Victory Capital Holdings, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 001-38388

Victory Capital Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		32-0402956
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

15935 La Cantera Parkway, San Antonio, Texas		78256
(Address of principal executive offices)		(Zip Code)

(216) 898-2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 Par Value	VCTR	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☒		Non-accelerated filer ☐		Smaller reporting company ☐
						Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share and Class B common stock, par value $0.01 per share, as of April 30, 2020 were 16,588,474 and 51,307,072 respectively.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1.	Financial Information	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	38
Item 6.	Exhibits	38
	Signatures	39

Forward‑Looking Statements

This report includes forward-looking statements, including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward‑looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward‑looking statements in this report.

Forward‑looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward‑looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following; reductions in assets under management (“AUM”) based on investment performance, client withdrawals, difficult market conditions and other factors such as a pandemic; the nature of our contracts and investment advisory agreements; our ability to maintain historical returns and sustain our historical growth; our dependence on third parties to market our strategies and provide products or services for the operation of our business; our ability to retain key investment professionals or members of our senior management team; our reliance on the technology systems supporting our operations; our ability to successfully acquire and integrate new companies; the concentration of our investments in long only small‑ and mid‑cap equity and U.S. clients; risks and uncertainties associated with non‑U.S. investments; our efforts to establish and develop new teams and strategies; the ability of our investment teams to identify appropriate investment opportunities; our ability to limit employee misconduct; our ability to meet the guidelines set by our clients; our exposure to potential litigation (including administrative or tax proceedings) or regulatory actions; our ability to implement effective information and cyber security policies, procedures and capabilities; our substantial indebtedness; the potential impairment of our goodwill and intangible assets; disruption to the operations of third parties whose functions are integral to our exchange traded fund (“ETF”) platform; our determination that we are not required to register as an “investment company” under the 1940 Act; the fluctuation of our expenses; our ability to respond to recent trends in the investment management industry; the level of regulation on investment management firms and our ability to respond to regulatory developments; the competitiveness of the investment management industry; the dual class structure of our common stock; the level of control over us retained by Crestview Partners II GP, L.P. (“Crestview GP”); our status as an emerging growth company and a controlled company; our ability to integrate the USAA Asset Management Company (“USAA Adviser”) and the Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services (together with USAA Adviser, the “USAA Acquired Companies”); and other risks and factors included, but not limited to, those listed under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020, which is accessible on the SEC’s website at www.sec.gov.

In light of these risks, uncertainties and other factors, the forward‑looking statements contained in this report might not prove to be accurate. All forward‑looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward‑looking statements, whether as a result of new information, future events or otherwise.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares data)

	March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	37,130		$	37,121
Receivables		77,610			95,093
Prepaid expenses		6,709			4,852
Investments		15,631			19,076
Property and equipment, net		14,028			13,240
Goodwill		404,750			404,750
Other intangible assets, net		1,172,305			1,175,471
Other assets		3,600			3,706
Total assets	$	1,731,763		$	1,753,309

Liabilities and stockholders' equity
Accounts payable and accrued expenses	$	79,111		$	89,203
Accrued compensation and benefits		33,544			54,842
Consideration payable for acquisition of business		113,200			118,700
Deferred tax liability, net		11,134			5,486
Other liabilities		25,047			22,668
Long-term debt, net		888,647			924,539
Total liabilities		1,150,683			1,215,438

Stockholders' equity
Class A common stock, $0.01 par value per share: 2020 - 400,000,000 shares authorized, 18,508,087 shares issued and 16,582,902 shares outstanding; 2019 - 400,000,000 shares authorized, 18,099,772 shares issued and 16,414,617 shares outstanding		185			181
Class B common stock, $0.01 par value per share: 2020 - 200,000,000 shares authorized, 54,537,895 shares issued and 51,436,953 shares outstanding; 2019 - 200,000,000 shares authorized, 53,937,394 shares issued and 51,281,512 shares outstanding		545			539
Additional paid-in capital		632,468			624,766
Class A treasury stock, at cost: 2020 - 1,925,185 shares; 2019 - 1,685,155 shares		(25,918	)		(21,524	)
Class B treasury stock, at cost: 2020 - 3,100,942 shares; 2019 - 2,655,882 shares		(40,173	)		(31,386	)
Accumulated other comprehensive loss		(4,887	)		—
Retained earnings (deficit)		18,860			(34,705	)
Total stockholders' equity		581,080			537,871
Total liabilities and stockholders' equity	$	1,731,763		$	1,753,309

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

	Three Months Ended March 31,
	2020			2019
Revenue
Investment management fees	$	146,881		$	74,411
Fund administration and distribution fees		57,540			13,068
Total revenue		204,421			87,479

Expenses
Personnel compensation and benefits		47,571			34,501
Distribution and other asset-based expenses		54,860			15,767
General and administrative		11,888			7,087
Depreciation and amortization		4,050			5,222
Change in value of consideration payable for acquisition of business		(5,500	)		—
Acquisition-related costs		(69	)		2,777
Restructuring and integration costs		998			—
Total operating expenses		113,798			65,354

Income from operations		90,623			22,125

Other (expense) income
Interest income and other (expense) income		(4,172	)		1,833
Interest expense and other financing costs		(11,408	)		(4,624	)
Loss on debt extinguishment		(1,054	)		—
Total other expense, net		(16,634	)		(2,791	)

Income before income taxes		73,989			19,334

Income tax expense		(16,823	)		(4,807	)

Net income	$	57,166		$	14,527

Earnings per share of common stock
Basic	$	0.84		$	0.22
Diluted	$	0.77		$	0.20

Weighted average number of shares outstanding
Basic		67,790			67,521
Diluted		74,350			72,282

Dividends declared per share of common stock	$	0.05		$	—

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2020			2019
Net income	$	57,166		$	14,527

Other comprehensive (loss) income, net of tax
Net unrealized loss on cash flow hedges		(4,820	)		—
Net unrealized (loss) income on foreign currency translation		(67	)		12
Total other comprehensive (loss) income, net of tax		(4,887	)		12

Comprehensive income	$	52,279		$	14,539

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands)

															Accumulated
												Additional			Other			Retained
	Common Stock					Treasury Stock						Paid-In			Comprehensive			(Deficit)
	Class A		Class B			Class A			Class B			Capital			Loss			Earnings			Total
Balance, December 31, 2019	$	181	$	539		$	(21,524	)	$	(31,386	)	$	624,766		$	—		$	(34,705	)	$	537,871
Issuance of common stock		—		—			—			—			26			—			—			26
Share conversion - Class B to A		4		(4	)		—			—			—			—			—			—
Repurchase of shares		—		—			(4,394	)		—			—			—			—			(4,394	)
Shares withheld related to net settlement of equity awards		—		—			—			(8,787	)		—			—			—			(8,787	)
Vesting of restricted share grants		—		7			—			—			(7	)		—			—			—
Exercise of options		—		3			—			—			1,690			—			—			1,693
Other comprehensive loss		—		—			—			—			—			(4,887	)		—			(4,887	)
Share-based compensation		—		—			—			—			5,993			—			—			5,993
Dividends paid		—		—			—			—			—			—			(3,601	)		(3,601	)
Net income		—		—			—			—			—			—			57,166			57,166
Balance, March 31, 2020	$	185	$	545		$	(25,918	)	$	(40,173	)	$	632,468		$	(4,887	)	$	18,860		$	581,080

														Accumulated
												Additional		Other
	Common Stock					Treasury Stock						Paid-In		Comprehensive			Retained
	Class A		Class B			Class A			Class B			Capital		(Loss) Income			Deficit			Total
Balance, December 31, 2018	$	153	$	553		$	(8,045	)	$	(21,719	)	$	604,401	$	(86	)	$	(119,709	)	$	455,548
Issuance of common stock		—		—			—			—			13		—			—			13
Share conversion - Class B to A		4		(4	)		—			—			—		—			—			—
Repurchase of shares		—		—			(1,344	)		—			—		—			—			(1,344	)
Shares withheld related to net settlement of equity awards		—		—			—			(318	)		—		—			—			(318	)
Exercise of options		—		1			—			—			220		—			—			221
Cumulative effect of adoption of ASU 2016-01 and 2018-02		—		—			—			—			—		62			(62	)		—
Other comprehensive income/(loss)		—		—			—			—			—		12			—			12
Share-based compensation		—		—			—			—			1,547		—			—			1,547
Dividends paid		—		—			—			—			—		—			(41	)		(41	)
Net income		—		—			—			—			—		—			14,527			14,527
Balance, March 31, 2019	$	157	$	550		$	(9,389	)	$	(22,037	)	$	606,181	$	(12	)	$	(105,285	)	$	470,165

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Victory Capital Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income	$	57,166		$	14,527
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes		7,182			1,360
Depreciation and amortization		4,050			5,222
Deferred financing costs and derivative and accretion expense		1,174			593
Stock-based and deferred compensation		2,772			3,924
Change in fair value of contingent consideration obligations		(5,500	)		—
Unrealized depreciation (appreciation) on investments		4,971			(1,458	)
Loss on equity method investment		—			4
Loss on debt extinguishment		1,054			—
Changes in operating assets and liabilities:
Receivables		16,439			(327	)
Prepaid expenses		(1,857	)		(1,181	)
Other assets		(18	)		—
Accounts payable and accrued expenses		(11,760	)		5,685
Accrued compensation and benefits		(23,990	)		(10,331	)
Other liabilities		239			(80	)
Net cash provided by operating activities		51,922			17,938

Cash flows from investing activities
Purchases of property and equipment		(708	)		(484	)
Purchases of trading securities		(2,617	)		(1,533	)
Sales of trading securities		1,091			570
Net cash used in investing activities		(2,234	)		(1,447	)

Cash flows from financing activities
Issuance of Class A common stock, net of underwriter discount		26			13
Issuance of Class B common stock from exercise of stock options		1,693			221
Repurchase of common stock		(6,020	)		(1,643	)
Payments of taxes related to net share settlement of equity awards		(4,431	)		(196	)
Repayment of long-term senior debt		(38,000	)		—
Repayment of promissory note		—			(96	)
Payment of dividends		(3,490	)		(41	)
Receipt of consideration for acquisition		649			—
Net cash used in financing activities		(49,573	)		(1,742	)

Effect of changes of foreign exchange rate on cash and cash equivalents		(106	)		21

Net increase in cash and cash equivalents		9			14,770
Cash and cash equivalents, beginning of period		37,121			51,491
Cash and cash equivalents, end of period	$	37,130		$	66,261

Supplemental cash flow information
Cash paid for interest	$	20,112		$	3,801
Cash paid for income taxes		1,345			343

See the accompanying notes to the unaudited condensed consolidated financial statements.

