Executive Summary / Key Takeaways

• Virtus Investment Partners operates a diversified multi-boutique asset management model, leveraging distinct investment managers to offer a broad array of strategies across asset classes, structures, and geographies, positioning it to capture demand across varying market cycles and investor preferences.
• Despite market volatility and net outflows in certain traditional areas like U.S. Retail Funds and Institutional accounts in Q1 2025, the company continues to demonstrate solid financial performance, driven by expense management and the inherent leverage in its asset-based fee model.
• Strategic focus areas like Retail Separate Accounts, ETFs, and Global Funds are showing growth momentum, supported by ongoing product development and efforts to enhance distribution access through intermediaries.
• The company maintains a strong balance sheet with modest leverage and robust cash flow generation, enabling a balanced capital allocation strategy that includes investing in organic growth (seed capital, new products), pursuing strategic M&A opportunities (particularly in less correlated and private markets), and consistently returning capital to shareholders through dividends and share repurchases.
• Key factors to watch include the impact of continued market volatility on AUM and flows, the success of new product launches in gaining traction, the execution of expense management initiatives, and the strategic deployment of capital for growth and shareholder returns.

Setting the Scene: A Multi-Boutique Approach in a Shifting Landscape

Virtus Investment Partners stands as a distinctive player in the asset management industry, operating through a multi-manager, multi-style model. This structure allows Virtus to offer a wide spectrum of investment strategies, managed by affiliated and select unaffiliated investment teams, each with its own specialized expertise and brand. This approach is foundational to Virtus's strategy, aiming to provide solutions for both institutional and individual investors across diverse asset classes—equity, fixed income, multi-asset, and alternatives—and various product structures, including mutual funds, ETFs, closed-end funds, retail separate accounts, and institutional mandates. The company's earnings are primarily derived from asset-based fees, directly linking its financial performance to the level and mix of its assets under management (AUM) and prevailing market conditions.

The asset management landscape is intensely competitive, populated by giants like BlackRock (BLK), large diversified firms such as Franklin Resources (BEN) and T. Rowe Price (TROW), and specialized players like Invesco (IVZ). While larger competitors like BlackRock benefit from immense scale and sophisticated, technology-driven platforms like Aladdin, which offer significant operational efficiencies and pricing power, Virtus competes by emphasizing the differentiated expertise and performance potential of its boutique managers. This model allows Virtus to target specific niches and investment styles, aiming for performance that justifies its active management fees, which are generally higher than passive alternatives but must remain competitive within the active management space.

Virtus's competitive positioning is further shaped by its technological approach. While the company's information doesn't detail a single, overarching proprietary technology platform akin to some larger competitors, it highlights the importance of investment research and technology costs within its operating expenses. Management commentary indicates ongoing efforts to streamline investment systems and data usage, suggesting a focus on optimizing the existing technological infrastructure to enhance efficiency and reduce costs. This contrasts with competitors like BlackRock and Invesco, whose technological investments appear geared towards broader scalability, faster product cycles, and potentially lower unit costs through automation. Virtus's strength lies more in the qualitative application of quantitative analysis within its specialized managers and the strategic use of technology to support their distinct investment processes and operational needs, rather than a centralized, large-scale tech moat. The strategic intent behind R&D and technology investment appears focused on supporting alpha generation within the boutiques and improving operational efficiency to maintain margins, rather than developing a standalone, revenue-generating technology platform.

The company's history, marked by strategic acquisitions to add new managers and capabilities, has built this diversified platform. Over the five years leading up to Q3 2024, Virtus added four new managers, expanding its offerings. Recent transactions, such as those involving Westchester Capital Management and NFJ Investment Group, and ongoing structured arrangements like the staged equity purchases of a majority-owned affiliate (reaching ~80% ownership in Q3 2024, with the final purchase in Q3 2025), reflect a history of inorganic growth aimed at enhancing its multi-boutique ecosystem. This strategic evolution has positioned Virtus to navigate market shifts and investor preferences by offering a wider range of specialized solutions.

Performance Under Pressure and Strategic Responses

The first quarter of 2025 presented a challenging market environment characterized by volatility and uncertainty, impacting Virtus's AUM and flows. Total assets under management stood at $167.5 billion at March 31, 2025, a decrease from $175.0 billion at December 31, 2024, reflecting both negative market performance ($4.1 billion decrease) and net outflows ($3.0 billion decrease). Compared to March 31, 2024, AUM was down $11.8 billion, primarily due to net outflows ($12.2 billion) partially offset by positive market performance ($2.9 billion).

