Q4 2020 Victory Capital Holdings Inc Earnings Call
Thank you before I turn the call over to David Brown, I would like to remind you that during today's conference call. We may make a number of forward looking statements. Please note that victory capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual result.
<unk> to differ materially from those expressed on today's call victory capital assumes no duty and does not undertake any obligation to update any forward looking statements. Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results, we believe the non-GAAP measures and the <unk>.
The understanding of our business and our performance reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call both of which are available on the Investor relations portions of our website at <unk>.
I R. <unk> D C M Dot com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO David.
Thanks, Matt Good morning, and welcome to victory Capital's fourth quarter 2020 earnings call.
I'm joined today by Michael Pellekar Po, our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
I'll start by providing the business overview for the quarter as well as an overview of the full year of 2020, and an update of our pending THB acquisition.
Then I will turn it over to Mike who will review our financial results in greater detail.
Following our prepared remarks, Mike, Matt and I will be available to take questions.
The business overview begins on slide five victory capital ended 2020 with record breaking financial performance across a number of metrics our business performed well in a very challenging operating environment, we entered the new year with strong momentum adjusted.
Adjusted EBITDA margin increased to a record 52% during the fourth quarter, resulting in record adjusted quarterly earnings of $1 seven per share.
That's up 7% from the third quarter of 2020.
Investment performance also remained strong with 67% of value I'm outperforming respective benchmarks over the one three and five year periods ended December 31.
Firm wide assets under management Rose to $147 2 billion at December 31, 2020, an increase of 11% relative to September 30.
We ended the year with long term AUM of $143 7 billion.
Long term growth flows increased 12% quarter over quarter to $5 7 billion. We also saw substantial improvement in our net flow picture in the fourth quarter relative to the first three quarters of the year, while we continue to see some of the same headwinds in our net flow profile in Q4 that we saw in previous quarters. It did.
Slow in activity on the intermediary and institutional sides of our business was strong and included the funding of some previously awarded institutional mandates and a number of intermediary platform wins in placements for example on the retirement side of our business, we executed a selling agreement with ADP for the USAA mutual funds.
Additionally, our recently launched NASDAQ next 50, ETF ticker Triple Q1 has been approved for sale in the L. P L. Raymond James and more recently, the Morgan Stanley wealth management platforms.
And Sterling Trust capital added surplus emerging market strategy towards discretionary models.
We've also increased our focus on registered investment advisors with the addition of a team of distribution professionals with deep experience specializing in this channel and expect to see increased activity as we progress through the year.
Lastly, we established a new institutional level relationship with Citi Private bank earlier in the year.
Moving to capital management, we generated strong cash flow for the quarter consistent with prior guidance most of the excess cash we generated in 2020 was allocated to reducing debt. This reduced our leverage ratio to one eight times at year end. We also have made additional debt payments post year end, which Mike will cover.
Finally, we increased our quarterly cash dividend from seven to nine.
29% increase we remain committed to enhancing our financial flexibility and balance sheet capacity through reduction of debt. So that we can pursue strategic acquisitions, while also balancing returning capital to shareholders through dividends and share buybacks. We will continue to evaluate the balancing of the two especially as we continue to create.
Capacity on our balance sheet through debt and interest expense reduction.
Turning to slide seven we'll step back and review the full picture for 2020.
In addition to ending the year with record long term AUM and record gross flows we saw marked improvement in long term net flows as the year progressed adjust.
Adjusted net income with tax benefit per diluted share was a record $3 87 up 47% from $2 63 in 2019.
We had record adjusted EBITDA margin of 49% in 2020, reflecting the strength efficiency and flexibility of our business model, even as we navigated a very uncertain business and market environment.
We reduced our debt by $164 million over the course of the year, while at the same time, returning $42 6 million to shareholders and with the latest dividend declared yesterday, we have increased the quarterly cash dividend by 80%.
We continue to invest in our business in 2020 through meaningful investments in product development digital transformation data and technology.
This included the launch in November of a new digital platform to support clients across all our business channels.
The pursuit of attractive inorganic growth opportunities also remained a focus last year and will continue into this year.
In September we announced that we had acquired a 15% interest in all the wood partners, which provides us with an attractive return opportunity and broadens our international scope for future acquisitions.
We are on track to close the previously announced THB asset management acquisition. Later this quarter, we look forward to welcoming THB as our 10th investment franchise and integrating their ESG focused investment strategies onto our platform.
Our investment in all the wood and our acquisition of THB will broaden our distribution opportunities outside the U S, particularly in the UK Europe and Australia.
We're continuing to actively evaluate M&A opportunities with a focus only on those that will make our company better by providing access to specialized asset classes, new distribution channels and do have the potential to expand our client base beyond those what we serve today.
Simply put we are in search of acquisitions that are strategic to our business.
Looking back even further slide eight lists several of the objectives, we laid out at the time of for IPO in February of 2018.
As you can see from the table, we've generated substantial profitable growth through 2020 per year, and we've achieved an 88% increase in revenues expanded margins by 1000 basis points more than tripled our GAAP earnings per diluted share and more than doubled adjusted net income with tax benefit this year.