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Victory Capital Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. ORGANIZATION AND NATURE OF BUSINESS

Victory Capital Holdings, Inc., a Delaware corporation (along with its wholly-owned subsidiaries, collectively referred to as the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our”) was formed on February 13, 2013 for the purpose of acquiring Victory Capital Management Inc. (“VCM”) and Victory Capital Advisers, Inc. (“VCA”), which occurred on August 1, 2013. On February 12, 2018, the Company completed the initial public offering (the “IPO”) of its Class A common stock, which trades on the NASDAQ under the symbol “VCTR.”

On and effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Adviser and VCTA, formerly known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services. The USAA AMCO Acquisition includes USAA’s mutual fund and ETF businesses and its 529 College Savings Plan (collectively, the “USAA Mutual Fund Business”). Refer to Note 4, Acquisitions, for further details on the acquisition.

VCM is a registered investment adviser managing assets through open-end mutual funds, separately managed accounts, unified management accounts, ETFs, collective trust funds, wrap separate account programs and Undertakings Collective Investment in Transferable Securities (“UCITs”). VCM also provides mutual fund administrative services for the Victory Portfolios, Victory Variable Insurance Funds, Victory Institutional Funds and the mutual fund series of the Victory Portfolios II (collectively, the “Victory Funds”), a family of open-end mutual funds, the VictoryShares (the Company’s ETF brand), as well as the USAA Mutual Fund Business, which includes the USAA Mutual Fund Trust, a family of open-end mutual funds (the “USAA Funds”). Additionally, VCM employs all of the Company’s United States investment professionals across its Franchises and Solutions, which are not separate legal entities. Effective on or about June 30, 2020, Victory Capital Advisers, Inc. is changing its name to Victory Capital Services, Inc. VCA is registered with the SEC as an introducing broker-dealer and serves as distributor and underwriter for the Victory Funds and USAA Funds. VCTA is registered with the SEC as a transfer agent for the USAA Funds.

NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial condition, results of operations, and cash flows for the interim periods presented. Operating results for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, after elimination of all intercompany balances and transactions. Our involvement with non-consolidated variable interest entities (“VIEs”) include sponsored investment funds and, in 2019, an equity method investment.

For further discussion regarding VIEs, refer to Note 2, Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates and Assumptions

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements and the notes. Actual results may ultimately differ materially from those estimates.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. COVID-19 did not have a material adverse effect on our reported results for our first quarter.

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New Accounting Pronouncements

Accounting Standards Adopted in 2020

•

Derivatives and Hedging: Effective January 1, 2020, the Company early adopted Accounting Standards Update (“ASU”) 2017-12 (“ASU 2017-12”), Derivatives and Hedging (Topic 815) and ASU 2019-04, Codification Improvements to Topic 815, Derivatives and Hedging (“ASU 2019-04”). ASU 2017-12 improves and simplifies accounting rules for hedge accounting to better present the economic results of an entity’s risk management activities in its financial statements and improves the disclosures of hedging arrangements. Various provisions of ASU 2017-12 were subsequently clarified by the Financial Accounting Standards Board (“FASB”) in April 2019 through the issuance of ASU 2019-04. The Company did not have any existing hedging relationships at the time of adoption; therefore, the adoption of ASU 2017-12 and ASU 2019-04 had no impact on our consolidated financial statements.

On March 27, 2020, the Company entered into an interest rate swap transaction (the “Swap”) to manage interest rate risk associated with a portion of its floating-rate long term debt (notional amount of $450 million). The Swap was designated as a cash flow hedge and the initial prospective quantitative hedge effectiveness assessment was deemed highly effective. Under ASU 2017-12, the Company has the option to perform subsequent assessments of hedge effectiveness qualitatively. The Company has elected to assess the Swap’s hedge effectiveness qualitatively and will verify and document on a quarterly basis that facts and circumstances have not changed.

Recently Issued Accounting Standards

•

Subsequent Measurement of Goodwill: In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) (“ASU 2017-04”) which simplifies the test for goodwill impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step two) to measure a goodwill impairment charge. Goodwill impairment will be based upon the results of step one of the impairment test, which is defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. The effective date for calendar-year public business entities was January 1, 2020. Due to the Company’s status as an emerging growth company (“EGC”), the new guidance will be effective for the Company’s fiscal year that begins on January 1, 2021 and requires a prospective approach to adoption. Early adoption is permitted for interim or annual goodwill impairment tests. The impact of this new guidance will depend upon the performance of our one reporting unit and the market conditions impacting the fair value.

•

Leases: In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (the “New Lease Standard”) which supersedes previous lease guidance, Accounting Standards Codification (“ASC”) Topic 840 (“ASC Topic 840”). The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) on their balance sheet at the commencement date and recognize expenses on their income statement similar to ASC Topic 840 guidance. In addition, the FASB issued ASU 2018-11, Leases Targeted Improvements, which provides a package of practical expedients for entities to apply upon adoption. The effective date for calendar-year public business entities was January 1, 2019. In November 2019, the FASB deferred the effective date of the New Lease Standard for private companies and other companies who had not yet been required to adopt the standard. Due to the Company’s EGC status, we will adopt the New Lease Standard on January 1, 2021.

We have assessed and evaluated our portfolio of active real estate leases and are currently surveying our business for other leases. As outlined in our Annual Report on Form 10-K for the year ended December 31, 2019, we have approximately $23 million in undiscounted, future minimum cash commitments under net operating leases. The New Lease Standard is expected to result in a gross up on our Consolidated Balance Sheets and to have no material impact to our Consolidated Statements of Operations, our liquidity or our debt covenant compliance under our current credit agreement.

•

Expected Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 creates a new model for determining current expected credit losses (“CECL”) on trade and other receivables, net investments in leases, contract assets and long-term receivables. The CECL impairment model requires companies to consider the risk of loss even if it is remote and to include forecasts of future economic conditions as well as information about past events and current conditions. The effective date for calendar-year public business entities is January 1, 2020. As an EGC, the Company currently expects to adopt ASU 2016-13 on January 1, 2023. We are currently reviewing the effect of this new standard on our consolidated financial statements.

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NOTE 3. Revenue RECOGNITION

In accordance with the new revenue recognition standard requirements, the following table disaggregates our revenue by type and product:

	Three Months Ended March 31,
(in thousands)	2020			2019
Investment management fees
Mutual funds (Victory/USAA Funds)	$	119,514		$	50,576
ETFs (VictoryShares)		3,162			2,016
Separate accounts and other vehicles		24,545			22,050
Performance-based fees
Separate accounts and other vehicles		(340	)		(231	)
Total investment management fees	$	146,881		$	74,411

Fund administration and distribution fees
Administration fees
Mutual funds (Victory/USAA Funds)	$	29,610		$	5,245
ETFs (VictoryShares)		385			270
Distribution fees
Mutual funds (Victory/USAA Funds)		6,796			7,553
Transfer agent fees
Mutual funds (USAA Funds)		20,749			—
Total fund administration and distribution fees	$	57,540		$	13,068

Total revenue	$	204,421		$	87,479

The following table presents balances of receivables:

(in thousands)	March 31, 2020		December 31, 2019
Customer receivables
Mutual funds (Victory/USAA Funds)	$	54,464	$	64,407
ETFs (VictoryShares)		1,155		1,391
Separate accounts and other vehicles		21,861		27,836
Receivables from contracts with customers		77,480		93,634
Non-customer receivables		130		1,459
Total receivables	$	77,610	$	95,093

Revenue

The Company’s revenue includes fees earned from providing;

•

investment management services,

•

fund administration services,

•

fund transfer agent services, and

•

fund distribution services.

Revenue is recognized for each distinct performance obligation identified in customer contracts when the performance obligation has been satisfied by transferring services to a customer either over time or at the point in time when the customer obtains control of the service. Revenue is recognized in the amount of variable or fixed consideration allocated to the satisfied performance obligation that Victory expects to be entitled to in exchange for transferring services to a customer. Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Investment management, fund administration and fund distribution fees are generally considered variable consideration as they are typically calculated as a percentage of AUM. Fund transfer agent fees are also considered variable consideration as they are calculated as a percentage of AUM or based on the number of accounts in the fund. In such cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying investor contributions and redemptions and financial

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market volatility. These fees are considered constrained and are excluded from the transaction price until the asset values or number of accounts on which the customer is billed are calculated and the value of consideration is measurable.

The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent and distribution services. Management considers whether we are acting as the principal service provider or as an agent to determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to third-party service providers, respectively. Victory is considered a principal service provider if we control the service that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by another party and do not control the service.

Investment Management Fees

Investment management fees are received in exchange for investment management services that represent a series of distinct incremental days of investment management service. Control of investment management services is transferred to the customers over time as these customers receive and consume the benefits provided by these services. Investment management fees are calculated as a contractual percentage of AUM and are generally paid in arrears on a monthly or quarterly basis.

Investment management fees are recognized as revenue using a time-based output method to measure progress. Revenue is recorded at month end or quarter end when the value of consideration is measured. The amount of investment management fee revenue varies from one reporting period to another as levels of AUM change (from inflows, outflows and market movements) and as the number of days in the reporting period change.

The Company may waive certain fees for investment management services provided to the Victory Funds, USAA Funds and VictoryShares and may subsidize certain share classes of the Victory Funds, USAA Funds and VictoryShares to ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. These waivers and reimbursements reduce the transaction price allocated to investment management services and are recognized as a reduction to investment management fees revenue. The amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers and expense reimbursements represent consideration payable to customers, which is recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, and no distinct services are received in exchange for these payments.