Total revenues in Q1 2025 were $217.9 million, a decrease of 1.9% from $222.0 million in Q1 2024. This decline was primarily attributed to decreased average fee rates, which fell slightly to 41.7 basis points in Q1 2025 from 41.9 basis points in Q1 2024 (excluding performance fees, the rate was unchanged sequentially at 41.7 bps in Q4 2024). The fee rate is influenced by the mix of assets, and shifts towards lower-fee strategies or products can impact overall revenue yield.

Net income attributable to Virtus Investment Partners decreased slightly to $28.6 million in Q1 2025 from $29.9 million in Q1 2024. Diluted earnings per share were $4.05 in Q1 2025, down from $4.10 in the prior year period. The effective tax rate increased significantly to 30.6% in Q1 2025 from 18.9% in Q1 2024, primarily due to changes in valuation allowances related to the tax effects of realized and unrealized losses on company investments in the current year compared to gains in the prior year.

Despite the revenue pressure, operating income increased by 13.3% to $36.6 million in Q1 2025 compared to $32.3 million in Q1 2024. This improvement was primarily driven by a decrease in total operating expenses, which fell by 4.4% to $181.3 million. Key expense reductions included employment expenses (down 5.3% to $109.1 million, mainly due to lower profit- and sales-based compensation) and amortization expense (down 15.6% to $12.9 million as intangible assets became fully amortized). Other operating expenses, however, increased by 5.4% to $33.1 million, partly due to higher rent costs associated with lease renewals and terminations. The operating margin in Q1 2025 was 27.6% (adjusted operating margin was 32.7% excluding seasonal expenses), reflecting the impact of seasonally higher Q1 employment costs, but management highlighted the operating margin reached its highest level in two and a half years in Q4 2024 (35.1%), demonstrating the leveragability of the business on higher AUM levels and expense discipline.

Flow trends in Q1 2025 showed continued challenges in traditional areas. Institutional accounts experienced net outflows of $1.2 billion, primarily from large-cap equity strategies, although partially offset by inflows into small/mid-cap equity and emerging market debt. Open-end funds had net outflows of $1.1 billion, driven by U.S. retail equity strategies, consistent with broader market trends favoring passive or alternative structures. Retail Separate Accounts also saw net outflows of $0.7 billion, largely influenced by the strategic soft closing of a successful SMID Cap Core equity model offering late in 2024 to protect future returns, despite continued demand in other SMID and mid-cap strategies.

These flow dynamics underscore the competitive pressures and market shifts Virtus faces. While larger, more diversified players like BlackRock can leverage their scale and passive offerings to capture flows regardless of active management performance, Virtus's performance is more sensitive to trends favoring specific active styles or market caps where its boutiques excel. The recent underperformance of mid/small caps relative to large-cap momentum stocks has created a headwind, as Virtus's asset base is more correlated to these segments. Similarly, periods where 'quality' investing underperforms 'momentum' can impact managers with that orientation. Virtus's response involves emphasizing the value of active management in volatile markets, highlighting strong relative performance (e.g., over 70% of equity strategies beat benchmarks in Q1 2025, 74% of equity AUM beat benchmarks over 10 years), and strategically shifting focus to product structures and asset classes currently in demand.

Investing in Growth and Disciplined Capital Management

Virtus is actively investing in areas showing growth momentum and investor demand. Retail Separate Accounts, including the wealth management business at Kayne Anderson Rudnick (which has doubled AUM over five years to $8.7 billion by Q3 2024), remain a key focus. The company has completed structural steps to expand its fixed income offerings in this channel and is increasing resources for asset raising.

The ETF platform is another strategic priority, demonstrating strong organic growth (73% over the past year as of Q1 2025) and consistent positive net flows ($0.3 billion in Q1 2025). Virtus has been actively launching new actively managed ETFs, including recent introductions from AlphaSimplex (managed futures), Kayne Anderson Rudnick (high-quality mid-cap equity), and Sykes (private credit CLO). The Sykes CLO ETF leverages the manager's deep expertise in the space, where they manage 10 CLOs totaling approximately $3.4 billion. With 20 ETFs now offered, Virtus is focused on building track records and increasing availability through intermediaries. Global Funds are also contributing positive net flows and organic growth (9% for the full year 2024). The company has a robust pipeline of new products under development and in filing, including its first interval product, aimed at meeting evolving investor preferences for different structures and strategies.