Illustrates the tangible results, we've achieved since becoming a public company and we believe serves as a report card for our business.
It is important to note that we've achieved these results while continuing to reinvest significantly in our business retaining to prove our talent base and deliver strong investment performance results for our clients. Looking ahead, we'll continue to focus on strong execution, while maintaining a long term view and creating lasting value for our shareholders.
Turning to slide nine I'd like to provide a brief update on our direct investor business.
We continue to enhance the service and products that we offer the direct investors and expanded our executive leadership team to include Mckeel, Sudan, who has been appointed to the newly created position of President direct investor business.
The kill brings a wealth of experience for this role most recently serving as a leader in Mckinsey as wealth and asset management practice, we are very pleased to welcome him to victory.
Looking at the direct business, we continue to benefit from a referral agreement with USAA and our ability to deliver diversified set of competitive products to USAA members and other direct investors.
Since we launched the business in July 2019, we have approximately 115000, new funded account registrations.
A good highlight is the USAA 529 College savings plan, which remained net positive in terms of both account growth and flows during 2020 and since we acquired the business in July 2019.
In November we completed the final transition from USA, a technology platform and introduced our new proprietary digital experience to serve direct investors as well as clients and other business channels.
The new digital marketplace advances, our sales and marketing efforts and enable us to more effectively promote our products to direct investors who were not USAA members. An example of a new feature is a software based investment planning solution that enables investors to create a personalized portfolio for retirement and non retirement accounts based on there.
Specific goals and risk tolerance.
Earlier in 2020, we launched the new IV, our contact center technology, which is fully integrated with our CRM data and better supports our marketing initiatives to gain wallet share with existing direct investors and attract new investors to our platform.
In addition to our marketing and digital efforts were focused on continuing to expand investment options.
In conjunction with the launch of our digital platform. We added a new no load member share class to a 11 of our existing victory funds specifically for the direct business. This means that direct investors are now able to invest in mutual funds not previously available through the legacy platform.
We also introduced taxable and tax exempt fixed income separately managed accounts SMA is managed by our U S. A a <unk>.
Vestments franchise on the direct platform in the fourth quarter.
As a side note, we will be offering this to the intermediary channel in the coming weeks as well.
During the year, we broadened our firm wide commitment to responsible investments by becoming a signatory to the United Nations supported principles for responsible investment.
In conjunction with this commitment we revised strategy for the U S. A a world growth fund to focus on sustainable and responsible investing and ESG considerations and changed the funds need to USA, a sustainable world for fun.
We've been steadily securing more product placements and shelf space for fixed income strategies managed by our USAA investments franchise.
The exceptional performance being generated by this group, which I'll cover in a moment is greatly enhancing our efforts to build these pipes for future asset flows. This is picked up recently and we anticipate this continuing throughout the year as I mentioned in the fourth quarter, we established a selling agreement with ADP for USAA mutual funds and <unk>.
<unk> added the USA, a intermediate term bond fund to one of its fiduciary products.
Charles Schwab also made allocations through its U M P product to the U S. A a high income fund and the USAA income fun. We are confident that we will continue to achieve more wins in 2021 as we further expand the commercial distribution of these strategies.
Turning to slide 10, I'll review the acquisition of THB asset management, which as I said earlier is on track to close later this quarter.
Th B has a 38 year history with an impressive investment performance track record.
As of January 31, the firm manage approximately $555 million in the Microcap small cap and mid cap asset classes, including U S Global and international strategies that number is up about 28% since the time of announcement.
These are capacity constrained asset classes that we know well and that are in demand. These are also asset classes in which active management is an important part of a well diversified portfolio from.
From a business perspective, THB us significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution and support.
All of THB strategies have ESG considerations fully integrated into their investment processes. In fact, THP was an earlier adopter and has been managing socially responsible investment portfolios for decades.
The table on this page highlights THB stellar investment performance track record.
All four of THB primary institutional strategies have outperformed their respective benchmarks for the one three and five year periods ended December 31. Additionally, all the strategies are ranked in the top quintile or top decile for the one year period and top quartile for the five year period According to investment.
This is a testament to the strength and consistency of Thb's processes.
And long tenure managing strategies in these specialized asset classes.
Th B is a great fit for us on many levels and highlights our ability to strike financially attractive creative deal structures with talented investment organizations Thb's entrepreneurial client first culture aligns well with ours and we are very pleased to welcome them to our team.
On Slide 12, I'll review, our investment results for the quarter as of December 31, 64% of company wide AUM in mutual funds and Etfs was ranked four or five stars overall by Morningstar 16 mutual funds ranked in the top quartile by Morningstar for the trailing one year period, including 11 funds in the top quintile.
Paul.
Looking at the investment performance of our victory shares Etfs for were ranked in the top quintile by Morningstar, including two ranked in the top decile for the trailing one year period.
