Q3 2021 Victory Capital Holdings Inc Earnings Call and to Discuss the WestEnd Advisors LLC Acquisition
Good morning, and welcome to the victory capital third quarter 2021 earnings Conference call. All callers are in a listen only mode.
Following the Companys prepared remarks, there will be a question and answer session.
I would now like to turn the call over to Mr. Matthew Dennis Chief of staff and director of Investor Relations. Please go ahead Mr. Dennis.
Okay.
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 results to differ materially.
From those expressed on today's call victory capital assumes no duty and does not undertake any obligation to update any forward looking statements.
A press release that was issued after the market closed yesterday disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release.
And in the slide presentation accompanying this call both of which are available on the Investor relations portion of our website at IR that BC dotcom.
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 third quarter 2021 earnings Conference 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.
We had a very successful and active third quarter in a number of areas and carried that momentum into the year's final quarter with yesterday's announcement of our agreement to acquire west end advisers.
I'll start today by providing an overview of the launch of our alternatives investment platform with the acquisition of New energy capital, which closed on November one.
Then I will cover our planned acquisition of West end advisors, which will position us as a leader in the very attractive model delivery segment of the industry.
Following that I will highlight our excellent operating results achieved in the quarter and then cover our investment performance, which continues to be strong.
After that I will turn it over to Mike who will review, our third quarter financial results in greater detail.
Following our prepared remarks, Mike, Matt and I will be available to take your questions.
Turning to slide five.
Had a desire to expand into alternative investments in private markets for several years and have done a significant amount of market research over that time, we've spoken to the leaders of many alternative firms and work with industry experts to gain knowledge and have the confidence to invest and compete in this space.
The traditional side of our business has grown from $17 billion eight years ago. When we became an independent company to approximately $160 billion today.
Now with greater scale financial stability and a deeper understanding we are well positioned to diversify our business into alternatives.
Leading up to this milestone we have been making deliberate investments to prepare for success in the alternative space.
Some examples are we recently developed a dedicated team of highly experienced our multifamily office sales specialists and have made investments in certain technology and data to support this expansion.
Yeah.
Since its founding in 2004.
<unk> business is focused exclusively on investing in the clean and renewable energy sectors.
Fact that their focus happens to be on investing in projects and companies involved with the transition away from carbon based energy sources is a function of the team's background and expertise.
We've launched a managed credit hybrid and equity funds. So they have a wide range of investing experience in this space.
They are always upheld and alpha first investing approach with any C. We added investment franchise that exemplifies investment performance excellence shares victories entrepreneurial and agile culture and moves everyday guided by a client first philosophy.
Consistent with our franchise model and the traditional side of our business, we've created economic alignment with the <unk> team through a revenue sharing arrangement and an earn out structure that is based on achieving targeted revenue growth in.
In addition, we will provide technology support and distribution in collaboration with any seize leadership.
Alternative investments in private markets present, an appealing new growth vertical for us and will complement the ongoing growth in our core traditional business.
The attractive margins fee rates asset flows and long dated capital there is a lot to like about alternatives.
Longer term, we envision creating value by leveraging our product development capabilities to create new vehicles that can democratize access to private markets for retail investors.
Rapid advances in technology are driving a convergence of private and public markets and victory capital is ideally situated to participate in this evolution.
We see tremendous opportunity to broaden access for mass market investors to investment strategies that had previously only been available to credit investors.
Our guiding principles remain the same of alternative investments will support investment autonomy ensure that economic incentives are aligned for the present and the next generation of each investment team.
And we will focus on high quality franchises with proven investment processes and teams with the closing of any C. Now behind US we are starting to prepare for the next growth phase of that franchise.
Turning to slide seven yesterday, we announced that we reached a definitive agreement to acquire 100% of Western advisors, which will become our 12 investment franchise West end is a leading third party ETF model strategies with approximately $18 billion of assets.
This acquisition is transformational for victory capital and that it provides us with a high quality investment platform in the fast growing model segment of the industry.
This transaction is also structure according to our guiding principles and that we have an earn out component of the purchase price that is based on achieving significant revenue growth targets and we will also have a revenue sharing arrangement in place.
We intend to retain the entire employee base and add to their team in areas, such as distribution and client service and investments over time to support the significant growth opportunity that lies ahead of us.
Our existing distribution team will be additive to westerns activities by leveraging our wider geographical footprint and having more sales personnel in market to drive increasing penetration at platforms or western currently have shelf space.
Compounding this growth will be our ability to leverage our team's long standing relationships to assist in securing new shelf space with numerous financial intermediaries for western.
As you can see from the graphics on this slide there are three primary ETF strategies make up approximately 90% of our assets all of those strategies have outperformed benchmarks for the latest 1357 and 10 year periods ended September 30th.
