vctr-10q_20210630.htm

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 June 30, 2021

☐	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 July 31, 2021 were 16,028,798 and 52,014,095 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	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
	Signatures	42

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; 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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2021, 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)

	June 30, 2021			December 31, 2020
Assets
Cash and cash equivalents	$	31,622		$	22,744
Receivables		98,684			88,182
Prepaid expenses		6,230			6,082
Investments, at fair value		29,566			23,493
Property and equipment, net		24,290			18,747
Goodwill		404,750			404,750
Other intangible assets, net		1,156,919			1,162,641
Other assets		4,014			4,090
Total assets	$	1,756,075		$	1,730,729

Liabilities and stockholders' equity
Accounts payable and accrued expenses	$	51,153		$	42,144
Accrued compensation and benefits		38,885			47,278
Consideration payable for acquisition of business		100,700			92,500
Deferred tax liability, net		51,022			37,684
Other liabilities		30,620			34,573
Long-term debt, net		667,539			769,009
Total liabilities		939,919			1,023,188

Stockholders' equity
Class A common stock, $0.01 par value per share: 2021 - 400,000,000 shares authorized, 19,816,767 shares issued and 16,059,105 shares outstanding; 2020 - 400,000,000 shares authorized, 19,388,671 shares issued and 16,205,689 shares outstanding		198			194
Class B common stock, $0.01 par value per share: 2021 - 200,000,000 shares authorized, 55,782,820 shares issued and 51,761,697 shares outstanding; 2020 - 200,000,000 shares authorized, 54,766,934 shares issued and 51,336,177 shares outstanding		558			548
Additional paid-in capital		659,920			647,602
Class A treasury stock, at cost: 2021 - 3,757,662 shares; 2020 - 3,182,982 shares		(63,290	)		(47,844	)
Class B treasury stock, at cost: 2021 - 4,021,123 shares; 2020 - 3,430,757 shares		(62,925	)		(47,080	)
Accumulated other comprehensive income (loss)		351			(7,460	)
Retained earnings		281,344			161,581
Total stockholders' equity		816,156			707,541
Total liabilities and stockholders' equity	$	1,756,075		$	1,730,729

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 June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Revenue
Investment management fees	$	168,033		$	130,032		$	328,317		$	276,913
Fund administration and distribution fees		53,871			51,854			106,536			109,394
Total revenue		221,904			181,886			434,853			386,307

Expenses
Personnel compensation and benefits		57,462			49,105			116,468			96,676
Distribution and other asset-based expenses		44,223			41,630			86,326			96,490
General and administrative		13,713			13,289			27,023			25,177
Depreciation and amortization		4,694			4,166			9,079			8,216
Change in value of consideration payable for acquisition of business		5,700			5,300			8,200			(200	)
Acquisition-related costs		422			(23	)		258			(92	)
Restructuring and integration costs		422			2,605			2,475			3,603
Total operating expenses		126,636			116,072			249,829			229,870

Income from operations		95,268			65,814			185,024			156,437

Other (expense) income
Interest income and other (expense) income		1,932			2,966			4,666			(1,206	)
Interest expense and other financing costs		(6,155	)		(9,710	)		(13,000	)		(21,118	)
Gain (loss) on debt extinguishment		(1,146	)		137			(3,927	)		(917	)
Total other expense, net		(5,369	)		(6,607	)		(12,261	)		(23,241	)

Income before income taxes		89,899			59,207			172,763			133,196

Income tax expense		(20,629	)		(14,487	)		(38,291	)		(31,310	)

Net income	$	69,270		$	44,720		$	134,472		$	101,886

Earnings per share of common stock
Basic	$	1.02		$	0.66		$	1.98		$	1.50
Diluted	$	0.93		$	0.61		$	1.81		$	1.38

Weighted average number of shares outstanding
Basic		67,776			67,821			67,769			67,806
Diluted		74,166			73,204			74,155			73,818

Dividends declared per share of common stock	$	0.12		$	0.05		$	0.21		$	0.10

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 June 30,						Six Months Ended June 30,
	2021			2020			2021		2020
Net income	$	69,270		$	44,720		$	134,472	$	101,886

Other comprehensive income (loss), net of tax
Net unrealized income (loss) on cash flow hedges		(2,971	)		(3,529	)		7,802		(8,349	)
Net unrealized income (loss) on foreign currency translation		11			13			9		(54	)
Total other comprehensive income (loss), net of tax		(2,960	)		(3,516	)		7,811		(8,403	)

Comprehensive income	$	66,310		$	41,204		$	142,283	$	93,483

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
	Common Stock					Treasury Stock						Paid-In			Comprehensive			Retained
	Class A		Class B			Class A			Class B			Capital			(Loss) Income			Earnings			Total
Balance, December 31, 2020	$	194	$	548		$	(47,844	)	$	(47,080	)	$	647,602		$	(7,460	)	$	161,581		$	707,541
Issuance of common stock		—		—			—			—			44			—			—			44
Share conversion - Class B to A		2		(2	)		—			—			—			—			—			—
Repurchase of shares		—		—			(7,122	)		—			—			—			—			(7,122	)
Shares withheld related to net settlement of equity awards		—		—			—			(10,916	)		—			—			—			(10,916	)
Vesting of restricted share grants		—		9			—			—			(9	)		—			—			—
Exercise of options		—		1			—			—			789			—			—			790
Other comprehensive loss		—		—			—			—			—			10,771			—			10,771
Share-based compensation		—		—			—			—			5,547			—			—			5,547
Dividends paid		—		—			—			—			—			—			(6,481	)		(6,481	)
Net income		—		—			—			—			—			—			65,202			65,202
Balance, March 31, 2021		196		556			(54,966	)		(57,996	)		653,973			3,311			220,302			765,376
Issuance of common stock		—		—			—			—			53			—			—			53
Share conversion - Class B to A		2		(2	)		—			—			—			—			—			—
Repurchase of shares		—		—			(8,324	)		—			—			—			—			(8,324	)
Shares withheld related to net settlement of equity awards		—		—			—			(4,929	)		—			—			—			(4,929	)
Vesting of restricted share grants		—		2			—			—			(2	)		—			—			—
Exercise of options		—		2			—			—			1,551			—			—			1,553
Other comprehensive loss		—		—			—			—			—			(2,960	)		—			(2,960	)
Share-based compensation		—		—			—			—			4,345			—			—			4,345
Dividends paid		—		—			—			—			—			—			(8,228	)		(8,228	)
Net income		—		—			—			—			—			—			69,270			69,270
Balance, June 30, 2021	$	198	$	558		$	(63,290	)	$	(62,925	)	$	659,920		$	351		$	281,344		$	816,156

															Accumulated
												Additional			Other			Retained
	Common Stock					Treasury Stock						Paid-In			Comprehensive			(Deficit)
	Class A		Class B			Class A			Class B			Capital			(Loss) Income			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
Issuance of common stock		—		—			—			—			32			—			—			32
Share conversion - Class B to A		2		(2	)		—			—			—			—			—			—
Repurchase of shares		—		—			(7,186	)		—			—			—			—			(7,186	)
Shares withheld related to net settlement of equity awards		—		—			—			(739	)		—			—			—			(739	)
Vesting of restricted share grants		—		2			—			—			(2	)		—			—
Exercise of options		—		—			—			—			1			—			—			1
Other comprehensive loss		—		—			—			—			—			(3,516	)		—			(3,516	)
Share-based compensation		—		—			—			—			3,887			—			—			3,887
Dividends paid		—		—			—			—			—			—			(3,439	)		(3,439	)
Net income		—		—			—			—			—			—			44,720			44,720
Balance, June 30, 2020	$	187	$	545		$	(33,104	)	$	(40,912	)	$	636,386		$	(8,403	)	$	60,141		$	614,840

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)

	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities
Net income	$	134,472		$	101,886
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes		10,623			11,907
Depreciation and amortization		9,079			8,216
Deferred financing costs and derivative and accretion expense		1,844			2,306
Stock-based and deferred compensation		16,476			9,446
Change in fair value of contingent consideration obligations		8,200			(200	)
Unrealized (appreciation) depreciation on investments		(4,530	)		2,269
Loss on equity method investment		157			—
Loss on debt extinguishment		3,927			917
Changes in operating assets and liabilities:
Receivables		(10,300	)		19,244
Prepaid expenses		(148	)		(1,400	)
Other assets		—			14
Accounts payable and accrued expenses		5,707			(12,615	)
Accrued compensation and benefits		(10,886	)		(20,881	)
Deferred compensation plan liability		(495	)		(151	)
Other liabilities		46			(47	)
Net cash provided by operating activities		164,172			120,911

Cash flows from investing activities
Purchases of property and equipment		(5,567	)		(5,280	)
Purchases of investments		(5,563	)		(3,915	)
Sales of investments		4,020			2,264
Cost of asset acquisition		(207	)		—
Net cash used in investing activities		(7,317	)		(6,931	)

Cash flows from financing activities
Issuance of Class A common stock, net of underwriter discount		97			58
Issuance of Class B common stock from exercise of stock options		2,343			1,694
Repurchase of common stock		(17,689	)		(13,057	)
Payments of taxes related to net share settlement of equity awards		(11,083	)		(7,880	)
Repayments and repurchases of long-term senior debt		(107,000	)		(70,287	)
Payment of dividends		(14,638	)		(7,008	)
Receipt of consideration for acquisition		—			649
Net cash used in financing activities		(147,970	)		(95,831	)

Effect of changes of foreign exchange rate on cash and cash equivalents		(7	)		(86	)

Net increase in cash and cash equivalents		8,878			18,063
Cash and cash equivalents, beginning of period		22,744			37,121
Cash and cash equivalents, end of period	$	31,622		$	55,184

Supplemental cash flow information
Cash paid for interest	$	10,567		$	23,296
Cash paid for income taxes		34,181			3,269

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 Services, Inc. (“VCS”), formerly known as Victory Capital Advisers, Inc., 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 Asset Management Company (“USAA Adviser”) and the Victory Capital Transfer Agency, Inc. (“VCTA”), formerly known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services (together with USAA Adviser, the “USAA Acquired Companies”). 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.