Performance of the fixed income mutual fund and ETF managed by our USAA investment franchise remained very strong in the fourth quarter the percentage of AUM in those products outperforming respective benchmarks over the trailing one year period was 90 per cent as of December 31. Additionally, 14 out of 16 mutual funds and Etfs.
We're ranked four or five stars overall by Morningstar.
This includes the two active fixed income Etfs managed by USAA investments.
Would you achieve their three year track records in October and are ranked for Starz overall by Morningstar as of December 31.
Reflecting on 2020 as a whole there's no doubt that it will be characterized as a year of unprecedented challenges both personally and professionally as we emerged from the global pandemic crisis, there will be undoubtedly substantial.
Substantial change ahead.
We believe our business model, which combines boutique investment qualities with the benefits of a fully integrated centralized operating a distribution platform is uniquely situated to navigate and thrive as we look forward. In fact history shows that this type of market environment presents real opportunities for talented active managers like our.
And solutions platform to outperform and deliver meaningful results to our clients now.
Now I'll turn it over to Mike to review, our financial results in more detail.
Thanks, Dave and good morning, everyone that for.
Our results review begins on slide 14.
For the fourth quarter increased 6% from the third quarter, reaching $200 million from the period.
For the full year revenues were a record $775 million up 27% from the $612 million reported for 2019.
GAAP operating margin was 39% in the fourth quarter and 41 per cent for the full year.
Our fourth quarter margin was down on a GAAP basis from the third quarter, primarily due to a noncash adjustment to the book value of the earn out liability related to the acquisition of USAA asset management business.
In the fourth quarter. This adjustment increased operating expense by $7 $5 million compared to the third quarter.
It suggests that was net of the first maximum earn out payment of 37, and a half million dollars that we made to USA during the quarter.
As you May recall these earn out payments are based on revenue retention, which was in excess of the maximum hurdle rate in our first year of ownership.
GAAP net income was $54 $9 million in the fourth quarter compared with $55 $7 million in the third quarter for us.
The fourth quarter of 2019, GAAP net income rose by 46%.
GAAP earnings per diluted share for 75 cents in the fourth quarter.
It was down a penny from the third quarter and up 24 cents or 47% with the fourth quarter of 2019.
For full year 2020.
GAAP net income jumped 130% for $213 million, while GAAP EPS rose, 129% to $2.88 per diluted share compared with $1.26 per diluted share last year.
Adjusted EBITDA margin widened to a record 52% in the fourth quarter.
Compounding the higher quarter over quarter revenue the margin expansion drove adjusted net income of tax benefit to a record high $78 $6 million, which was up 7% from the previous record set in the third quarter.
Adjusted earnings per diluted share reached $1 seven.
Which was up from $1 per diluted share in the third quarter and up from 99 in the same quarter last year.
But for the full year period, adjusted EBITDA margin expanded 480 basis points to 49% up from 44% in 2019 due to better operating leverage and resulted in full year <unk> with tax benefit reaching a record $286 million.
This was up 48% from an Io tax benefit of $193 million.
In 2019.
On a per share basis, and our tax benefit improved to $3 87 per diluted share a 47% increase from 2019.
As Dave highlighted we increased our quarterly cash dividend for the third time in the past year.
We also continued our share repurchase program, while directing most of our free cash flow to reducing debt.
Paid down $49 million during the quarter, which increased full year debt prepayments to $164 million.
This reduced our leverage ratio to one eight times at the end of the year.
Since the beginning of 'twenty 'twenty, one we've repaid an additional $32 $5 million of debt.
Turning to slide 15, total AUM rose, 11% during the quarter.
The $147 $2 billion of AUM at year end reflects positive market action that was partially offset by net outflows, which improved in the fourth quarter.
Since the first quarter low point at the end of March our total AUM growth steadily during the final three quarters of the year increasing 19%.
The diversity of AUM in our distribution channels remained strong throughout the year.
Long term asset flows are covered on slide 16.
Consistent with guidance on our third quarter call in November the <unk>.
Proving flow trend that began in the second quarter continued in the fourth quarter.
From a chart you can clearly see the steady decline in redemptions throughout the year.
Also gross flows turned higher in the fourth quarter, increasing by 12% from the third quarter level.
A couple of our won but not yet funded mandates came in during the fourth quarter and we have a significant number of remaining mandates that have yet to fund we expect most of these to fund in the first half of this year.
Turning to slide 17 quarter over quarter revenues increased by 6%, which is slightly ahead of the 5% increase in average AUM.
The average fee rate in the quarter rose seven tenths of a basis point to 57, one from $56 four basis points from the prior quarter.
The higher average fee rate in the fourth quarter was the result of improving asset and channel mix shift better fulcrum fees on certain USAA mutual funds as well as additional performance fees recorded in the fourth quarter.
This was partially offset by higher yield support our money market funds during the period and a slight decline in the administration and servicing fees.
For the full year, our average fee rate was $56 eight basis points.
Looking ahead, we continue to be encouraged by the improving investment performance and the largest USAA mutual funds with Falcon piece.
I've highlighted investment performance has continued to outpace respective benchmarks on many of the fixed income products managed by our USAA investments franchise.