These returns net of fees and demonstrate western's investment value proposition for clients.
Turning to slide eight western is well positioned to continue benefiting from multiple industry trends, which I will highlight in a moment.
They are one of the largest third party Etfs model strategy just in the industry.
West end does not use any proprietary products in their model portfolios.
By using only third party Etfs the gain the desired sector exposure therefore.
The types of conflicts faced by home office models that broker dealers and asset manager models, they use their own proprietary products.
Also unlike proprietary models delivered by asset managers, which tend to be more static western models have active strategic and tactical components that feature sector exposure over style categories, such as growth or value when.
[noise] Westerns approach also provides financial advisers with a valuable and independent solutions West.
Western currently has recommended shelf space on the largest wire houses and has grown client assets to more than $1 billion at six different platforms.
Through these and other platforms they were working with approximately 3000 advisors.
To put this opportunity into context today victory is working with nearly 100000 advisors and we believe our current advisor relationships will be instrumental in increasing advisor penetration on these existing platforms for western.
Moreover, there is a great opportunity to expand <unk> presence to include the many platforms that are existing products are currently on and there is or not.
We view this transaction as an excellent means a further utilizing and monetizing the investments we have made over the past years to build out our distribution system.
Beyond their model delivery, which is typically used by advisors for a holistic or a completion solution, providing another source of alpha west and delivers complementary services to help advisors grow and gain scale on their own practices.
They provide valuable collateral around their investment thesis as well as market commentaries and other client ready educational collateral that advisers can repurpose directly with their clients.
This extra value add is greatly appreciated by financial advisers, as evidenced by west and being named E. Vest net asset manager and strategy of the year in 2021.
On slide nine we always straight several secular industry trends that are creating strong tailwind for ETF models.
First investors increased preference for competitively priced ETF vehicle wrappers for investment exposure.
Second more intermediaries are promoting adoption of model portfolios for regulatory reasons as well as to free up advisors to focus on client service and gathering assets rather than portfolio constructions.
Lastly, the ongoing migration of advisers away from commission based business models to fee based revenue models.
All of this bodes well for continued accelerated organic growth for western which is nicely positioned in the middle of these major industry trends that are evolving the asset and wealth management landscape.
Additional evidence of these material trends as illustrated on slide 10.
Overall model portfolios have grown 29% annually over the last three years.
Inside of this shift ETF models are growing faster than mutual fund models and have been gaining market share as the total market pie grows in size Needless to say, we are very optimistic about this acquisition and how it will enhance our overall organic growth trajectory.
On Slide 11, you can see that west end growth has significantly exceeded that of the industry with assets growing at more than 40% annually from the end of 2016 through 2020.
And the first nine months of 2021 assets increased another 53% with most of the growth coming from positive net inflows.
The $3 5 billion of positive net flows generated by western in the first nine months of this year represents more than 30% of their assets at the start of the year.
Even with this rapid growth they had very low single digit penetration at most of the platforms, where they currently have shelf space.
This provides a very long runway for sustainable asset growth.
This acquisition is also a sufficient size that we expect it will have a meaningful accretive impact on our overall net flows and it will steepen, our overall organic growth trajectory.
On slide 12, we provide a summary of our financial structure and pro forma estimates there'll be acquisition, which illustrate the value creation opportunity for our shareholders alongside the compelling strategic rationale.
We will be making a $480 million cash payment at closing this.
This will be financed through an incremental term loan b facility that is already fully committed.
We do not anticipate any significant changes with this incremental facility from our current term loan.
Western will add approximately 9% of EPS accretion in year, one which will grow double digit accretion in year, two and by year, four we expect accretion to exceed 20% or well over $1 per diluted share.
Over the same timeframe, we expect west end will generate strong positive net flows fueling this growth.
Our final aspect to point out is that this acquisition is strategic and thus we do not anticipate any significant cost reductions to be generated from the transaction.
We may very well achieve some minor cost reductions from leveraging our operational platform. However to be conservative we have not included any cost synergies in our projections. There also should be minimal integration costs incurred.
Turning to the quarterly business overview that begins on slide 14, we ended the quarter with 160 billion of AUM.
Earlier this year I featured a number of our products with significant open capacity that had been attracting assets as investors continue to recalibrate portfolios.
This has led to record long term gross sales of $22 4 billion in the first nine months of the year, which is 28% higher than during the same period last year.
A few examples of the products our Morningstar five star rated victory floating rate fund and the victory market neutral income fund, which have continued to experience positive net flows in the current market environment.
Additionally, our victory shares ETF platform generated positive net flows for the fourth consecutive quarter.