On March 1, 2021, the Company completed the acquisition of THB Asset Management (“THB”), resulting in THB becoming the Company’s tenth investment franchise. At March 1, 2021, the THB AUM that was acquired totaled $547 million. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies. Refer to Note 4, Acquisitions, for further details on the acquisition.

VCM is a registered investment adviser managing assets through mutual funds, institutional separate accounts, separately managed account products, unified managed account products, collective trust funds, private funds, undertakings for the collective investment in transferrable securities, other pooled vehicles and ETFs. 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. VCM’s three wholly-owned subsidiaries are RS Investment Management (Singapore) Pte. Ltd., RS Investments (Hong Kong) Limited, and RS Investments (UK) Limited. VCS is registered with the SEC as a limited purpose 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, 2020.

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- and six-month periods ending June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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.

The Company owns a 15% equity interest in Alderwood Partners LLP (“Alderwood”). Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company analyzed its investment in Alderwood under the voting interest model and determined that it would not consolidate Alderwood as it does not have a controlling financial interest.

The Company’s involvement with non-consolidated variable interest entities (“VIEs”) include sponsored investment funds. 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, 2020.

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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 the three and six months ended June 30, 2021.

New Accounting Pronouncements

Accounting Standards Adopted in 2021

•

Internal-Use Software: Effective January 1, 2021, the Company adopted, on a prospective basis, Accounting Standards Update (“ASU”) 2018-15 (“ASU 2018-15”), "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. The adoption had no impact on the Company’s consolidated financial statements.

•

Subsequent Measurement of Goodwill: Effective January 1, 2021, the Company adopted, on a prospective basis, ASU 2017-04 (“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 adoption had no impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards

•

Reference Rate Reform: In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, (“ASU 2020-04”), “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 contains optional practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The amendments in this guidance are effective for all entities from March 12, 2020 through December 31, 2022, and the amendments for contract modifications may be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. Interest payable on the Company’s outstanding term loans under the 2019 Credit Agreement and amounts receivable or payable under the Company’s Swap are based on the three month LIBOR rate. The Company is currently assessing the practical expedients and exceptions available under ASU 2020-04 as it prepares for the future discontinuance of this LIBOR rate.

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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 emerging growth company (“EGC”), the Company will adopt ASU 2016-13 on January 1, 2023 and is currently reviewing the effect of this new standard on its consolidated financial statements.

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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 June 2020, 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 Victory’s EGC status, the Company will adopt the New Lease Standard on January 1, 2022.

Management has assessed and evaluated the Company’s portfolio of active real estate leases and is currently surveying the business for other leases. As outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the Company has approximately $16.7 million in undiscounted, future minimum cash commitments under net

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operating leases. The New Lease Standard is expected to result in a gross up on the Consolidated Balance Sheets and to have no material impact to the Consolidated Statements of Operations, liquidity or the Company’s debt covenant compliance under the current credit agreement.

NOTE 3. Revenue RECOGNITION

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

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2021			2020			2021			2020
Investment management fees
Mutual funds (Victory/USAA Funds)	$	134,675		$	104,858		$	262,421		$	224,372
ETFs (VictoryShares)		4,000			2,446			7,454			5,608
Separate accounts and other vehicles		31,102			23,057			60,643			47,602
Performance-based fees
Mutual funds (USAA Funds)		(1,553	)		—			(2,992	)		—
Separate accounts and other vehicles		(191	)		(329	)		791			(669	)
Total investment management fees		168,033			130,032			328,317			276,913

Fund administration and distribution fees
Administration fees
Mutual funds (Victory/USAA Funds)		30,013			26,733			59,017			56,343
ETFs (VictoryShares)		460			300			901			685
Distribution fees
Mutual funds (Victory/USAA Funds)		7,346			5,907			14,284			12,703
Transfer agent fees
Mutual funds (USAA Funds)		16,052			18,914			32,334			39,663
Total fund administration and distribution fees		53,871			51,854			106,536			109,394

Total revenue	$	221,904		$	181,886		$	434,853		$	386,307

The following table presents balances of receivables:

(in thousands)	June 30, 2021		December 31, 2020
Customer receivables
Mutual funds (Victory/USAA Funds)	$	64,242	$	60,868
ETFs (VictoryShares)		1,626		1,419
Separate accounts and other vehicles		23,415		22,641
Receivables from contracts with customers		89,283		84,928
Non-customer receivables		9,401		3,254
Total receivables	$	98,684	$	88,182

Revenue

The Company’s revenue includes fees earned from providing;

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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.

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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 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, VictoryShares and other pooled investment vehicles and may subsidize certain share classes of the Victory Funds, USAA Funds, VictoryShares and other pooled investment vehicles 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, VictoryShares and other pooled investment vehicles 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 and to the extent that 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. Fulcrum fee arrangements include a performance fee adjustment, increasing or decreasing the total investment management fee depending on whether the assets being managed experienced better or worse investment performance than the index specified in the customer’s contract. The performance fee adjustment arrangement with certain equity and fixed income USAA Funds took effect on July 1, 2020 and is calculated monthly based on the investment performance of those funds relative to their specified benchmark indexes over the discrete performance period ending with that month.

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’s fund administration fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations.

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

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consideration is measured using actual average daily net assets or actual number of accounts and constraints are removed. The Company’s fund transfer agent fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations.

The Company also receives fees for sub-transfer agency services under contracts with the Victory Funds for member class shares. Sub-transfer agency fees are recognized and recorded in a manner similar to fund transfer agent fees and are recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations.

The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. As the Company is the primary obligor under the transfer agency contracts with the USAA Funds and has the ability to select the service provider and establish pricing, 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 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

THB Acquisition

On March 1, 2021, the Company completed the acquisition of certain assets of THB Asset Management (“THB”), including without limitation, (i) certain investment advisory and business contracts, (ii) certain books and records, (iii) the investment performance track record, and (iv) all business intellectual property and proprietary software, and hired the THB investment team, resulting in THB becoming the Company’s tenth investment franchise. At March 1, 2021, the THB AUM that was acquired totaled $547 million. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies.

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Because substantially all of the fair value of the acquired assets was concentrated in a single identifiable asset, the transaction was accounted for as an asset acquisition. Estimated acquisition costs of $0.6 million were allocated to a definite-lived customer relationship intangible asset.

USAA AMCO Acquisition

On and effective July 1, 2019, the Company completed the USAA AMCO Acquisition which expanded and diversified the Company’s investment platform and increased the Company’s size and scale. The acquisition also 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 distribution channel.

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 payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the USAA Stock Purchase Agreement. During the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period. A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers as of June 30, 2021.

The estimated fair value of contingent consideration payable to sellers is determined using the real options method. Revenue related to “non-managed money” assets is simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which are 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. The market price of risk and revenue volatility are based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, the Company assesses a discount rate which incorporates adjustments for credit risk and the subordination of the contingent consideration.

Significant inputs to the valuation of contingent consideration payable to sellers as of June 30, 2021 and December 31, 2020 are as follows and are approximate values:

	June 30, 2021			December 31, 2020
Non-managed money revenue average annual growth rate		4.1	%		2.8	%
Market price of risk (continuous)		6.9	%		6.8	%
Revenue volatility	15.8		%		15.6	%
Discount rate	2.4		%	3.1		%
Years remaining in earn out period	2.4				2.9
Undiscounted estimated remaining earn out payments in millions	$104.1 - $112.5			$97.7 - $112.5

The estimated fair value of contingent consideration payable to sellers is recorded in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets and was estimated at $100.7 million at June 30, 2021 as compared to $92.5 million at December 31, 2020. The increase in the liability of $5.7 million and $8.2 million in the three and six months ended June 30, 2021, respectively, and an increase of $5.3 million and decrease of $0.2 million for the three and six months ended June 30, 2020, respectively, was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

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.

