Good morning. My name is Tawana 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 to your host. Sean Rourke, you may begin.

Thank you 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 second 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 will start today with an overview of the results we reported this morning and give an update on the Westchester Capital Management transaction before turning it over to Mike to provide more detail on the quarter. Then before taking your questions, I will make some comments on our recent announcement of the agreement with Stone Harbor Investment Partners. Turning to the performance for the quarter, we continued to deliver very strong results demonstrating the value of our business model and collection of distinctive investment managers. For the second quarter, we reported a significant increase in assets under management, the fifth consecutive quarter of positive net flows, record levels of operating profitability and margin, our highest level of earnings per share as adjusted, strong cash generation with EBITDA more than double prior year levels, and consistent return of capital to shareholders and debt reduction. Our track record of strong growth and profitability is the product of execution on our long-term strategy and the actions we have taken to build a differentiated partnership of managers, offering diverse compelling products and strategies supported by effective distribution and experienced business resources. Over the past year, we have built on that foundation, adding scale and complementary investment capabilities to support continued organic growth while maintaining a balance sheet that provides flexibility for continued return of capital as well as to be strategically opportunistic with inorganic opportunities. Over the past year, we finalized our partnership with Allianz GI adding significant scale and complementary investment strategies in the U.S. retail market, executed and are completing our transaction with Westchester Capital, adding well-regarded event-driven strategies that will meaningfully expand our alternative offerings and announced an agreement to acquire Stone Harbor adding emerging market debt capabilities and enhancing our non-U.S. institutional opportunities.

Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At June 30, assets under management were $178.6 billion, up 6% from $168.9 billion at March 31. The sequential increase reflected $8.8 billion of market appreciation and $1.3 billion of positive net flows. AUM remains diversified by product type with open-end funds, institutional and retail separate accounts representing approximately 42%, 26% and 23% of AUM respectively. In terms of asset classes, equity assets were 64% of AUM, with three quarters of that in domestic equity relatively evenly split among large, mid and small-cap assets. International and global were 21% of equity assets and specialty was 6%. Fixed income represented 20% of AUM at June 30 and multi-asset and alternatives were 13% and 3% respectively. In addition, we had $3.8 billion of other fee earning assets at June 30, an increase from $3.4 billion at March 31.

Thanks Mike. Before we take your questions, I’d like to discuss our recently announced agreement to add Stone Harbor as an affiliated manager Stone Harbor is the premier manager of emerging market debt and multi-asset credit strategies with $15.3 billion in assets under management, primarily offered to global institutional clients, including some of the largest and most sophisticated cyber wealth funds, pension plans, foundations and endowments. We are excited to add Stone Harbor to our family of affiliated managers. Stone Harbor will significantly enhance our fixed income capabilities, complementing our offerings from new fleet and sites with well-regarded emerging market debt strategies that have a proven track record through multiple credit cycles. It will broaden our base of clients and channels and geographies that have growth prospects and expand our opportunities in those regions. Stone Harbor’s distribution professionals and relationships in the non-U.S. institutional market will significantly enhance overseas resources and capabilities. In addition, Stone Harbor will provide us with a proprietary operating analytical platform that offers end-to-end investment and risk management technology and can be leveraged by other affiliates. Stone Harbor will operate as an individual will take retaining autonomy over its investment process and maintaining its independent culture and brand identity. Under the agreement, we would acquire 100% of Stone Harbor from the principles. The transaction structure includes an upfront payment as well as potential future earn-out payments based upon the growth in the business. We expect the transaction to be modestly accretive to earnings as adjusted upon closing, which we anticipate will take place near year-end. We look forward to providing more details as we get closer to closing. So with that, we will now take your questions. Tawana, can you open up the lines, please?

Thank you. Our first question comes from the line of Sumeet Mody with Piper Sandler. Your line is open.

Thanks. Good morning guys. I just wanted to follow-up on that last Stone Harbor point, George, is there any more details that you guys plan on providing on sort of the price of the earn-out on Stone Harbor?

