Victory Capital Holdings, Inc. (VCTR) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Victory Capital Holdings, Inc., Fourth Quarter 2019 Conference Call. [Operator Instructions]. I would now like to hand the conference over to Matt Dennis. Please go ahead, sir.

Good morning. Before I turn the call over to David Brown, I'd like to note that today's discussion contains forward-looking statements, and as such, include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause actual results to differ materially from those projected in the forward-looking statements. While a recording of this call will be made available by us on our website, any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these forward-looking statements to reflect new information or future events that occur or circumstances that exist after the date on which they were made. In addition to U.S. GAAP reporting, we also report certain financial measures that do not conform to generally accepted accounting principles. We believe these 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 the tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which can be accessed on the Investor Relations portion of our website at ir.vcm.com. Now, it's my pleasure to turn the call over to David Brown, Chairman and CEO. David?

Thanks, Matt. Good morning, and welcome to Victory Capital's Fourth Quarter 2019 Earnings call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'm going to spend a few minutes discussing our record fourth quarter results, which I believe demonstrate the earnings power of our integrated business model. I'll also share an update on the integration of the USAA Investments acquisition. Then I will turn it over to Mike, who will review our financial results for the quarter and full year in greater detail. Following our prepared remarks, Mike, Matt and I will be available to take questions. The business overview begins on Slide 5. 2019 was a transformational year for Victory Capital in many levels. We significantly increased our size, scale, asset class, product and client diversification, while generating outstanding financial results for our shareholders and investing significantly for the future. Total AUM grew to $151.8 billion at the end of 2019. AUM increased by 188% year-over-year, reflecting acquired assets and long-term net inflows of $1.8 billion. Positive flows during the full year period were driven by net inflows into our recently acquired USAA Investments franchise as well as our Solutions Platform. Both benefited from industry trends favoring fixed income and competitively priced Solutions products. As a reminder, the margins we earn on most of our Solutions strategies are higher than our firm-wide average despite typically lower-than-average fee rates. This is due to the efficiencies gained by managing rules-based quantitative strategies on our integrated platform. After two straight quarters of positive net flows, we did experience net long-term outflows of $1.5 billion during the fourth quarter, reflecting a significant amount of client reallocations tied to strong investment performance by our franchises, coupled with positive market momentum. While the impact of a reallocation is a net outflow, we often continue to have larger economic relationship with clients despite the rebalancing. Additionally, client rebalancing activity is typically cyclical and reinforces the importance of diversification and taking a longer-term view of our business, which is how we think about it. Adjusted net income with tax benefit increased to a record $0.99 per diluted share in the fourth quarter, up 9% from the third quarter and up 161% from the fourth quarter of 2018. Adjusted EBITDA margin also set a record high of 46.8% during the quarter. This is a 200 basis point improvement over the third quarter and an expansion of 890 basis points from the last year's same quarter. These results can be attributed to our superior business model, combined with superior execution. We remain committed to our disciplined capital management strategy in 2019. We ended the year with $952 million of debt, down significantly from $1.1 billion on July 1, when we closed the USAA Asset Management company acquisition. Subsequent to year-end, we further reduced debt to $929 million with additional principal payments. We also declared a cash dividend of $0.05 per share, payable on March 25, for shareholders of record on March 10. We continue to make exceptional progress in integrating the business we acquired from USAA and remain ahead of schedule on the achievement of our previously disclosed cost synergies. As we move through 2020, we look forward to shifting our focus from integrating the acquisition to realizing growth opportunities with our direct channel for USAA members and selling the acquired products through our traditional distribution channels. Finally, we've completed the move into our new headquarters in San Antonio, which has now become our largest office and our new home. Our Investment Franchises and Solutions Platform continue to deliver excellent investment results during the fourth quarter, as illustrated on Slide 7. More than 2/3 of AUM in our mutual funds and ETFs was ranked 4 or 5 stars overall by Morningstar as of the end of the year. We had multiple franchises with mutual funds ranked in the top quintile by Morningstar for the trailing 1-year period, including Sycamore, RS Investments, INCORE, Munder and Trivalent. USAA Investments had mutual fund and an ETF rank in the top quintile. Over the trailing three year period, 79% of AUM in Legacy Victory Capital strategies and 85% of AUM in our USAA fixed income strategies outperformed its respective benchmarks. Additionally, 11 of the 12 USAA fixed income mutual funds rated 4 or 5 stars overall by Morningstar as of the end of 2019. Across our total platform, 64% of AUM outperformed respective benchmarks for the trailing three year period. Slide 8 illustrates the percentage of strategies that have outperformed their benchmarks over the trailing 1-, 3-, 5- and 10-year periods. These results highlight that we are producing for our current clients and our platform is attractive, new clients seeking the types of investment products and solutions that we provide. Turning to Slide 10. I would like to provide an update on our acquisition of USAA Asset Management Company. As I said earlier, our integration efforts are progressing well, and we remain ahead of schedule on our previously disclosed cost synergies. I would like to spend a few minutes drilling down on a few areas and providing some additional transparency into our growth efforts. First, the referral agreement we have in place with USAA ensures that all members interested in investing directly in the USAA Mutual Fund or the 529 College Savings Plan are promptly