Moreover, the net flow improvements in our direct investor business have persisted into the most recent quarter. All of this culminated in our second consecutive quarter of positive net flows revenues grew 2% sequentially and were up 20% versus the same quarter of last year. Adjusted net income with tax benefit per diluted share grew to a record.
$1 25.
Which was up 6% from the second quarter and up 25% from last year's third quarter.
Our integrated operating platform continues to demonstrate the efficiency of our model with adjusted EBITDA margins coming in above 50% for five consecutive quarters.
We continue to reduce debt during the quarter at the same time, we accumulated cash to fund the <unk> acquisition and other cash needs, including the second USAA earn out payment.
Yesterday, we also announced that our board declared the sixth consecutive increase in our quarterly cash dividend raising it 13% to <unk> 17 per share.
On slide 15, our view, the direct investor business and new product developments.
During the quarter, our contact center field at approximately 110000 investor calls with an average speed to answer of less than one minute with superior customer satisfaction scores.
As I mentioned earlier flows improved for the past five consecutive quarters, and our direct investor business, which is encouraging as we continue to build out enhancements and look forward to adding many new features and products during 2022.
A referral agreement with USAA continues to support new account growth on average we've added more than 5000 accounts per month since the acquisition <unk>.
<unk> in this number are new clients acquired outside of the referral agreement and we are encouraged about the long term opportunity that is in front of us with regard to account growth.
529 plan has also been a positive contributor adding new accounts.
During the first nine months of 2021 and since the acquisition in 2019. The 529 plan has been net flow positive.
In the third quarter, we also launched our mobile app for direct investors and it has gotten off to a strong start and has already been downloaded from the Apple and Android stores by approximately 100000 users.
Enhancing the ways in which direct investors can digitally engaged with us we are simultaneously, increasing investor satisfaction, while enhancing our operating efficiency.
Regarding new product development in August we launched our private crypto fun part of our exclusive agreement with NASDAQ and global Crypto focused asset manager harsh tax.
This is a differentiated product that provides a credit investors with access to a diversified basket of digital assets with competitive pricing and no lockups.
<unk> tracks, the NASDAQ Crypto index ticker, NCI, which is a multi corn crypto index that employee strict eligibility criteria and rebalancing constituents quarterly <unk>.
This structure creates beta like exposure to these asset for investors in a dynamic and adaptable manner.
Earlier in the current quarter. We also launched three actively manage ESG focused etfs.
Turning to perhaps the most important page in the presentation, our strong investment performance as illustrated on slide 17.
Our investment franchises continued to generate attractive investment returns for our clients during the third quarter.
The number of mutual funds and Etfs with the four or five star rating from Morningstar increased to 45% at the end of September and approximately two thirds of our AUM is in mutual funds and Etfs with four or five star ratings, which is an increase from last quarter.
For the trailing 12 months ended in September 21 of the mutual funds, we manage ranked in the top quartile of their peer groups.
With that I will turn it over to Mike for a more in depth discussion of the financials Mike.
Thanks, Dave and good morning, everyone. The financial results review begins on slide 19.
Revenue was up 2% sequentially from the second quarter, reaching $226 $3 million.
This was a 20% increase over the same quarter in 2020.
Adjusted EBIT margin was 58% up 20 basis points from the second quarter and up 10 basis points from the third quarter of last year.
Year to date adjusted EBITDA margin was 55%, which is a 290 basis point improvement over the comparable period in 2020.
GAAP net income and earnings per share set new quarterly records at $74 2 million and $1 per diluted share respectively.
And adjusted net income with tax benefit was a record $92 $6 million or $1.25 per diluted share.
Which is up 6% sequentially and up 25% year over year.
<unk> continued to reduce debt paying down $35 million in the first half of the quarter before we began accumulating cash in preparation for the <unk> transaction closed as the quarter progressed.
We repaid a total of $454 million of debt since the acquisition of the USAA mutual funds and 529 business just over two years ago.
We returned a total of $19 million of capital to shareholders in the form of cash dividends and share repurchases in the quarter, which brings the year to date total capital return to just over $51 million.
Lastly, the 13% higher quarterly cash dividend of <unk> 17 per share.
Is payable on December 27 to shareholders of record on December 10th.
Turning to slide 20.
Total AUM declined 1% during the quarter to $159 $9 billion.
This was driven by negative market action that was partially offset by positive net flows in the quarter.
AUM is up 21% from the same time last year with our long term AUM ending the quarter at $156 7 billion.
The business continues to be highly diversified by clients as evidenced by the bar chart on this page.
We have three deep distribution channels with each representing over 25% of our firm AUM.
On 'twenty, one we cover long term asset flows.
