Good morning. My name is Carmen, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. . I will now turn the conference over to your host, Sean Rourke.

Thank you, Carmen, and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the first quarter of 2021. Our speakers today are George Aylward, President and CEO of Virtus; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we will have a Q&A period.

Thank you, Sean. Good morning, everyone. I'll start today with an overview of the results we reported this morning, as well as a brief update on Westchester Capital Management, before turning it over to Mike to provide more detail on the quarter. So turning to the results, we are pleased with the very strong start to the year, continuing the momentum that accelerated throughout last year, and reflecting the benefits of our new partnership with AllianzGI. For the quarter, we delivered a significant increase in assets under management to nearly $170 billion; the fourth consecutive quarter of positive net flows, representing an organic growth rate of 10% over the past 12 months, our highest level of quarterly sales, which exceeded $10 billion for the first time; strong growth in operating profitability, with the operating margin of more than 10 percentage points over the prior year; a 32% sequential increase in earnings per share as adjusted to their highest level; and consistent return of capital to shareholders and debt reduction. We're especially pleased with our continued trend of broad-based sales strength and positive net flows. The foundation of that growth is our ability to provide a holistic set of building blocks, made available by effective and differentiated distribution with a demonstrated track record of driving growth. Our collection of differentiated managers, each with distinctive strategies, approaches to investing, and compelling investment performance offers a diversity of products and strategies that can appeal to investors and financial advisers across market cycles and changing investor preferences. Our results over the past year have demonstrated the value of our model and approach.

Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management, at March 31, assets under management were $168.9 billion, up 28% from $132.2 billion at December 31. The sequential increase reflected the addition of $29.5 billion of assets from AGI on February 1, $4.7 billion of market appreciation, and $2.4 billion of positive net flows. AUM is diversified by product type, with open-end funds, institutional, and retail separate accounts representing approximately 43%, 25% and 22% of AUM, respectively. In terms of asset classes, equity assets represented 63% of AUM, fixed income represented 21%, and multi-asset and alternatives represented 13% and 3%, respectively. Within equity, domestic assets were 73% of total, international and global were 21%, and specialty equity represented 6%. Domestic equity is relatively evenly split among large, mid, and small-cap assets. In addition, we had $3.4 billion of other fee-earning assets at March 31 that resulted from the AGI partnership. Turning to investment performance, we continue to generate strong relative performance across our strategies. As of March 31, approximately 72% of rated fund assets had 4 or 5 stars, and 96% were in 3, 4, or 5-star funds. We currently have 12 funds with AUM of $1 billion or more that are rated 4 or 5 stars, representing a diverse set of strategies from 6 different managers. In addition to very strong fund performance, 93% of institutional assets and 100% of retail separate account assets were beating their benchmarks on a 3-year basis as of March 31. And 93% of institutional assets and 93% of retail separate account assets were outperforming their benchmarks over 5 years. Also, 87% of institutional assets were exceeding the median performance of their peer groups on the same 5-year basis.

Thanks, Mike. So we'll now take some of your questions. Carmen, can you open up the lines, please?

. First question comes from Jeremy Campbell with Barclays.

Before I ask my question, I just want to point a clarification here. George, I think you mentioned, when talking about Westchester accretion, it was 6% on top of normalized 1Q. So is the math we take your $6.78, we add back to $0.85 of seasonal and then another month of AGI, so maybe something north of $8, as normalized, for the first quarter?

I'm not going to give you a number. Yes, but we did update based upon our most recent earnings, which are the first quarter, and doing it on a run rate normalized basis.

And I think the adjustments that you just outlined are appropriate to get to that level.

Perfect. Great. And then, George, I know it's still really early, but the data suggests that your sales force might be getting some traction already in distributing the Allianz funds. Just kind of wondering how you'd characterize the early experience so far.