Capital management is a core strength, providing flexibility to support these growth initiatives while returning value to shareholders. Virtus maintains a strong balance sheet with modest leverage. At March 31, 2025, gross debt to EBITDA was 0.7 times, and the company ended Q4 2024 in a net cash position. While Q1 is typically the highest cash utilization quarter due to annual incentive payments ($158.4 million paid in Q1 2025 for 2024 performance) and revenue participation payments ($23.1 million paid in Q1 2025), the company's cash flow generation remains significant.

Virtus has a consistent track record of returning capital. It has a long-standing share repurchase program, under which it repurchased 111,200 shares for $20.0 million in Q1 2025. As of March 31, 2025, 292,112 shares remained available for repurchase.

The company has also demonstrated a commitment to dividend growth, achieving its seventh consecutive annual increase by Q4 2024, often with double-digit percentage increases. The quarterly cash dividend was $2.25 per share declared in Q1 2025.

Strategic capital uses also include predetermined obligations from past transactions. A significant portion of the contingent consideration liability ($40.4 million remaining at March 31, 2025) is scheduled for payment, with the bulk expected in Q1 2026. The final stage equity purchase of a majority-owned affiliate is planned for Q3 2025.

Virtus continues to evaluate inorganic growth opportunities, particularly in less correlated and private markets, which are seen as additive capabilities not fully represented in its current portfolio. While valuations for private market strategies are currently higher than traditional long-only strategies, Virtus remains flexible in its approach, considering acquisitions or joint ventures for the right strategic fit that can enhance long-term shareholder value.

Furthermore, Virtus benefits from a significant cash tax asset derived from its intangible assets. The net present value of this asset was approximately $112 million, or $16 per share, as of March 31, 2025. While this benefit is not included in adjusted EPS, it represents real economic value and contributes approximately $2.50 per share annually in cash flow, providing an additional layer of financial flexibility.

Outlook, Risks, and the Path Forward

Management's outlook reflects cautious optimism tempered by the prevailing market uncertainty. They anticipate the average fee rate to remain in the range of 41 to 42 basis points for modeling purposes, with potential for $3 million to $5 million in annual performance fees. Employment expenses are expected to be in the 49% to 51% range of revenues, potentially at the higher end if markets remain flat. Other operating expenses are projected to stay within a $30 million to $32 million quarterly range, supported by ongoing cost management initiatives like office space consolidation.

Near-term flow trends observed in April 2025 showed retail trends consistent with late Q1, with ETFs continuing strong positive flows, while institutional known redemptions slightly exceeded known wins. Management acknowledges institutional flows are inherently difficult to predict but notes the pipeline remains broad-based across managers and strategies.

Key risks for Virtus include continued market volatility, which can negatively impact AUM and fee revenue. Shifts in investor preferences away from active management or specific asset classes where Virtus has significant exposure could also pose challenges. Competition remains intense, particularly in the institutional space and as technological advancements by larger players potentially create efficiency gaps. The ability to attract and retain key investment professionals and manage the integration of acquired businesses are also important factors. Regulatory and legal risks are inherent in the asset management industry, although management believes current matters are not likely to have a material adverse effect.

Despite these challenges, Virtus's multi-boutique model, strategic focus on growing product structures like ETFs and Retail Separate Accounts, disciplined expense management, and strong capital position provide resilience. The company's ability to offer differentiated strategies across market cycles, coupled with its commitment to investing in growth and returning capital, forms the core of the investment thesis. The cash tax benefit from intangible assets further enhances its financial flexibility. The path forward involves executing on its product development pipeline, expanding distribution, selectively pursuing M&A, and leveraging its diversified platform to capture opportunities as market conditions evolve.

Conclusion

Virtus Investment Partners operates a differentiated multi-boutique asset management business, strategically positioned to offer a diverse range of investment solutions across various market segments and product structures. While susceptible to broader market volatility and shifts in investor demand, particularly impacting traditional fund categories, the company is actively directing its resources and product development efforts towards areas demonstrating growth, such as Retail Separate Accounts and ETFs.

The company's financial performance in Q1 2025, while showing a slight revenue dip due to AUM and fee rate dynamics, highlighted effective expense management that supported operating income. Virtus's strong balance sheet, characterized by modest leverage and robust cash flow generation, underpins its ability to pursue a balanced capital allocation strategy, funding organic initiatives, evaluating strategic acquisitions, and consistently returning capital to shareholders. The significant cash tax benefit from intangible assets further enhances this financial flexibility. The investment thesis for Virtus hinges on its ability to leverage the specialized expertise of its boutique managers to deliver performance, successfully execute its strategy in growing product areas, maintain cost discipline, and deploy its capital effectively to drive long-term value creation in a competitive and evolving industry landscape.