Gross sales declined sequentially, primarily due to a couple of previously disclosed institutional mandates that were funded in the second quarter and seasonal volatility.
More importantly year over year gross long term sales improved 12% from the third quarter to $5 7 billion.
Compared with $5 1 billion.
In last year's third quarter.
Year to date gross long term sales were $22 4 billion.
Which is a 28% improvement over gross long term sales of $17 5 billion.
And the same 2020 period.
As Dave mentioned this was our second consecutive quarter of positive net long term flows.
Year to date net long term outflows are approximately half a billion dollars.
Which is a significant improvement from the $9 4 billion of long term outflows in the first nine months of last year.
Year to date flows have been well diversified by investment franchise distribution channel and client type.
More specifically, we have seen better net flows in our direct investor business.
Strong sales of many of our high performing products and a pickup this year in institutional activity.
Turning to slide 22 quarter over quarter revenues increased by 2% and year over year revenue was up 20% due to higher average AUM and each respective period.
Average fee rates in the quarter.
It was 55 three basis points, which was down nine tenths of a basis point from the second quarter.
Gross to investment management fees were eight tenths of a basis point lower due to channel and asset mix.
Net management fees were helped by better fulcrum fee performance and lower fund waivers and reimbursements in the quarter.
This was partially offset by higher money market yield support.
While we have seen improvement in the fulcrum fees on the USAA mutual funds the impact for the quarter was negative three tenths of a basis point.
There is upside as we have mentioned previously on our fee rate on both the fulcrum fees.
And as we see improvements in the rate environment on our money market fund yield support which was negative nine tenths of a basis point in the quarter.
Fund administration distribution and Ta fees were down two tenths of a basis point versus the second quarter based on channel and product vehicle mix.
Fee rates will fluctuate quarter to quarter based on client and asset mix.
It is important to note that our margins did increase during a period in which our fee rates contracted highlighting the power of our operating model.
As we look ahead, the management fee rate realized by less than approximately 30 basis points, which is below our current average management fee rate.
And given that there are no associated fund admin distribution for Ta fees associated with weapons model business, we expect product mix shift.
Lower average consolidated fee rates following the close of that transaction.
That said as we have repeatedly stated we are much more focused on margins than fee rate.
Our business model is designed to maximize efficiencies and enable us to earn healthy margins on very competitively priced products.
This is evident in the current year with the uptick in margins and net income despite lower realized fee rates.
Moving to slide 23, you can see our total expenses increased 1% from the second quarter in line with higher AUM revenue and earnings.
Lower quarter over quarter cash compensation expenses were offset by higher acquisition restructuring and integration expenses, which increased by $1 $9 million in the quarter related to the any fee and USAA asset management acquisitions.
As a percentage of revenue cash compensation remained steady at 23%.
Shifting to our non-GAAP metrics for the quarter, Please turn to slide 24.
Adjusted net income of tax benefit per diluted share increased to $1 25.
Up 6% from the second quarter, and 25% higher than last year's same quarter.
Adjusted net income of $92 6 million achieved in the quarter included a $6 $9 million tax benefit.
Year to date adjusted net income of tax benefit grew more than 27% to $263 million or $3 55 per diluted share.
Adjusted EBIT margins widened slightly compared with the second quarter.
We are continuing to make investments in the business and Thats, we will maintain our adjusted EBIT margin guidance of approximately 49%.
As we've discussed in the past this can fluctuate quarter over quarter or even year over year, depending on AUM levels.
And the timing of the investments being made to drive future growth.
Taking a look at our financial condition on slide 25, you can see that we have been actively preparing our balance sheet to provide capacity and support of our inorganic growth strategy.
Our interest rate and our absolute cost of debt have declined dramatically since we originated the term loan a little over two years ago.
This is the result of reducing the outstanding debt and to re pricings that lowered the spread we pay on the debt as well as lower LIBOR.
Our primary cash needs for the business in the final quarter of this year include consideration for the <unk> acquisition, which was paid at closing earlier. This week. The second earn out payment for the USAA acquisition, which is once again, a full earn out payment of $37 $5 million.
Due to revenue exceeding projections.
And the westbound acquisition, which is being financed with an incremental term loan b facility that as Dave mentioned earlier is fully committed.
Marketing for the debt deal will commence next week as.
As we are on track to close the western acquisition by year end.
We do not anticipate any significant changes to the term loan associated with the incremental facility.
On a pro forma basis, the term loan extension will increase our leverage ratio to approximately two three times based on estimated run rates at closing.
This is lower leverage versus when we entered into the original term loan two years ago.
Our pro forma run rate EBITDA from this transaction is projected to be in excess of $500 million.
