Victory Capital Holdings, Inc. (NASDAQ:VCTR) is a diversified global asset management firm with total client assets of $175.5 billion, assets under management of $170.3 billion and other assets of $5.1 billion as of March 31, 2024. The company operates a next-generation business model combining boutique investment qualities with the benefits of an integrated, centralized operating and distribution platform.

Business Overview

Victory Capital provides specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors with 11 autonomous Investment Franchises and a Solutions Platform. The company offers a wide array of investment products, including actively and passively managed mutual funds, rules-based and active exchange traded funds (ETFs), institutional separate accounts, variable insurance products (VIPs), alternative investments, private closed end funds, and a 529 Education Savings Plan. Victory Capital's strategies are also offered through third-party investment products, including mutual funds, third-party ETF model strategies, retail separately managed accounts (SMAs) and unified managed accounts (UMAs) through wrap account programs, Collective Investment Trusts (CITs), and undertakings for the collective investment in transferable securities (UCITs).

As of March 31, 2024, the company's Franchises and Solutions Platform collectively managed a diversified set of 121 investment strategies for a wide range of institutional and retail clients and direct investors. Victory Capital has grown its total client assets from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $175.5 billion at March 31, 2024. This growth is attributed to the company's success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct investor channels with deep penetration.

Financials

In the first quarter of 2024, Victory Capital reported annual net income of $213,157,000, annual revenue of $840,357,000, annual operating cash flow of $330,291,000, and annual free cash flow of $325,122,000. For the first quarter of 2024, the company reported net income of $55,691,000 and revenue of $215,857,000.

The company's assets under management (AUM) at March 31, 2024 increased by $9.0 billion, or 5.6%, to $170.3 billion from $161.3 billion at December 31, 2023, driven by market appreciation of $10.2 billion partially offset by net outflows of $1.1 billion. Total gross flows for the first quarter were $7.2 billion, including long-term gross flows of $7.0 billion.

Victory Capital's investment performance remained strong with 69% of its AUM in mutual funds or ETFs earning overall 4-or 5-star ratings from Morningstar. Over the critical 3- and 5-year periods, 61% and 85% of the company's total AUM outperformed their respective benchmarks. On a relative ranking basis for the trailing 3 years, 34 funds representing nearly half of Victory Capital's AUM in mutual funds and ETFs were ranked in the top quartile of the respective categories by Morningstar as of the end of the first quarter.

The company's Adjusted EBITDA margin was 52.1% for the first quarter of 2024, which is industry-leading and a testament to Victory Capital's focused execution, combined with the efficiency and effectiveness of its operating platform. Management continues to guide to a long-term Adjusted EBITDA margin of 49%.

Liquidity

Victory Capital has a strong balance sheet, ending the first quarter of 2024 with $80 million in cash and an undrawn $100 million revolving credit facility. The company's net leverage ratio remains at a modest 2.0x. During the quarter, Victory Capital made an $80 million earnout payment related to the WestEnd Advisors acquisition and returned $35 million to shareholders through dividends and share repurchases.

Recent Developments

In April 2024, Victory Capital announced a Memorandum of Understanding (MOU) to combine Amundi's U.S. business into the company. Under the terms of the MOU, Amundi will become a 26.1% strategic shareholder of Victory Capital and the two firms will enter into a 15-year global distribution agreement. The transaction is expected to be low double-digit EPS accretive by the end of the first full year of ownership and generate $100 million of expense synergies within the first 2 years, with the majority realized in the first year.

The combination of the Amundi U.S. business will add significant size, scale and complementary investment capabilities to Victory Capital, while also immediately diversifying the company's client base with an increased international presence. Amundi's U.S. business currently has over $104 billion in AUM, with more than one-third from non-U.S. clients. Victory Capital expects the transaction to enhance its geographic diversification, with approximately 15% of pro forma AUM coming from non-U.S. clients upon closing.

Outlook

Victory Capital's management team remains optimistic about the company's business outlook, citing improving sales activity, positive net flows in March, and strong investment performance. The company continues to strategically invest in areas that will drive organic growth, such as new products, vehicle wrappers, and data/analytics capabilities. With the pending Amundi transaction, Victory Capital is poised to further accelerate its growth trajectory through expanded distribution reach, enhanced product capabilities, and increased scale.

Conclusion

Overall, Victory Capital's diversified investment platform, industry-leading profitability, strong balance sheet, and strategic growth initiatives position the company well for continued success. As the company executes on the transformative Amundi transaction and continues to invest in its business, shareholders can look forward to Victory Capital's ability to drive long-term value creation.