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	Acquisition-related costs
	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2021		2020			2021		2020
USAA AMCO Acquisition	$	7	$	12		$	17	$	(112	)
Other		415		(35	)		241		20
Total acquisition-related costs	$	422	$	(23	)	$	258	$	(92	)

Restructuring and Integration Costs

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 and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2021			2020			2021			2020
Liability balance, beginning of period	$	1.4		$	2.5		$	1.0		$	3.0
Severance Expense - USAA AMCO		0.1			0.9			1.6			0.9
Severance Expense - THB		-			-			0.2			-
Integration costs - USAA AMCO		0.1			1.7			0.5			2.7
Integration costs - THB		0.2			-			0.2			-
Total restructuring and integration costs		0.4			2.6			2.5			3.6
Settlement of liabilities		(1.0	)		(2.3	)		(2.7	)		(3.8	)
Liability balance, end of period	$	0.8		$	2.8		$	0.8		$	2.8

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:

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

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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.

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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 assets and liabilities measured at fair value on a recurring basis.

	As of June 30, 2021
(in thousands)	Total			Level 1		Level 2		Level 3
Financial Assets
Money Market Fund	$	10,089		$	10,089	$	—	$	—
Investments in Proprietary Funds		905			905		—		—
Deferred Compensation Plan Investments		28,661			28,661		—		—
Interest Rate Swap Asset		303			—		303		—
Total Financial Assets	$	39,958		$	39,655	$	303	$	—
Financial Liabilities
Interest Rate Swap Liability	$	—		$	—	$	—	$	—
Contingent Consideration Arrangements		(100,700	)		—		—		(100,700	)
Total Financial Liabilities	$	(100,700	)	$	—	$	—	$	(100,700	)

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	As of December 31, 2020
(in thousands)	Total			Level 1		Level 2			Level 3
Financial Assets
Money Market Fund	$	10,088		$	10,088	$	—		$	—
Investments in Proprietary Funds		922			922		—			—
Deferred Compensation Plan Investments		22,571			22,571		—			—
Total Financial Assets	$	33,581		$	33,581	$	—		$	—
Financial Liabilities
Interest Rate Swap Liability	$	(10,006	)	$	—	$	(10,006	)	$	—
Contingent Consideration Arrangements		(92,500	)		—		—			(92,500	)
Total Financial Liabilities	$	(102,506	)	$	—	$	(10,006	)	$	(92,500	)

Level 1 assets consist of money market funds and open-end mutual funds. The fair values for these assets are determined utilizing quoted market prices for identical assets. The money market fund is included in cash and cash equivalents in the unaudited Condensed Consolidated Balance Sheets and proprietary fund investments and deferred compensation plan investments are included in investments in the unaudited Condensed Consolidated Balance Sheets.

The interest rate swap (the “Swap”) asset and liability represent amounts receivable or payable 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 is included in the unaudited Condensed Balance Sheets in other assets at June 30, 2021 and in other liabilities as of December 31, 2020. Pricing is 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 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 contingent consideration arrangement liabilities, 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 change in contingent consideration arrangement liabilities for the six months ended June 30, 2021.

(in thousands)	Contingent Consideration Liabilities
Balance, December 31, 2020	$	(92,500	)
USAA AMCO change in fair value measurement		(8,200	)
Balance, June 30, 2021	$	(100,700	)

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2020 to June 30, 2021. 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 June 30, 2021 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.

NOTE 6. Related-Party Transactions

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

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The Company receives investment management, administrative, distribution and compliance fees in accordance with contracts that VCM and VCS 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.

The Company receives investment management, administrative and compliance fees in accordance with contracts that VCM has with the VictoryShares. We also receive investment management fees from the Victory Collective Funds and certain other pooled investment vehicles under VCM’s advisory contracts with these funds. In addition, VCTA receives fees for transfer agency services under contracts with the USAA Funds and sub-transfer agency services under contracts with the Victory Funds for member class shares.

Director fees payable by the Company in cash and contributions made under the Director Deferred Compensation Plan for non-employee members of our Board of Directors are included in general and administrative expense in the unaudited Condensed Consolidated Statements of Operations.

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.

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

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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 and Victory Funds for transfer agent and sub-transfer agent services.

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

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Realized and unrealized gains and losses and dividend income on investments in the Victory Funds and USAA Funds classified as investments in proprietary funds and deferred compensation plan investments 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.

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Amounts due to the Victory Funds, USAA Funds, VictoryShares and certain other pooled investment vehicles 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.

(in thousands)	June 30, 2021		December 31, 2020
Related party assets
Cash and cash equivalents	$	10,089	$	10,088
Receivables (investment management fees)		51,717		46,958
Receivables (fund administration and distribution fees)		16,857		16,971
Investments (investments in proprietary funds, fair value)		905		922
Investments (deferred compensation plan investments, fair value)		27,029		22,062
Total	$	106,597	$	97,001

Related party liabilities
Accounts payable and accrued expenses (fund reimbursements)	$	6,837	$	5,978

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Related party revenue
Investment management fees	$	141,472	$	108,966	$	274,766	$	233,276
Fund administration and distribution fees		53,871		51,854		106,536		109,394
Total	$	195,343	$	160,820	$	381,302	$	342,670

Related party expense
General and administrative	$	133	$	—	$	263	$	—
Total	$	133	$	—	$	263	$	—

Related party other income (expense)
Interest income and other income (expense)	$	1,908	$	2,702	$	4,583	$	(2,096	)

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NOTE 7. Investments

At June 30, 2021 and December 31, 2020, the Company had investments in proprietary funds and deferred compensation plan investments. Investments in proprietary funds consist entirely of seed capital investments in certain Victory Funds and USAA Funds. Deferred compensation plan investments are held under deferred compensation plans and include Victory Funds, USAA Funds and third-party mutual funds.

Unrealized and realized gains and losses on investments in proprietary funds and deferred compensation plan investments are recorded in earnings as interest income and other income (expense).

Investments in Proprietary Funds

The following table presents a summary of the cost and fair value of investments in proprietary funds:

			Gross Unrealized					Fair
(in thousands)	Cost		Gains		(Losses)			Value
As of June 30, 2021	$	684	$	222	$	(1	)	$	905
As of December 31, 2020		758		164		—			922

Unrealized and realized gains and losses on investments in proprietary funds are recognized in the accompanying unaudited Condensed Consolidated Statements of Operations as “Interest income and other income (expense).” Proceeds from sales and realized gains and losses from investments in proprietary funds in the periods ended June 30, 2021 and 2020 were as follows:

	Sale		Realized
(in thousands)	Proceeds		Gains		(Losses)
For the three months ended June 30, 2021	$	196	$	50	$	—
For the three months ended June 30, 2020		274		18		(13	)

	Sale		Realized
(in thousands)	Proceeds		Gains		(Losses)
For the six months ended June 30, 2021	$	215	$	50	$	—
For the six months ended June 30, 2020		274		18		(13	)

Deferred Compensation Plan Investments

The following table presents a summary of the cost and fair value of deferred compensation plan investments:

			Gross Unrealized					Fair
(in thousands)	Cost		Gains		(Losses)			Value
As of June 30, 2021	$	23,150	$	5,581	$	(70	)	$	28,661
As of December 31, 2020		21,205		1,725		(359	)		22,571

Proceeds from sales of deferred compensation plan investments and realized gains and losses recognized during the three and six months ended June 30, 2021 and 2020 are as follows:

	Sale		Realized
(in thousands)	Proceeds		Gains		(Losses)
For the three months ended June 30, 2021	$	1,915	$	218	$	—
For the three months ended June 30, 2020		899		17		(96	)

	Sale		Realized
(in thousands)	Proceeds		Gains		(Losses)
For the six months ended June 30, 2021	$	3,805	$	307	$	(28	)
For the six months ended June 30, 2020		1,990		37		(142	)

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NOTE 8. Income Taxes

The effective tax rate for the three and six months ended June 30, 2021 and 2020 differs from the United States federal statutory rate primarily as a result of state and local income taxes and excess tax benefits on share-based compensation.

For the three months ended June 30, 2021 and 2020, the provision for income taxes was $20.6 million and $14.5 million, or 22.9% and 24.5%, of pre-tax income respectively. For the six months ended June 30, 2021 and 2020, the provision for income taxes was $38.3 million and $31.3 million, or 22.2% and 23.5% of pre-tax income, respectively.

The effective tax rate for the three and six months ended June 30, 2021 was lower than the effective tax rate for the same periods in 2020 mainly due to higher excess tax benefits on share-based compensation.

No valuation allowance was recorded for deferred tax assets in the periods ended June 30, 2021 and 2020.

NOTE 9. Debt

2020 Debt Repricing

On January 17, 2020, the Company 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. The Company refinanced the 2019 term loans for a reduced applicable margin on LIBOR of 75 basis points. After the January 2020 repricing, the applicable margin on LIBOR was 2.50%, compared to 3.25% under the 2019 term loans.