Approximately 30% higher than the EBITDA run rate of $385 million at the time of origination.
As in the past, we intend to deploy the majority of this higher cash generation to reduce debt.
Additional capital management activities are detailed on slide 26.
Cash flow from operations was approximately $100 million in the quarter.
After repaying $107 million in debt in the first half we paid down an additional $35 million early in the third quarter.
We returned a total of $19 million to shareholders through share repurchases and dividends during the quarter.
We repurchased an additional 189000 shares in the third quarter at an average price of $33 29 per share.
This increased year to date share repurchases to 763000 shares through the end of September at an average cost of $28 46 per share.
We also announced the sixth consecutive increase in our quarterly cash dividend yesterday, which is up 13% from the dividend paid in the third quarter.
That concludes our prepared remarks, I'll now turn it back over to the operator for questions.
If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Pause for a moment to compile the Q&A roster.
Your first question comes from Robert Lee with K B W.
Great. Thanks. Good morning, Thanks for taking my questions I guess, maybe my first question is on <unk>.
On western.
Curious I mean there.
You know how youre thinking about your.
<unk>.
Distribution leverage you can add or maybe what they can bring to you. The date I guess they already seem to be in many of the larger or midsized distribution platform. So really have a presence there it's pretty good growth so no.
How much do you think you could possibly accelerate and then maybe by the same token what is this.
You know do you.
Overall SMA business.
<unk>.
To what extent does.
Do you think this helps maybe the rest of your platform of products that you may have in the SMA market.
Good morning.
Dave and thanks for your question.
Western is let me start by saying Western is a transformational transaction for us.
It's going to put us into a segment of the industry that's growing very quickly.
A huge shifts going on.
At the intermediary platforms.
Evolving to models.
Moving to more fee based type of accounts and so for west and the opportunity set to partner with US is to really have first more sales professionals in the field.
To have a wider geographical.
Reach so when you think about one of the stats we gave in the prepared remarks of they do business with 3000 advisors and we do business with 100000 advisors.
<unk> opportunities just to get more.
Advisers to learn about west end and there are a lot of platforms that they don't do business with that we do business with so we'll be able to introduce their product set to that group of platforms and then within the platform as they do business with today.
We'll be able to introduce their product to more of the advisors as.
As we said in our prepared remarks.
We're keeping 100% of their employees their entire distribution force or distribution forces unbelievably excited as they learned about this yesterday and I think theres, a real opportunity to accelerate what they've already done and they've done a tremendous job growing their business and establishing their business to be one of the law.
<unk>.
Third party ETF model providers in the industry.
As far as our existing business, there's a real opportunity.
For us to cross sell products with advisors.
To get introduced to advisors that maybe we're not doing business with today.
But we look at this is all additive and this really allows us to utilize and really monetize the investments we've made in distribution even further than what we're doing today.
Great and then maybe just a quick follow up I'm, assuming post transaction. There is no change in how you're thinking about.
Cash and capital management.
Got it in place this is carlin.
At a steady pace and kind of reload I would assume that doesn't change.
Exactly no change in our overall capital policy the strategy we've employed.
The last few years is to use the <unk>.
Primary.
Free cash flow.
To pay down debt.
And then to have a flexible balance sheet to take advantage of the consolidation that's happening in the industry and to <unk>.
Put ourselves in a position to be flexible and nimble and when you think about what we've accomplished in 2021.
Announcing anything and closing it and then the anticipation of the close of West end before the end of the year.
That's really available to us because of the flexibility of our balance sheet and how prepared it is.
Great. Thanks for taking my questions.
Your next question comes from Alex <unk> with Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the question.
Couple of questions on it.
Curious if you could expand a bit on the different products and really the wrappers that they currently have to distribute their product.
Sort of anything on the open ended side anything on the perpetual side just to get a better understanding for the duration of capital there and then how quickly do you think victors distribution could start to add to the organic growth profile on that day.
Hi, Alex.
So today <unk> really has only private only has a private fund option avail.
Available too.
Accredited investors are qualified investors.
Our vision for that business to continue down that path and also as we said make it available to a larger investing base through some of our wrappers that we have today that's in development.
It's a great opportunity to really take return streams, and really access to private markets and make that available to the masses.
I think you've seen a lot in the last few weeks with some of the announcements in the industry.
That that we've seen.
Theres, a real opportunity to do that and we think we're well positioned to do that.
Got you, Okay, great and then on the Westin.
And how would you guys say, it's at 30 basis points to your business. How stable has obviously regain all time call. It over the last couple of years.
And as you think about.
Sort of the forward on the <unk>, what's the competitive mode for this entity do you think that will provide theory from coming down as they might you know against Hasnt seen where maybe you have some of the other rappers or ultimately more kind of past the point of vehicles.