Performance‑based investment management fees, which include fees under performance fee and fulcrum fee arrangements, are included in the transaction price for providing investment management services. Performance-based investment management fees are calculated as a percentage of investment performance on a client’s account versus a specified benchmark or hurdle based on the terms of the contract with the customer. Performance-based investment management fees are variable consideration and are recognized as revenue when it is probable that a significant reversal of the cumulative revenue for the contractual performance period will not occur. Performance-based investment management fees recognized as revenue in the current period may pertain to performance obligations satisfied in prior periods.

Fund Administration Fees

The Company recognizes fund administration fees as revenue using a time-based output method to measure progress. Fund administration fees are determined based on the contractual rate applied to average daily net assets of the Victory Funds, USAA Funds and VictoryShares for which administration services are provided. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets and constraints are removed.

The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses are recorded on a gross basis.

Fund Transfer Agent Fees

The Company recognizes fund transfer agent fees using a time-based output method to measure progress. Fund transfer agent fees are determined based on the contractual rate applied to either the average daily net assets of the USAA Funds for which transfer agent services are provided or number of accounts in the USAA Funds. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets or actual number of accounts and constraints are removed.

The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. We are the primary obligor under the transfer agency contracts with the USAA Funds and have the ability to select the service provider and establish pricing. As a result, fund transfer agent fees and sub-transfer agent expenses are recorded on a gross basis.

Fund Distribution Fees

The Company receives compensation for sales and sales-related services promised under distribution contracts with the Victory Funds and USAA Funds. Revenue is measured in an amount that reflects the consideration to which the Company expects to be entitled in exchange for providing distribution services. Distribution fees are generally calculated as a percentage of average net assets in the

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Victory Funds and USAA Funds. The Company’s performance obligation is satisfied at the point in time when control of the services is transferred to customers, which is upon investor subscription or redemption.

Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, the Company may recognize distribution fee revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved. The Company’s distribution fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations.

The Company has contractual arrangements with third parties to provide certain distribution services. The Company is the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to select the service provider and establish pricing. Substantially all of the Company’s revenue is recorded gross of payments made to third parties.

Costs Incurred to Obtain or Fulfill Customer Contracts

The Company is required to capitalize certain costs directly related to the acquisition or fulfillment of a contract with a customer. Victory has not identified any sales-based compensation or similar costs that meet the definition of an incremental cost to acquire a contract and as such we have no intangible assets related to contract acquisitions.

Direct costs incurred to fulfill services under the Company’s distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares. The Company may pay upfront sales commissions to dealers and institutions that sell Class C shares of the participating Victory Funds at the time of such sale. Upfront sales commission payments with respect to Class C shares equal 1.00% of the purchase price of the Class C shares sold by the dealer or institution. When the Company makes an upfront payment to a dealer or institution for the sale of Class C shares, the Company capitalizes the cost of such payment, which is recorded in Prepaid expenses in the unaudited Condensed Consolidated Balance Sheets and amortizes the cost over a 12-month period, the estimated period of benefit.

Valuation of Assets Under Management

The fair value of assets under management of the Victory Funds, USAA Funds and VictoryShares is primarily determined using quoted market prices or independent third-party pricing services or broker price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a pricing service. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored products. The same prescribed valuation process is used to price securities in separate accounts and other vehicles for which a quotation or price evaluation is not readily available from a pricing service. For the periods presented, a de minimis amount of the AUM was priced in this manner.

NOTE 4. ACQUISITIONS

USAA AMCO Acquisition

On and effective July 1, 2019, the Company completed the USAA AMCO Acquisition, acquiring 100% of the outstanding common stock of the USAA Acquired Companies and the USAA Mutual Fund Business. The USAA AMCO Acquisition expands and diversifies the Company’s investment platform, particularly in the fixed income and solutions asset classes, and increases the Company’s size and scale. Additional products added to the Company’s investment platforms include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. The acquisition also added to the Company’s lineup of asset allocation portfolios and smart beta equity ETFs and provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct member channel.

Purchase Price

During the first quarter of 2020, the Company received a post-closing purchase price adjustment of $0.7 million in cash from the sellers related to net working capital adjustments. We continue to evaluate the acquisition and purchase price accounting.

Total consideration paid through March 31, 2020 for the USAA AMCO Acquisition was $949.4 million, comprised of $851.3 million of cash paid at closing plus the acquisition date value of contingent payments due to sellers of $98.8 million less $0.7 million in net working capital adjustments settled in the first quarter of 2020.

A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing. To receive any contingent payment in respect of “non-managed money”-related assets for a given year, annual revenue from “non-managed money”-related assets must be at least 80% of the revenue run-rate (as calculated under the Stock Purchase Agreement) of the USAA Adviser’s “non-managed money”-related assets under management as of the closing date, and to achieve the maximum contingent payment for a given year, such annual revenue must total at least 100% of that closing date revenue run-rate. Annual contingent

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payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the USAA Stock Purchase Agreement.

The Company accounted for the acquisition in accordance with ASC 805, Business Combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the USAA AMCO Acquisition. We used an independent valuation specialist to assist with the determination of fair value for certain of the acquired assets and assumed liabilities disclosed below.

The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $120.6 million was recorded to goodwill in the unaudited Condensed Consolidated Balance Sheets, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition primarily results from expected future earnings and cash flows, as well as the synergies created by the integration of the USAA Acquired Companies within our organization.

The following table summarizes the estimated amounts of identified acquired assets and liabilities assumed as of the acquisition date:

(in thousands)
Cash and cash equivalents	$	17,473
Investment management fees receivable		25,353
Fund administration and distribution fees receivable		4,779
Other receivables and prepaid expenses		299
Property and equipment		1,165
Other intangible assets⁽¹⁾		808,670
Goodwill		120,643
Accounts payable and accrued expenses		(5,575	)
Accrued compensation and benefits		(5,907	)
Payable to members and custodians		(17,473	)
Contingent consideration payable to sellers		(98,800	)
Total purchase price consideration	$	850,627

⁽¹⁾

Includes $750.2 million for indefinite-lived investment advisory contracts, $19.1 million for indefinite-lived transfer agent contracts, $0.8 million for indefinite-lived distribution contracts, $38.2 million for definite-lived trade name assets and $0.4 million for definite-lived lease-related assets, all of which are recorded in other intangible assets, net on the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the change in the goodwill balance from December 31, 2019 to March 31, 2020:

(in thousands)	As of March 31, 2020
Balance, beginning of period	$	404,750
Goodwill recorded in acquisition		—
Balance, end of period	$	404,750

Contingent Consideration

The fair value of contingent consideration payable to sellers at March 31, 2020 was estimated to be $113.2 million as compared to $118.7 million at December 31, 2019. The decrease in the liability of $5.5 million in the first quarter of 2020 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

The fair value of the USAA AMCO Acquisition contingent consideration payable was estimated using the real options method. Revenue related to “non-managed money” assets was simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which were then discounted from the expected payment dates at the relevant cost of debt. Significant assumptions and inputs include the “non-managed money” revenue projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral expected growth rate, revenue volatility and discount rate.

As of March 31, 2020, the projected annual growth rate for “non-managed money” revenue was approximately 5%. The market price of risk and revenue volatility of approximately 8% and 18%, respectively, were based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, we have assessed a discount rate of approximately 7.5%, which incorporates adjustments for credit risk and the subordination of the contingent consideration. Total estimated undiscounted earn out payments ranged from $130 million to $150 million, the maximum amount payable to sellers.

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Actual and Pro Forma Results for USAA Acquired Companies

Revenue of the USAA Acquired Companies for the three months ended March 31, 2019, was as follows:

	Unaudited
	Three Months Ended
(in millions)	March 31, 2019
Revenue	$	117.4

Net income attributable to the USAA Acquired Companies for the three months ended March 31, 2019 is impractical to determine as the Company does not prepare discrete financial information at that level.

The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2018. This unaudited information should not be relied upon as indicative of historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future.

The historical consolidated financial information of Victory and the USAA Acquired Companies have been adjusted to give effect to unaudited pro forma events that are directly attributable to the transaction, factually supportable and expected to have continuing impact on the combined results. These amounts have been calculated after adjusting the results of the USAA Acquired Companies to reflect additional interest expense, distribution costs, share-based compensation expense, income taxes and intangible asset amortization that would have been expensed assuming the fair value adjustments had been applied on January 1, 2018. In addition, Victory’s and the USAA Acquired Companies’ results were adjusted to remove incentive compensation, legal fees and mutual fund proxy costs directly attributable to the acquisition.

	Unaudited
	Three Months Ended
(in thousands, except per share amount)	March 31, 2019
Revenue	$	205.0
Net income	$	13.2

Earnings per share of common stock
Basic	$	0.20
Diluted	$	0.18

Weighted average number of shares outstanding
Basic		67,599
Diluted		72,376

Acquisition-Related Costs

Costs related to acquisitions are summarized below and include legal and filing fees, advisory services, mutual fund proxy voting costs and other one-time expenses related to the transactions. These costs are included in acquisition-related costs in the unaudited Condensed Consolidated Statements of Operations.

	Acquisition-related costs
	Three Months Ended March 31,
(in thousands)	2020			2019
USAA AMCO Acquisition	$	(124	)	$	2,586
Other		55			191
Total acquisition-related costs	$	(69	)	$	2,777

Restructuring and Integration Costs

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In connection with business combinations, asset purchases and changes in business strategy, the Company incurs costs integrating investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies.

The following table presents the rollforward of restructuring and integration liabilities, which are recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(in millions)	2020			2019
Liability balance, beginning of period	$	3.0		$	0.1
Integration costs-USAA AMCO		1.0			—
Total restructuring and integration costs		1.0			—
Settlement of liabilities		(1.5	)		—
Liability balance, end of period	$	2.5		$	0.1

NOTE 5. Fair Value Measurements

The Company determines the fair value of certain financial and nonfinancial assets and liabilities. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value determinations utilize a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the fair value hierarchy contains three levels:

•

Level 1—Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.

•

Level 2—Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the asset or liability being measured.

•

Level 3—Valuation inputs are unobservable and significant to the fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The table below shows liabilities measured at fair value on a recurring basis.