Well, I've been very pleased with the overall experience, and I know I can speak for pretty much everyone here and our sales force and marketing. So I've been incredibly impressed with the caliber of onboarding from AllianzGI. I mean they're a great firm, and I participated in some of the onboarding and the educational sessions for our sales force, which have been very extensive, and I would describe it kind of as best-in-class. So I think they've done a great job in terms of communicating their value proposition, and our folks, who are very used to bringing on new managers and new strategies, I think have absorbed that. So I view that as we're off to a good start. I think currently, for the funds that are currently sub-advised by AGI, I believe they were positive flows in the first 2 months, which I think, as you're sort of pointing out, is off to a good start to take on a new manager and a new set of strategies. So I feel very good about that. And going back to the whole strategic partnership, I think this sort of underscores the intent from our mutual intent, which was for the future growth of a business, which is why the deal is structured the way it is, is because both they and we are really optimistic about the future opportunity to grow the business, as opposed to just have it as a transaction.

And then maybe just in that vein, George, I mean, with this pretty -- is a pretty unique deal and now you have a structural blueprint in place since last summer. Now you have an early case study showing solid sales for the Virtus pipes. Do you think there's potentially appetite from other large players, maybe that have a bit more of an institutional SKU, to pursue a similar type of partnership structure with you guys or elsewhere in the industry on the retail side?

Well, I mean, I would hope, right? Again, it's really -- this is a well-structured, if your expectation is on the partnering side, on the other side, to grow the business and participate and continue to be successful in the business through a partnership. So the structure doesn't work for someone who's looking to exit a business, is the way I would sort of describe it. So I do think our structure has mutual benefits and creates, actually, really good alignment. But I can't speak for other parties and what they'll sort of view as what's in their best interest. I'm certainly willing to entertain this structure with any party that would like to have the conversation.

Our next question comes from Mike Carrier with Bank of America.

First, just with the AGI Partners closed, can you provide some context on the plan and probably timing just around offering those strategies throughout the Virtus distribution network?

Yes. No, it's already -- it's up and running. So in advance of the closing, so there was a prolonged period to get the fund and the client consent approvals. So during that period, as I sort of alluded to earlier, we had done a lot of work as it related to educating all of our people to be prepared upon close to effectively be able to distribute through their financial advisers. And again, they're already well-known at the national account level. And we did actually take this as an opportunity to enhance some of our resources, some of the resources that previously supported AllianzGI as employees, as their employees. So it's already off and running. And again, as I alluded to, the funds that are managed by EGI for the first 2 months alone have already been net positive, which we think is a good start.

Okay. Great. And then -- and for Mike, just in terms of the $138 million in revenue participation liability related to AGI, I just want to clarify, will that have any impact on the adjusted income statement? Or is it just a cash flow item going forward?

Yes. And we recorded the consideration that's contingent this period. The accounting for that was based on the unique nature of the transaction. That amount does represent the full liability and the sum total of the payments that we expect to make, based on the assessed value at the end of the first quarter. We will assess those payments on each quarter point and update accordingly, and we'll update it going forward. But it will likely not have a P&L impact going forward, but we'll continue to evaluate that if there's any change. But the view is it's a contingent consideration and will flow through balance sheet items, and any P&L impact would be adjusted on a non-GAAP basis going forward.

Yes. And as Mike pointed out, the cash payments will be annually once a year, so you'll sort of see that in terms of liability, which will adjust based upon estimates of future revenue, but it will also then be adjusted for any future payment. So that liability will change over time for those reasons.

Our next question comes from Sumeet Mody with Piper Sandler.

For me on the comp ratio, excluding the $9.4 million of seasonal items, getting that core 43.3% for the quarter, how should we square that with the guidance of 44% to 46% that's been maintained? Can you talk about the decision to maintain that and any considerations? Why the first quarter came in below that range or future quarters might be 100 to 300 basis points higher, given the majority of those AGI funds are kind of splitting that net management fee kind of outside of those NFJ funds?