Alex Good morning, it's Mike. Thanks for the question, yes that west and fee rates as we said in the prepared remarks are about 30 basis points and they've been consistent really since the beginning of <unk>.
Their access of their products to the retail platforms that they sit on.
We believe going forward that the fee rates have remained stable.
They provide really active ETF model portfolios.
On these platforms and they are differentiated in both their structure and how they provide.
Our investment thesis.
And so we feel pretty confident that going forward.
The basis points that theyre charging that had been consistent and will remain the same because of the differentiation that they provide within these platforms.
Got it great. Thanks very much.
Sure.
Your next question comes from Collyn Johnson with B Riley Securities.
Hey, Thanks, good morning, Thanks for taking my questions.
It's a new energy is currently about $1 billion Tonight, yet immediate huge feat today, but you could probably see some positive net flows there with that.
To support this fee rate at the margin, assuming some meaningful AUM growth in that in.
In that segment.
Hey, Tom It's Mike.
At $1 billion.
It probably wont provide significant support since were 160 billion overall, but as we have said any CS fee rates are typical to private equity private credit structures.
And we do expect that we'll continue to raise assets going forward with that.
From a math perspective, it's just a little bit too small to provide significant support but.
But we do feel like the the opportunity set for organic growth with NBC is pretty substantive going forward.
And it does create the opportunity for us now within alternatives platform.
To attract additional alternative products.
Within the operating platform.
Got it that's helpful.
And then just looking at expenses the distribution and asset based expense.
I guess kind of late 2019 or early 2020, we saw it maybe closer to the $50 million range, but lately, it's been running low <unk> low to mid 40%.
Probably a fair way to think about that that value.
The intermediate term here.
Yes, I think the current kind of run rates are definitely the opportunity set going forward for kind of our distribution and AUM related.
Expenses in 2020, we had.
With the transaction within USAA, some declining as we were able to execute on some incremental synergies with respect to those expenses.
Got it that's helpful. Those are all my questions. Thanks.
Sure.
Your next question comes from Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my question.
One on the West end in terms of the the projections you talked about in the prepared remarks.
Wondering how much of the projections are assuming a certain amount of expansion based on benefits from victory capital's distribution capabilities versus.
I guess just further growth within the current platforms, our clients that that western already has thanks.
It's Dave.
Hard to say.
Segment that out I think what we've thought about is we're going to take.
<unk> existing distribution.
Penetration their existing distribution people combine it with ours, and we think putting that together is going to be pretty powerful going forward.
We're anticipating the same type of growth that they've achieved over the last four years going forward and that accelerating this is really hitting.
A couple of as we've talked about a couple of key points.
In the industry.
Secular tailwind.
We think we're going to be right in the middle of and then with our distribution and really it.
Really it allowing us to.
Utilize all of the investments we've made in our distribution, we think it's going to grow quite.
Quite significantly, but we have not segmented out what exactly victory is going to bring versus what west and wood.
Would bring but we know putting together it can be pretty powerful.
Yeah.
That's helpful.
Just one follow up if I may and perhaps this is a little bit more broadly in terms of alternative products and as you build out your capabilities and offering alternative products I Wonder if you could just talk a little bit more about.
What kind of changes do you envision for your distribution platform I think you talked about within your prepared remarks, some additions of more specialized sales.
Just wondering at a high level what sorts of changes do you think are needed for your distribution platform in order to start distributing alternative products more widely going forward. Thanks.
It's Dave again.
We've been making those changes already I think we've talked about.
Really preparing and evolving our distribution platform and our overall platform. So some of those changes have occurred.
With investments in technology, and data and some of the different pieces of our distribution.
Will evolve going forward.
Our institutional channel.
And our intermediary channel, but there won't be major changes needed.
The alternatives platform you know like we said we have studied alternatives for years, we've talked to a lot of industry leaders, we've prepared our platform.
And we think it's a great opportunity going forward and I think as the buyers.
Evolve for these kinds of products I think we're really well positioned to take advantage of them with the resources, we have today and the continued evolution.
<unk> is a platform for us our approach is going to be exactly what we've done with our traditional platform. We built it over a number of years, we built it methodically.
<unk> built it efficiently I think we built it smartly and.
And I think the success speaks for itself and that will be the same path will take on the alternative side, we're in no rush.
We're looking for high quality franchises.
That are really value added to clients portfolios any C is a perfect example.
And I think what will guide us as our principles.
But from a distribution perspective, specifically.
We're a good ways there.
And we will evolve.
The rest of the way as we continue to expand it out.
Great very helpful. Thanks again.
Your next question comes from Owen Lau with Oppenheimer.