Moving to slide 18, the higher fourth quarter expenses compared with the third quarter for attributable primarily to the increase in the contingent liability valuation for the remaining USAA earn out I mentioned previously.
Fourth quarter adjustment of $9 $5 million reflects a lower discount rate used to calculate the liabilities present value plus a shorter time period for the three remaining payments and is net of the cash payment made during the quarter.
This expense is included in acquisition related restructuring and integration and represents nearly the entire increase in this category from Q3, but in this adjustment was $2 million.
The maximum liability of the three remaining payments is $112 $5 million.
At year end, the estimated present value was $92 million.
Collectively personnel and operating expenses were 6% higher than the third quarter, which was in line with revenue growth in the period for us.
Now expenses grew 12%, which included a sizable noncash mark to market for our deferred compensation plan in Q4 as a result of market appreciation. This expense is 100% offset as a reduction in non operating expenses and has no financial impact on the company's earnings adjusted for this expense personnel expense growth was 6%.
And in line with our revenue and earnings growth for the quarter.
Variable operating expenses flex tire due to the increased day AUM and revenue in the quarter and other operating expenses rose 1%.
Non operating expenses declined by 35% from the third quarter.
This was driven by 6% lower interest expense quarter over quarter as outstanding debt continued to rapidly decline in the quarter and the offset for the deferred compensation plan Mark to market mentioned previously.
Before we move to our non-GAAP results, we thought it might be helpful to illustrate long term trends in our annual incentive compensation on slide 19.
Another benefit of increasing scale is that incentive compensation increased in absolute dollars since our management buyout with the addition of new investment franchises distribution and support staff, but the percentage of pre incentive compensation EBITDA represented by that incentive compensation has been reduced by more than half from 40.
Percent for less than 19%.
This is another demonstration of the substantial operating leverage we can achieve with our business model.
Slide 20 provides a snapshot of our non-GAAP metrics for the quarter adjusted net income with tax benefit per diluted share was up 7% from the third quarter and up 8% from 99 per diluted share reported in last year's fourth quarter.
While we are not surprise for a strong financial performance and record results from 2020. It is still gratifying to realize the profitable growth we envisioned.
Our highly variable expense structure was deliberately designed to ensure a consistently strong financial results regardless of market conditions.
Our strategy was put to the test during the year, coupled with resilient execution, we emerged as a stronger company.
It certainly included strong execution by our investment franchises and solutions platform.
Our investment professionals successfully navigated the unprecedented disruptions during the pandemic, while continuing to deliver robust investment performance.
Our investment teams are provided with uninterrupted best in class resources from a centralized operating platform, allowing them to remain focused on managing client assets.
Our adjusted net income of $71 $8 million generated in the fourth quarter was another record.
There also was a small increase in the quarter's cash tax benefit due to making the first full contingency payments for USAA, which increased goodwill and acquired intangibles modestly during the quarter.
The end result was an anti with tax benefit growing by 7% from quarter to $78 $6 million.
As we look ahead the significant expansion in our adjusted earnings margin from Q1 to Q4, and 2020 of 700 basis points as a testament to our financial execution and our operating platform.
Margins will vary quarter to quarter based on the timing of investments, we're making to drive future growth and some seasonality of certain expenses.
We look at our full year 2020 margin level of 49% as sustainable going forward, which will include our investments in the digital transformation of distribution and marketing product development data technology and analytics.
Finally, moving to slide 21, I'll cover our capital management activities, we paid down an additional $49 million from debt during the quarter and another 32 and a half million dollars subsequent to year end.
Since the origination of the term loan in July of 2019, we've repaid approximately $345 million of the outstanding debt.
As a result of our proactive measures to manage our interest cost our cost of debt has decreased over 240 basis points since July of 2019.
You can see the impact of the steady decline in our pay downs in the chart on the top right of this slide.
Also our $100 million committed revolver remains undrawn and we continue to generate substantial free cash flow.
GAAP net cash flow from operating activities in the fourth quarter was $68 million for.
For the full year period cash flow from operations totaled $251 million, which does not include the $27 million, we realized from cash tax savings during the year.
With our strong financial position and free cash flow, we have added flexibility to return capital to shareholders. As we look ahead, we intend to maintain our capital allocation priorities with the majority of our excess cash flow being allocated to reducing debt.
However, as our cash flows growth and leverage declines we intend to strike a balance that allows us to continue to pursue strategic and value, creating acquisitions, while increasing capital returns to shareholders.
And the final quarter of 2020, we returned $10 $3 million to shareholders in the form of share repurchases and dividends.
We repurchased 272000 shares at an average cost of $19 72 per share and announced our third consecutive dividend increase.
For the full year, we returned a total of $42 $6 million from capital to shareholders nearly matching the savings in our run rate cost of financing.
But our debt to equity ratio close to one to one and a very attractive interest rate below three 5% locked in on $450 million of the outstanding debt. We are evaluating if this fixed rate portion of our debt might represent a natural floor.