Yes. I think what we’d say is we’ve given the general transaction structure, which is an upfront payment and then potential earnings payouts in the future. So I would, in some way, sort of think about structured not too dissimilar with the drivers behind the AGI structure, which is really all about believing in the future growth of our businesses together. So that is the way the structure is. When we get closer, you may see a little additional information. But that’s the way you should be thinking of that.

Okay, great. And then on the fee rate, it seems like the rate declined much less than we were expecting after AGI’s first quarter of inclusion. Can you talk about the driver of the resiliency there? And then secondly, I appreciate the guidance on 42 to 44 basis points for the remainder of this year, it seems like it should increase with Westchester and Stone Point after those close. How do we think about the combined effects from those two deals on the rate for 2022?

Sure. I mean, a couple of thoughts and then Mike will expand upon that. So that fee rate is going to be impacted. Obviously, the temporal timing of the AGI transaction and their average rate versus ours, obviously, that was a big driver of the change over the prior quarters. We continue to have a variety of different products sold at different rates and redeeming at different rates. And then when you get to the Westchester as well as ultimately the Stone Harbor, each of them will have their separate impacts, but they’ll be co-mingled with the other activities that are going on in the business. Mike, do you want to go into?

Yes. I think that’s right, Sumeet. The 42% to 44% range, I don’t think will be impacted in total by the addition of either Westchester or Stone Harbor. So certainly, each of the product structure line items will be impacted on its own as Westchester is predominantly open-end funds, and that will have an impact on that fee rate and Stone Harbor predominantly institutional. But overall, I think that 42% to 44% rate holds pretty tight. And we are pleased with the continued differential between our sales and redemptions on the fee rate, giving us confidence in that range. On the open-end side, I think the sales were at about 51.5, and redemptions were just under 50, so about 0.5 basis point differential. And then on the institutional side, we didn’t really get into it, but the sales increased about 22% this quarter, as sales came in around 36 basis points where the redemptions were at 27 basis points and included a low fee redemption. So we feel pretty good about the outlook on the fee rate in the guidance that we provided.

Okay, great. And then similarly on the comp ratio, I know you guys have talked about third quarter being roughly in line with the second, but is it a fair – Is it fair to think about this as more of a longer term run rate going forward? Or is there kind of more considerations outside of the third quarter, especially after kind of Westchester and to Stone Point close to?

Yes. I mean, the factors that drive it is multiple factors, right? So the revenue growth factor, particularly as equity markets move up, that has a really big impact on that. So since it’s being divided by revenue revenues being impacted by other markets just moving up and up or are they flat? And then on the variable side of the comp and a high percentage of our compensation is variable and it will be based upon our profitability. So it’s hard to particularly say like a given run rate because it will be highly influenced by those factors. But I think Mike has given the indication in year.

Yes. And I think George’s point, certainly, that ratio will be impacted by factors like the market and like sales levels, which have moved around a bit and also the level of unaffiliated sub-advised assets, which have increased with the addition and full quarter impact of the AGI assets this quarter. And looking forward, we will have Westchester coming on at Stone Harbor coming on. We will provide additional insight on the – on that ratio as those transactions come on, we did talk about the accretion of each of those transactions to give you a frame of reference of the impact on the bottom line. And as we get closer, if there is an impact on the ratio, we will update you. But certainly, for the third quarter, all else being equal, we think the ratio that came in, in the second quarter is appropriate.

Okay. And then if I could squeeze one more in. Just with the closing of the two pending deals expected in the coming months and kind of given your pristine balance sheet and higher run rate on cash flows. Can you talk about the conversations you’re having with more potential targets? And particularly on the larger M&A opportunities that could be more transformative in nature? What’s the opportunity set look like today?