Good morning, and thank you for taking my question could.
Could you. Please talk about your appetite for further acquisition in the near term.
How should investors think about the pace of the acquisition, but you took a pause while you are finding the right target or you're in active dialogue with potential sellers and getting close to the finish line. Thank you.
Hi, it's Dave again.
I would say 'twenty, one is going to turn out to be a really active.
Year for us from an acquisition perspective.
T H b.
C and now west and all.
All should close before the end of the year and that's on the heels of the investment we've made in Alder wood.
And I think one thing to point out is really the last four.
Transactions are all what I would term as growth transactions.
Areas, where we're investing in growth and I think 'twenty two is going to be a year, where we're going to really see the impact of that growth on all four of those.
About all there would fund raising.
In 'twenty, two and in THP.
Starting to really come online and then any sea fund raising in 'twenty, two as well and then the impact of West and I think youll see a real impact to our business.
When it comes to activity I've said this quarter over quarter, we are active.
We will be able to immediately go to another acquisition.
After we close western.
We will pay down debt very quickly we have lots of different ways to structure transactions and we're talking to a lot of folks today, our platform is really appealing.
And I would anticipate that we continue this pace.
We're not going to rush anything there'll be pockets of time, where we don't do anything but it doesn't mean the dialogue is going to stop but I can tell you that we are we are active we are talking to groups actively and there are a lot of great opportunities out there for us are guiding principle on acquisitions is pretty simple.
<unk> it.
It has to make our company better and.
And I think what we've done has made our company significantly better and that'll be the approach we use going forward.
Got it that's very helpful. And then could you. Please also give us more color after a quickbooks strategy. What do you see in terms of the institutional adoption. All featured assets. These days. Thank you.
You I did not understand the question can you repeat it.
Oh, sorry, I just wanted to see whether you can give us more color on crypto strategy anything related to digital assets and what do you see in terms of the.
Adoption of digital assets.
Sure.
So we launched the crypto product a few months ago, we have seen.
Really good interest we're in an education phase with a number of our potential clients we've had.
Some clients purchased the product.
And I think when we think about the institutional side, we are in an educational.
Part of the process given that given that it's a new asset class I think longer term youre going to see institutions.
Use of the crypto asset classes that diversify or as an enhancement to our larger portfolio we've seen.
And it's to a large institution actually by crypto, which I think is the first step. So we have high hopes for it we're talking about it with a lot of clients, it's resonating and.
And we're really in the process of educating which I think is this step before actually purchasing.
Got it thank you very much.
Your next question comes from Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for taking the question just on the.
Model portfolio.
Base, certainly a growing part of the industry, but it's pretty it's getting a little crowded too. So can you just talk about what <unk> is doing differently in the marketplace that is resulting in the growth and can you also talk about the competitive.
Landscape, how you see that evolving and what do they need to do right in order to be a winner in five years.
Hi, its Dave.
First their investment process.
They are active they have had excellent investment performance over a long period of time, the well experienced.
They they give excellent client service.
Really value added to the advisers.
When when they're taking what they do and packaging that up for the advisors.
For themselves and the advisers to use for their clients.
They have a very tax efficient portfolio utilizing etfs, they don't utilize any of their proprietary products. So this is truly a third party.
Makeup of Etfs, so they are able to be selective on how they're getting their exposure to different sectors.
If you look at the landscape and you look at what they have to offer it's really either a holistic solution for an advisor or a complement.
To an overall portfolio, where there were there you know maybe 10% to 30% of our portfolio.
And when you think about how they performed over the different market cycles.
And also coupled out with the tax efficiency and what Theyre doing from our education of the adviser, giving collateral to the advisor, it's a really compelling proposition.
<unk> forward I think it's going to be.
What theyre doing today, there could be some product expansion.
We have discussed, which I think could be quite interesting as well.
But I think they're very.
<unk> well positioned.
Crowded when you look at the overall model industry, but there.
A certain part of the industry, where I think they really have been able to stand out and will continue to be able to stand out with what theyre doing.
Yes.
Great and then just on the earn out can you help quantify what the range of potential earn out payments could be how significant is that could it be as large as the upfront payment and what sort of metrics need to be met for that to be fully paid versus partially paid.
Mike Good morning, it's Mike Yes, the earn out is the upfront purchases a majority of the total potential purchase price.
So the earn out really is the minority of the purchase price and what I'd say is it.
Earned outs and it's up to the.
The potential to earn it out over five and a half years post the transaction.
And the.
How it will be earned is really based on material revenue growth over that period.
And then revenue growth just from a <unk>.
Sizing perspective, really will be and needs to be in line with their kind of recent growth trends that they've experienced to earn the full earn out.