Of course, it will ultimately depend on a number of factors that will be driven by the actual facts and circumstances.
And given what we have all endured over the past year, we know a lot can change in a very short period of time.
With that I will conclude our prepared remarks and turn it back over to the operator for questions.
Ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad again Thats Star one.
Pause for just a moment took a path for Q&A roster.
Your first question is from the line of credit with William Blair.
Hey, guys good morning.
You mentioned that you're evaluating the optimal leverage level can you just give us a little more insight into what you're thinking there at least at a high level.
You should or should we read that it always saying anything about the size of potential acquisitions Youre looking at.
Good morning, Chris.
A couple of things one is no you shouldn't read that at all is the size of acquisitions, we're looking at as I've said many times.
We're going to do small acquisitions, we're going to do large acquisitions and really the key driver is going to be.
Is it strategic to our business, we're not gonna do sized acquisitions just to gain size and scale I think it has to be a lot more strategic than that.
Mike and I talked about in the prepared remarks.
The optimal leverage level.
It'll depend on facts and circumstances of the time, but we are evaluating where we are today and when we think about that.
The reduction of debt the reduction of the cost of debt and really the strengthening balance sheet and our free cash flow and the strength of our business. It just makes sense to look at this probably through a different lens.
We are our balance sheet is prepared and we're prepared to really balance it to where we're not going to do anything it's going to prevent us from doing an acquisition, but also probably increase our ability to return capital to shareholders through buybacks and through dividends.
Okay got it.
And then one more specific just regarding the rollout of separately managed accounts that USAA or are you able as part of your relationship to become more of a.
I guess, a managed accounts provider there building goals based portfolios that incorporate both proprietary and.
Third party funds and Etfs I'm, just not sure exactly what the line is between what you're allowed to do and what Schwab can do as part of the relationship.
So.
If you start about start with our direct investor business, we have the ability.
<unk> to offer our current clients, which are which are a good amount of them are USAA members, some or not we can offer them any product that we'd like there.
For the referral agreement from USAA their referring.
Members that inquire about USAA mutual funds over to us they they inquire through a call or through digitally and they'll refer those to us. Once we are speaking to a USA remember we have the ability to offer them really any product that.
Debt that we have in our diverse investor business and as we talked about we have mutual funds, we've expanded the mutual funds.
To add some victory funds.
Can offer them a portfolio of planning tool, we have the fixed income SMA as we talked about and we'll be expanding that so we have the ability to really offer them any product what you're probably referring to is the referral agreement of how things are referred over and we get the referrals in reference to the USAA mutual funds.
Okay got it thanks, Dave.
Your next question is from the line of Randy Binner with B Riley.
Oh, Hey, good morning, good quarter, I said that kind of a couple of cleanup questions I guess for Sun solutions, Dave you highlighted in your script that at 529 was good and it was but I think flows for maybe a little bit slower there.
<unk>.
So I'm just asking.
Is it is there a slowdown in that business or is that just kind of normal fluctuation we'd see.
There and.
Just looking for kind of the outlook you see from a flow perspective for solutions in 'twenty one.
The solutions business for us is really going to be a grower.
It's a growth has been a grower and when we look forward what we have to offer there where the solutions business really as an engine.
Net investment engine for us. So you think about the victory shares Etfs, you think about some of the customized portfolios that we do and some of the other products. We think that's going to be a grower, especially as investors are thinking about.
Outcome based portfolios are more accustomed based portfolios, if there's a slowdown quarter that quarter or if one quarters.
Slower than another that that's really just going to ebb and flow of just.
Natural market swing.
The swings.
Okay got it and then.
Can you can you please review the.
Some of your comments around the compensation line.
Line.
I think you said maybe the stock.
Base comp aspect of the personal comp and benefits line gets offset in operating but I just I just wanted to understand what the offset you referred to is in the income statement.
Sure and good morning.
Yes, so it relates to Oh, we have a deferred compensation plan offered to employees.
And the asset and the liability both sit on the balance sheet.
So when Theres, a mark to market and we saw strong market appreciation in Q4, we recorded $3 $4 million of a markup of that plan that goes through the compensation line item.
And that same $3 $4 million is offset in non operating expenses as a reduction of non operating expense. So it gives me inflation. If you will of our personnel expense.
Which is really offset 100% by the decline in non operating expense that we show has no impact at all to the bottom line, but it's really a geography.
Okay understood and then on.
Just on USAA is there are there any further earn outs.
You know that are notable expected for 2021.
Sure. It's Mike again, so that the structure of the earn outs with respect to the USA acquisition.
It was over four years, so on an annual basis, there's a maximum payment of $37 $5 million annually.
And as we said in our prepared remarks, we met exceeded the maximum revenue threshold from a retention perspective in 2020 and made the first of those payments in.
In the fourth quarter so.
So we would expect going forward, we will evaluate the ongoing.
Those are revenue based on the contractual obligations that we have and we have up to three additional payments that we will make.
Over the next three years really really Q3 Q4 timeframe.
Post the computation from the evaluation.