directed to Victory. This interest may be expressed when a member visits the USAA website, calls USSA directly or responds to an e-mail from USAA promoting our investment products. In each case, the prospect is guided by USAA to Victory. This is an important component of establishing new interaction with members, who do not currently own one of our products. Having this long-term referral agreement in place strengthens the foundation for our future success in this channel. Second, we are actively marketing the USAA Mutual Funds, ETFs and 529 College Savings Plan to members. Be it through e-mail, phone or other means, we are in the beginning phases and plan to accelerate these efforts as the year progresses. For example, we distributed tens of thousands of e-mails designed to increase the number of recurring automatic investment plans with existing customers. We received a great response and realized a 153% increase in new automatic investment plan activations in the second half of the year. From July 1, when we closed the acquisition through the end of 2019, 49,000 members activated new automatic investment plans, which was up from 19,000 during the same period in 2018. Another example is in the fourth quarter. We also executed a 529 e-mail campaign, encouraging members to consider 529 contributions as a gift idea. In December alone, we realized a 44% increase in 529 contributions compared with the same month the prior year. This resulted in a few thousand new 529 accounts opened in December alone, with 89% of those coming through the website. While still early, these tangible results are really encouraging and reinforce our thesis that we can increase wallet share among existing accounts and attract new USAA members to Victory. These test cases provide a sampling of the types of programs we have started executing, and we have a number of similar campaigns staged or under way. In addition, we're developing new products for this channel, and we'll be launching a new technology and digital platform in the second quarter to enhance these marketing efforts. Our goal is to strike the proper balance of continuing to provide exceptional client service at the level USAA members have come to expect, while accelerating the growth opportunities in front of us. We continue to effectively engage with and serve members through our dedicated member contact center. Our contact center is staffed primarily with long-tenured employees, who joined Victory Capital from USAA. So they are familiar with and understand how to serve members' needs. We have taken approximately 300,000 sales and service calls since we closed the transaction on July 1. Each one of these calls is an opportunity to converse with the members about their financial objectives and provide solutions. We have licensed professionals conducting personalized portfolio reviews, providing college financial planning assistance and delivering general investment guidance at no cost to the member. We are offering these services to members because we believe they provide significant value and members are validating the importance of these customized services in our conversations with them. Additionally, we are expanding communication options and recently added live chat functionality, which is preferred by some members. The goal is to enable members to engage with us through the platform of their choice. We are very happy with how our contact center operation has evolved and is working in the way we envisioned. Another substantial growth driver is the commercial distribution of USAA investment products through our existing retail, intermediary and institutional channels. We are steadily gaining traction on this front, which typically had a longer sales cycle. For example, last month, we learned that the USAA tax-exempt intermediate term fund will be added to the Morgan Stanley Wealth Management Global Investment Manager analyst approved list as a recommended fund. This expands the funds availability within an important distribution channel for Victory, and we expect to continue to see similar successes as the year unfolds. Turning to Slide 11. We are confident we have all the tools in place to further enhance shareholder value as we execute on our growth strategy. Our ability to rapidly delever provides us the flexibility we need with our balance sheet to execute future shareholder-friendly deals. Beyond simply increasing scale, which is critical in today's market environment, all of our acquisitions include a strategic element that improves our company. By that, I mean, we see deals that make our platform and our company better, so we can enhance how we serve current and future clients. We are continuing to evaluate potential acquisitions and are quite encouraged by the opportunity set that we see. We believe our management team's experience in-sourcing, integrating and operating acquired businesses is best-in-class, and we have truly become the acquirer of choice for many in our industry. With that in mind, we do not foresee any changes in the cadence of completing transactions as we look forward. Before I turn the call over to Mike, I would like to spend a minute discussing the benefits of our business model. We are a growth company in an industry where most companies are struggling to maintain the status quo. Our business model is generally unique and was specifically designed to address the types of challenges currently facing our industry. The efficiency of our fully integrated operating platform, combined with the advantages of our multi-boutique structure, sets us apart. Our unique model avoids disadvantages facing most multi-boutiques, such as lack of control from partial ownership, complexity, operating redundancies or lack of real scale. We share none of these challenges. Victory Capital is a single registered investment adviser, and our investment franchises and solutions platform are not separate entities, but a part of our company and our platform. This provides effective controls while also allowing each franchise to remain completely autonomous in their investment process. Additionally, our revenue sharing model with our franchises mitigates complexity. We have no significant operating redundancies and our product offerings are at sufficient scale. We have started referring to the combination of these favorable attributes around our operating model and infrastructure as our Victory Edge. Looking ahead, the current headwinds in the asset management industry are likely to persist. We see the challenges, but we also see great opportunity. We believe we are very well positioned with the right business model, the right team and the necessary resources to create substantial value for our shareholders in this rapidly changing environment. Now I'll turn it over to Mike for his financial review.