2021 Debt Repricing

On February 18, 2021, the Company entered into the Second Amendment (the “Second 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 Second Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $755.7 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 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the Existing Term Loans.

During the six months ended June 30, 2021 and 2020, the Company incurred costs of $0.4 million and $0.9 million related to the Second Amendment and First Amendment, respectively, which were recorded in general and administrative expense in the unaudited Condensed Consolidated Statements of Operations ($0 for the three months ended June 30, 2021 and 2020).

The following table summarizes the components of long-term debt in the unaudited Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020:

(in thousands)	June 30, 2021			December 31, 2020			Effective Interest Rate
Term Loans
Due July 2026, 2.73% interest rate	$	—		$	788,239			3.17	%
Due July 2026, 2.44% interest rate		681,239			—			2.84	%
Term loan principal outstanding		681,239			788,239
Unamortized debt issuance costs		(8,596	)		(12,065	)
Unamortized debt discount		(5,104	)		(7,165	)
Long-term debt, net	$	667,539		$	769,009

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 June 30, 2021, there were no outstanding borrowings under the revolving credit facility and the Company was in compliance with its financial performance covenant.

Repayments of outstanding term loans under the 2019 Credit Agreement totaled $57.0 million and $107.0 million for the three and six months ended June 30, 2021, respectively. Refer to Note 16, Subsequent Events, for information related to term loan activity subsequent to June 30, 2021.

The Company recognized a loss on debt extinguishment of $1.1 million and $3.9 million in the three and six months ended June 30, 2021, respectively, due to repayments of term loan principal and entering into the Second Amendment.

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A total of $33.3 million and $71.3 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the three and six months ended June 30, 2020, respectively. The Company recognized a net gain on debt extinguishment of $0.1 million and a net loss on debt extinguishment of $0.9 million in the three and six months ended June 30, 2020 due to term loan repurchases and repayments and entering into the First Amendment.

Interest Expense

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 June 30, 2021 and 2020:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(in thousands)	2021		2020			2021		2020
Interest expense	$	4,348	$	8,967		$	9,277	$	19,023
Amortization of debt issuance costs		585		756			1,247		1,537
Amortization of debt discount		276		377			597		769
Interest rate swap expense (income)		874		(519	)		1,692		(519	)
Other		72		129			187		308
Total	$	6,155	$	9,710		$	13,000	$	21,118

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, 2020		19,389		54,767			(3,183	)		(3,431	)
Issuance of shares		1		—			—			—
Share conversion - Class B to A		221		(221	)		—			—
Repurchase of shares		—		—			(287	)		—
Vesting of restricted share grants		—		953			—			—
Exercise of options		—		109			—			—
Shares withheld related to net settlement of equity awards		—		—			—			(431	)
Balance, March 31, 2021		19,611		55,608			(3,470	)		(3,862	)
Issuance of shares		2		—			—			—
Share conversion - Class B to A		204		(204	)		—			—
Repurchase of shares		—		—			(288	)		—
Vesting of restricted share grants		—		143			—			—
Exercise of options		—		236			—			—
Shares withheld related to net settlement of equity awards		—		—			—			(159	)
Balance, June 30, 2021		19,817		55,783			(3,758	)		(4,021	)

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	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	)
Issuance of shares		2		—			—			—
Share conversion - Class B to A		207		(207	)		—			—
Repurchase of shares		—		—			(457	)		—
Vesting of restricted share grants		—		173			—			—
Exercise of options		—		—			—			—
Shares withheld related to net settlement of equity awards		—		—			—			(43	)
Balance, June 30, 2020		18,717		54,504			(2,382	)		(3,144	)

Share Repurchase Program

On May 13, 2021, the Company’s Board of Directors authorized a share repurchase program whereby the Company may 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. The amount and timing of purchases under the share repurchase program authorized in May 2021 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 program can be suspended or discontinued at any time and expires when $15 million shares of Class A common stock have been repurchased or on December 31, 2022.

During the three and six months ended June 30, 2021, the Company repurchased 288,130 and 574,680 shares of Class A common stock at a total cost of $8.3 million and $15.4 million for an average price of $28.89 and $26.88 per share. At June 30, 2021, a total of $11.7 million was available for future repurchases under the current share repurchase program, and a cumulative total of 3,757,662 shares of Class A common stock had been repurchased under programs authorized by the Company’s Board of Directors at a total cost of $63.3 million for an average price of $16.84 per share.

Dividend Payments

Dividends paid or payable for the three and six months ended June 30, 2021 totaled $8.2 million and $14.7 million, respectively, and included $8.1 million and $14.2 million for quarterly dividends and $0.1 million and $0.5 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 June 30, 2021, the Company issued restricted stock awards for 19,032 shares of common stock, of which awards for 9,536 shares were fully vested on the grant date, awards for 6,595 shares vest based on service over a two year period, and awards for 2,901 shares vest based on service over a three year period. For the six months ended June 30, 2021, the Company issued restricted stock awards for 250,600 shares of common stock, of which awards for 19,104 shares were fully vested on the grant date, awards for 6,595 shares vest based on service over a two year period, and awards for 224,901 shares vest based on service over a three year period.

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Stock option award and restricted stock award activity during the six months ended June 30, 2021 and 2020 was as follows:

	Shares Subject to Stock Option Awards
	Six Months Ended June 30,
	2021							2020
	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	$	3.91	$	6.50		6,865,101		$	3.83	$	6.27		7,880,167
Forfeited		5.26		10.63		(75,887	)		6.34		13.86		1,272
Exercised		4.09		6.80		(344,780	)		3.74		5.89		(287,621	)
Outstanding at end of the period	$	3.89	$	6.44		6,444,434		$	3.84	$	6.28		7,593,818
Vested	$	3.80	$	6.18		6,016,911		$	3.67	$	5.78		6,758,066
Unvested		5.10		10.04		427,523			5.20		10.35		835,752

	Restricted Stock Awards
	Six Months Ended June 30,
	2021					2020
	Avg wtd grant-					Avg wtd grant-
	date fair value		Units			date fair value		Units
Unvested at beginning of period	$	14.99		2,827,008		$	14.29		3,215,619
Granted		26.71		250,600			16.18		297,833
Vested		15.02		(1,095,668	)		14.66		(892,921	)
Forfeited		16.13		(89,719	)		17.29		(18,277	)
Unvested at end of period	$	16.46		1,892,221		$	14.45		2,602,254

At June 30, 2021 and December 31, 2020, 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, 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.

The Company recorded $4.3 million and $3.9 million of share-based compensation expense in the three months ended June 30, 2021 and 2020, respectively, and $9.9 million of share-based compensation in the six months ended June 30, 2021 and 2020, 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 June 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands except per share amounts)	2021		2020		2021		2020
Net income	$	69,270	$	44,720	$	134,472	$	101,886
Shares:
Basic: Weighted average number of shares outstanding		67,776		67,821		67,769		67,806
Plus: Incremental shares from assumed conversion of dilutive instruments		6,390		5,383		6,386		6,012
Diluted: Weighted average number of shares outstanding		74,166		73,204		74,155		73,818
Earnings per share
Basic:	$	1.02	$	0.66	$	1.98	$	1.50
Diluted:	$	0.93	$	0.61	$	1.81	$	1.38

Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive were de minimus in amount for the three months ended June 30, 2021 and for the six months ended June 30, 2021 and 2020. Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive was $0.6 million for the three months ended June 30, 2020. 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 Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2021 and 2020.

				Cumulative
	Cash Flow			Translation
(in thousands)	Hedges (a)			Adjustment			Total
Balance, December 31, 2020	$	(7,573	)	$	113		$	(7,460	)
Other comprehensive income (loss) before reclassification and tax		8,616			11			8,627
Tax impact		(2,095	)		(2	)		(2,097	)
Reclassifications, before tax		1,692			—			1,692
Tax impact		(411	)		—			(411	)
Net current period other comprehensive income (loss)		7,802			9			7,811
Balance, June 30, 2021	$	229		$	122		$	351
Balance, December 31, 2019	$	—		$	—		$	—
Other comprehensive income (loss) before reclassification and tax		(10,438	)		(72	)		(10,510	)
Tax impact		2,485			18			2,503
Reclassifications, before tax		(519	)		—			(519	)
Tax impact		123			—			123
Net current period other comprehensive income (loss)		(8,349	)		(54	)		(8,403	)
Balance, June 30, 2020	$	(8,349	)	$	(54	)	$	(8,403	)

(a)

Reclassifications out of accumulated other comprehensive income (loss) related to cash flow hedges are recorded in interest expense and other financing costs.

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 Company does not purchase or hold any derivative instruments for trading or speculative purposes. Under the terms of the Swap, the Company pays interest at a fixed rate of interest on a quarterly basis and receives interest at the three-month LIBOR rate in effect for that quarter. The notional value, fixed rate of interest and expiration date of the Swap as of June 30, 2021 were $450 million – 0.965% – July 1, 2026. Refer to Note 5, Fair Value Measurements, for additional disclosures regarding fair value measurements.

