Good morning. My name is Tawanda 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 being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period and instructions will follow at that time. I will now turn the conference over to your host Sean Rourke. Sir, you may begin.

Thank you, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the second quarter of 2023. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on page two of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George?

Thank you, Sean. Good morning, everyone. I'll start with an overview of the results we reported earlier today before turning it over to Mike to provide more detail. Key highlights of the second quarter included a meaningful improvement in net flows to breakeven, strong institutional sales and flows across affiliates, strategies and geographies, positive net flows in global funds, private client and ETFs, attractive investment performance, both long-term and year-to-date across strategies, continued investment in the diversification of the business with the addition of the new affiliate, and we maintained a well-positioned balance sheet and modest net leverage. Turning now to a review of the results. Total assets under management increased 9% to $168 billion due to the addition of AlphaSimplex and market appreciation. Sales increased 22% sequentially to $7.6 billion due to continued momentum in our institutional business. On the retail side, sales declined primarily in domestic equity, though global equity sales increased significantly. Retail separate account sales were essentially unchanged from the prior quarter. Our net flows are breakeven, a significant improvement from the prior quarter due to institutional. By product, institutional net flows of $2.2 billion improved from modest net outflows in the first quarter with strong sales and net flows across affiliates, strategies and geographies. Over the past four quarters, institutional has generated 5% organic growth in a challenging environment. Fund net outflows of $2.1 billion compared with $1.8 billion in the first quarter as an improvement in fixed income strategies was more than offset by lower equity flows consistent with the industry. Within equities, both global equity and domestic SMID cap generated positive net flows. Retail separate accounts continue to be at relatively breakeven levels. In terms of what we're seeing in July, our institutional pipeline remains strong with one but not funded mandates exceeding…

Thank you, George. Good morning, everyone. Starting with our results on slide seven, assets under management. At June 30th, assets under management were $168.3 billion, up 9% from $154.8 billion at March 31st. The growth reflected the addition of $7.8 billion of assets from AlphaSimplex and $6.3 billion from favorable market performance. Average assets in the quarter increased 7% to $163 billion, and ending assets under management were 3% higher than the quarter's average. Our assets under management remained diversified by asset class and product type. We've continued to expand our investment capabilities in less correlated and alternative strategies, which now represent 11% of AUM, up from 7% prior to the acquisition of AlphaSimplex. Fixed income and multi-asset were each relatively unchanged sequentially at 23% and 12% of AUM, respectively, though each increased during the quarter. Notably, institutional now represents 37% of total AUM, up from 32% a year ago and non-US clients are 17%, up from 15% last year. We also continue to have compelling long-term relative investment performance across products and strategies. As of June 30th, approximately 69% of institutional assets and 89% of retail separate account assets were outperforming their benchmarks over five years. In addition, approximately 62% of rated fund assets had four or five stars, up from 43% last quarter and 87% were in three, four or five star funds. We had 38 funds that were rated four or five stars, including 11 with AUM of $1 billion or more, up from seven last quarter. On a five-year basis, 77% of our rated fund AUM was outperforming the median performance of their peer groups. I would also note that our managers performed well year-to-date in volatile markets with 67% and 86% of institutional and separate account AUM, respectively, beating benchmarks for the period and 70%…

Thanks, Mike. We will now take your questions. Tawanda, would you please open up the lines?

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

Thanks. Good morning guys. I wanted to start on the fee rate. AUM was up a bit sequentially, still came in at the -- the fee rate on the AUM was up a bit sequentially here. Just wondering, with the large institutional inflows, maybe offset a bit by AlphaSimplex, can you unpack the dynamics around what drove the level here in the second quarter kind of net-net of any of those onetimers?

Sure. And for the fee rate, again, the geography and the underlying changes in either AUM mix strategies that are either redeeming or pulling in assets can create a little movement within the components and the subcomponents, particularly in a quarter like last quarter, where you kind of had a rising market and then you had flows going in at different fee rate differentials. Mike, do you want to go through the pieces?

Yes. I think as we look at the fee rate, providing it by product, the mix shift certainly impacts the overall fee rate. We look at it by product, it's stayed in a relatively tight range, even increasing in the quarter, as you noted, from AlphaSimplex. And institutional has become a bigger part of the business. We noted it's now 37% of the business, up from 32% a year ago. So you're seeing that impact the overall fee rate. I think adjusting for the discrete item, we ticked up from 42 to 42.5 and reiterated the range, but that range will be impacted by the mix shift and by the market action. So we'll continue to update accordingly. But from our standpoint, the fee rate has been resilient, has been resilient on each of the product categories, and we're impacted more again by markets and the mix shift.

Got it. Thanks, Mike. And then nice to see the institutional wins in the quarter. Just wondering if you can get an update on that pipeline for July to date? And then how that demand for kind of institutional and SMA funds have kind of trended there?

Yes. On the institutional side, we continue to be pleased with the strength of the pipeline. And as we speak to strength, generally, we prefer to see is diversity in terms of either strategies, affiliates as well as geographies, and I think we highlighted that in our comments. So we continue to see that as a nice pipeline. Again, it's a very lumpy business. So of course, there will be different timing aspects of some of the mandates versus the others. But it is nice to see not only some of the fixed income strategies being attractive, but then that are at one fee level, but as well as some of the growth equity side, which is slightly different, which sort of then lends to the changes in our fee rate, but we continue to be pleased with what that looks like and how diverse it is.