Thanks, Dave, and good morning. The financial results review begins on Slide 13. Revenue for the quarter was $219 million, up 128% from the fourth quarter of 2018. Our average fee rate remained steady quarter-over-quarter at 58.7 basis points. Adjusted net income with tax benefit increased to $0.99 per diluted share, up 9% relative to the prior quarter, and 161% relative to the prior year. Adjusted EBITDA margins grew to 46.8%, that's an increase of 200 basis points relative to the prior quarter and 890 basis points relative to the prior year. We are pleased with our ability to quickly achieve most of the acquisition-related cost synergies and earn record high margins in the fourth quarter. We will continue to make investments in the business for the future so we are maintaining our forward guidance on our adjusted EBITDA margin of approximately 46%. This number will fluctuate slightly up or down as the timing of these investments will not be steady, but we are confident in our overall guidance moving forward. The ability to maintain these margin levels and make the necessary investments in the business further illustrate the advantages of our model and our superior execution. Moreover, our model gives us the flexibility to scale up significantly and quickly through acquisitions. At the same time, we have been able to deliver record financial results while driving measurable operating efficiencies. We are able to take advantage of our strong financial performance to reprice our Term Loan B and reduced interest expense by 75 basis points, which will increase free cash flow used for deleveraging and future strategic initiatives. We also returned $9.6 million to shareholders during the fourth quarter through share repurchases and dividends, bringing total capital return to shareholders during 2019 to $23 million. Slide 14 provides a snapshot of our AUM growth through year-end. Our AUM increased to $151.8 billion as of December 31, up 188% from prior year. Our asset class mix as of December 31, was 38% U.S. equities, 8% global non-U.S. equities, 21% solutions and 33% fixed income and money markets. We also have a well-diversified mix of product vehicles, including institutional separate accounts, mutual funds with multiple share classes, ETFs, collective trust funds, SMA and UMA models. Entering 2020, we now have a very balanced business that is well positioned for all market environments. I would like to reiterate our expectations for our money market fund business. Based on the information that is publicly available today, we do expect to see a material decline in the portion of the approximately $8 billion in money market fund assets. We managed that currently sit on the USAA brokerage platform following the close of Schwab's planned acquisition of that business. As we have mentioned before, those money market assets are currently subject to an arm's length revenue share arrangement, so they are profit neutral to us. Therefore, we do not anticipate any earnings impact when these assets leave. It will simply lower our money market AUM levels, while modestly increasing our average fee rate and margin. On the other hand, the remaining $3.6 billion of money market assets that sit on and are sourced through the direct member for 529 channels are not subject to any revenue sharing arrangement and contribute to our profitability. These direct money market assets are not at risk assets like the other money market assets that sit on the brokerage platform. Hence, we intend to grow these assets over time. Turning to Slide 15. We achieved long-term gross flows of $23.3 billion for the full year 2019. Long-term net flows were positive at $1.8 billion, reflecting a strong organic growth rate of 3.5% for 2019. These flows were across all channels with 4 investment franchises and our solutions platform having positive net flows for the year. From an asset class perspective, we saw a strong positive long-term net flows in fixed income and solutions for the 12 months ended December 31, 2019. We experienced long-term net outflows of $1.5 billion during the fourth quarter, due in part to client reallocations resulting from strong investment performance and positive market momentum. Looking ahead, we remain confident that our diverse, high-performing product platform is appropriately weighted towards strategies that represent the growers of the future. And following on Dave's comments around ongoing initiatives in our direct member channel, combined with commercially distributing USA Investments products, we feel good about our organic growth outlook. Slide 16 provides a snapshot of