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 assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. For the three and six months ended June 30, 2021 and since inception, the Swap was deemed to be highly effective.

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 are reclassified to interest expense in the same period during which the hedged transaction affects earnings. The amount payable to the Swap counterparty at June 30, 2021 of $0.8 million is recorded in other liabilities in the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the classification of the Swap in the unaudited Condensed Consolidated Balance Sheets at June 30, 2021 (in thousands):

Balance Sheets	Description	June 30, 2021		December 31, 2020
Other assets (Other liabilities)	Fair value of interest rate swap	$	303	$	(10,006	)
	Notional amount		450,000		450,000

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The following table summarizes the effects of the Swap in the unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (in thousands):

		Three Months Ended					Six Months Ended
		June 30,					June 30,
Statement of Operations	Description	2021			2020		2021			2020
Interest expense and other financing costs	(Loss) gain reclassified from AOCI(L)	$	(874	)	$	519	$	(1,692	)	$	519

		Three Months Ended						Six Months Ended
		June 30,						June 30,
Statements of Comprehensive Income	Description	2021			2020			2021		2020
Other comprehensive income (loss)	Income (loss) recognized in AOCI(L), net of tax	$	(2,971	)	$	(3,529	)	$	7,802	$	(8,349	)

NOTE 15. EQUITY METHOD INVESTMENT

On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest voting share and income share in Alderwood. Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company has commitments to contribute additional capital of $4.5 million to Alderwood and $50 million to a private fund to be launched by Alderwood, subject to certain terms and conditions, which include receipt of required regulatory approvals from the Financial Conduct Authority of the United Kingdom and obtaining an agreed amount of aggregate legally binding commitments from investors in the private fund. On March 8, 2021, the Company announced that Alderwood Capital had received authorization from the Financial Conduct Authority of the United Kingdom and that Alderwood’s private fund had been formally launched to institutional investors.

The Company analyzed its investment in Alderwood under the voting interest model and determined that it does not have a controlling financial interest over Alderwood and should not consolidate under the voting interest model. Given the level of ownership interest in Alderwood, which is an English limited liability partnership, and the fact that Alderwood will maintain specific ownership accounts for investors, the Company accounts for its investment in Alderwood using the equity method of accounting.

Equity method investments are recorded in other assets in the unaudited Condensed Consolidated Balance Sheets. At June 30, 2021 and December 31, 2020, the Company’s equity method investment in Alderwood totaled $1.3 million and $1.4 million, respectively. Gains and losses from equity method investments are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2021, losses from equity method investments were $0.1 million ($0 for the three and six months ended June 30, 2020).

NOTE 16. SUBSEQUENT EVENTS

Subsequent to June 30, 2021, the Company repaid $35 million of outstanding term loans for a total debt reduction of $453.8 million since July 1, 2019.

On August 5, 2021, our Board of Directors declared a quarterly cash dividend of $0.15 per share on Victory common stock. The dividend is payable on September 27, 2021, to stockholders of record on September 10, 2021.

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 June 30, 2021 and December 31, 2020, results of operations for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes

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included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2020. 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, 2020.

Overview

Our Business – We are a diversified global asset management firm with $161.9 billion in assets under management as of June 30, 2021. The Company operates a next-generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform.

We provide specialized investment strategies to institutions, intermediaries, retirement platforms and individual investors. With 10 autonomous Investment Franchises and a Solutions Platform, Victory Capital offers a wide array of investment styles and investment vehicles including, actively managed mutual funds, institutional separate accounts, separately managed accounts, unified managed account products, collective trust funds, private funds, undertakings for the collective investment in transferrable securities, other pooled vehicles and ETFs. 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. VCM employs all of our U.S. 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 to rules‑based investing 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.

Professionals within our institutional and retail distribution channels, direct to investor business 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 to investor business 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 $161.9 billion at June 30, 2021. 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 to investor channels with deep penetration.

THB Asset Management Acquisition – Effective March 1, 2021, the Company completed the acquisition of certain assets of THB Asset Management (“THB”). The acquisition expanded and diversified our investment platform, adding capacity constrained assets classes that we like and know well. The team manages strategies in U.S. micro-cap, small-cap and mid-cap assets classes as well as international small cap and global small cap portfolios; all of which are asset classes in which active management is an important part of a well-diversified portfolio. At March 1, 2021, the THB AUM that was acquired totaled $547 million.

In addition to servicing clients in the U.S., THB has a footprint in Australia and Europe which provides us with expanded distribution opportunities in regions in which we have a limited presence today. This will benefit all of our Franchises as we look to leverage THB’s distribution footprint to sell more of our investment strategies outside the U.S.

Aligning with the Company’s responsible investing initiatives, all of THB’s strategies have environmental, social and governance (“ESG”) considerations fully integrated into their investment processes. THB was an early adopter of responsible investment practices and has been managing responsible investment portfolios for decades.

Nominal consideration was paid for the assets of THB. The THB investment team will share in the revenue generated on their products and benefit from our centralized operational, marketing and distribution platforms. THB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support.

USAA AMCO Acquisition – Effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and Victory Capital Transfer Agency, Inc. (“VCTA”), formally known as the USAA Transfer Agency Company. The acquisition expanded and diversified the Company’s investment platform and increased

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the Company’s size and scale. The acquisition also 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 distribution channel.

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. In 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment.

The estimated fair value of contingent consideration payable to sellers was estimated at $100.7 million at June 30, 2021 as compared to $92.5 million at December 31, 2020 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets. The increase in the liability of $8.2 million in the first six months of 2021 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

COVID-19 Pandemic – The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. While COVID-19 did not have a material adverse effect on our business, operations and financial results, the extent to which the 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.

Business Highlights

Assets under management:

•

AUM at June 30, 2021 increased by $7.6 billion, or 4.9%, to $161.9 billion from $154.3 billion at March 31, 2021, driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million. Net flows for the quarter ended June 30, 2021 were comprised of $302 million of net long-term inflows and $126 million of net short-term outflows.

•

AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively. We generated $10.1 billion in gross flows and $176 million in positive net flows for the three months ended June 30, 2021 compared to $9.6 billion in gross flows and $11.9 billion in negative net flows for the same period in 2020. Net flows for the three months ended June 30, 2021 were comprised of $0.3 billion of long-term inflows and $0.1 billion of short-term outflows.

•

AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively. We generated $16.9 billion in gross flows and $1.0 billion in negative net flows for the six months ended June 30, 2021 compared to $24.5 billion in gross flows and $14.8 billion in negative net flows for the same period in 2020. Net flows for the six months ended June 30, 2021 were comprised of $0.7 billion of net long-term outflows and $0.3 billion of net short-term outflows.

Investment performance:

•

44 of our Victory Capital mutual funds and ETFs had overall Morningstar ratings of four or five stars and 62% of our fund and ETF AUM were rated four or five stars overall by Morningstar. 64% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 71% over a three-year period, 72% over a five-year period and 71% over a ten-year period. On an equal-weighted basis, 60% of our strategies have outperformed their benchmarks over a one-year period, 54% over a three-year period, 60% over a five-year period and 65% over a ten-year period.

Financial highlights:

•

Total revenue for the three months ended June 30, 2021 was $221.9 million compared to $181.9 million for the same period in 2020. For the six months ended June 30, 2021 and 2020, total revenue was $434.9 million and $386.3 million, respectively.

•

Net income was $69.3 million for the three months ended June 30, 2021 compared to $44.7 million for the same period in 2020. For the six months ended June 30, 2021 and 2020, net income was $134.5 million and $101.9 million, respectively.

•

Adjusted EBITDA was $112.2 million for the three months ended June 30, 2021, or 50.6% of revenue, compared to $86.3 million, or 47.5% of revenue, for the same period in 2020. For the six months ended June 30, 2021, Adjusted EBITDA was $219.1 million, or 50.4% of revenue, compared to $177.8 million, or 46.0% of revenue, for the same period in 2020. 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 with tax benefit was $87.2 million for the three months ended June 30, 2021 compared to $65.1 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, Adjusted Net Income with tax benefit was $170.8 million compared to $133.5 million for the same period in 2020. Refer to “Supplemental Non-GAAP Financial

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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 June 30,						Six Months Ended June 30,
($ in millions, except for basis points and percentages)	2021			2020			2021			2020
AUM at period end	$	161,936		$	129,070		$	161,936		$	129,070
Average AUM		158,471			128,927			154,781			136,519
Gross flows		10,074			9,577			16,908			24,502
Net short term flows		(126	)		(8,416	)		(317	)		(8,214	)
Net long term flows		302			(3,466	)		(681	)		(6,568	)
Net flows		176			(11,882	)		(998	)		(14,782	)
Total revenue		221.9			181.9			434.9			386.3
Revenue on average AUM	56.2 bps			56.7 bps			56.7 bps			56.9 bps
Net income		69.3			44.7			134.5			101.9
Adjusted EBITDA⁽¹⁾		112.2			86.3			219.1			177.8
Adjusted EBITDA Margin⁽²⁾		50.6	%		47.5	%		50.4	%		46.0	%
Adjusted Net Income⁽¹⁾		80.3			58.3			157.0			120.0
Tax benefit of goodwill and acquired intangibles⁽³⁾		6.9			6.7			13.8			13.5