Great. Thank you. And then last one for me here. Just on the fixed income side of the business. Just looking at retail, outflows have been pretty consistent since rates started increasing last year. They've been slowing a little bit in recent months. So with the range of strategies that you guys have across fixed income, can you talk about your expectations for the demand kind of across retail and institutional, given the mix? And then maybe you can add some commentary on that market neutral merger fund as well within alternatives. It's a context of the environment. Thanks.

Well, on the second piece, I think the macro view on mergers and acquisitions is not the most favorable that it's been. So that's going to have an impact on how people look at strategies like that. So again, with some of the headlines and some of the transactions, I think, unfortunately, some retail investors are incorrectly being a little more negative on those types of strategies than they should be. Going back to fixed income, our view is that there really should be a lot more of an interest in some of those strategies. We've seen some increases in some of our strategies, improvements from where they were, but not to the levels where we need to be. But the hope would be, as people start getting a little more clarity on the rates going forward, they'll start taking advantage of some different strategies than previously what they've been doing.

Great. Thanks for taking the questions.

No problem.

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

Hey, good morning. Thanks for taking the question. Maybe coming back to some of the commentary on the institutional pipeline. I guess my follow-up question here would just be how do you sort of characterize the fee rate on the pipeline compared to the 31 basis points or so institutional fee overall? And I think you mentioned that you had a low fee institutional mandate fund in the quarter. Maybe you can help quantify is that single-digit sort of zip code? And what sort of strategy that was in the quarter?

Yes. And on that, I think Mike referred to it as lower fee. So again, in the mix in terms of what we see going forward, I think we've -- in the comments, basically indicated that we still feel very comfortable with the range of the 42 to 44, which, again, given the mix could move up and down a little bit. But to some of my earlier comments, sometimes we will see some larger mandates because of their size or their strategy such as investment grade will be lower than other fees. And then other strategies, more sophisticated or high conviction equity strategies will have higher. So we kind of look at that collectively in terms of the bucket because you'll be having some coming in and going out. So that one account did not impact the guidance that we're giving in terms of what the reasonable fee rate is because there'll be -- there are a lot of moving parts. And then including on the underlying assets, which for institutional or mix of fixed income as well as equity, the relative sizes based upon market appreciation will also change. Anything else, Mike, you'd add?

I think, George, you summed that up pretty well. I think and specifically, Michael, looking at the pipeline, it does support the current quarter's level of institutional just above that 31.5 fee rate level. It has -- given the breadth of it, it has fixed income as well as equity. It has a breadth across geographies as well. And looking at the new business that was also part of the strength in institutional in the current quarter, excluding this larger mandate, you're actually above the fee rate. So you've got some puts, some takes. But when we look at the breadth of the business, I think the current quarter's level is appropriate for modeling and supports, again, some of the strength that we're seeing on that institutional side.

Great. And just maybe you could update us on how you're thinking about capital allocation here and M&A on the capital allocation side. I hear you on paying down the $40 million revolver, it sounds like by the end of the year. Just how are you thinking about buybacks as well into the end of the year as well as M&A? How much time are you spending on that these days? And maybe you can give us an update on what sort of properties you're seeing out there and where you might have interest from here?

Sure. So in terms of the capital priority, so in the comments kind of indicated, we do believe that it's appropriate to pay down what we drew on the credit facility. So our goal, and I think we commented on last quarter as well as in our comments earlier today, by the end of the year, bringing that down. And again, given our current low level of leverage and our cash flow generation, we can certainly do that, and we continue to believe that repurchasing our shares in view of the current valuation is a great use of our capital. So we purchased -- we used $10 million last year, and we continue to see that as an opportunity. In terms of M&A, continue to be as active as we've always been, which really refers to the amount of activity and work that we're doing sometimes which turn into transactions and sometimes don't. We continue to see that to be an area of opportunity for us. Again, we always do try to prioritize our organic growth, but we continue to consider inorganic opportunities. So I do think there continues to be a lot of activity going on in the M&A market in our sector. We continue to evaluate things that we think would be strategically additive to the business in terms of further diversification, particularly as it relates to clients and geographies as well as, as you've seen in our last two transactions, we're also kind of focused towards less correlated investment strategies from the traditional long-only equity and fixed where we always had a pretty good array of that. So we'll continue to evaluate that. But again, we'll continue to take the cash that we generate and make sure that we have a comfortable level of leverage as well as returning capital to shareholders through both our repurchases as well as our dividend. And as you know, we've increased our dividend annually over the last few years. Mike, anything else you'd add to that?

Yes. I think, George, the other thing I'd reiterate on what you indicated in part of the prepared remarks on capital, we do continue to invest in the business. George alluded to the fact that we're seeing CLO opportunities, and we would use capital to support the teams on CLO issuance, which is something that the current market environment seems that may be conducive. So we're balancing all the priorities George alluded to as well as continuing to support our affiliates growth.

Great. And just a final question for me. You guys have done a number of acquisitions over the past couple of years and a number of them have also had these contingent payments or earn-outs. So I was hoping you might be able to remind us on what's still to come through from a cash standpoint over the next couple of years that could be paid out?

Yes. And we have the contingent consideration that we look at each quarter on the balance sheet and you may recall that each first quarter, we have a payment of the revenue participation payments that have been in the $25 million range over the first two periods. This would be the third period coming up. And we had talked about the bulk of that being over a five-year period and there's also some longer tailed contingent consideration related to Westchester Capital, which would be out years four and five post that transaction, which closed in 2021. So that's two to three years from now, so more imminent over the next 2 years or the first quarter of each year related to the revenue participation payments.

Great. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Aylward.

Great. Thank you so much. And I want to thank everyone today for joining us. And as always, if there's any additional questions, please feel free to reach out with further questions. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you for your participating and you may now disconnect.