quarterly revenues. Fourth quarter 2019 revenues increased to $218.6 million, up 2% for the quarter and 128% compared with the fourth quarter of 2018. Average AUM increased to $147.9 billion during the fourth quarter, and our end of the year AUM is up approximately 3% from that number. Revenue realization remained steady at 58.7 basis points. We saw a slight positive impact from the achievement on certain performance fees on Legacy Victory products in Q4. Please note, these are not related to the fulcrum fees that we have waived as part of the USAA acquisition. The opportunity to earn those performance fees restarts July 1 of this year. As I've said in the past, our average fee rates will vary from time-to-time based on asset class mix, client mix and product mix. Turning to Slide 17. Expenses decreased by 6% to $170.1 million for the quarter compared with $180.9 million in the previous quarter. Nonoperating expenses decreased by 27% during the quarter due to a lower onetime debt financing costs related to the USAA acquisition in Q3 and reduced interest expense due to debt reduction. General and administrative expenses reduced by 17% as a result of the operating leverage from the successful integration of USAA investments onto our platform. Importantly, approximately 2/3 of our expense base remains variable, which is a key element of our overall business model. The onetime acquisition-related restructuring and integration expenses recorded in 2019 are consistent with our original estimates. In the fourth quarter, these expenses include a onetime noncash expense of $19.9 million, reflecting a higher valuation estimate for the contingent payment. This represents the mark-to-market of the potential $150 million total earn-out to be paid to USAA in 4 annual installments of $37.5 million each. As a reminder, the earn-out is based on revenue retention associated with the acquired business. As of December 31, 2019, we have achieved $117 million in annual run rate synergies. We expect to achieve the additional $3 million in annual synergies by 3Q 2020 for the total of $120 million. These cost synergies are net of strategic investments in the business, which I will touch on momentarily. Lastly, as of the end of the quarter, we have spent $27 million of the projected $50 million of onetime costs, and we do not anticipate exceeding the projected amount. We expect to spend the remaining $23 million over the next 9 months. We continue to make great strides through strategic investments in enhancing our investment support, technology, marketing, distribution, client servicing and product capabilities to support future growth. Some examples of specific areas in which we are currently investing are the build-out of our direct member channel, the evolution of our web and mobile platform to support all of our business channels and the enhancement of our digital efforts around advanced analytics and technologies. Our non-GAAP earnings, EPS and margin metrics are shown on Slide 18. Adjusted net income with tax benefit increased to $0.99 per diluted share in the fourth quarter of 2019, up from $0.91 per share in the third quarter and $0.38 per share from Q4 2018. This is an increase of 9% quarter-over-quarter and 161% year-over-year. ANI with tax benefit for the quarter increased to $72.8 million, an increase of 9% for the quarter and 180% over the same quarter last year. Adjusted EBITDA was $102.3 million, up from $96.3 million in Q3 and $36.4 million in Q4 2018. Finally, turning to Slide 19. We continue to deliver against our balanced and strategically aligned capital management plan in 2019. We repurchased 293,000 shares in Q4. Our share buyback program demonstrates our thoughtful and proactive approach to capital management and reflects our confidence in our long-term business strategy. We have reduced our net debt to run rate EBITDA ratio at the end of the quarter to 2.3x. We anticipate continuing to lower that ratio as we look forward and execute on our deleveraging strategy. In January of this year, we announced the repricing of our existing term loan. Repricing lowered the interest rate spread by 75 basis points from 3.25% over LIBOR to 2.5% over LIBOR, while maintaining the current maturity and structure of the term loan. Our strong financial performance allowed us to execute the repricing, which will result in annualized interest savings of approximately $7 million. With our strengthening balance sheet, we are enhancing capital flexibility to support future inorganic growth initiatives. This concludes our prepared remarks. I will now turn it back over to the operator for questions.