Sure. So I'll give a couple of thoughts and then Mike fill them in. For that ratio, so again, a lot of things that impact that ratio, and I think the one that people generally underestimate is the market performance revenue lift component of that, right? So you sort of see like a perfect combination of factors in this first quarter, where equity markets are continuing to come up. We pulled in a large amount of assets that are sub-advised, and therefore, do not have employment expense. And then we did it for 2 out of the 3 months, right? So that creates a little bit of complexity in terms of really sort of having to nail that for that quarter. So -- and you're asking more in terms of the guidance and the range, which, again, as Mike noted, is subject to variability. And again, it could be impacted by a lot of those factors, including both the revenue and then where we are in terms of profit and sales, et cetera. Mike?

Yes, I think that's right. As we look forward, we take into consideration the highest level of profitability that we've had. We look at the sales levels. We look at expected investments supporting the growth of the business. And I'd expect, all else being equal, perhaps to be at the low end of that range looking ahead. But certainly, it's subject to the markets, sales, profitability as the key elements.

Got it. And then one on capital allocation. You guys have been paying down in the kind of $12 million to $18 million range over the last few years. And first quarter came in a little bit below the range. And then considering repurchases and net settlements, the new $138 million revenue participation liability, the increasing dividend, potential future acquisitions, how should we think about this change in capital allocation from here? And maybe specifically on the appetite for acquisitions, has that changed at all, given now you have 2 balance sheet items with the kind of high cash flow that you guys are bringing in and current acquisition costs, the zero net debt. So putting all of that together, A, how does the capital allocation strategy change, and then B, how does that impact your appetite for acquisitions kind of going forward?

Yes. Well, I don't think the overall strategy changes. I think the fundamental premise of the strategy was to basically make sure that we had flexibility to do all of these things in terms of investing in the growth of the business and returning to shareholder, and then always maintaining reasonable levels of debt. So we actually feel pretty good that, because of where we currently are in terms of our levels of debt, that even with some of those upcoming cash obligations that Mike highlighted, that the cash flow that we're generating is sufficient to really sort of address those and then still leave opportunity if we ever determine that M&A transaction makes sense. So we actually feel like we have a lot of flexibility to continue to evaluate all of those opportunities at any given time. And as it relates to M&A, as we've said before, our growth strategy is not predicated upon continuous M&A. However, we will do M&A in those opportunities that we think will be incredibly additive or strategic in terms of either product capability or distribution access or sometimes in terms of scale. So we kind of feel very comfortable that, on a relative basis, we have that flexibility to do those. Mike, any anything you'd add to that?

Yes. No, I would just reiterate the upcoming payments that are obligations that we're considering in the next 12 months with the closing of Westchester in the first quarter, first revenue participation payment. So we're factoring all of those into our capital priorities.

. Our next question is from Michael Cyprys with Morgan Stanley.

Maybe just coming back on the AGI side, I was hoping you could talk maybe a little bit about some of the distribution initiatives, how you plan to sort of expand distribution of those AGI products. You went through some of the actions you've taken just around educating the sales force. But as you kind of look forward, what are some of the actions that are coming down the pike? And what's the opportunity, would you say, on the institutional side? I know you spoke about some of the retail investor add, but what's the opportunity for expanding distribution of those AGI products on the institutional side, and how are you approaching that?

Yes. Just on the last piece, to clarify, so for AGI, we are not representing and supporting them on the institutional side, so we really are their U.S. retail partner. So our focus with them is bringing their very compelling strategies to the retail U.S. intermediary space, in particular, so it really is focused in on the retail. So as we sort of look at what is that opportunity set for AGI, so again, the collection of products were very strong and very differentiated. They had very good access in many of the places that we're available. So our approach has been to take the great foundation that is already present with the products and the relationships that existed there, and then, using some of the resources that have that knowledge and experience, and then expanding it with ours to try to sort of leverage our additional relationships and more expanded sales access to sort of maximize that. So I think, where I think they did a great job with what they had, I think where we might be able to have some opportunities working collectively with them is to really find more and better ways to sort of position their products with -- in some of the areas of access that we have greater access than maybe they historically had. The other thing I would point out that for AGI, we look at this as a very important strategic relationship. And included in that will be further thoughts around introducing other of their capabilities in the retail market. So this isn't a closed block of capabilities. We maintain a continuous dialogue with them about other opportunities because they have a lot of compelling capabilities that we might find opportunity for in future retail products.