	As of March 31, 2020
(in thousands)	Total			Level 1		Level 2			Level 3
Financial Liabilities
Interest Rate Swap Liability	$	(6,300	)	$	-	$	(6,300	)	$	-
Contingent Consideration Arrangements		(113,200	)		-		-			(113,200	)
Total Financial Liabilities	$	(119,500	)	$	-	$	(6,300	)	$	(113,200	)

	As of December 31, 2019
(in thousands)	Total			Level 1		Level 2		Level 3
Financial Liabilities
Contingent Consideration Arrangements	$	(118,700	)	$	-	$	-	$	(118,700	)
Total Financial Liabilities	$	(118,700	)	$	-	$	-	$	(118,700	)

The Swap liability represents amounts owed as of March 31, 2020 under a floating-to-fixed interest rate swap transaction entered into by the Company on March 27, 2020. The Swap effectively fixes the interest rate at 3.465% on $450 million of the outstanding Term Loan balance through the Term Loan’s maturity in July 2026. The fair value of the Swap was included in other liabilities on the unaudited Condensed Balance Sheets at March 31, 2020. Pricing was determined based on a third party, model-derived valuation in which all significant inputs are observable in active markets (Level 2). Refer to Note 14, Derivatives, for further detail on the Swap.

The contingent consideration arrangement liabilities represent the USAA AMCO Acquisition estimated earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 4, Acquisitions, for further details related to the contingent consideration arrangement.

Significant unobservable inputs for the option pricing model used to determine the estimated fair value of the USAA AMCO Acquisition earn-out payment liability include the “non-managed money” revenue projected growth rate, revenue volatility, market price of risk and discount rate. An increase in market price of risk, discount rate and revenue volatility results in a lower fair value for the earn-out payment liability, while an increase in the projected growth rate for “non-managed money” revenue results in a higher

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fair value for the earn-out payment liability. Refer to Note 4, Acquisitions, for further details related to the valuation of contingent consideration payable related to the USAA AMCO Acquisition.

Changes in the fair value of the liability, realized or unrealized, are recorded in earnings and are included in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

The following table presents the balance of the contingent consideration arrangement liabilities at December 31, 2019 and March 31, 2020, respectively.

(in thousands)	Contingent Consideration Liabilities
Balance, December 31, 2019	$	(118,700	)
USAA AMCO change in fair value measurement		5,500
Balance, March 31, 2020	$	(113,200	)

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2019 to March 31, 2020. The Company recognizes transfers at the end of the reporting period.

The net carrying value of accounts receivable and accounts payable approximates fair value due to the short‑term nature of these assets and liabilities. The fair value of our long-term debt at March 31, 2020 is considered to be its carrying value as the interest rate on the bank debt is variable and approximates current market rates. As a result, Level 2 inputs are utilized to determine the fair value of our long‑term debt.

The fair value of the Company’s money market investment ($10.1 million within cash and cash equivalents), available-for-sale investments and trading securities are measured using Level 1 inputs, which are the market prices for shares in these open-end mutual funds.

NOTE 6. Related-Party Transactions

The Company considers certain funds that it manages, including the Victory Funds, the USAA Funds, the VictoryShares and collective trust funds that it sponsors (the “Victory Collective Funds”), to be related parties as a result of our advisory relationship.

The Company receives investment management, administrative, distribution and compliance fees in accordance with contracts that VCM and VCA have with the Victory Funds and the USAA Funds and has invested a portion of its balance sheet cash in the USAA Treasury Money Market Fund and earns interest on the amount invested in this fund. We also receive investment management fees from the VictoryShares and Victory Collective Funds under VCM’s advisory contracts with these funds and administrative fees from the VictoryShares. In addition, we receive transfer agent fees in accordance with a contract that VCTA has with the USAA Funds.

The table below presents balances and transactions involving related parties included in the unaudited Condensed Consolidated Balance Sheets and unaudited Condensed Consolidated Statements of Operations.

•

Included in cash and cash equivalents is cash held in the USAA Treasury Money Market Fund.

•

Included in receivables (fund administration and distribution fees) are amounts due from the Victory Funds and USAA Funds for compliance services and amounts due from the USAA Funds for transfer agent services.

•

Included in revenue (fund administration and distribution fees) are amounts earned for compliance services and transfer agent services.

•

Realized and unrealized gains and losses and dividend income on investments in the Victory Funds classified as available-for-sale securities and investments in the Victory Funds and USAA Funds classified as trading securities and dividend income on investments in the USAA Treasury Money Market Fund are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations.

•

Amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers of investment management fees and reimbursements of fund operating expenses are included in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets and represent consideration payable to customers.

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(in thousands)	March 31, 2020		December 31, 2019
Related party assets
Cash and cash equivalents	$	10,085	$	10,060
Receivables (investment management fees)		39,722		47,872
Receivables (fund administration and distribution fees)		17,315		19,313
Investments (available-for-sale securities, fair value)		582		771
Investments (trading securities, fair value)		14,679		17,914
Total	$	82,383	$	95,930

Related party liabilities
Accounts payable and accrued expenses (fund reimbursements)	$	4,587	$	4,316

	Three Months Ended March 31,
(in thousands)	2020			2019
Related party revenue
Investment management fees	$	124,312		$	53,793
Fund administration and distribution fees		57,540			13,067
Total	$	181,852		$	66,860

Related party other (expense) income
Interest income and other (expense) income	$	(4,798	)	$	1,361

NOTE 7. Investments

As of March 31, 2020 and December 31, 2019, the Company held both available-for-sale securities and trading securities. Available-for-sale investments consist entirely of seed capital investments in certain Victory Funds. Trading securities are held under a deferred compensation plan and include Victory Funds, USAA Funds and third party mutual funds.

Available‑For‑Sale Securities

A summary of the cost and fair value of investments classified as available-for-sale were as follows:

			Gross Unrealized					Fair
(in thousands)	Cost		Gains		(Losses)			Value
As of March 31, 2020	$	696	$	4	$	(118	)	$	582
As of December 31, 2019		696		85		(10	)		771

Unrealized and realized gains and losses on available‑for‑sale investments are recognized in the unaudited Condensed Consolidated Statements of Operations as interest income and other income (expense). There were no sales of available-for-sale investments in the three months ended March 31, 2020 and 2019.

Trading Securities

A summary of the cost and fair value of investments classified as trading securities were as follows:

			Gross Unrealized					Fair
(in thousands)	Cost		Gains		(Losses)			Value
As of March 31, 2020	$	20,170	$	38	$	(5,159	)	$	15,049
As of December 31, 2019		18,670		733		(1,098	)		18,305

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Unrealized and realized gains and losses on trading securities are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations. Proceeds from sales and realized gains and losses from trading securities in the periods ended March 31, 2020 and 2019 were as follows:

	Sale		Realized
(in thousands)	Proceeds		Gains		(Losses)
For the three months ended March 31, 2020	$	1,091	$	20	$	(46	)
For the three months ended March 31, 2019		570		2		(20	)

NOTE 8. Income Taxes

The effective tax rate for the three months ended March 31, 2020 and 2019 differs from the United States federal statutory rate primarily as a result of state and local income taxes, excess tax benefits on share-based compensation, certain non-deductible expenses and for 2020, expense related to increasing the liability for unrecorded state tax benefits.

For the three months ended March 31, 2020 and 2019, the provision for income taxes was $16.8 million and $4.8 million, or 22.7% and 24.9%, of pre-tax income respectively. The effective tax rate for the three months ended March 31, 2020 was lower than the effective tax rate for the same period in 2019 due mainly to higher excess tax benefits on share-based compensation.

No valuation allowance was recorded for deferred tax assets in the period ended March 31, 2020 and 2019.

During the three months ended March 31, 2020, the Company recorded a liability for $0.3 million ($0.2 million net of federal benefit) for unrecognized tax benefits. The gross unrecognized tax benefits and interest and penalties of $2.2 million and $2.9 million at March 31, 2020 and December 31, 2019, respectively, are included in other liabilities in the unaudited Condensed Consolidated Balance Sheets. The Company expects that the amount of unrecognized tax benefits will change in the next 12 months; however, this change is not expected to have a material impact on the consolidated financial statements.

The following table presents the changes in gross unrecognized tax benefits, excluding interest and penalties, for the three months ending March 31, 2020 and 2019.

(in thousands)	2020			2019
Beginning balance	$	2,582		$	—
Additions based on tax positions related to current period		280			—
Reductions related to settlement of tax matters		(908	)		—
Ending balance	$	1,954		$	—

NOTE 9. Debt

2020 Debt Repricing

Concurrent with the USAA AMCO Acquisition on July 1, 2019, the Company (i) entered into the 2019 Credit Agreement, (ii) repaid all indebtedness outstanding under the previous credit agreement (dated February 2018), and (iii) terminated the previous credit agreement.

On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the First Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $952.0 million (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term Loans.

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The following table summarizes the components of long-term debt under the 2019 Credit Agreement in the unaudited Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019:

(in thousands)	March 31, 2020			December 31, 2019
Term loan principal outstanding	$	914,000		$	952,000
Unamortized debt issuance costs		(15,907	)		(17,230	)
Unamortized debt discount		(9,446	)		(10,231	)
Long-term debt, net	$	888,647		$	924,539

The 2019 Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0% of the commitments thereunder (excluding certain letters of credit), of no greater than 3.80 to 1.00. As of March 31, 2020, there were no outstanding borrowings under the revolving credit facility and we were in compliance with our financial performance covenant.

A total of $38.0 million of the outstanding term loans under the 2019 Credit Agreement was repaid in the first quarter of 2020. Refer to Note 15, Subsequent Events, for information related to term loan activity subsequent to March 31, 2020.

2020 Swap Transaction

On March 27, 2020, the Company executed the Swap, a floating-to-fixed interest rate swap transaction, to effectively fix the interest rate at 3.465% on $450 million of its outstanding term loan through the term loan maturity date of July 2026. Refer to Note 14, Derivatives, for further information on the Swap.

Interest Expense

As of March 31, 2020, the term loans under the 2019 Credit Agreement had an interest period of one month and an interest rate of 4.02%. Including the impact of amortization of debt issuance costs and original issue discount described herein, the effective yield for term loans under the 2019 Credit Agreement as of March 31, 2020 was 4.45%. The following table summarizes the components of interest expense and other financing costs in the unaudited Condensed Consolidated Statements of Operations for the periods ended March 31, 2020 and 2019:

	For the Three Months Ended March 31,
(in thousands)	2020		2019
Interest expense	$	10,056	$	3,880
Amortization of debt issuance costs		781		364
Amortization of debt discount		392		146
Other		179		234
Total	$	11,408	$	4,624

NOTE 10. Equity

Shares Rollforward

The following tables present the changes in the number of shares of common stock issued and repurchased (in thousands):

	Shares of Common Stock Issued					Shares of Treasury Stock
	Class A		Class B			Class A			Class B
Balance, December 31, 2019		18,100		53,937			(1,685	)		(2,656	)
Issuance of shares		2		—			—			—
Share conversion - Class B to A		406		(406	)		—			—
Repurchase of shares		—		—			(240	)		—
Vesting of restricted share grants		—		719			—			—
Exercise of options		—		288			—			—
Shares withheld related to net settlement of equity awards		—		—			—			(445	)
Balance, March 31, 2020		18,508		54,538			(1,925	)		(3,101	)

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	Shares of Common Stock Issued					Shares of Treasury Stock
	Class A		Class B			Class A			Class B
Balance, December 31, 2018		15,281		55,284			(856	)		(2,147	)
Issuance of shares		—		—			—			—
Share conversion - Class B to A		382		(382	)		—			—
Repurchase of shares		—		—			(123	)		—
Vesting of restricted share grants		—		40			—			—
Exercise of options		—		72			—			—
Shares withheld related to net settlement of equity awards		—		—			—			(29	)
Balance, March 31, 2019		15,663		55,014			(979	)		(2,176	)

Share Repurchase Program

The share repurchase program authorized in 2018 for $15.0 million of the Company’s Class A common stock was completed in September 2019. In August 2019, the Company’s Board of Directors authorized the Company to repurchase up to an additional $15.0 million of the Company’s Class A common stock in the open market or in privately negotiated transactions (“2019 Share Repurchase Program”). The amount and timing of the purchases under the 2019 Share Repurchase Program will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions. The 2019 Share Repurchase Program can be suspended or discontinued at any time.

As of March 31, 2020, a total of 1,925,185 shares of Class A common stock had been repurchased under the initial share repurchase program and the 2019 Share Repurchase Program at a total cost of $25.9 million for an average price of $13.46 per share. As of March 31, 2020, $4.1 million was available for future repurchases. The 2019 Share Repurchase Program expires on December 31, 2020.

Quarterly Dividends

Dividends paid during the three months ended March 31, 2020 included $3.4 million for the March 2020 quarterly dividend and $0.1 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards.

NOTE 11. Share‑Based Compensation

Current Period Activity

During the three months ended March 31, 2020, the Company issued restricted stock awards for 276,981 shares of common stock, of which awards for 3,238 shares were fully vested on the grant date and awards for 273,743 shares vest based on service over a three year period.

Stock option award and restricted stock award activity during the three months ended March 31, 2020 and 2019 was as follows:

	Shares Subject to Stock Option Awards
	Three Months Ended March 31,
	2020							2019
	Avg wtd		Avg wtd					Avg wtd		Avg wtd
	grant-date		exercise					grant-date		exercise
	fair value		price		Units			fair value		price		Units
Outstanding at beginning of period	$	3.83	$	6.27		7,880,167		$	3.79	$	6.12		9,070,052
Forfeited		6.32		13.80		1,708			6.52		14.27		(25,160	)
Exercised		3.74		5.89		(287,565	)		2.80		3.08		(71,652	)
Outstanding at end of the period	$	3.84	$	6.28		7,594,310		$	3.79	$	6.12		8,973,240
Vested	$	3.67	$	5.75		6,659,406		$	3.41	$	4.95		6,752,579
Unvested		5.04		10.05		934,904			4.94		9.69		2,220,661

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	Restricted Stock Awards
	Three Months Ended March 31,
	2020					2019
	Avg wtd grant-					Avg wtd grant-
	date fair value		Units			date fair value		Units
Unvested at beginning of period	$	14.29		3,215,619		$	13.17		2,997,856
Granted		16.62		276,981			14.97		518,385
Vested		14.14		(719,531	)		13.15		(39,636	)
Forfeited		16.07		(2,390	)		14.02		(367,998	)
Unvested at end of period	$	14.62		2,770,679		$	13.37		3,108,607

Dividend Payments

At March 31, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million and $1.3 million, respectively, which was not recorded as a liability as of the balance sheet date. A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

Share-Based Compensation Expense

The Company recorded $6.0 million and $1.5 million of share-based compensation expense in the three months ended March 31, 2020 and 2019, respectively, in personnel compensation and benefits in the unaudited Condensed Consolidated Statements of Operations.

NOTE 12. Earnings Per Share

The following table sets forth the reconciliation of basic earnings per share and diluted earnings per share from net income for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(in thousands except per share amounts)	2020		2019
Net income	$	57,166	$	14,527
Shares:
Basic: Weighted average number of shares outstanding		67,790		67,521
Plus: Incremental shares from assumed conversion of dilutive instruments		6,560		4,761
Diluted: Weighted average number of shares outstanding		74,350		72,282
Earnings per share
Basic:	$	0.84	$	0.22
Diluted:	$	0.77	$	0.20

Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive totaled 31 thousand and 1.4 million for the three months ended March 31, 2020 and 2019, respectively. Holders of non-vested share-based compensation awards do not have rights to receive nonforfeitable dividends on the shares covered by the awards.

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NOTE 13. Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss by component for the three months ended March 31, 2020 and 2019.

	Available-for-						Cumulative
	Sale			Cash Flow			Translation
(in thousands)	Securities			Hedges			Adjustment			Total
Balance, December 31, 2019	$	—		$	—		$	—		$	—
Other comprehensive loss before reclassification and tax		—			(6,318	)		(88	)		(6,406	)
Tax impact		—			1,498			21			1,519
Net current period other comprehensive loss		—			(4,820	)		(67	)		(4,887	)
Balance, March 31, 2020	$	—		$	(4,820	)	$	(67	)	$	(4,887	)
Balance, December 31, 2018	$	(59	)	$	—		$	(27	)	$	(86	)
Other comprehensive income before reclassification and tax		—			—			16			16
Tax impact		—			—			(4	)		(4	)
Net current period other comprehensive income		—			—			12			12
Cumulative effect of adoption of ASU 2016-01 and 2018-02		59			—			3			62
Balance, March 31, 2019	$	—		$	—		$	(12	)	$	(12	)

NOTE 14. DERIVATIVES

Interest Rate Swaps

On March 27, 2020, the Company entered into the Swap to manage interest rate risk associated with a portion of its floating-rate long-term debt. The Swap has a notional amount of $450 million. The Company will pay interest at a fixed rate of interest of 3.465% and receive interest that varies with the three-month LIBOR rate.

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument. A derivative qualifies for hedge accounting treatment if, at inception, it meets defined correlation and effectiveness criteria. These criteria require that the anticipated cash flows and/or changes in fair value of the hedging instrument substantially offset those of the position being hedged.

The Swap is designated as a cash flow hedge. Accordingly, the Swap is measured at fair value with mark-to-market gains or losses deferred and included in accumulated other comprehensive income (loss), net of tax, to the extent the hedge is determined to be effective. Gains or losses from the Swap will be reclassified to interest expense in the same period during which the hedged transaction affects earnings.

At March 31, 2020, the fair value of the interest rate swap was $6.3 million, which was included in other liabilities on the unaudited Condensed Consolidated Balance Sheets.

NOTE 15. SUBSEQUENT EVENTS

Subsequent to March 31, 2020, the Company established a trading account to purchase its outstanding term loans in the open market and has bought back $31 million of outstanding term loans for a total debt reduction of $217 million since July 1, 2019.

On May 11, 2020, our Board of Directors declared a quarterly cash dividend of $0.05 per share on Victory common stock. The dividend is payable on June 25, 2020, to stockholders of record on June 10, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our” shall mean Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries.

The following discussion is intended to assist in the understanding of our financial position at March 31, 2020 and December 31, 2019, results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended

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December 31, 2019. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2019.

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business. While COVID-19 did not have a material adverse effect on our reported results for our first quarter, the extent to which the COVID-19 pandemic impacts our business, operations and financial results going forward will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; and the effect on our ability to sell and provide our services.

Overview

We are a diversified global asset management firm operating a next generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform. We have $123.8 billion in assets under management (“AUM”) as of March 31, 2020. Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our Franchises and Solutions. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees.

Franchises

Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. Victory Capital Management Inc. (“VCM”) employs all of the Company’s United States investment professionals across our Franchises, which are not separate legal entities.

Solutions

Our Solutions Platform consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer our Solutions Platform through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions. Our approach furthers our commitment to rules‑based investing and includes single and multi‑factor strategies designed to provide a variety of outcomes, including maximum diversification, dividend income, downside mitigation, minimum volatility, thematic and targeted factor exposure.

Operations

Our centralized operations functions provide our Franchises and Solutions Platform with the support they need so that they can focus on their investment processes. Our centralized operations functions include trading platforms, risk and compliance, middle‑ and back‑office support, technology, finance, human resources, accounting and legal. Although our operations are centralized, we do allow our Franchises a degree of customization with respect to their desired investment support functions, which we believe helps them maintain their individualized investment processes and minimize undue disruptions.

We outsource certain middle‑ and back‑office activities, such as sub-transfer agent, trade settlement, portfolio analytics, custodian reconciliation, portfolio accounting, corporate action processing, performance calculation and client reporting, to scaled, recognized service providers, who provide their services to us on a variable‑cost basis. Systems and processes are customized as necessary to support our investment processes and operations. We maintain relationships with multiple vendors for the majority of our outsourced functions, which we believe mitigates vendor‑specific risk. We also have information security, business continuity and data privacy programs in place to help mitigate risk.

Outsourcing these functions enables us to grow our AUM, both organically and through acquisitions, without the incremental capital expenditures and working capital that would typically be needed. Under our direction and oversight, our outsourced model enhances our ability to integrate our acquisitions, as we are experienced in working with our vendors to efficiently bring additional Franchises onto our platform in a cost‑efficient manner.