Okay. Yeah. So we have it in the third quarter, but I guess this year it slipped more to the fourth quarter.
It's just the timing.
The anniversary if you will of the close was July 1st.
I need to make the computations in the payments it'll be Q3 Q4.
Ongoing it just was in Q4 this year.
Alright, that's great. Thanks, a lot share.
Sure.
Yeah.
Your next question is from the line of Ken right Langton with JP Morgan.
Good morning. This is will cuddy filling in for Ken.
So Dave you mentioned several intermediary wins in your prepared remarks could you help us understand the progression from initial intermediate replacement to flows.
How long has it typically take to get traction on our new intermediary platform, how does that timeline vary depending on the intermediary.
Good morning.
So it really does vary based on each platform I think.
Rule, we kind of use internally from the time of year.
<unk> are approved it's probably a year before you see significant flows.
Some of the platforms are sooner or some of them are longer. It also depends on exactly what youre being approved and where youre being approved but I think a good rule of thumb is probably 12 months and so we're seeing a lot of traction.
The strong investment performance plus.
Our ability to just continue to work into our pre existing relationships and newer relationships.
So we're building the pipes today and we know when you look over the horizon six to 12 months out we know that it was going to follow with with flows.
Great.
So.
The second question, so there's been a renewed.
Recent interest in asset manager consolidation.
As you look at your M&A opportunity set.
What is the uptick in asset manager M&A interest impacted your outlook for source attractive and strategic firms at good valuations.
So you know.
Really this is the busiest we've ever been from you know sourcing and speaking for potential acquisition candidates for.
For us it's not an issue of having the volume we have we've had plenty of volume and we have plenty of volume today, it's really finding the right partner for US we are selective weed.
We've been doing acquisitions for a long time.
We are not in a rush, but that being said it is pretty its pretty fruitful out there talking to people.
And we are you know we're looking at things that are going to be strategic to our business as far as valuations go they're in line. Some some are you know rightfully more expensive than others based on quality, but for us.
We have the means the resources and the balance sheet to really to get things done debt that we think would make sense, but for.
For us it's not a volume issue, it's really about our selection issue.
Great. Thanks, Dave just as a quick cleanup Mike.
And apologize if I missed this but what was the impact of the fee waivers and fulcrum fees for the quarter.
Yes, so our basis points in the fourth quarter was $57 one.
And the increase if you will quarter over quarter was a combination of enhanced bocom fees.
As well as asset and client mix, just what the market appreciation and seeing a little bit more towards equities, and then were offset a little bit with increased waivers on money markets.
The yield support with respect to money markets is still present.
And then the we had a little bit of a drag in admin and service fees to offset that so you kind of look at that and it nets out to a seven basis point increase quarter over quarter.
The annual performance fees that we book are immaterial, so overall for the business day.
Less than 1% of revenue for.
For the quarter, so really it was driven by <unk>.
Slight improvement in fulcrum fees quarter over quarter.
Not not not significant we're still we still have upside with that as we look out it's still a negative impact to the business.
Okay. Thank you for taking our questions Sir.
Sure.
Your next question is from the line of Kenneth Lee with RBC capital markets.
Hi, good morning, Thanks for taking my question.
Just one follow up in terms of potentially seeing some increased capital returns.
Realizing that you're going to still allocated majority to Delevering I Wonder if you could just talk further about considerations that could bias the additional capital returns either to share repurchases or dividends.
Good morning.
We have not decided really the avenue.
On how we're going to deliver that would be an increase in dividends or big increase in the buybacks.
We have increased our dividend over the last few quarters.
I wouldnt anticipate that changing but as far as the capital allocation it'll really depend on the facts and circumstances at the time, what we know is as we're generating more free cash flow. We know our cost of debt has come down we know our business has strengthened our balance sheet is strong.
We have a really positive outlook for the growth of our business. So we'll figure out at the time.
Working with our board what the right.
Avenue is to increase and it doesn't have to be through one it could be through increased buybacks or it could be through increased dividends and a combination thereof.
Great very helpful and just one follow up if I may you mentioned in the prepared remarks seeing some.
Contribution from previously awarded mandates being funded in the fourth quarter wondering if you could just.
Give us a little more detail how much of a contribution that was in terms of net flows and then relatedly.
In terms of the unfunded pipeline being funded in the first half just wondering if you could just.
Help us quantify.
Rough ballpark there thanks.
So it contributed to the fourth quarter I would say it wasn't a material amount.
When I think about the first half of this year, we have a sizable amount that has been.
Awarded to us, but not funded yet and that's building.
That's gonna lean very heavily towards the first half of the year a lot of that is going to be through our institutional.
Channel and some of our smaller amount in our kind of retail and retirement channel.
As you know, we don't really give guidance on flows intra quarter and a lot can change quarter to quarter, but we have a we have a book that's building and it's really found.
Founded on we have really strong investment performance across the board. We have some products that I think are or are starting to see traction through.
Really through.
A desire for investors to use these products in their portfolios and then we've also added a few sales professionals that we talked about in our prepared remarks.