Yes. I always start answering that question by saying our long-term growth strategy is not dependent on M&A. But obviously, we have just announced, what, three or four in a short period of time. So, we have always had those conversations. As I indicated in the comments, we are – to your point, we have a strong balance sheet our cash flow, as both Mike and I pointed out has significantly increased and expanded, allowing us to continue to invest in the growth in the business as well as return capital, pay-down debt and to potentially fund other future inorganic opportunities. We do continue to be involved in multiple conversations and look at those things that are available. But for us, it has to fit a criteria that makes sense for us. So, we don’t need to buy things focused entirely on short-term accretion. It really is going to be focused on what is an additive capability or additive resources or additive market opportunities that will further facilitate continued organic growth coming from the rest of our business. So, continuing to see a lot of opportunities out there, we do have the ability to be selective in what is a good fit for us in terms of either a product capability or a business. I do agree and believe that they will continue to be more consolidation in the industry. We think we are well positioned as it relates to that. Given just the fundamental strength of the business in terms of the business fundamentals of investment performance and flows and profitability, as well as having a nice balance sheet and we will continue to look at opportunities and other ways to build out towards the future creation of shareholder value.

Okay, great. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open.

Thanks. Good morning George and Michael.

Good morning.

Thanks for taking the question. I was just hoping you could talk a little bit about your vision for Virtus over the next 5 years. What, in your view, does the Virtus of 2026 look like? And how different might that look from the way Virtus looks today, whether it’s number of affiliates, types of capabilities, global footprint, etcetera. And then if you kind of think about the path to getting there, what sort of strategies and affiliates do you think we are going to have the biggest impact on the growth of the firm?

Sure. No, great question. What I would say is the vision we have for the future of the business is basically the vision we have been executing on at least for 13 years, and actually, I would argue probably 2 years prior to that. And that really is to have a differentiated best-in-class multi-boutique model, where we have a collection of some of the best managers of individual capabilities and strategies and that we facilitate their ability to focus on generating great performance by supporting them from the business perspective and then simultaneously making as many clients and channels open to them. So, it’s always been the vision for the business. Over the last many years, we have been building out all aspects of that, right. So, over the last 12 years or 13 years, you have seen us building out and further enhancing our retail distribution, investing in institutional distribution, non-U.S. distribution. Beneath, we are also working on all of our infrastructure. And then through a whole series of transactions, you have seen us expanding the investment capabilities where at this point, I would kind of argue, we pretty much fill a pretty wide spectrum of actively managed traditional asset classes in both equity and fixed, both U.S. and non-U.S., etcetera. And then with Westchester, you are actually adding a little bit more into the alternative strategies. So, the same vision is saying. The other pieces that we have commented on that are still areas for us is continuing to grow our non-U.S. footprint in terms of our client base. So, Stone Harbor, one of the many things that was attractive about Stone Harbor is they do have a very nice presence and client base outside of the U.S. We continue to see that as a green pasture for some of our strategies. So, a lot of – we didn’t get into some of our specific mandates that we have been winning over the last few quarters. We have actually started seeing from resources that came actually as part of the RidgeWorth transaction and some other investments we have made. We have already started growing our own business on the non-U.S. side, continue to see that as something that is just a high level of opportunity for our existing capabilities. And as it relates to other capabilities, we continue to think that there are other asset classes that may have less correlation or have less liquidity that may be an important part of the building block for portfolios. So, those could be areas that we continue to find interesting.

Great. Thanks for that. Maybe just building off your last point on Stone Harbor with the international presence, maybe you could just expand a little bit more on how you – what sort of go-to-market and execute on that sort of international sales distribution strategy. I imagine the distribution team is kept within Stone Harbor. But how do you sort of work with that incentivize and so forth to drive existing products and new fleet sites and other affiliates through that distribution channel that’s coming over from Stone Harbor on the institutional side globally?

Yes. Well, to be clear, I am not giving specific to the Stone Harbor piece of it, but we have non-U.S. resources that are supportive of multiple affiliates. In the non-U.S. market, that is the opportunity for us to add to their existing resources and facilitate their growth in those areas. So, you should think of the non-U.S. opportunity as resources can support multiple affiliates, not necessarily only one affiliate. Our model is affiliate-centric and that each affiliate should really be driving their institutional strategy and growth. But we support that by having resources available to help them either in channels that they are not going to fully dedicate on or in markets where it makes no sense for each affiliate to have resources. So, that is one of the things that we have seen in our growth from some of our shared resources have been some meaningful wins outside the U.S. market. I would say with Stone Harbor we are looking for the same thing. It’s to try to just take advantage of resources and footprint and to the extent that we can make that additive for other parts of the business that will absolutely be part of the plan.