Great. And just maybe a broader question on the institutional side, I think you had referenced a pipeline of mandates that have been won but not yet funded. Maybe you could just elaborate on some of the areas where you're seeing strength on the institutional side. Are you able to sort of elaborate on the pipeline and help quantify maybe how that stands today versus last quarter or a year ago? And just more broadly, on the institutional marketplace, maybe you could talk about some of the emerging trends that you're seeing amongst your client set and the products that you're seeing in demand and how your approach within the institutional channel is evolving to keep pace.

So for us -- so my comments around the institutional and the pipeline area, so as we've sort of spoken about it over the last few years, this was an area that we had continued to see as a great opportunity for growth and put increased focus and resources on it. And over the last 3 or 4 years, you would have heard an evolution of very sporadic opportunities and other big win or big loss. We then started seeing more of a sustained continuing of new mandates, and that has continued to sort of mature and evolve. So my comment really focused on, as I look at the current pipeline in terms of where we are in the number of affiliates, and the types of strategies is generally broader than it has been in the past. But as you know, institutional is really lumpy, and they can change at any point in time. But my comments were meant to sort of indicate that there were multiple capabilities that currently had very attractive things. So we see that as a continued evolution of that business, and we still think there's opportunities for us to continue to expand that, particularly with non-U.S. clients. That has been an area of focus for us. We do think that many of our managers who are not as broadly known outside the U.S., therefore, have a great opportunity once they get known outside the U.S. So we've been very focused in on that. And we play that -- the institutional space, the way that our strategies allow us to, right? So most of our affiliated managers generally will play in very differentiated, either high-conviction or quality-oriented or income-oriented strategies. So it's really, for us, about trying to find where is that great match between the capability that we have and the part of the market that is interested in that. So we still continue to see that there's an opportunity for that, but institutional is always going to be lumpy with ins and outs. But it's nice to see a broader set of capabilities across managers and asset classes. I mean I still think the thing that I'm happiest about in the market, and then for us in the first quarter, is really sort of seeing more of a fixed income orientation. So that had some weaknesses in the prior year, and then to see that sort of reemerging, I think in some of our strategies, I think that's really healthy. Because, again, our product set is meant to be sort of flexible so that, if certain things go out of favor and certain things come in favor, that we'll have something that meets that. So some of the strength that we're starting to see in the fixed income side was nice to see.

Got it. And then just the latter point just around your approach on the institutional challenges, anything to speak to there in terms of maybe how your approach to the channel, perhaps on the sales side, is evolving? Maybe you can remind us how you're sort of approaching the marketplace from a sales standpoint in terms of salespeople at the center versus at the individual affiliate franchises. How are you thinking about and approaching that?

Yes. Well, it's generally what I would describe as affiliate-centric, right? Because each of the affiliates is very different in terms of where they are and what their opportunity set is. We have shared resources that support the affiliates. So in some instances, we will do certain -- a large amount of things, and in certain instances, we'll be providing support or systems. It really is tailored for each one in terms of what their best is, but everyone has a different opportunity set, and so we have a combination of resources that will support them.

Okay, and this concludes our question-and-answer session. I would like to turn the conference back to Mr. Aylward for his final remarks.

All right. Well, thank you very much. I want to thank everyone for joining us today and certainly ask you to call us or reach out if you have any other further questions. Have a great day. Thanks.

And thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect.