Virtus Investment Partners Inc (VRTS) 2018 Q2 法說會逐字稿

Good morning. My name is Brian, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. (Operator Instructions)

I would now turn the conference over to your host, Jeanne Hess.

Thank you, and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the second quarter of 2018.

Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's earnings release and discussed in our annual report on Form 10-K and quarterly report on Form 10-Q and other SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements.

In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website.

Now I'd like to turn the call over to our President and CEO, George Aylward. George?

Thank you, Jeanne. Good morning, everyone. I'll start today by giving an overview of the results for the quarter before turning it over to Mike to provide some more detail.

Before I start, as a reminder, we separately announced the July 1 acquisition of our majority interest in Sustainable Growth Advisers. And while it will not impact our second quarter results, we will provide some additional color.

Now let me begin with assets under management and flows. Long-term AUM increased 2.7% sequentially to $89.8 billion as a result of strong market performance and positive net flows. Total assets, which include liquidity strategies, ended the period at $91.6 billion.

Total sales increased sequentially by $1.2 billion or 22% to $6.6 billion, reflecting high levels of demand for our offerings. Increase in sales and the associated sales rate resulted from higher sales in institutional, open-end funds and retail separate accounts.

We have $1 billion of higher sales in institutional, primarily in large-cap value at Ceredex as well as small-cap growth at Kayne. Open-end fund sales increased $0.6 billion or 15% sequentially due primarily to higher sales in certain domestic and international equity funds. And there were no new CLOs in the quarter, whereas the first quarter included a $0.4 billion issuance.

Total net flows were positive $1.3 billion in the quarter, a significant improvement from net outflows of $0.7 billion sequentially due to positive net flows in open-end funds and retail separate accounts. These flows represent a 5.9% annualized organic growth rate on long-term AUM, which we view as a strong result given the current environment for asset managers.

The positive flows in open-end funds results from higher sales in domestic equity, including Kayne's small- and mid-cap offerings as well as Zevenbergen's large-cap growth products. In terms of fixed income, the Seix floating rate high-income fund contributed positive flows in the quarter.

Retail separate accounts were positive $0.2 billion in the quarter as we have increased sales in intermediary sold managed accounts and the private client business returned to positive net flows. Institutional net flows were essentially flat in the quarter, an improvement from the prior quarter.

In terms of what we're seeing in July, mutual fund sales continue to be strong, and net flows remain positive. Regarding our other products, for institutional, amounts expected to be funded in July, which includes a mandated SGA versus those redeemed, were modestly positive. We continue to see a growing pipeline in the institutional business. In structured products, we currently have a CLO in the warehouse space that we expect to issue later in the year.

Moving over to the financial results. Second quarter operating income, as adjusted, of $37.6 million increased 15% from the prior quarter as higher revenues as adjusted and lower operating expenses as adjusted contributed to a margin increase of 370 basis points. Revenues, as adjusted, increased sequentially due to higher investment management fees, which benefited from an increased fee rate that reflects a shift in the mix of our assets.

Employment expenses, as adjusted, decreased 9% from the first quarter. Higher variable compensation resulting from the strong level of sales in the second quarter was more than offset by the absence of $6.8 million of seasonal items in the prior quarter.

Other operating expenses, as adjusted, increased sequentially, included $1.2 million of higher sales and marketing costs and $0.8 million for the annual grant to the Board of Directors.

Turning over to the balance sheet and talking about capital. We repurchased approximately 61,000 shares or 0.8% of shares outstanding for $7.5 million in the quarter. Working capital at June 30, which includes an estimate of required principal payments over the next 12 months, increased 17% to $94.3 million.

In terms of capital allocation going forward, as I noted, our debt has required principal payments based upon our annual excess cash flow. As we operate the business with the longer-term goal of achieving investment-grade credit rating and associated benefits, we will balance appropriate debt levels, investing in the business and returning capital to shareholders.

So with that, I'll turn it over to Mike. Mike?

Thank you, George, and good morning, everyone.

Starting on Slide 7, assets under management. At June 30, long-term assets were $89.8 billion, which reflects a sequential quarter increase of 2.7% and an increase of 5.7% from the prior year quarter. Sequential increase was balanced between market appreciation of $1.5 billion and positive net flows of $1.3 billion. The change from the prior year primarily reflects market appreciation of $6 billion and modestly positive flows.

Our long-term AUM continues to be well-diversified by product type with $44.4 billion in open-end funds, $19.7 billion in institutional, $14.7 billion of retail separate accounts, $6.3 billion in closed-end funds, $3.7 billion of structured products and $1 billion in ETFs.

Our relative investment performance continued to be strong as of June 30, with 98% of rated-fund AUM having 3, 4 and 5 stars and approximately 94% and 97% of institutional assets beating their benchmarks on a 3- and 5-year basis, respectively.

Turning to Slide 8, asset flows. Total sales were $6.6 billion, a sequential increase of $1.2 billion or 22%, primarily due to $1 billion in higher institutional sales and $0.6 billion in higher open-end fund sales. The positive net flows of $1.3 billion in the quarter reflect net flows in open-end funds, retail separate accounts and ETFs and essentially breakeven flows in institutional.

With respect to open-end mutual funds, net flows for the quarter were $1.1 billion, representing an annualized organic growth rate of 10.5%, which is strong on a relative basis compared to the industry.

The flows in organic growth rate resulted from higher sales, as demonstrated by the 40.4% annualized sales rate as well as lower redemptions that were reflected by the 29.9% annualized redemption rate, which decreased 460 basis points sequentially.

Looking at the mutual fund flows by asset class. Domestic equity funds had net inflows of $1.5 billion, an increase from net inflows of $0.4 billion sequentially, as small- and mid-cap strategies at Kayne continued to generate strong levels of sales.

International equity funds had net outflows of $0.1 billion in the quarter compared to breakeven in the prior quarter. Positive net flows of $0.2 billion in international small-cap equity were offset by $0.3 billion of net outflows in large-cap emerging and developed markets equity.

Fixed income funds had net outflows of $0.1 billion, consistent with the first quarter, as $0.3 billion of positive flows and bank loan strategies were offset by modest net outflows and investment-grade and short-term bond.

Regarding flows and other products. Institutional flows, which can vary greatly, reflect $1.4 billion of inflows primarily from new accounts, including large-cap value at Ceredex and small-cap growth at Kayne, offset by outflows of $1.5 billion, which included $0.8 billion from partial redemptions and $0.7 billion from closed accounts.

For retail separate accounts, flows returned to positive $0.2 billion for the quarter compared with net outflows of $0.1 billion in the first quarter, which included a large, low fee redemption in the private client business.

Turning to Slide 9. Investment management fees, as adjusted, of $104.6 million, increased $2.6 million or 2.6% sequentially due to a higher blended fee rate and a generally flat level of average assets under management.

The average fee rate on long-term assets for the quarter was 46.7 basis points, an increase from 46 basis points in the prior quarter due to higher fee rates in open-end funds and retail separate accounts. I would note that there were no performance fees on structured products in the quarter.

With respect to open-end funds, the fee rate increased to 51.8 basis points from 50.3 basis points in the first quarter. The increase is the result of the shift in the mix of our business and is driven by the differential between the fee rates on sales and redemptions.

The blended fee rate on mutual fund sales was strong in both the first and second quarter at 64.7 and 56.4 basis points, respectively, while the rate on redemptions were consistent at approximately 50 basis points in both periods. The increase in the fee rate on new sales reflects continued strong sales into higher fee domestic and international equity products, primarily managed by Kayne.

Regarding SGA, they had $11.3 billion of AUM at June 30, which is not included in our results. The AUM is primarily institutional with a blended fee rate that is generally consistent with our institutional fee rate. For modeling purposes, with the addition of SGA, a reasonable institutional fee rate for the third quarter will be in the 30 to 32 basis point range, all else being equal.

As a reminder, given the majority ownership structure, we will reflect 100% of SGA's results in the respective line items of the income statement, with the minority interest being reduced through noncontrolling interests.

Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses, as adjusted, of $53.7 million decreased $5.1 million or 9% sequentially for the first quarter, which included $6.8 million of seasonally higher employment expenses resulting from the timing of incentive payments. The absence of seasonal expenses was partially offset by higher sales-based and profit-based compensation. Sales-based compensation increased $0.7 million sequentially as a result of the 20% increase in retail sales. As a percentage of revenues, as adjusted, employment expenses were 49%. We do not expect that to be meaningfully impacted by SGA.

The trend in other operating expenses, as adjusted, reflects the timing of product, distribution and operational activities. Other operating expenses, as adjusted, were $18.2 million, an increase of $2.5 million or 16% from the prior quarter. The increase resulted from $0.8 million for the annual equity grants to the Board of Directors and $1.2 million of higher sales and marketing costs. As a reminder, last year's second quarter had $0.7 million of increase in sales and marketing costs.

This quarter's $1.2 million of higher sales and marketing costs include $0.6 million of increased business development in our retail business and at our affiliates, $0.4 million of higher cost associated with intermediary support and $0.2 million of incremental institutional marketing activities. With the addition of SGA, we expect other operating expenses to range from $16.5 million to $18.5 million quarterly, which will vary based on the timing of distribution and marketing activities and other seasonal factors.

Slide 12 illustrates the trend of financial results. In terms of the non-GAAP results, operating income, as adjusted, increased $4.8 million or 15% sequentially. Operating margin, as adjusted, was 34% compared with 30% in the first quarter and 29% in the prior year quarter. Net income, as adjusted, of $25 million or $2.97 per diluted share increased from $21.8 million or $2.59 per share in the prior quarter. It's important to note that our non-GAAP earnings do not include interest and dividends earned on CLO and seed investments, which were $4.6 million or $0.39 on an after-tax, per-share basis in the quarter, an increase from $3.4 million and $0.29 in the prior quarter.

Regarding GAAP results. Second quarter net income per share was $2.75 compared with $2.77 in the first quarter. Second quarter net of tax GAAP earnings included the following items: $0.22 per share of acquisition and integration costs, $0.07 per share of discrete tax adjustments and $0.04 per share related to realized and unrealized losses.

Slide 13 shows the trend of our capital position and related liquidity metrics. Working capital at June 30, 2018, increased $14 million or 17% sequentially, reflecting operating earnings and net proceeds from CLO and seed capital activity, partially offset by the estimated required principal payments on our term loan, interest expense on debt, dividends to shareholders and share repurchases.

Of this activity, there are a few items I'd like to focus on, specifically CLO investments declined by approximately $30 million as the company sold $38 million of investments in 2 CLOs, partially offset by a $7.5 million investment to sponsor a new CLO that is currently in the warehouse phase. Share repurchases in the quarter totaled $7.5 million or approximately 61,000 shares of our common stock, which represented 0.8% of our outstanding common shares, as adjusted.

Our working capital calculation for the quarter includes an estimate of the principal payments due over the next 12 months. As we have previously noted, in addition to the scheduled amortization, our term loan includes an excess cash flow suite feature that applies cash generated over a certain level to be paid against the loan. We are currently estimating the payment due in 2019. The actual excess cash flow payment will be measured based on full year 2018 financial results and the net leverage ratio as of December 31, 2018.

With respect to SGA, when we closed in July, we drew an additional $105 million of term loan debt that we had secured in the first quarter and funded the remaining consideration with balance sheet resources. The pro forma impact to our June 30 capital position is as follows: cash would decrease from $139 million to $109 million; working capital would decrease from $94 million to $70 million; net debt will increase from $119 million to $254 million; and net debt to bank EBITDA will increase from 0.7x to approximately 1.3x.

With that, let me turn the call back over to George. George?

Thanks, Mike. That concludes our prepared remarks. And now we'll take some questions. Brian, can you open up the line, please?

(Operator Instructions) And our first question will come from the line of Ari Ghosh with Crédit Suisse.

Institutional segment, if I'm just looking at flows there, it improved versus last quarter, but is it getting into 2Q? I believe you had some more, like, decent funding, at the same time, channel flows were tracking positive through May. So just curious if you saw something lumpy in June that you can call out. And then excluding G&A -- SGA, sorry, can you talk about the outlook over the next 6 months in the institutional channel? Where is the interest coming from? Is it a variety of different products and offerings over there that you're seeing some funding in the pipeline?

Sure. So for institutional, which we're pleased to see the building of that part of our business and then, obviously, with the transaction with Seix, Ceredex, Silvant, that adds more institutional capabilities to us. So going back to our last call, we were pleased to be able to point out that we had a couple of large mandates that have been funding in the month as we were doing the call, so that was all very positive. And later in that quarter, in June, in any given month, there's always some redemption, so there were some redemptions there in June. As I sort of alluded to on the phone when I gave the sort of the outlook for July, so in addition to strong sales in mutual funds and then remaining in strong positive net flows, on the institutional side from -- for the month of July, in terms of what we expect in terms of what we'll fund versus what we redeem, I indicated that that's modestly positive. I didn't go into beyond that, what we've been notified of wins versus redemptions. So while I didn't cover that, what I would sort of say there is we're very pleased with how that pipeline looks, and it cost us a variety of managers. I think there's about four managers where we're aware of potential wins they have not yet funded and on the redemption side, which doesn't give you as much lead time. That's a much smaller amount, so the net of those two numbers would also be positive. But I always point out that for redemptions, I literally hang up the phone call here and get an e-mail that there's another redemption. But right now, it looks really good. I felt very good in the last call that I had multiple affiliates with institutional wins that were upcoming. And now, as we sit on this call, we have more affiliates. So I feel that we're building up that business a little bit more. But as I'm sure you've heard a million times over, it's a really lumpy business, and institutional clients can make changes related to manager consolidations, hey can make changes related to a strategy if it has a target allocation and appreciates above it, they have to rebalance down. So there's lots of factors that sort of make it a harder part of the business, but I feel really good with the variety. And I mentioned the large-cap value, obviously, Kayne in the small-cap, and we have some great fixed income. And SGA, even though we've just closed on the transaction, obviously, that's been their big focus since the announcement in early February. I did note in my comments that one of the mandates that we're sort of thinking through for July is an SGA mandate, and I'm pleased with how their pipeline currently looks. So again, I feel better about where we are in that business than I have felt in many, many years there. So hopefully, that's helpful.

Got it. Very helpful. And then just moving on to capital. I know you're still working through the numbers, and you added a little commentary earlier. But just looking at your run rate earnings and the debt covenants with the excess cash suite function, it looks like your mandated amount would be around in the $50 million range. So just want to see if we have the right ballpark over here. And then, as you think about your excess cash versus current leverage, is there any interest to maybe accelerate the debt pay-down, in addition of what is required in early '19?

Yes. Just on the latter part of that question, as we sort of indicated, we're looking at the use of the capital because, again, we have a strong cash flow. And even though our working capital post SGA is at $70 million, which is on the lower end, with the cash flow that we currently have, we'll have abilities to put capital to use for the 3 areas. So in terms of the excess cash flow and the principal pay-downs, Mike will give you a little color on that. But we are very cognizant of looking at that and the timing of when we want to address that as it balances out with other really strong priorities for us, which include return of capital, which, as you saw, I think we surprised some investors this quarter by doing a stock repurchase in the quarter right after the first quarter, which is the highest cash quarter, and right before at close on a transaction. But we've always viewed that as a really important tool for us as we look for ways to create value for shareholders. But debt -- and I made comments about investment-grade credit long term. It's an important goal because as we look to grow the business, cost of capital and having flexibility not to have to use equity for acquisitions and to continue to use credit where appropriate, we view as a really important long-term objective for us. So Mike, do you want to go through the excess cash flow?

Yes. Ari, it's Mike Angerthal. Just as we made an estimate to incorporate it into our working capital this quarter as the excess cash flow payment is now within 12 months, so according to the agreement, we'll be due in approximately early April of 2019, one of the things to consider in the definition of excess cash flow, there are reductions made for certain cash expenditures. So any cash that would be out for, say, acquisitions or CapEx would also go into the excess cash flow calculation. So I think you may need to factor that into the analysis where -- to sort of refine the number that you reflected. We're coming up with more of a number in the $30 million to $40 million range. But it is an estimate. We'll continue to refine that as we go forward.

And our next question will come from the line of Michael Carrier with Bank of America.

Maybe first question, just on the flows in the quarter and mostly on the retail side. So when we look at the industry trends, you guys came in much stronger. I just wanted to get some sense -- I mean, you mentioned the performance, and we can see that. But also, on distribution platforms, like were there any like either new adds, new wins, anything that would have driven that besides this kind of the core blocking and tackling to produce the flows that you've generated in the quarter?

Yes, no, good question. No, there were really no -- we've always had incredibly broad access, so there's really not -- this is not anything specific to either a new firm, a new platform or a new allocation. And this is really more wholesale flows as opposed to platform or model allocation flows, which we've had previously with products like emerging markets. So this is just old-fashioned blocking and tackling, a great manager in Kayne. What's interesting, as you sort of look at the Kayne, and our focus is really always on selling the way a manager manages money, so seeing sales in both core and growth and international small-cap, which is one of our newer capabilities, happy to see people starting to be interested in mid-cap, which we sort of -- we think really, right now, this is a good timing for taking another look at the mid-cap asset class. And then I referenced Zevenbergen and some of our other capabilities as well. So we're really pleased with what we had in the second quarter, but there's really nothing driving that, that is related to either a new distribution partner, a new platform or anything other than just the convergence of good performance and the right level of demand.

Okay, that's helpful. And then just given that you've seen some demand in some of the flows on the small-cap side, maybe just an update across the products on like the small or even mid-cap, just where you stand from like a capacity standpoint?

Sure. So we're very disciplined about capacity because our first objective is to make sure that the investment strategy is executed as it should be. Kayne has multiple products on the small-cap side, and we have other offerings related to small-cap. So those are the ones that have the most in terms of capacity. I think core is the one that's furthest along in its capacity, and growth is coming next. Others like international small-cap have a long way to go. Those are newer products, newer strategies. But the way that Kayne approaches the game, they have multiple other versions of their small-cap strategies as well as SMIDs as well as mid-caps, so there's a whole variety of other ways to access a great manager through other variations of their strategy. But we're very thoughtful about making sure that we pay attention to capacity and have it not interfere with performance.

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

Just a follow-up to the last question around capacity. So as it relates to Kayne Small-Cap Growth specifically, I think that fund is around $4.5 billion, $5-ish billion in AUM. Is there a sense of how much capacity there is still in that particular fund because that used to be the biggest driver of flows for you guys over the last few months?

Yes. When we look at capacity, we're not just looking at the funds, we're also looking at whether it's available institutionally. So again, I think core is the one that clearly across the board is furthest along in its capacity availability, and growth would be also doing quite well and getting closer to that. But there are still other opportunities in their other mid-caps and SMIDs, et cetera.

Got you. And then just going back to discussion around SGA. Can you guys give us an update, I guess, how the business has performed since you announced the acquisition? I think you said asset levels are around $11.5 billion. I think it's a little bit lower than what it was at the time the deal was announced. So just wondering whether it's just all markets or there's been any ins and outs in terms of the flows? And then when you're looking out into the next couple of months, I think one of the things you said, institutional wins here are pending, include some wins from SGA as well. Any redemptions that you're aware of, either at SGA or at broader institutional pipeline?

Yes. So the first part, so for SGA, I think we now set early in February, so the primary focus of the folks down at SGA is their communications with their clients and dealing with a thoughtful process of change in control and consents. So that was managing the clients' assets and then dealing with the change in control was their primary focus. We gave the AUM number of $11.3 billion, which is down slightly from the $11.6 billion we have previously given. Like any business with institutional clients, there's ins and outs, so there was a little bit of a decline in that AUM at that level. But as you did note in the July color that I provided, I indicated that there was -- that included a mandate from SGA, which is not an insignificant one. And later on, when I answered the question in terms of the pipeline going forward, where we sort of feel good in terms of what we're seeing versus things that we're aware of that we would have won but have not funded, as well as what we know has been terminated but not redeemed, which again is on a net positive basis. That does include a good pipeline. So as I think I said, I'm sort of pleased with what I know right now in terms of the pipeline for SGA.

Got it. And then shifting gears a little bit, just want to head on the balance sheet for a sec. So Mike, I think you mentioned the pro forma debt to bank EBITDA of 1.3, up from 0.7. As we think about you guys deleveraging over the next, call it, 12 months or so, is 0.7, 0.8 kind of the range we should be thinking about in terms of the comfort level, in terms of the leverage in the business and, therefore, kind of all the excess cash flows could go towards dividends, buybacks, other forms of kind of returns of capital?

Yes. I think George outlined some of the priorities earlier. But certainly, we have the excess cash flow suite, and that's a key priority for us. We've talked about leverage levels that can shift based on a given activity, which, at this point in time, just closing on the transaction or increasing to a 1.3x will, most importantly, continue to focus on operating the business with a mindset toward our credit rating. And again, that provides us solid access to capital. We'll de-lever. And with our excess capital above the required, we'll balance it between investing in the business and returning capital to shareholders, as we demonstrated with the $7.5 million that we repurchased in the first quarter. So we'll continue to balance that and prioritize the buybacks and returns of capital with investing in the business going forward.

Yes. And just to add on to that, so again, with the balance sheet that we currently have and our expectations of the cash generation going forward, we know that we have to sacrifice any of the 3 opportunities to use capital for the others, right? So we do think in terms of the excess suite and what that allows to do in terms of maintaining reasonable levels of leverage, still allows us to be very thoughtful on things that we've consistently done, particularly return of capital where I think, other than in periods where we've been doing acquisitions, we've consistently made that an important part of our toolbox and seeing new products are always fee-generating products. So as Mike and I both alluded to, we have a new small investment that we made in the CLO to generate some fees and additional AUM, which we consider another useful and important use of capital going forward.

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

Just following up on some of the color you had on the institutional pipeline, maybe just a little bit bigger picture on the institutional channel. Just curious if you could speak to some of the key trends that you see in the institutional channel right now in terms of, say, for example, a shift towards more solutions-based mandate and how you're evolving your approach within the institutional channel, given some of those dynamics that play more broadly.

Yes, no, it's an interesting question because one of the things that -- my personal opinion that why institutional is always harder, really, to sort of project than retail is there's a lot of divergence within institutional clients of really what they're looking for and how they're approaching it, right? So you can literally have some institutional clients adding an asset class while the other one is divesting of the exact same asset class or strategy. So there's lots of unique drivers for different clients, different consultants and different platforms. So there really is a lot of divergence there. So we could literally see an inflow and outflow in the exact same strategy just because the clients have different needs. So what our goal really is, is really, as is with our retail business, is having those managers that have differentiated capabilities that will fit into those well-diversified portfolios. So we really try to focus in on those opportunities where we think the capabilities of our managers have a really good fit and a good opportunity. We're not going to be the full-service provider of every type of strategy. So it's really more of focusing in on those opportunities where each one of our individual managers has an opportunity. And as I sort of alluded to before, as I look at the pipeline, and I'm seeing not 1, not 2, not 3, but 4 managers having opportunities in the short term on wins, I feel really good that that's a much better place than we have been previously.

Okay, great. And just maybe more of a bigger-picture question on the industry. Just we see a number of different approaches to the multi-affiliate model out there right now, some newer forms that have been introduced more recently. I guess, if we look out 5 years, how do you think the multi-affiliate structures are going to evolve in terms of alignment, optimal alignment, ownership, degree of collaboration? Just curious your perspective on that.

Sure. And I agree with you that not every multi-manager model is the same. And I think, generally, what we all share in common is the belief that either dedicated teams or dedicated firms that really focus and specialize over time can provide more predictable, sustainable results. So really, the divergence has generally been more in terms of a level of autonomy versus level of services provided to them. I generally think, consistent with the overall industry, as scale becomes more important and fees come under pressure, that just from a standpoint of having investment professionals focused on managing money and the cost of asset acquisition and operations, I think you'll see an increase in the amount of support provided by the model of a multi-boutique as opposed to each individual boutique doing everything themselves because again, it's generally always been a distraction and it's always been a little bit expensive. But I think now, with some of the competitiveness and the fee pressures, it's just more and more sense for that model to be more -- and again, I think we're in the case of a model where there's a lot more in terms of trying to provide support to grow the business, support to distribute the business and to do all those back office and operational things.