[Operator Instructions]. Our first question will come from the line of Randy Binner with B. Riley.

I just wanted to ask maybe about the cadence of integrating acquisitions, I think. With people I talked to the kind of the rapid integration of USAA and the paydown of debt has people thinking ahead when there might be another acquisition. So can you remind us of what that cadence timing is?

Randy, the cadence I was referring to is really our historical pace of acquisitions, which over the last 6 years, we've averaged probably 1 or so every year or 2. We can't predict when we're going to do the next acquisition. But based on what we're seeing in the market, we're really excited. We think there's great opportunities. In my prepared remarks, I mentioned that I thought we were becoming an acquirer of choice for many in the industry. We're seeing that. So my reference to the cadence is really about what we've done historically and really the opportunity we set seeing -- going forward. The strengthening of our balance sheet, I think, allows us to really be flexible on what we can do. And as you know, our desire is to delever quickly, of course, to derisk, but also to set us up for the next transaction, given what's happening in the industry.

All right. Yes, I appreciate that. I guess, my follow-up would be that the USAA deal is quite a bit larger than the historical deal. So is it -- is your integration machine running smoothly enough that even though it's larger that the processes could move along fast enough that you might be ready like this year because if you look at that EBITDA and other metrics, it seems like you would be back to kind of a pre-USAA balance sheet situation by the end of this year?

Yes.

Your next question will come from the line of Alex Blostein with Goldman Sachs.

Couple of questions. So first, I was hoping you could frame the distribution opportunity versus -- with the USAA. So maybe how big the addressable market is there for Victory's products, sort of what percentage of the customer wallet you guys have today where they could go? And also, what type of products on the Victory side you think are most likely to gain share of assets on that platform?