Focus on registered investment advisors, and that's a new focus for us and we're starting to see some benefits there and then we're rolling out our fixed income SMA commercially.
You know in the next few weeks. So we're excited about that as well so put all that together and I think we have a.
A more positive outlook.
Around flows as we think about from a growth perspective.
Great that's very helpful. Thanks again.
Your next question is from the line of Alex Scott.
Hultman sacks.
Hi.
Shannon filling in for Alex.
I appreciate the color on the M&A front, if you can provide more details on the pipeline in the sense of what kind of asset classes and what kind of channels. Your guidance are you guys are targeting and how are the conversations but when I say on that front.
Sure.
So let me start off and say that anything we do is going to be strategic where we are not interested in just doing something for size sake.
Our scale sake, I think we have the size and scale and the operating leverage as you can see with our margins for the year in this quarter.
We're looking we start off with products, we're looking for.
For products that fit within our.
Portfolio.
A well diversified portfolio a portfolio of the future and when you think about that you think about products that generate income products that potentially are in private markets products that offer solutions have in ESG.
Tilt to it or outcome based I mean, we're really looking at those.
Those kinds of products, when we think about acquisitions.
And then from there we're also looking at.
Do these acquisitions bring us more distribution do they bring us access to new clients, new geographies geographies and distribution and also in manufacturing the sizing of the pipeline acquisition pipeline really ranges from small and very strategic.
Two large and strategic we've done acquisitions. The latest one we've done th P is small, but very strategic and is gonna be a grower is going to bring us positive flows great investment performance, great asset classes it fits what.
We've been looking for it you go back for USAA. It was very large in size and it was very strategic for us It brought us a great fixed income offering that brought us a.
A new distribution channel, a new business and the direct investor business.
So we built our business really now to have a platform, where we can do something that's small and something that's large and we're talking really to to all ranges from.
Size.
Got it thank you and one more Florida, Mike on the 49% so from.
A sustainable margin going forward can you help us understand D D.
D G. The sensitivity to that if the market kind of just keep going higher or if at all in D. C line.
A decline in the market.
Yeah.
Yeah. So so we did guide to kind of our full year margins as kind of a sustainable and foundational.
As we look ahead.
I think margins will ebb and flow.
Quarterly depending upon seasonality of expenses at the level and timing of investments that we're making.
As well as kind of ongoing asset and product mix, if you will.
With two thirds of our expenses being variable we have tried to design the expense base of the business. It's a free.
Flow.
With market.
In Q2, we had seen some market depreciation and some some recovery.
Early part of 2020 and we sustained.
Margins that have since expanded since then so we think that the business is set up pretty well to flex with margin and end market appreciation.
But for 49 percentage is where we feel comfortable running the business, where we are today.
Some of the investments that we highlighted in our prepared remarks, and kind of where we're thinking going forward.
Got it thank you so much.
Yeah.
And your next question is from the line of Jeremy Campbell with Barclays.
Hey, guys.
Maybe just a higher level, one day, you and Mike have gone through a rigmarole of the different kind of positive things from declining headwind from USAA strong pipeline, new products, new channels get performance new markets et cetera.
David I know you're going to want to say all of the above but if we're sitting here in February 22, and we're looking back over the year and flows have inflicted from out to N.
What are the one or two aspects of the giant menu you've laid out here that you have the highest conviction that helped drive that inflection.
So.
I would say.
The fixed income.
Traction, we're making today is going to drive flows.
If you look at what's happening just generally speaking.
You know from from investors and looking for income and the quality of that franchise and and really today.
When you think about today backwards, we have not been rewarded with flows yet we're building distribution. So I think the fixed income.
<unk> flows will be very impactful.
And then I think you know we.
We have a number of.
You know franchises that had been building great track Records.
And you think about.
You know franchises with with with lots of capacity and I can go through.
Number of them and add THB two to it as well.
That group will drive flows as well that doesn't mean that the direct investor business that doesn't mean some of the other things we're doing.
Have high conviction in or I don't think will be big contributors, but when I stand here today and with my Crystal ball, that's still pretty blurry.
Those are the two big buckets, I would say that where we go from out to end.
Great and then just maybe just a follow up on THP and I apologize if I missed this one but I know these are capacity constrained as you guys noted what's the headroom in that in that business between where they're at and where your share.
You're either hard or soft cap would be.
So today, they're at at the end of January there are about $555 million or higher than that actually today.
We think easily it's a $15 billion free.
<unk> franchise. So if you think about $600 million to $15 billion.
That would be the open capacity will evaluate capacity as we hit as we do with every franchise when we get to $2 billion to 5 billion and $10 billion, but but from what we know today, probably $15 billion of capacity at the top end.
Great. Thanks, a lot guys.
Yeah.
Your next question is from the line of rapidly with K B W.
Hi, Good morning, this is Jeff Drezner on for Rob Lee.
Quick question on ESG, and you mentioned that THP has a full ESG integration.
The investment process I was just wondering going forward on any acquisitions, how important was that kind of integration P. In terms of ESG.
And any.
<unk>.
<unk> plans to perhaps join.
Signatories onto the FASB or or some standards like that thanks.
So first on ESG.
Gration into our investment processes.
I think it's important it's where the industry is going for us it's going to be unique to each franchise that is with US today and then unique to the businesses that will buy I don't think there is one way to integrate ESG, but it is important it's a factor.
And I don't think it's a trend that's changing I think it's a trend that's accelerating we've made a lot of progress on our ESG internally, we've talked about the U N P. R. I I find.
CEO action pledge and we have a number of other initiatives and we're evaluating another a number of other <unk>.
Signatory.
Forums to get involved in but it's important to our company. It is important to our employees. It is important to me personally and it's important to our clients. Most importantly, and we've really you know it.
It'll be part of who we are going forward I'd also say in our prepared remarks, we talked about launching the USA a sustainable world growth fund.
And I would anticipate theres more of those kinds of products that we're going to launch over the next quarters and years.
Great and if I can just.
I was going to just follow up on that real quick Jeff. We did just join the FASB Alliance as a user remember that's happened earlier this quarter in the in 2021.
Oh, great. Okay. Thank you.
And then if I could just and I apologize if you mentioned this already but maybe for.
For your outlook is on the on the fee rate I know it kind of ticked up quarter over quarter. I was just curious how you're thinking about that going forward.
Yeah.
Yeah. So our full year free rate last year was $56 eight basis points I think thats a good rate that we're looking at going out.
It'll ebb and flow based on asset mix and channel mix, but.
As we look out that 56 eight seems to be.
Consistent.
And again looking back at ebbed and flowed a little bit based on fulcrum fees asset channel money market yield support, but we're looking at that as the rate going forward.
Yeah.
Great. Thank you.
And your next question is from the line of Michael Saphris with Morgan Stanley.
Hi, Good morning, this is Stephanie on for Mike.
Can you update us on the flow dynamics in the USAA channel and what in your view is leading to the continued drag on Friday.
What actions if any can you take to stem. This dragon any sense on the timeframe for when that's going to stabilize.
Good morning.
I think where we're at with the drag on flows we're seeing it subside.
We've done a lot from.
Bettering our investment performance.
Working with clients to working with.
Our partners in Schwab in USA, So I think over time, you'll see that and you are seeing that slowdown.
I don't really have any specifics.
Anything more specific to add to that.
Okay, Great and then as my follow up curious your latest thinking on the opportunity to expand distribution outside the U S.
What sort of initiatives are you putting in place or are contemplating at this point.
So with the acquisition of THB.
That'll help us in Australia, and will help us in Europe, there is relationships that they bring.
Our investment in all the wood that we made in 2020 will help us with distribution in Europe.
And those are probably the two things I'd point out.
When we when we look at acquisitions I talked about earlier about thinking about geography around distribution.
So we have that.
But that being said I think we have a tremendous opportunity here in the U S.
To really grow our distribution talked about adding a team to focus on registered investment advisors.
Building out our direct investor business. So we've got plenty to do here in the U S and I think we can be really successful with distribution with the lineup. We have today here inside of the state.
Your next question is from the line of <unk> Mody with Piper Sandler.
Thanks, Good morning, guys just a high level question for me just wanted to get a little bit more color around kind of how you guys are leveraging technology, both on a firm wide basis, and then across the affiliates.
Well do the improvements for the distribution platform I know you guys.
The new.
Allergy in the direct channel across the firm is that something you guys have been able to kind of apply elsewhere and then is there any inorganic and organic growth component there or is it mostly just kind of inorganic for future growth.
Sure. It's Mike I'll start yeah, we did mention that we did launch a new digital platform really new digital website.
To benefit all of our channels. So the direct channel is clearly a focus as we came off of legacy technology as part of the USAA transaction for the direct investor business, but that will also benefit all of our investors institutional and intermediary.
And so we continue to make investments.
Around the Digitization of distribution and marketing and how we can continue to leverage.
Digital footprint to access and service our clients across all channels.
We continue to look at data and analytics, we've talked a lot about that.
To be able to provide better data and analytics for the sales efforts that we have and the marketing efforts, both new and existing clients as well as for our investment franchises.
Continued to offer everything that we can to our investment franchises with respect to data and analytics to support their efforts on their investment processes research and execution.
A couple of highlights that we're looking at so I think we're making investments that will benefit not one particular aspect of the business day technology, but the entire business.
Great. Thank you.
Our final question is from that line of.
Chris <unk> with William Blair.
Hey, guys my questions have been asked and answered thanks a lot.
Thank you I would now like to turn the conference over to Mr. David Brown for closing remarks.
Great. Thank you. Thanks.
Thanks for joining us. This morning, we look forward to sharing our continued progress throughout 2021, we will be attending the credit Suisse annual financial services for them on February 25th and next month on March 10th we will be at RBC capital market Conference. We hope to see all of you there virtually and everyone have a great day.
Thank you, ladies and gentlemen, we ask that you now please disconnect your lines.
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