It is a capped earn out and we look at it as you know should they hit the cap on the earn outs. It will be self funding from a cash flow perspective based on the growth. That's that's delivered.
Great. Thanks for taking my questions.
Your next question comes from Ken Worthington with Jpmorgan.
Hi, good morning.
Wanted to dig deeper into alternatives.
Do you see filling out your alternative suite of products and what alternative areas are sort of must have if youre going to meet your vision for this for this business.
And what is pricing sort of looks like for alternative asset manager acquisitions. It seems like such a hot area.
That pricing could possibly be a challenge to growing that business.
Is that possibly the case and can you use deal structure to.
To mitigate high prices.
Hi, Ken.
So to answer the first part of your question as far as filling out the different buckets and alternatives, we really start with their client portfolio and think about areas where.
Clients will allocate and we can compete.
So we don't really look at it where we must have this kind of capability or that kind of capability. Some areas that we're interested in.
You know definitely private credit direct lending.
Thought about real estate.
And so those are areas that are interesting to us, but I wouldn't say any of them are must haves, we really do start from the client side.
And really where we think we can add value and compete.
From a deal cost or pricing perspective.
Would say.
When we speak to alternative managers.
The managers that want to partner with us are really thinking about growth going forward theyre thinking about how do we get access to a much larger.
Client base, given our distribution reach and I think that when you have those kinds of conversations upfront pricing is important and you have to be competitive and yes, it's more expensive.
Structuring definitely.
Yeah.
Can get you there, but I think it's more of a holistic discussion of what does the future look like and what is the future opportunity to create value and earnings and so the firms that are looking to if you will cash out or monetize are probably not the kinds of firms that are we're a good partner with I think it is.
The firms that are really looking at how do we get access to a larger client base, how do I get to the next level as an organization.
But we don't see pricing today.
Something that we can overcome with structuring with the ability to pay fair prices and really with <unk>.
<unk>, our platform and what we have to offer.
Thank you and then in terms of structure following up on Alex's question.
You implied or talked about bringing some of these alternative products to non accredited investors and youre working on sort of product structure.
How how small investments.
Do you think your wrappers could handle it.
How far down market do you anticipate being able to go with the alternative platform is this something where you get down to $50000 sort of investments can be 'twenty could be 10 could be five like how small.
Ken can you support.
In terms of structure for these alternative products that you envision.
Yes.
I think that is.
Complicated answer and what I would say is it really depends on the specific facts and circumstances of the product.
How you package the product, but I think the longer term opportunity set.
For us is to go down to the smallest investor.
All the way to the to the largest investor and I think.
I think that that is a great opportunity, it's why you're seeing some of the transactions you've seen announced in the last few weeks.
And I think we are well positioned to take advantage of that but a lot of it as facts and circumstances dependent but I don't see if you will a bottom cap.
That would prohibit you from taking a certain type of product in a certain situation down to a very small investor, which which we very additive to that investor is properly allocated portfolio.
Great. Thank you very much.
Your final question comes from Robert Lee with <unk>.
Thank you thanks for taking my follow up then.
Apologize if you may have covered some of this slide.
On the call a little bit, but just on going back to the west and in some of the.
Puts into the guidance.
<unk> accretion so there's some 30 basis points, but can you.
Maybe just refresh on kind of.
What kind of baked in growth do you have in that and it would seem just given the moving pieces of it.
No.
Maybe a higher than even those 30 basis points, maybe a higher then.
Average EBITDA margin.
<unk>.
Goodwill.
Thanks.
Goodwill benefit it will be pretty significant.
Yeah. Thanks, Thanks, Rob It's Mike Yeah, as we mentioned the fee rates on West end, our 30 basis points.
What I would say is it will be accretive to our overall margins.
<unk> is a highly scaled business today.
And as we think about integrating them into the victory operating and distribution platform, we were really be able to utilize efficiently our platform.
And would expect that there'll be minimal incremental investments that will need to make to support the growth that we foresee.
And Dave had mentioned before that we really see a lot of complementary opportunities with our distribution with the relationships that we have that.
We look at supporting the levels of growth that western has accomplished on their own.
There is tremendous upside to that as well as we move forward.
Okay. Thank you for taking my follow ups and have a good weekend.
Thanks.
That concludes the Q&A portion of today's call I would now like to turn the call back over to Mr. David Brown for closing remarks.
Thank you and thank you for joining us. This morning, we look forward to keeping you updated on the execution of our strategy and hope to see you next week when we've been meeting with investors at the bank of Americas banking and financials conference or next month, we will be attending the Goldman Sachs U S Financial services conference have a one.
Wonderful day, thank you.
Thank you for participating in today's conference you may now disconnect.
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