Alex, it's Dave. First, on the addressable size of the USAA market, I believe, there's about 13 -- 13.5 million members. We have close to 1 million members as clients today. So I think the remaining members who don't have products with us today could be potential clients. The -- when I think about the opportunity and some of the information we shared today in the prepared remarks around some of the progress we're making, we feel really good as those are really small, but tangible results and also feel that they're really good test cases. So we're starting to accelerate that as we think about this year and the years to come. As far as products, I will say that one product that we feel is very applicable to that group is our USAA 529 plan product, where we're conversing with members around college savings, around savings for their children's education. And we have seen good results with that. So that's one example. We think that, that there's obviously other products, but that's a really good example of something that we feel we can make really good progress with.

Great. And second question just around the profitability. So the EBITDA margin is obviously quite strong, over 46% in the quarter. Just curious why 46% EBITDA margin is still the right target over the near term, given the fact that, obviously, markets have been supportive, assets are up. Understanding you guys are doing incremental investments. So maybe help us frame how much in incremental cost you expect to run through the model as you make these enhancements? And what are the kind of probabilities? And what's kind of the moving needle on potentially getting to about 46% EBITDA margin this year?

Alex, it's Mike. Yes, I think we have stated the guidance of 46%. We had a very strong quarter in Q4, as you mentioned, with respect to the markets. But we also mentioned that we're making investments in the business and some of those investments will be over time as we think about it. And we talked about the areas of the direct channel, standing up the direct platform as well as thinking about continuing to invest in the investment support for our franchises, client service, distribution and technology. But I would say, as we think about going forward, the 46%, it will be tight to that range, inclusive of those investments longer term, absent and the ability to see expanded margins will really depend on our next phase from an acquisition perspective and inorganic growth, what we can accomplish. But we're confident in the 46%, and there will be a tight range around that.

Your next question comes from the line of Ken Worthington with JPMorgan.

Maybe first on solutions. Can you talk about the pipeline there? You've had a couple of quarters now of 2020 outflows. So how does the pipeline look for solutions over, say, the next couple of quarters?

Ken, it's Dave. We're very happy with our solutions business. It has grown from where we really started it back in April 2015. We think it's going to be a bigger part of our business going forward. We have a lot of clients that have -- that we're working with around outcomes. And we think that the pipeline is strong. Sometimes, the sales cycle depends on the client and depends on the work that we're doing. So sometimes, it's a quarter, it could be multiple quarters, but we feel really good about the pipeline. We feel really good about that part of our business. And that is definitely a portion of where the industry is going, and we think we're pretty well positioned there with the team that we have and the products that we have.

Great. You mentioned the referral agreement. I was hoping you could give us a little more information in terms of how the direct account business is growing, if there's any information you can share, either growth rates or number of accounts? And I know this is starting from a standstill, but again any sense would be great. And then what does the sales cycle look like in the direct account business? So once you get a referral, how long is it taking to turn referral into account opening? I assume it's fairly short, but maybe that's wrong.

So the referral agreement, as we referenced in our prepared remarks, is in place. It's working. There's some incentivization for USAA to pass us referrals through the earn out. They've been great partners, and it's really working the way we envisioned. We shared some statistics. Again, those are just pieces of what we are doing. We're not in a position today or would not like today to share some of the more detailed numbers, but what I can share with you is that it's working the way we envisioned. I can also share that with you that we think we're really just beginning and starting to scratch the surface on those opportunities. We have started off really focusing on service, service to the members in a way that USAA members would expect. We've been able to reproduce that service, if not, expand that service and do a better job. And now we're pivoting towards working with the members and thinking about how we can grow wallet share, how we'd be a better partner for them. We have taken 300,000 calls, as I said in my prepared remarks, since July 1. That is 300,000 calls that we've been able to interact, converse, guide members with -- and it's a touch point. So we think there's a lot of opportunity in this channel. And we think our product set will work for a large group of these members that we get to interact with and we get to touch.

Your next question comes from the line of Mike Carrier with Bank of America.