Great. And just a follow-up question on the SME side of your business, you have been having a lot of success there, pretty consistently. I was just hoping you could maybe elaborate on your perspective on how sustainable do you think those flows are coming from SME. Maybe if you talk a little bit about which channels, in particular, are you seeing greater strength? Is that with the wires or is that more RIAs? And any sort of color on the product sets as well there around the SME side and the strength you are seeing?

Yes. I would say at a high level and then I will ask Mike to get into some of it as well. The SME, we are big believers in SMEs. We started talking about and emphasizing SMEs many years ago. We are very pleased with the continued success in terms of growth, both on the sales side as well as the net flow side for the SMEs. We continue to think that, that is a very important component in the retail market. And we do see the opportunities not only in the warehouse channels, but in our case, we do have a high net worth business at one of our – at Cannes and Redneck which is also a great area of nice, stable assets. So, we continue to focus on that area, focus on additional products that will fit very well into the SME vehicle, in addition to our open-end funds, but we continue to see that as an area of growth.

Yes. And I think just expanding on that, I think we have seen growth in all investment strategies on the equity side, certainly in different market capitalizations and both on core growth and value. And we believe that, that is an important area of growth across that and even some fixed income opportunity as well as growth equity across several of our affiliates and multiple different product structures.

Great. And just maybe if I could sneak in another question just on the institutional side, maybe if you can just give us a little bit of update on the institutional pipeline, how that is looking like today relative to where it has in the past couple of quarters and if you could touch upon some of the traction and activity that you are seeing there? And also on the CLO structured products business, I know in the past, there had been a regular source of inflows. Obviously, the pandemic, I think, had impacted that. But now with the market recovering, particularly for CLO managers, we have seen that with some others in the space. Just curious what opportunity set might there be for you guys to bring another product to market maybe later this year?

Yes. So, on the institutional, we are really pleased with the evolution of the institutional business. So, that has been something we have been focused on and building out over the past few years, and we have evolved from sporadic periods of inflows at one or two affiliates to more consistent ones at multiple affiliates. As we alluded to in our prepared remarks, we continue to see good levels of activity at multiple affiliates with new mandates. I have added to that now that some of those mandates are actually meaningful non-U.S. mandates. So, it continues to expand in terms of what that opportunity says. I still think we have much greater opportunities ahead of us, but the trajectory has been very good. And we are pleased with the level of activity. It is, by nature, a lumpy business, so you are going to have ins and outs and particularly in market cycles where you start having rebalancing and stuff like that. We see that as an opportunity. So, one of the reasons for our model is if there are rotations. If we are on both sides of the rotations at growth and value, we actually have opportunities in those. So, we feel pretty good about that. Mike, if you want to add to that and then the CLOs?

Yes. No, I think you touched on that, where we are seeing opportunity with some of our value managers or perhaps we hadn’t seen those opportunities 12 months to 24 months ago. So, there is traction there. From the CLO perspective, we continue to look at that market. I think we haven’t talked about an open warehouse, so there is nothing imminent in that product structure, but the fixed income team certainly have been regular issuers in that market when opportunities arise, and they do stay close to the market and if we believe that it’s a good use of the sponsor and support our managers will certainly deem that an appropriate use of capital and update you as appropriate. But as of now, there is nothing imminent in the warehouse space, but we do stay close to that market.

Great. Thank you.

Thank you.

Thank you. I am not showing any further questions in the queue. This concludes the question-and-answer session. I would now like to turn the call back over to George for closing remarks.

Great. Thank you. And I do want to thank everyone, as always, for joining us, and certainly encourage you to reach out our call if you have any other further additional questions. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.