We believe both the scalability of our business and our cost structure, in which approximately two‑thirds of our operating expenses are variable, should drive industry-leading margins and facilitate free cash flow conversion. Additionally, we believe having a majority of our expenses tied to AUM and the number of client accounts provides downside margin protection should there be sustained net outflows or adverse market conditions.

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Professionals within our institutional, retail and direct member distribution channels and marketing organization sell our products through our centralized distribution model. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs. Our direct member channel serves the investment needs of individual clients including USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $123.8 billion at March 31, 2020. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct member distribution channels with deep penetration.

USAA AMCO Acquisition

Effective July 1, 2019, the Company completed the USAA AMCO Acquisition, a transformative acquisition that increased AUM by $81.1 billion and significantly impacted our financial results for the three month period ended March 31, 2020. The acquisition not only increased AUM and revenue, but also introduced additional personnel expenses and new and additional operating expenses such as third party distribution costs, expenses related to a transfer services agreement with USAA, 529 College Savings Plan, and direct member channel expenses that the Company did not incur prior to the acquisition. In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019.

The USAA AMCO Acquisition expands and diversifies our investment platform, particularly in the fixed income and solutions asset classes, and increases our size and scale. Additional products added to our investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. We have also added to our lineup of asset allocation portfolios and smart beta equity ETFs. Through the acquisition, the Company has the rights to offer products and services using the USAA brand for a period of time and the opportunity to offer its products to USAA members through a direct member channel. In addition, we have entered into a referral agreement with USAA for members that are interested in investing in USAA Funds or the USAA 529 College Savings Plan.

Total consideration for the USAA AMCO Acquisition was $949.4 million, comprising of $851.3 million of cash paid at closing plus $98.8 million as the estimated fair value of contingent consideration as of the acquisition date less $0.7 million in net working capital adjustments settled in the first quarter of 2020. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing date.

The estimated fair value of contingent consideration arrangements as of March 31, 2020 was $113.2 million and consist of the USAA AMCO earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition.

Business Highlights

Assets under management:

•

AUM at March 31, 2020 decreased by $28.1 billion, or 18.5%, to $123.8 billion from $151.8 billion at December 31, 2019, driven by negative market action and net outflows of $25.2 billion and $2.9 billion, respectively.

•

AUM at March 31, 2020 and 2019 was $123.8 billion and $58.1 billion, respectively. We generated $14.9 billion in gross flows and $2.9 billion in negative net flows for the three months ended March 31, 2020 compared to $3.0 billion in gross flows and $1.1 billion in negative net flows for the same period in 2019.

Investment performance:

•

39 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 61% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 44% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 55% over a three-year period, 69% over a five-year period and 79% over a ten-year period. On an equal-weighted basis, 31% of our strategies have outperformed their benchmarks over a one-year period, 41% over a three-year period, 48% over a five-year period and 67% over a ten-year period.

Industry achievements and recognition:

•

We ranked 7^th in “Barron’s Best Fund Families of 2019” for the five-year period and 10^th for the 10-year period ended December 31, 2019. We ranked 17^th overall on a one-year basis for 2019. This is the 3^rd consecutive year that we have

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been ranked among the top 10 best fund families and the 6^th consecutive year that we have been ranked among the top 25 best fund families by Barron’s.

Financial highlights:

•

Total revenue for the three months ended March 31, 2020 was $204.4 million compared to $87.5 million for the same period in 2019.

•

Net income was $57.2 million for the three months ended March 31, 2020 compared to $14.5 million for the same period in 2019.

•

Adjusted EBITDA was $91.5 million for the three months ended March 31, 2020, or 44.8% of revenue, compared to $33.6 million, or 38.4% of revenue, for the same period in 2019. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted EBITDA calculation and reconciliation of generally accepted accounting principles (“GAAP”) net income to Adjusted EBITDA.

•

Adjusted Net Income was $61.7 million for the three months ended March 31, 2020 compared to $21.9 million for the three months ended March 31, 2019. Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income.

Key Performance Indicators

The following table is a summary of key performance indicators utilized by management to assess results of operations:

	Three Months Ended March 31,
($ in millions, except for basis points and percentages)	2020			2019
AUM at period end	$	123,779		$	58,119
Average AUM		144,112			57,043
Gross flows		14,925			3,038
Net flows		(2,900	)		(1,105	)
Total revenue		204.4			87.5
Revenue on average AUM	57 bps			62 bps
Net income		57.2			14.5
Adjusted EBITDA⁽¹⁾		91.5			33.6
Adjusted EBITDA Margin⁽²⁾		44.8	%		38.4	%
Adjusted Net Income⁽¹⁾		61.7			21.9
Tax benefit of goodwill and acquired intangibles⁽³⁾		6.7			3.4

(1)

Management utilizes Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one‑time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “Supplemental Non‑GAAP Financial Information.”

(2)	Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

(3)

Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

Assets Under Management

Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including; (i) investment performance, including fluctuations in the financial markets and the quality of our investment decisions; (ii) client flows into and out of our various strategies and investment vehicles; (iii) industry trends toward products or strategies that we either do or do not offer; (iv) our ability to attract and retain high quality investment, distribution, marketing and management personnel; (v) our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re‑open strategies in part or entirely; and (vi) general investor sentiment and confidence. Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. Due to rounding, AUM numbers presented in the tables below may not add up precisely to the totals provided.

The following table presents our AUM by asset class as of the dates indicated:

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	As of
	March 31,
(in millions)	2020		2019
Fixed Income	$	35,402	$	6,973
Solutions		25,526		3,996
U.S. Mid Cap Equity		18,622		22,169
U.S. Small Cap Equity		11,885		14,714
U.S. Large Cap Equity		10,703		4,117
Global / Non-U.S. Equity		9,372		5,234
Other		140		918
Total Long-Term Assets	$	111,650	$	58,119
Money Market & Short-Term Assets		12,129		—
Total	$	123,779	$	58,119

The following tables summarize our asset flows by asset class for the periods indicated:


	U.S. Mid			U.S. Small						U.S. Large			Global /												Money
	Cap			Cap			Fixed			Cap			Non-U.S.									Total			Market /
(in millions)	Equity			Equity			Income			Equity			Equity			Solutions			Other			Long-term			Short-term			Total
For the Three Months Ended March 31, 2020
Beginning AUM	$	26,347		$	17,346		$	37,973		$	14,091		$	12,603		$	31,649		$	236		$	140,245		$	11,587		$	151,832
Gross client cash inflows		1,474			1,233			1,951			238			671			1,695			11			7,273			7,652			14,925
Gross client cash outflows		(2,265	)		(1,310	)		(2,890	)		(807	)		(684	)		(2,394	)		(24	)		(10,374	)		(7,451	)		(17,825	)
Net client cash flows		(791	)		(77	)		(939	)		(569	)		(13	)		(699	)		(12	)		(3,101	)		201			(2,900	)
Market appreciation / (depreciation)		(6,907	)		(5,325	)		(1,361	)		(2,828	)		(3,245	)		(5,436	)		(86	)		(25,187	)		34			(25,153	)
Net transfers		(28	)		(59	)		(272	)		9			27			12			3			(307	)		307			—
Ending AUM	$	18,622		$	11,885		$	35,402		$	10,703		$	9,372		$	25,526		$	140		$	111,650		$	12,129		$	123,779
For the Three Months Ended March 31, 2019
Beginning AUM	$	20,019		$	12,948		$	6,836		$	3,759		$	4,610		$	3,767		$	824		$	52,763		$	—		$	52,763
Gross client cash inflows		993			992			303			26			365			279			81			3,038			—			3,038
Gross client cash outflows		(1,786	)		(1,059	)		(383	)		(183	)		(277	)		(349	)		(107	)		(4,143	)		—			(4,143	)
Net client cash flows		(793	)		(67	)		(79	)		(158	)		88			(70	)		(26	)		(1,105	)		—			(1,105	)
Market appreciation / (depreciation)		2,942			1,834			216			516			535			297			120			6,460			—			6,460
Net transfers		2			(1	)		—			(1	)		—			1			(1	)		—			—			—
Ending AUM	$	22,169		$	14,714		$	6,973		$	4,117		$	5,234		$	3,996		$	918		$	58,119		$	—		$	58,119

The following table presents our AUM by distribution channel as of the dates indicated:

	As of March 31,
	2020					2019
(in millions)	Amount		% of total			Amount		% of total
Member	$	64,188		52	%	$	—		0	%
Institutional		30,235		24	%		32,714		56	%
Retail		29,356		24	%		25,405		44	%
Total AUM⁽¹⁾	$	123,779		100	%	$	58,119		100	%

(1)The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.

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The following tables summarize our asset flows by vehicle for the periods indicated:

							Separate
							Accounts and
							Other
(in millions)	Mutual Funds(1)			ETFs(2)			Vehicles(3)			Total
Three Months Ended March 31, 2020
Beginning AUM	$	118,605		$	4,213		$	29,014		$	151,832
Gross client cash inflows		13,745			255			925			14,925
Gross client cash outflows		(15,631	)		(461	)		(1,733	)		(17,825	)
Net client cash flows		(1,886	)		(205	)		(809	)		(2,900	)
Market appreciation (depreciation)		(18,413	)		(830	)		(5,910	)		(25,153	)
Net transfers		—			—			—			—
Ending AUM	$	98,305		$	3,177		$	22,296		$	123,779
Three Months Ended March 31, 2019
Beginning AUM	$	30,492		$	2,956		$	19,315		$	52,763
Gross client cash inflows		2,379			242			417			3,038
Gross client cash outflows		(2,887	)		(299	)		(957	)		(4,143	)
Net client cash flows		(508	)		(58	)		(540	)		(1,105	)
Market appreciation (depreciation)		3,801			224			2,435			6,460
Net transfers		—			—			—			—
Ending AUM	$	33,786		$	3,123		$	21,210		$	58,119

(1)	Includes institutional and retail share classes, money market and Variable Insurance Products or VIP funds.

(2)

Excludes assets managed for other proprietary product (i.e. funds of funds) in order to adjust for double counting.

(3)	Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.

March 31, 2020 AUM compared to December 31, 2019 AUM. At March 31, 2020, our total AUM was $123.8 billion, a decrease of $28.1 billion, or 18.5%, from $151.8 billion at December 31, 2019, primarily driven by negative market action and net outflows of $25.2 billion and $2.9 billion, respectively. The negative market action was driven by pullback in the market as a result of the economic uncertainty due to the COVID-19 pandemic.

