, 2019, and incorporated herein by reference).
Amendment and Restatement of the Victory Capital Management Inc. Deferred Compensation Plan,
dated as of November 13, 2019 (filed as Exhibit 10.3 to the Company’s Report on Form 10-Q, File No.
001-38388, on November 13, 2019, and incorporated herein by reference).
10.31+*
Amendment and Restatement of the Victory Capital Management Inc. Deferred Compensation Plan
10.32+*
Victory Capital Management Inc. Director Deferred Compensation Plan
21.1*
23.1*
31.1*
31.2*
List of Subsidiaries
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
111
Table of Contents
32.1**
32.2**
101*
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
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
The following information formatted in XBRL (eXtensible Business Reporting Language): (i) Audited
Consolidated Balance Sheets as of December 31, 2019 and 2018, (ii) Audited Consolidated Statements
of Operations for the years ended December 31, 2019, 2018 and 2017, (iii) Audited Consolidated
Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017, (iv)
Audited Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and
2017, (v) Audited Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2019, 2018 and 2017 and (vi) Notes to the Audited Consolidated Financial Statements.
*
**
+
Filed herewith
Furnished herewith
This exhibit is a management contract or compensatory plan or arrangement.
112
Table of Contents
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 13th day of March,
2020.
SIGNATURES
VICTORY CAPITAL HOLDINGS, INC.
/s/ DAVID C. BROWN
By:
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
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
/s/ DAVID C. BROWN
David C. Brown
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ MICHAEL D. POLICARPO
Michael D. Policarpo
/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
President, Chief Financial Officer and Chief
Administrative Officer (Principal Financial
Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
113
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 13, 2020, 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, 2019.
Exhibit 23.1
Cleveland, Ohio
March 13, 2020
Exhibit 31.1
I, David C. Brown, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Victory Capital Holdings, Inc. (the “registrant”);
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;
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;
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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
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;
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;
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
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.
b.
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
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 13, 2020
By:/s/ DAVID C. BROWN
David C. Brown
Chief Executive Officer and Chairman
Exhibit 31.2
I, Michael D. Policarpo, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Victory Capital Holdings, Inc. (the “registrant”);
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;
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;
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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
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;
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;
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
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.
b.
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
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 13, 2020
By:/s/ MICHAEL D. POLICARPO
Michael D. Policarpo
President, Chief Financial Officer and Chief
Administrative 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
March 13, 2020
CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
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
March 13, 2020
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 and Head of Human
Resource Administration
CORPORATE OFFICE
Victory Capital
15935 La Cantera Parkway
San Antonio, TX 78256
INDEPENDENT AUDITORS
Ernst & Young LLP
950 Main Ave.
Cleveland, OH 44113
TRANSFER AGENT
AST Shareholder Services
help@astfinancial.com
800.937.5449 or 718.921.8124
INVESTOR INQUIRIES
Matthew Dennis, CFA
Chief of Staff
Director, Investor Relations
Phone: 216.898.2412
Email: mdennis@vcm.com
ANNUAL MEETING
OF STOCKHOLDERS
May 20, 2020 // 8:00 a.m. ET
www.virtualshareholdermeeting.com/VCTR2020
CORE VALUES
BUILD TRUST
We go to great lengths to fulfill our com-
mitments, and we work hard to do the
right thing for our clients.
RESPECT AUTONOMY
We value independent decision-making
and respect the autonomy of each
of our Investment Franchises and
Solutions Platform.
INVEST PERSONALLY
We are invested in our clients’ success.
We demonstrate that commitment by
investing our time, energy, and our own
assets in our strategies.
1 5 9 3 5 L a C a n t e r a P a r k w a y // S a n A n t o n i o , T X , 7 8 2 5 6 // w w w . v c m . c o m
CREATE ALIGNMENT
We work together toward a common
objective–helping our clients to achieve
their goals. We have approximately
$182MM invested in our own products.