(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
	June 30,
(in millions)	2021		2020
Solutions	$	39,640	$	29,305
Fixed Income		36,410		35,622
U.S. Mid Cap Equity		30,340		22,483
U.S. Small Cap Equity		20,617		14,083
Global / Non-U.S. Equity		15,931		11,130
U.S. Large Cap Equity		15,284		12,524
Other		460		195
Total Long-Term Assets		158,682		125,343
Money Market & Short-Term Assets		3,254		3,727
Total	$	161,936	$	129,070

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 June 30, 2021
Beginning AUM	$	29,156		$	20,230		$	36,776		$	14,448		$	14,652		$	35,356		$	341		$	150,958		$	3,373		$	154,331
Gross client cash inflows		1,412			1,238			1,750			91			1,072			4,370			40			9,973			102			10,074
Gross client cash outflows		(1,940	)		(1,428	)		(2,949	)		(407	)		(541	)		(2,380	)		(27	)		(9,671	)		(228	)		(9,898	)
Net client cash flows		(527	)		(190	)		(1,200	)		(316	)		531			1,991			13			302			(126	)		176
Market appreciation / (depreciation)		1,745			616			677			1,253			928			2,419			62			7,700			3			7,703
Net transfers⁽¹⁾		(33	)		(39	)		156			(101	)		(180	)		(126	)		44			(278	)		3			(275	)
Ending AUM	$	30,340		$	20,617		$	36,410		$	15,284		$	15,931		$	39,640		$	460		$	158,682		$	3,254		$	161,936
For the Three Months Ended June 30, 2020
Beginning AUM	$	18,622		$	11,885		$	35,402		$	10,703		$	9,372		$	25,526		$	140		$	111,650		$	12,129		$	123,779
Gross client cash inflows		943			997			1,498			216			436			1,067			10			5,166			4,411			9,577
Gross client cash outflows		(1,511	)		(1,393	)		(2,775	)		(599	)		(575	)		(1,767	)		(12	)		(8,632	)		(12,826	)		(21,459	)
Net client cash flows		(568	)		(396	)		(1,278	)		(383	)		(138	)		(700	)		(3	)		(3,466	)		(8,416	)		(11,882	)
Market appreciation / (depreciation)		4,428			2,592			1,503			2,207			1,898			4,479			55			17,159			14			17,173
Net transfers		2			2			(4	)		(2	)		(1	)		—			3			—			—			—
Ending AUM	$	22,483		$	14,083		$	35,622		$	12,524		$	11,130		$	29,305		$	195		$	125,343		$	3,727		$	129,070

(1)	The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

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				U.S.						U.S.
	U.S. Mid			Small						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
Six Months Ended June 30, 2021
Beginning AUM	$	26,230		$	18,368		$	36,599		$	14,230		$	13,982		$	34,041		$	257		$	143,706		$	3,534		$	147,241
Gross client cash inflows		3,154			2,310			3,774			189			1,664			5,513			95			16,698			209			16,908
Gross client cash outflows		(3,794	)		(3,124	)		(4,651	)		(839	)		(1,188	)		(3,729	)		(55	)		(17,379	)		(526	)		(17,906	)
Net client cash flows		(640	)		(814	)		(877	)		(650	)		476			1,784			40			(681	)		(317	)		(998	)
Market appreciation / (depreciation)		4,777			2,641			458			1,857			1,628			3,940			119			15,420			1			15,421
Net transfers⁽¹⁾		(27	)		423			229			(152	)		(155	)		(125	)		44			236			36			272
Ending AUM	$	30,340		$	20,617		$	36,410		$	15,284		$	15,931		$	39,640		$	460		$	158,682		$	3,254		$	161,936
Six Months Ended June 30, 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		2,416			2,230			3,449			454			1,107			2,762			21			12,439			12,063			24,502
Gross client cash outflows		(3,776	)		(2,703	)		(5,665	)		(1,406	)		(1,259	)		(4,161	)		(36	)		(19,007	)		(20,277	)		(39,284	)
Net client cash flows		(1,360	)		(473	)		(2,217	)		(952	)		(152	)		(1,399	)		(15	)		(6,568	)		(8,214	)		(14,782	)
Market appreciation / (depreciation)		(2,479	)		(2,733	)		142			(621	)		(1,347	)		(956	)		(32	)		(8,027	)		48			(7,979	)
Net transfers		(25	)		(57	)		(276	)		7			26			12			6			(307	)		307			—
Ending AUM	$	22,483		$	14,083		$	35,622		$	12,524		$	11,130		$	29,305		$	195		$	125,343		$	3,727		$	129,070

(1)

The six months ended June 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

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

	As of June 30,
	2021					2020
(in millions)	Amount		% of total			Amount		% of total
Investor	$	70,656		44	%	$	64,171		49	%
Institutional		47,544		29	%		34,361		27	%
Retail		43,736		27	%		30,538		24	%
Total AUM⁽¹⁾	$	161,936		100	%	$	129,070		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 Pooled
(in millions)	Mutual Funds (1)			ETFs (2)			Vehicles (3)			Total
Three Months Ended June 30, 2021
Beginning AUM	$	117,830		$	4,441		$	32,061		$	154,331
Gross client cash inflows		5,060			239			4,775			10,074
Gross client cash outflows		(5,376	)		(169	)		(4,353	)		(9,898	)
Net client cash flows		(317	)		70			423			176
Market appreciation (depreciation)		5,879			218			1,606			7,703
Net transfers⁽⁴⁾		(229	)		(375	)		329			(275	)
Ending AUM	$	123,164		$	4,354		$	34,418		$	161,936
Three Months Ended June 30, 2020
Beginning AUM	$	98,305		$	3,177		$	22,296		$	123,779
Gross client cash inflows		8,621			90			866			9,577
Gross client cash outflows		(19,726	)		(214	)		(1,519	)		(21,459	)
Net client cash flows		(11,104	)		(124	)		(653	)		(11,882	)
Market appreciation (depreciation)		13,229			409			3,535			17,173
Net transfers		—			—			—			—
Ending AUM	$	100,430		$	3,462		$	25,179		$	129,070

							Separate
							Accounts and
							Other Pooled
(in millions)	Mutual Funds (1)			ETFs (2)			Vehicles (3)			Total
Six Months Ended June 30, 2021
Beginning AUM	$	112,998		$	3,976		$	30,267		$	147,241
Gross client cash inflows		10,525			479			5,904			16,908
Gross client cash outflows		(11,669	)		(286	)		(5,950	)		(17,906	)
Net client cash flows		(1,145	)		193			(46	)		(998	)
Market appreciation (depreciation)		11,454			561			3,406			15,421
Net transfers⁽⁵⁾		(144	)		(375	)		791			272
Ending AUM	$	123,164		$	4,354		$	34,418		$	161,936
Six Months Ended June 30, 2020
Beginning AUM	$	118,605		$	4,213		$	29,014		$	151,832
Gross client cash inflows		22,366			345			1,790			24,502
Gross client cash outflows		(35,357	)		(675	)		(3,252	)		(39,284	)
Net client cash flows		(12,990	)		(330	)		(1,462	)		(14,782	)
Market appreciation (depreciation)		(5,185	)		(421	)		(2,374	)		(7,979	)
Net transfers		—			—			—			—
Ending AUM	$	100,430		$	3,462		$	25,179		$	129,070

(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 accounts, UMAs, UCITS, private funds and non-U.S. domiciled pooled vehicles.

(4)

The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

(5)

June 30, 2021 AUM compared to March 31, 2021 AUM. At June 30, 2021, our total AUM was $161.9 billion, an increase of $7.6 billion, or 4.9%, from $154.3 billion at March 31, 2021, primarily driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million.

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Net inflows into our Solutions platform and global / non-U.S. equity strategies of $2.0 billion and $0.5 billion, respectively, were partially offset by outflows from our fixed income and domestic equity strategies of $1.2 billion and $1.0 billion, respectively.

June 30, 2021 AUM compared to December 31, 2020 AUM. Total AUM increased by $14.7 billion, or 10.0%, to $161.9 billion at June 30, 2021 compared to $147.2 billion at December 31, 2020. The increase in AUM was primarily due to positive market action of $15.4 billion and acquired assets of $547 million partially offset by net outflows of $1.0 billion and seed capital liquidation and fund closures of $275 million.

Net inflows into our Solutions platform and global / non-U.S. equity strategies of $1.8 billion and $0.5 billion, respectively, were offset by outflows from our domestic equity strategies, fixed income strategies and money market and short-term assets of $2.1 billion, $0.9 billion and $0.3 million, respectively.