Net outflows were driven by our fixed income strategies, U.S. mid cap equity strategies and Solutions platform of $0.9 billion, $0.8 billion and $0.7 billion, respectively. Money market and short-term assets accounted for $12.1 billion, or 9.8%, of the total AUM of $123.8 billion at March 31, 2020.

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GAAP Results of Operations

The following table presents our GAAP results of operations for the three months ended March 31, 2020 and 2019. The financial results for the three months ended March 31, 2020 reflect the USAA AMCO Acquisition that closed on July 1, 2019. The acquisition significantly impacted our financial results for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.

	Three Months Ended March 31,
(in thousands, except per share data)	2020			2019
Revenue
Investment management fees	$	146,881		$	74,411
Fund administration and distribution fees		57,540			13,068
Total revenue		204,421			87,479

Expenses
Personnel compensation and benefits		47,571			34,501
Distribution and other asset-based expenses		54,860			15,767
General and administrative		11,888			7,087
Depreciation and amortization		4,050			5,222
Change in value of consideration payable for acquisition of business		(5,500	)		—
Acquisition-related costs		(69	)		2,777
Restructuring and integration costs		998			—
Total operating expenses		113,798			65,354

Income from operations		90,623			22,125

Other (expense) income
Interest income and other (expense) income		(4,172	)		1,833
Interest expense and other financing costs		(11,408	)		(4,624	)
Loss on debt extinguishment		(1,054	)		—
Total other expense, net		(16,634	)		(2,791	)

Income before income taxes		73,989			19,334

Income tax expense		(16,823	)		(4,807	)

Net income	$	57,166		$	14,527

Earnings per share of common stock
Basic	$	0.84		$	0.22
Diluted	$	0.77		$	0.20

Weighted average number of shares outstanding
Basic		67,790			67,521
Diluted		74,350			72,282

Dividends declared per share of common stock	$	0.05		$	—

Investment Management Fees

Three months ended March 31, 2020 compared to March 31, 2019. Investment management fees increased by $72.5 million, or 97.4%, to $146.9 million for the three months ended March 31, 2020 from $74.4 million for the same period in 2019 due to an increase in average AUM year over year, partially offset by a decrease in the realized fee rate due to a shift in asset mix. Average AUM was $144.1 billion for the three months ended March 31, 2020 compared to $57.0 billion for the same period in 2019, largely attributable to acquired assets in the USAA AMCO Acquisition.

Fund Administration and Distribution Fees

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Three months ended March 31, 2020 compared to March 31, 2019. Fund administration and distribution fees increased by $44.5 million, or 340.3%, to $57.5 million for the three months ended March 31, 2020 from $13.1 million for the same period in 2019 due to an increase in average AUM year over year and the addition of $20.7 million in transfer agent fees with the USAA Funds related to the USAA AMCO Acquisition, partially offset by a shift in the mix of assets to lower 12b-1 paying share classes.

Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(in thousands)	2020		2019
Salaries, payroll related taxes and employee benefits	$	16,562	$	14,904
Incentive compensation		20,504		14,662
Sales-based compensation⁽¹⁾		3,919		3,388
Equity awards granted to employees and directors⁽²⁾		5,993		1,547
Acquisition and transaction-related compensation		593		—
Total personnel compensation and benefits expense	$	47,571	$	34,501

(1)	Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2)	Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards is recognized as compensation expense over the vesting period.

Three months ended March 31, 2020 compared to March 31, 2019. Personnel compensation and benefits were $47.6 million for the three months ended March 31, 2020, an increase of $13.1 million, or 37.9%, from $34.5 million for the same period in 2019 primarily attributable to an increase in the headcount due to the USAA AMCO Acquisition. Incentive compensation and equity awards granted to employees and directors were $20.5 million and $6.0 million, respectively, for the three months ended March 31, 2020, compared to $14.7 million and $1.5 million, respectively, for the same period in 2019. Salaries, payroll related taxes and employee benefits were $16.6 million and $14.9 million, respectively, for the three months ended March 31, 2020 and 2019.

Distribution and Other Asset‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(in thousands)	2020		2019
Broker-dealer distribution fees	$	6,108	$	6,979
Platform distribution fees		38,992		4,583
Sub-administration		4,082		1,682
Sub-advisory		3,237		847
Middle-office		2,441		1,676
Total distribution and other asset-based expenses	$	54,860	$	15,767

Three months ended March 31, 2020 compared to March 31, 2019. Distribution and other asset-based expenses are primarily based on AUM. For the three months ended March 31, 2020, distribution and other asset-based expenses were $54.9 million, an increase of $39.1 million, or 247.9%, from $15.8 million for the same period in 2019, primarily due to the USAA AMCO Acquisition. The acquisition introduced new operating expenses that the Company did not incur prior to the acquisition, such as platform distribution costs paid to third parties and USAA, sub-transfer agent service costs and 529 College Savings Plan expenses.

General and Administrative

Three months ended March 31, 2020 compared to March 31, 2019. General and administrative expenses were $11.9 million for the three months ended March 31, 2020 compared to $7.1 million for the same period in 2019. The increase of $4.8 million, or 67.7%, was primarily due to the addition of transition service agreement costs related to the USAA AMCO Acquisition partially offset by $3.5 million in Ohio Commercial Activity Tax refunds received for tax years 2015-2019.

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Depreciation and Amortization

Three months ended March 31, 2020 compared to March 31, 2019. Depreciation and amortization decreased by $1.2 million, or 22.4%, to $4.1 million for the three months ended March 31, 2020 from $5.2 million for the same period in 2019, due to a reduction in amortization expense related to definite-lived intangible assets in connection with the Munder Capital Management acquisition that became fully amortized in the fourth quarter of 2019.

Change in Value of Consideration Payable for Acquisition of Business

Three months ended March 31, 2020 compared to March 31, 2019. The fair value of the contingent consideration associated with the USAA AMCO acquisition decreased by $5.5 million, resulting in a change in the estimated fair value of consideration payable of $5.5 million for the three months ended March 31, 2020. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Acquisition‑Related Costs

Three months ended March 31, 2020 compared to March 31, 2019. Acquisition-related costs for the three months ended March 31, 2020 were ($0.1) million and $2.8 million for the three months ended March 31, 2019. The March 31, 2019 acquisition related costs were related to the USAA AMCO acquisition.

Restructuring and Integration Costs

Three months ended March 31, 2020 compared to March 31, 2019. Restructuring and integration costs for the three months ended March 31, 2020 was $1.0 million compared to no such costs for the same period in 2019. The increase is primarily due integration and conversion costs related to the USAA AMCO Acquisition.

Interest Income and Other Income/(Expense)

Three months ended March 31, 2020 compared to March 31, 2019. Interest income and other income/(expense) was expense of $4.2 million for the three months ended March 31, 2020 compared to income of $1.8 million for the same period in 2019. The expense for the three months ended March 31, 2020 was primarily due to a $4.8 million reduction in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

Interest Expense and Other Financing Costs

Three months ended March 31, 2020 compared to March 31, 2019. Interest expense and other financing costs increased $6.8 million to $11.4 million for the three months ended March 31, 2020, compared to $4.6 million for the same period in 2019 due an increase in interest payments as a result of a higher debt principal balance over the comparable period as a result of the Company entering into the 2019 Credit Agreement, dated July 1, 2019, in conjunction with the USAA AMCO Acquisition.

Loss on Debt Extinguishment

Three months ended March 31, 2020 compared to March 31, 2019. Loss on debt extinguishment was $1.1 million and $0.0 million, respectively, for the three months ended March 31, 2020 and 2019. The Company wrote-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal under the 2019 Credit Agreement. The Company paid down $38.0 million of debt during the first quarter of 2020. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

Income Tax Expense

Three months ended March 31, 2020 compared to March 31, 2019. The effective tax rate for the three months ended March 31, 2020 and 2019 was 22.7% and 24.9%, respectively. The decrease in the effective tax rate was primarily due to higher excess tax benefits on share-based compensation.

Supplemental Non‑GAAP Financial Information

We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income.

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The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

	Three Months Ended March 31,
(in thousands)	2020			2019
Reconciliation of non-GAAP financial measures:
Net income (GAAP)	$	57,166		$	14,527
Income tax expense		(16,823	)		(4,807	)
Income before income taxes	$	73,989		$	19,334
Interest expense⁽¹⁾		10,528			3,853
Depreciation⁽²⁾		884			571
Other business taxes⁽³⁾		(3,296	)		555
Amortization of acquisition-related intangible assets⁽⁴⁾		3,166			4,651
Stock-based compensation⁽⁵⁾		5,372			1,478
Acquisition, restructuring and exit costs⁽⁶⁾		(1,542	)		2,777
Debt issuance costs⁽⁷⁾		2,389			364
Earnings/losses from equity method investments⁽⁸⁾		—			4
Adjusted EBITDA	$	91,490		$	33,587

	Three Months Ended March 31,
(in thousands)	2020			2019
Reconciliation of non-GAAP financial measures:
Net income (GAAP)	$	57,166		$	14,527
Adjustments to reflect the operating performance of the Company:
i. Other business taxes⁽³⁾		(3,296	)		555
ii. Amortization of acquisition-related intangible assets⁽⁴⁾		3,166			4,651
iii. Stock-based compensation⁽⁵⁾		5,372			1,478
iv. Acquisition, restructuring and exit costs⁽⁶⁾		(1,542	)		2,777
v. Debt issuance costs⁽⁷⁾		2,389			364
Tax effect of above adjustments⁽⁹⁾		(1,522	)		(2,456	)
Adjusted Net Income	$	61,733		$	21,896
Tax benefit of goodwill and acquired intangibles⁽¹⁰⁾	$	6,728		$	3,361

Adjustments made to GAAP Net Income to calculate Adjusted EBITDA and Adjusted Net Income, as applicable, are:

(1)	Adding back interest paid on debt and other financing costs, net of interest income.

(2)	Adding back depreciation on property and equipment.

(3)	Adding back other business taxes.

(4)	Adding back amortization expense on acquisition‑related intangible assets.