First, just on the flows. So you got positive for the year and then some outflows in the fourth quarter, Dave, I think you mentioned you'd some cyclical client rebalancing. Maybe just some color based on like either historical perspective, knowing like the clients and the affiliates. Just how long does that tend to last? And then given some of the strategic focus you have with USAA solutions, do you think there's enough, maybe, momentum in those other areas to offset some of that cyclical rebalancing?

Sure. We have seen -- we saw in the fourth quarter, a heightened level of client reallocations. As I said in my prepared remarks, sometimes, those reallocations, they occur as a net outflow, but we actually have a larger economic relationship with the client. Those, if there are good outflows, that is a good outflow. That is a client that's rebalancing to their investment guidelines or in their investment policy. So we are perfectly fine with those. Those are cyclical in nature, but there's definitely been a heightened level of those, and I would attribute that to where we are in the market cycle. As far as do we have enough to offset that, I would absolutely say yes. We have a diversified product set. We have a really good investment performance and with some of the products we have that are just getting pushed into our traditional channels, the fixed income -- USAA fixed income, the solutions product and then the opportunity set in the direct side, we're encouraged by our opportunity to be in net inflows in 2020 and forward.

Okay. And then just a follow-up. So given the USAA deal and then some of the strategic focus on some of the organic growth opportunities, I guess, maybe from like a time standpoint, like how active are you guys looking for new affiliates, any particular areas? And maybe a little bit of like who's responsible for driving USAA forward versus looking for some of the new potential out there?

So let me start to say that doing acquisitions is really a part of our culture. It's part of our management team. So I would say that our management team is responsible for pushing the opportunity in USAA forward and being successful there as well as finding new opportunities from an inorganic growth perspective. As we've said before, we start off looking at inorganic growth opportunities, to say, does this opportunity make our company better. It isn't just about financial engineering, it isn't about size and scale. It starts off, does this make our company better. We also look at the product set. What I've always said and what we've always kind of communicated is that we are looking for products that work for clients in the portfolios, where they're willing to pay a fair fee for and where we think we can win, where there's less opportunity to be disintermediated by a passive product. And we use those as principles to look for opportunities. We are active, as I've said, searching for those opportunities. It is an interesting time in the industry. We have -- as I said earlier, that we have become, I believe, for many an acquirer of choice. We're mindful of what we want to do. We also are creative, and we're very well experienced. So I think the ability to make USAA successful as well as the ability to pursue inorganic growth opportunities, we're perfectly capable of doing both. And I think we're actually pursuing those in a really good way at this point.

Your next question comes from the line of Kenneth Lee with RBC Capital markets.

Just one on the net flows. Were there any kind of key redemptions within the fixed income or any other key net flows that you'd like to highlight in the quarter? And then looking forward, could you just comment on your expectations for net flows within fixed income? And whether the product offerings there are well positioned to allow you to take advantage of client demand that's being seen across the industry?

Sure, Ken. It's Mike. No significant flows to highlight in Q4 for fixed income or any of the product offerings. I think we saw activity and flows across all channels and products and franchises, but nothing significant. They've highlighted some reallocations with respect to the positive momentum in the equity markets, but nothing to point out. As far as going forward, I think we've talked a lot about now having 1/3 of our assets in high-performing fixed income products with the USAA acquisition plus our INCORE franchise. We feel like we are very well positioned in the fixed income across all strategies to continue to look at capitalizing on both the distribution within the direct channel as well as our institutional and retail and retirement distribution. Fixed income offers us a great opportunity, especially as we think about where markets are today. It just offers us another bucket to continue to capture organic growth.

Great. And just one follow-up, if I may. In terms of the investments you're going to make and that includes the digital platform, the marketing direct member channel and a couple of other efforts that you mentioned. It feels as if most of the investments are going to be within this year. Just wanted to check on terms of time frames, whether it's maybe just this year? Or could it potentially spill over into next year?