GAAP Results of Operations

The following table presents our GAAP results of operations for the three and six months ended June 30, 2021 and 2020.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2021			2020			2021			2020
Revenue
Investment management fees	$	168,033		$	130,032		$	328,317		$	276,913
Fund administration and distribution fees		53,871			51,854			106,536			109,394
Total revenue		221,904			181,886			434,853			386,307

Expenses
Personnel compensation and benefits		57,462			49,105			116,468			96,676
Distribution and other asset-based expenses		44,223			41,630			86,326			96,490
General and administrative		13,713			13,289			27,023			25,177
Depreciation and amortization		4,694			4,166			9,079			8,216
Change in value of consideration payable for acquisition of business		5,700			5,300			8,200			(200	)
Acquisition-related costs		422			(23	)		258			(92	)
Restructuring and integration costs		422			2,605			2,475			3,603
Total operating expenses		126,636			116,072			249,829			229,870

Income from operations		95,268			65,814			185,024			156,437

Other income (expense)
Interest income and other income (expense)		1,932			2,966			4,666			(1,206	)
Interest expense and other financing costs		(6,155	)		(9,710	)		(13,000	)		(21,118	)
Gain (loss) on debt extinguishment		(1,146	)		137			(3,927	)		(917	)
Total other expense, net		(5,369	)		(6,607	)		(12,261	)		(23,241	)

Income before income taxes		89,899			59,207			172,763			133,196

Income tax expense		(20,629	)		(14,487	)		(38,291	)		(31,310	)

Net income	$	69,270		$	44,720		$	134,472		$	101,886

Earnings per share of common stock
Basic	$	1.02		$	0.66		$	1.98		$	1.50
Diluted	$	0.93		$	0.61		$	1.81		$	1.38

Weighted average number of shares outstanding
Basic		67,776			67,821			67,769			67,806
Diluted		74,166			73,204			74,155			73,818

Dividends declared per share of common stock	$	0.12		$	0.05		$	0.21		$	0.10

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Investment Management Fees

Three months ended June 30, 2021 compared to June 30, 2020. Investment management fees increased by $38.0 million, or 29.2%, to $168.0 million for the three months ended June 30, 2021 from $130.0 million for the same period in 2020 due to an increase in average AUM over the comparable period. Average AUM was $158.5 billion for the three months ended June 30, 2021 compared to $128.9 billion for the same period in 2020.

Six months ended June 30, 2021 compared to June 30, 2020. Investment management fees increased by $51.4 million, or 18.6%, to $328.3 million for the six months ended June 30, 2021 from $276.9 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Average AUM was $154.8 billion and $136.5 billion, respectively, for the six months ended June 30, 2021 and 2020.

Fund Administration and Distribution Fees

Three months ended June 30, 2021 compared to June 30, 2020. Fund administration and distribution fees increased by $2.0 million, or 3.9%, to $53.9 million for the three months ended June 30, 2021 from $51.9 million for the same period in 2020 due to an increase fund administration fees, partially offset by a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes.

Six months ended June 30, 2021 compared to June 30, 2020. Fund administration and distribution fees decreased by $2.9 million, or 2.6%, to $106.5 million for the six months ended June 30, 2021 from $109.4 million for the same period in 2020 due to the combination of a decrease in transfer agent fees and 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 and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Salaries, payroll related taxes and employee benefits	$	22,770	$	20,425	$	47,971	$	36,987
Incentive compensation		25,606		20,829		48,774		41,333
Sales-based compensation⁽¹⁾		4,742		3,369		9,832		7,288
Equity awards granted to employees and directors⁽²⁾		4,344		3,887		9,891		9,880
Acquisition and transaction-related compensation		—		595		—		1,188
Total personnel compensation and benefits expense	$	57,462	$	49,105	$	116,468	$	96,676

(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 June 30, 2021 compared to June 30, 2020. Personnel compensation and benefits were $57.5 million for the three months ended June 30, 2021, an increase of $8.4 million, or 17.0%, from $49.1 million for the same period in 2020 due to the combination of an increase in the headcount due to the launch of the new direct to investor digital platform and an increase in incentive compensation as a result of an increase in earnings over the comparable period. Incentive compensation and equity awards granted to employees and directors were $25.6 million and $4.3 million, respectively, for the three months ended June 30, 2021, compared to $20.8 million and $3.9 million, respectively, for the same period in 2020. Salaries, payroll related taxes and employee benefits were $22.8 million and $20.4 million, respectively, for the three months ended June 30, 2021 and 2020.

Six months ended June 30, 2021 compared to June 30, 2020. Personnel compensation and benefits increased by $19.8 million, or 20.5%, to $116.5 million for the six months ended June 30, 2021 from $96.7 million for the same period in 2020 due to the same factors as discussed above in the quarterly section. Salaries, payroll related taxes and employee benefits were $48.0 million and $37.0 million, respectively, for the six months ended June 30, 2021 and 2020. Incentive compensation and equity awards granted to employees and directors were $48.8 million and $9.9 million, respectively, for the six months ended June 30, 2021 compared to $41.3 million and $9.9 million, respectively, for the same period in 2020.

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Distribution and Other Asset‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Broker-dealer distribution fees	$	6,581	$	5,343	$	12,782	$	11,451
Platform distribution fees		27,440		27,897		53,272		66,889
Sub-administration		4,293		3,206		8,384		7,288
Sub-advisory		3,102		2,822		6,432		6,059
Middle-office		2,807		2,362		5,456		4,803
Total distribution and other asset-based expenses	$	44,223	$	41,630	$	86,326	$	96,490

Three months ended June 30, 2021 compared to June 30, 2020. Distribution and other asset-based expenses are primarily based on AUM. For the three months ended June 30, 2021, distribution and other asset-based expenses were $44.2 million, an increase of $2.6 million, or 6.2%, from $41.6 million for the same period in 2020. The increase is primarily due to an increase in sub-administration, broker dealer distribution, and middle-office fees as a result of an increase in average AUM over the comparable period, partially offset by a beneficial change in asset mix of our underlying retail distribution platforms.

Six months ended June 30, 2021 compared to June 30, 2020. Distribution and other asset-based expenses were $86.3 million for the six months ended June 30, 2021, a decrease of $10.2 million, or 10.5%, from $96.5 million for the same period in 2020 primarily due to a change in asset mix of our underlying retail distribution platforms.

General and Administrative

Three months ended June 30, 2021 compared to June 30, 2020. General and administrative expenses were $13.7 million for the three months ended June 30, 2021 compared to $13.3 million for the same period in 2020. The increase of $0.4 million, or 3.2%, was primarily due to increases in facility, technology and professional fees partially offset by a reduction in transition service agreement costs related to the USAA AMCO Acquisition, which ended in the fourth quarter of 2020.

Six months ended June 30, 2021 compared to June 30, 2020. For the six months ended June 30, 2020 and 2019, general and administrative expenses were $27.0 million and $25.2 million, respectively, for a year over year increase of $1.8 million, or 7.3%. The increase was due to the same factors as discussed above in the quarterly section.

Depreciation and Amortization

Three months ended June 30, 2021 compared to June 30, 2020. Depreciation and amortization increased by $0.5 million, or 12.7%, to $4.7 million for the three months ended June 30, 2021 from $4.2 million for the same period in 2020, due to the addition of depreciation expense related to the launch of the Company’s new direct to investor digital platform, which went live in November 2020.

Six months ended June 30, 2021 compared to June 30, 2020. Depreciation and amortization increased by $0.9 million, or 10.5%, to $9.1 million for the six months ended June 30, 2021 from $8.2 million for the same period in 2020, due to the same factors as discussed above in the quarterly section.

Change in Value of Consideration Payable for Acquisition of Business

Three months ended June 30, 2021 compared to June 30, 2020. The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $5.7 million, resulting in a change in the estimated fair value of consideration payable of $5.7 million for the three months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Six months ended June 30, 2021 compared to June 30, 2020. The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $8.2 million, resulting in a change in the estimated fair value of consideration payable of $8.2 million for the six months ended June 30, 2021. Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

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Acquisition‑Related Costs

Three months ended June 30, 2021 compared to June 30, 2020. Acquisition-related costs for the three months ended June 30, 2021 were $422 thousand and ($23) thousand for the three months ended June 30, 2020. The June 30, 2021 acquisition related costs were related to legal fees and advisory services for potential acquisitions.

Six months ended June 30, 2021 compared to June 30, 2020. Acquisition-related costs for the six months ended June 30, 2021 and 2020 were $0.3 million and ($0.1) million, respectively. The increase for the six months ended June 30, 2021 was due to the same factors as discussed above in the quarterly section.

Restructuring and Integration Costs

Three months ended June 30, 2021 compared to June 30, 2012. Restructuring and integration costs for the three months ended June 30, 2021 was $0.4 million and $2.6 million for the three months ended June 30, 2020. The decrease is primarily due to integration and conversion costs related to the USAA AMCO Acquisition in 2020.