And is there anything around the margin in terms of tweaks as you think about your structure and approach, given some of those challenges you mentioned for the industry?

No, I mean, I think we sort of approach that way. There's always things that we can -- you can enhance and technologies that you can provide and efficiencies you can create, so I think we've always been cognizant on it. The focus of our model has always been to have the autonomy of the investment process at our affiliates and have them focus on their clients and managing clients' assets and providing to them either distribution or support for any other non-client-related activity. That continues to be how we think that we could provide support for our affiliates.

And our next question will come from the line of Andrew Disdier with Sandler O'Neill.

So appreciate the color on the OpEx bump tied to SG&A. And I would just like to be able to get a better feel for the top line on a run rate basis. So I guess, it looks like there is about 24 employees about to come online, 12 of which are investors. So again, one, just would like a better feel for the run rate comp; and then, two, I guess tied to the mandate, should we expect to see some type of lagging award to an SGA salesperson?

Yes. Hey, Andrew, it's Mike Angerthal. I think in the prepared remarks, importantly, as you model and you think about modeling SGA, we're going to be picking up 100% of their results on our key financial statement line items, the investment management fees, employment expenses and other operating expenses, try to provide some insight on what that could look like from a modeling perspective going forward. And I think from an employment expense perspective, the commentary indicated that we wouldn't really expect to see a meaningful change in the ratio of employment expenses as adjusted to revenues as adjusted. So I think from that perspective, the 49% that was achieved this quarter is a good assumption for SGA going forward. And then just from the compensation to institutional sales folks, that's just going to be similarly structured to the way sales folks are compensated. So I think, again, that would be any employment elements would be incorporated into the -- that 49% range from a modeling perspective. And then just kind of closing the loop on SGA, the 30% piece that's not currently owned by Virtus would come through on a noncontrolling interest line. So from modeling perspective, again, the 100% comes through on the financial statement line items, and the 30% reduction comes through in noncontrolling interests.

Got it. And then tied to the CLOs, I guess, first, why did you sell 2 investments and then in 2 CLOs and then reload into another? I'm presuming it has to do something with rates. And then two, I guess, the signal then I'm taking away is that there's definitely commitment to maintaining this CLO origination where it has on a forward basis.

Well, a couple of things. The CLO business, we view that as a good business, a very great business. We like that that's a good way to leverage the capabilities that exist. And with 2 managers that can currently manage CLO sites, obviously, has done the more recent CLOs. So we do look at that as a good, steady, reliable fee pattern type of a product. So when you sort of look at -- so yes, we do think that's a business that -- well, there are opportunities there to leverage the capabilities we have with our managers to participate there. Going to the first part of the question, so as we continually look at making sure that we're being as efficient as we can with our balance sheet, and I think as you're aware, there are some changes in risk retention and some other requirements around CLOs, the decision was made that there were certain of the older CLOs where we would liquidate that, particularly as we look for other uses of capital such as the stock repurchase we did in the quarter and other things. So they're really sort of 2 separate things. One is we thought there was a better usage for the existing legacy money that was tied up. But we continue to see -- putting in an investment for the launch of new CLO and generate a new fee-earning product with a good stand-alone IRR separately was a good use of a portion of that money. Mike, anything you'd add to that?

Yes. And I think George alluded to with the risk retention rules changed in the second quarter, I think it was finalized in early May, and the 2 investments that we did sell were vertical investments that are in a highly liquid part of the CLO market, so it was an opportunistic ability to exit that part of the CLO capital structure and redeploy the capital for other uses as we prepare to close SGA and execute on the stock repurchase.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Aylward.

All right. Thank you, Brian. I just want to thank everyone for joining us today. And obviously, if you have any other questions, we encourage you to give us a call, and we look forward to speaking with you next quarter. Thank you.

This concludes today's teleconference. Thank you for participating. You may now disconnect.