It's Dave. It's definitely in this year, but these are investments to stay competitive that will continually make as we think about moving forward. The investment in technology, the investment in data, the investment in the ability to service clients better, faster and with better transparency, those are going to be things that we're going to need to continue to do. But that being said, our model and our ability to make those investments and ability to make those investments once across our entire platform and not have redundancies is really an advantage that we see with our model as we move forward and as there is a requirement for reinvestment and evolution and change in the industry. We just think we're very well positioned to continue to make these investments at a very efficient way.

[Operator Instructions]. Your next question will come from the line of Alex Blostein with Goldman Sachs.

Just wanted to get your thoughts on the mix of capital priorities as you progress through 2020. So obviously, nice to see the loan refi. You lowered the cost by significant 75 basis points. Does that decelerate at all the need to delever and maybe use some of the excess cash towards the buyback, given the fact that the stock is still trading at quite a low multiple, both on earnings and EBITDA? So just some thoughts around the pace of deleveraging from here and the buyback?

Alex, it's Dave. I'd start off saying, I agree with you on your analysis of the stock. But that being said, our goal is to create the balance sheet, where we have the most flexibility to execute our strategic growth plan. And today, that is around delevering. We have a small, as you know, buyback program and a small dividend program. I don't see those programs changing in the near future. We think the best use of our capital is to delever to create a balance sheet that gives us the most flexibility to go out and do future acquisitions.

Your next question will come from the line of Michael Cyprys with Morgan Stanley.

Just on the -- as you think about your operating platform today, largely outsourced model, just thinking around capacity to do a deal from an operating platform perspective, so I guess with the more outsourced model that you have, I guess, how much more an assets could you bolt-on, say, in similar asset classes to what you have today without meaningfully changing the expense and margin profile of the company?

Mike, it's Mike. Yes, I think we've talked a lot about the model that we have and the integrated operating platform. That does allow us with the outsourced model that we have to scale up pretty quickly. So with that said, there really isn't an asset level that we say we cannot handle. We talk a lot about the types of assets that we do and the complexity of the business. As you said, if we are looking at asset classes that we already trade, settle, have compliance programs around, those are very easy for us to kind of execute upon and to integrate, where we start to see the complexity is that there's different asset classes and/or different geographies. And those are things that we would take slowly to walk through, but have the platform and the experience to be able to leverage. So I think the answer really comes down to, we can continue based on the business model we have where we're making the investments once and it's a singular platform to continue to scale.

Should I take away from that, if the acquisition is similar asset classes and we should expect a similar EBITDA, 46% sort of margin, assuming it's similar to what you have today in terms of asset classes?

It's Dave. I think each acquisition is different. It depends on a lot of different variables. I think what you should take away is that we have been able to grow our business pretty significantly over the last few years through acquisitions and really execute the same business model. As we look forward, I don't see that opportunity set changing. I think our platform is built to grow, also the outsourcing relationships we have. We have great partners. We also had built a really strong internal platform as well to manage the business. So going forward, be it in the same asset classes, be it in new asset classes or new geographies, we feel that we're well positioned to grow through acquisition. And we don't really see any limits today within the universe that we're looking at.

Okay, great. And then just a follow-up question, maybe just on the sales side of things. Pace of gross sales looked like it was down a little bit in the quarter. Just curious to any color you could share around the decline there? And as you look forward from here, I guess, where from a sales perspective, do you think you're most underpenetrated from, say, a channel or asset class perspective?

I wouldn't take anything from the quarter on gross sales, quarter-over-quarter on the reduction. Either it was cyclical or -- I don't think there's anything to take from there. I think we're pretty well penetrated in the markets that we want to be in around our institutional, retail and retirement side. We're working on the direct channel, obviously. But I don't think there's a market that I'd point out to say that we're really focusing on to get more penetration in.

And we have no further questions at this time. I'll turn the conference back over to management for any closing remarks.

Thank you for participating in today's call. We look forward to providing you with ongoing updates as we continue to execute on our strategy, and I hope all of you have a wonderful day. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.