(5)	Adding back stock‑based compensation associated with equity awards issued from pools created in connection with the management‑led buyout and various acquisitions and as a result of equity grants related to the IPO.

(6)

Adding back direct incremental costs of acquisitions, including restructuring costs.

	Three Months Ended March 31,
(in thousands)	2020			2019
Acquisition-related costs	$	(69	)	$	2,777
Restructuring and integration costs		998			—
Change in value of consideration payable for acquisition of business		(5,500	)
General and administrative		2,436			—
Personnel compensation and benefits		593			—
Total acquisition, restructuring and exit costs	$	(1,542	)	$	2,777

(7)	Adding back debt issuance costs.

(8)	We adjust for earnings/losses on equity method investments.

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(9)	Subtracting an estimate of income tax expense applied to the sum of the adjustments above.

(10)

Represents the tax benefits associated with deductions allowed for intangible assets and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangible assets with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures.

Liquidity and Capital Resources

Our primary uses of cash relate to repayment of our debt obligations, funding of acquisitions and working capital needs, repurchasing of shares and payment of dividends, which are all expected to be met through cash generated from our operations and available capital resources.

We cannot predict the duration or scope of the COVID-19 pandemic, its impact on our business, and the potential negative financial impact to our results, but the Company has actively positioned itself so that our cash flows from operations and financing sources will be sufficient to meet our needs. During the period of uncertainty related to the COVID-19 pandemic, we will continue to monitor our liquidity.

The following table shows our liquidity position as of March 31, 2020 and December 31, 2019.

	March 31,			December 31,
(in thousands)	2020			2019
Cash and cash equivalents	$	37,130		$	37,121
Accounts and other receivables		77,610			95,093
Undrawn commitment on revolving credit facility		100,000			100,000
Accounts and other payables		(112,655	)		(144,045	)

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consists primarily of investment management fees that have been earned but not yet received from clients, income and other taxes receivable, and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to assess collectability. We continue to actively monitor the impact of the COVID-19 pandemic on the collectability of certain receivables. We maintained a $100.0 million revolving credit facility at March 31, 2020 and December 31, 2019 (under the 2019 Credit Agreement) which had $100.0 million undrawn as of March 31, 2020 and December 31, 2019.

2019 Credit Agreement and 2020 Debt Repricing

In conjunction with the USAA AMCO Acquisition, the Company entered into the 2019 Credit Agreement, dated July 1, 2019, and obtained a seven-year term loan in an aggregate principal amount of $1.1 billion. All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019. As of March 31, 2020, the Company has repaid $186.0 million of the outstanding term loans under the 2019 Credit Agreement. As of March 31, 2020, we were in compliance with our financial performance covenant. Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement.

On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the First Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $952.0 (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term Loans. Refer to Note 9, Debt, for further information on the repricing.

Subsequent to March 31, 2020, the Company established a trading account to opportunistically take advantage of potential short term trading arbitrage with respect to our term loan. An alternative to principal prepayments, this allows us to buy back our outstanding term loan in the open market and retire the debt. As we look to pay down our debt, this alternative is preferable at this time to principal prepayments when our debt trades at a discount to par. Subsequent to March 31, 2020, we have bought back $31 million of our term loan, for a total debt reduction of $217 million since July 1, 2019.

2020 Swap Transaction

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On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction (“Swap”) to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. Refer to Note 14, Derivatives, for further information on the Swap.

Capital Requirements

VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents.

Cash Flows

The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows:

	Three Months Ended March 31,
(in thousands)	2020			2019
Net cash provided by operating activities	$	51,922		$	17,938
Net cash used in investing activities		(2,234	)		(1,447	)
Net cash used in financing activities		(49,573	)		(1,742	)

Operating Activities – Cash provided by operating activities during the three months ended March 31, 2020 was $51.9 million, compared to $17.9 million of cash provided by operating activities for the same period in 2019. The $34.0 million increase in cash provided by operating activities was primarily due to a $42.6 million and $6.1 million increase in net income and non-cash items, partially offset by a $14.7 million net decrease in working capital source of cash.

The net decrease in working capital source of cash was primarily due to accounts payable and accrued expenses and compensation which was a $35.6 million use of cash for the three months ended March 31, 2020 compared to a $4.6 million use of cash for the same period last year, due to new and additional operating expenses that the Company did not incur prior to the USAA AMCO acquisition, such as distribution costs paid to third parties and USAA, sub-transfer agent service costs, 529 College Savings Plan expenses, and direct member channel expenses.

Investing Activities – Cash used in investing activities during the three months ended March 31, 2020 was $2.2 million and consisted of net trading activity of $1.5 million and $0.7 million of property and equipment purchases. The nature of our trading activities is further described in Note 2, Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

For the three months ended March 31, 2019, cash used in investing activities was $1.4 million and consisted of $1.0 million of net trading activity and $0.5 million of property and equipment purchases.

Financing Activities – Cash used in financing activities during the three months ended March 31, 2020 was $49.6 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, and payment of dividends of $38.0 million, $6.0 million and $3.5 million, respectively.

Cash used in financing activities for the same period in 2019 was $1.7 million and consisted primarily of the repurchase of common stock of $1.6 million.

Contractual Obligations

On January 17, 2020, we entered into the First Amendment to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the First Amendment, the Company repriced its Term Loan, lowering the interest rate spread by 75 basis points, from 3.25% over LIBOR, to 2.50% over LIBOR. On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. As of March 31, 2020, the Company recorded a $6.3 million liability, which is included in other liabilities in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 14, Derivatives, for further discussion regarding the swap transaction.

For the three month period ended March 31, 2020, the Company recorded a $5.5 million reduction in contingent consideration arrangement liabilities representing the USAA AMCO Acquisition earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing.

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There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off‑Balance Sheet Arrangements

In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest.

The Company announced the initiation of quarterly cash dividends in August 2019. Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.

As of March 31, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million and $1.3 million, respectively, which was not recorded as a liability as of the balance sheet date. A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our Annual Report on Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are primarily based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower risk, which could cause our revenues and net income to decline further.

The value of our AUM was $123.8 billion at March 31, 2020. A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately $70.6 million at our weighted-average fee rate of 57 basis points for the quarter ended March 31, 2020. Because of declining fee rates from larger relationships and differences in our fee rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds and USAA Funds, to which we provide a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or decrease in our revenues of approximately $78.0 million at the Victory Funds’ and USAA Funds’ aggregate weighted-average fee rate of 63 basis points for the quarter ended March 31, 2020. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease in our revenues of approximately $42.1 million at the weighted-average fee rate across all of our institutional separate accounts of 34 basis points for the quarter ended March 31, 2020.

As is customary in the investment management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures. We have not adopted a corporate‑level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result in a reduction in our revenues.

Exchange Rate Risk

A portion of the accounts that we advise hold investments that are denominated in currencies other than the U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of that AUM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non‑U.S. currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s exposure to non‑U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 8% of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by approximately $990.0 million, which would cause an annualized increase or decrease in revenues of approximately $5.6 million at our weighted-average fee rate for the business of 57 basis points for the quarter ended March 31, 2020.

We operate in several foreign countries and incur operating expenses associated with these operations. In addition, we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe foreign currency fluctuations materially affect our results of operations.

Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. On March 27, 2020, the Company executed the Swap, a floating-to-fixed interest rate swap transaction, to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026. Refer to Note 14, Derivatives, for further information on the Swap. At March 31, 2020, we were exposed to interest rate risk as a result of the unhedged amounts outstanding under the 2019 Credit Agreement. Refer to Note 9, Debt, for a description of the amounts outstanding as of such date and the applicable interest rate.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) at March 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not currently a party to any material legal proceedings.

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC and the information contained in this report. The declaration, payment and determination of the amount of our quarterly dividends may change at any time. In making decisions regarding our quarterly dividends, we consider general economic and business conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions (including under the terms of our 2019 Credit Agreement as amended) and legal, tax, regulatory and such other factors as we may deem relevant. There have been no material changes, other than as described below, to the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our results of operations could be materially adversely impacted by the COVID-19 pandemic.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. In particular, global financial markets have seen increased volatility and significant changes in the value of investments. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that are outside of our control and that we may not be able to accurately predict, including: the duration and scope of the pandemic, actions taken in response to the pandemic, the impact of the pandemic on economic activity, the impact on our vendors, and the effect on our employees’ productivity. Any of these events could cause or contribute to the risks and uncertainties enumerated in the Annual Report and could materially adversely affect our business, financial condition, results of operations and/or stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The share repurchase program authorized in 2018 for $15.0 million of the Company’s Class A common stock was completed in September 2019. On August 28, 2019, our Board of Directors authorized the Company to repurchase up to an aggregate of $15.0 million of the Company’s Class A common stock through December 31, 2020. These repurchases may be made in privately negotiated transactions, through block trades, pursuant to open market purchases, or pursuant to any trading plan adopted in compliance with Rule 10b5-1. The manner, timing, share number and price, of the repurchases will be determined by the Company, subject to market conditions, applicable securities laws, alternative investment opportunities and other factors. The Board’s authorization does not obligate the Company to acquire any particular amount of Class A common stock, and may be modified, suspended or terminated at any time. The following table sets out information regarding purchases of equity securities by the Company for the three months ended March 31, 2020.

					Total Number of Shares		Approximate Dollar Value
	Total Number of		Average Price		of Class A Common		That May Yet Be Purchased
	Shares of Class A		Paid Per Share		Stock Purchased as Part of		Under Outstanding
	Common Stock		of Class A		Publicly Announced		Plans or Programs
Period	Purchased		Common Stock		Plans or Programs		(in millions)
Jan 1-31, 2020		63,980	$	21.30		63,980	$	7.1
Feb 1-29, 2020		51,675		21.80		51,675		6.0
March 1-31, 2020		124,375		15.32		124,375		4.1
Total		240,030	$	18.31		240,030

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

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Item 5. Other Information

None

Item 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Description
31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002
101		The following information formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, (v) Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019; (vi) Notes to Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2020 and 2019.
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of May, 2020.

VICTORY CAPITAL HOLDINGS, INC.


By:	/s/ MICHAEL D. POLICARPO
	Name:	Michael D. Policarpo
	Title:	President, Chief Financial Officer and Chief Administrative Officer