Six months ended June 30, 2021 compared to June 30, 2020. Restructuring and integration costs were $2.5 million and $3.6 million, respectively, for the six months ended June 30, 2021 and 2020. The six months ended June 30, 2021 restructuring and integration costs were related to personnel restructuring within the direct to investor business compared to integration and conversion costs associated with the USAA AMCO Acquisition in 2020.

Interest Income and Other Income (Expense)

Three months ended June 30, 2021 compared to June 30, 2020. Interest income and other income/(expense) was income of $1.9 million for the three months ended June 30, 2021 compared to income of $3.0 million for the same period in 2020. The income for the three months ended June 30, 2021 was primarily due to a $1.5 million increase in the net unrealized fair value of deferred compensation plan investments. The income for the three months ended June 30, 2020 was primarily due to a $2.6 million increase in the net unrealized fair value of deferred compensation plan investments.

Six months ended June 30, 2021 compared to June 30, 2020. For the six months ended June 30, 2021 and 2020, interest income and other income/(expense) was income of $4.7 million and expense of $1.2 million, respectively. The higher income for the six months ended June 30, 2021 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents. The expense for the six months ended June 30, 2020 was primarily due to a decrease 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 June 30, 2021 compared to June 30, 2020. Interest expense and other financing costs decreased $3.6 million to $6.2 million for the three months ended June 30, 2021, compared to $9.7 million for the same period in 2020 due to a decrease in interest payments as a result of a lower debt principal balance and lower average interest rate over the comparable period.

Six months ended June 30, 2021 compared to June 30, 2020. For the six months ended June 30, 2021 and 2020, interest expense and other financing costs were $13.0 million and $21.1 million, respectively. The year-over-year decrease is primarily due to the same factors as discussed above in the quarterly section.

(Loss) Gain on Debt Extinguishment

Three months ended June 30, 2021 compared to June 30, 2020. (Loss) gain on debt extinguishment was a loss of $1.1 million for the three months ended June 30, 2021 compared to a gain of $0.1 million for the same period in 2020. During the quarter ended June 30, 2021, the Company paid down $57.0 million of debt through prepayments and wrote off $1.1 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. During the quarter ended June 30, 2020, the Company repurchased and retired outstanding debt below par in the open market and recognized a $1.0 million gain partially offset by $0.9 million in the write-off of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due. Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

Six months ended June 30, 2021 compared to June 30, 2020. Loss on debt extinguishment was $3.9 million for the six months ended June 30, 2021, due to the write-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 expense for the six months ended June 30, 2020 was due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal partially offset by gains recognized on open market debt repurchases and retirements below par.

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Income Tax Expense

Three months ended June 30, 2021 compared to June 30, 2020. The effective tax rate for the three months ended June 30, 2021 and 2020 was 22.9% and 24.5%, respectively. The decrease in the effective tax rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020.

Six months ended June 30, 2021 compared to June 30, 2020. For the six months ended June 30, 2021 and 2020, the effective tax rate was 22.2% and 23.5%, respectively. The decrease in the effective rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020. Refer to Note 8, Income Taxes, for further details on our income taxes.

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.

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

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2021			2020			2021			2020
Reconciliation of non-GAAP financial measures:
Net income (GAAP)	$	69,270		$	44,720		$	134,472		$	101,886
Income tax expense		(20,629	)		(14,487	)		(38,291	)		(31,310	)
Income before income taxes		89,899			59,207			172,763			133,196
Interest expense⁽¹⁾		6,086			8,267			13,396			18,795
Depreciation⁽²⁾		1,524			746			2,770			1,630
Other business taxes⁽³⁾		524			219			898			(3,077	)
Amortization of acquisition-related intangible assets⁽⁴⁾		3,171			3,420			6,309			6,586
Stock-based compensation⁽⁵⁾		3,124			3,068			7,760			8,440
Acquisition, restructuring and exit costs⁽⁶⁾		6,544			10,105			10,933			8,563
Debt issuance costs⁽⁷⁾		1,304			1,312			4,097			3,701
Losses from equity method investments⁽⁸⁾		65			—			157			—
Adjusted EBITDA	$	112,241		$	86,344		$	219,083		$	177,834

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2021			2020			2021			2020
Reconciliation of non-GAAP financial measures:
Net income (GAAP)	$	69,270		$	44,720		$	134,472		$	101,886
Adjustments to reflect the operating performance of the Company:
i. Other business taxes⁽³⁾		524			219			898			(3,077	)
ii. Amortization of acquisition-related intangible assets⁽⁴⁾		3,171			3,420			6,309			6,586
iii. Stock-based compensation⁽⁵⁾		3,124			3,068			7,760			8,440
iv. Acquisition, restructuring and exit costs⁽⁶⁾		6,544			10,105			10,933			8,563
v. Debt issuance costs⁽⁷⁾		1,304			1,312			4,097			3,701
Tax effect of above adjustments⁽⁹⁾		(3,667	)		(4,531	)		(7,499	)		(6,053	)
Adjusted Net Income	$	80,270		$	58,313		$	156,970		$	120,046
Tax benefit of goodwill and acquired intangibles⁽¹⁰⁾	$	6,918		$	6,745		$	13,836		$	13,473

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.

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(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 June 30,					Six Months Ended June 30,
(in thousands)	2021		2020			2021		2020
Acquisition-related costs	$	422	$	(23	)	$	258	$	(92	)
Restructuring and integration costs		422		2,605			2,475		3,603
Change in value of consideration payable for acquisition of business		5,700		5,300			8,200		(200	)
General and administrative		—		1,628			—		4,064
Personnel compensation and benefits		—		595			—		1,188
Total acquisition, restructuring and exit costs	$	6,544	$	10,105		$	10,933	$	8,563

(7)	Adding back debt issuance costs.

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

(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 June 30, 2021 and December 31, 2020.

	June 30,			December 31,
(in thousands)	2021			2020
Cash and cash equivalents	$	31,622		$	22,744
Accounts and other receivables		98,684			88,182
Undrawn commitment on revolving credit facility (1)		100,000			100,000
Accounts and other payables		(90,038	)		(89,422	)

(1)	The balance at June 30, 2021 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location.

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 June 30, 2021 and December 31, 2020 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of June 30, 2021 and December 31, 2020.

2019 Credit Agreement and 2020 and 2021 Debt Repricing

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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. For the three and six months ended June 30, 2021, the Company reduced outstanding debt by $57.0 million and $107.0 million, respectively. Subsequent to June 30, 2021, the Company reduced outstanding debt by $35.0 million, for a total debt reduction of $453.8 million since July 1, 2019. As of June 30, 2021, 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 February 18, 2021, the Company entered into the Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement, as amended, with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank. Pursuant to the Second Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $755.7 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 1, 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25%, compared to 2.50% under the First Amendment. Refer to Note 9, Debt, for further information on the repricing.

2020 Swap Transaction

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. At June 30, 2021, the $450 million notional value Swap had a fair value of $0.3 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2021, the Company recognized a loss, net of tax, of $3.0 million and income of $7.8 million, respectively, in accumulated other comprehensive income (loss). For the three and six months ended June 30, 2021, the Company reclassified a loss of $0.9 million and $1.7 million, respectively, from accumulated other comprehensive income (loss) to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 14, Derivatives, for further information on the Swap.

Capital Requirements

Victory Capital Services 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:

	Six Months Ended June 30,
(in thousands)	2021			2020
Net cash provided by operating activities	$	164,172		$	120,911
Net cash used in investing activities		(7,317	)		(6,931	)
Net cash used in financing activities		(147,970	)		(95,831	)

Operating Activities – Cash provided by operating activities during the six months ended June 30, 2021 was $164.2 million, compared to $120.9 million of cash provided by operating activities for the same period in 2020. The $43.3 million increase in cash provided by operating activities was primarily due to a $32.6 million and $10.9 million increase in net income and non-cash items.

Cash provided by operating activities during the six months ended June 30, 2020 was $120.9 million and comprised of $101.9 million and $34.9 million of cash provided by net income and non-cash items, partially offset by $15.8 million in working capital source of cash.

Investing Activities – Cash used in investing activities during the six months ended June 30, 2021 was $7.3 million and consisted of property and equipment purchases of $5.6 million and $1.5 million of net trading activity.

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Cash used in investing activities during the six months ended June 30, 2020 was $6.9 million and consisted of property and equipment purchases of $5.3 million and $1.6 million of net trading activity.

Financing Activities – Cash used in financing activities during the six months ended June 30, 2021 was $148.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $107.0 million, $17.7 million, $14.6 million, and $8.6 million, respectively.

Cash used in financing activities during the six months ended June 30, 2020 was $95.8 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $70.3 million, $13.1 million, $7.0 million, and $6.1 million, respectively.

Contractual Obligations

On February 18, 2021, the Company entered into the Second 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 Second Amendment, the Company repriced its Term Loan, lowering the interest rate spread by 25 basis points, from 2.50% over LIBOR, to 2.25% over LIBOR.

For the three and six months ended June 30, 2021, the Company recorded an increase of $5.7 million and $8.2 million, respectively, in the USAA AMCO Acquisition contingent 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. During the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period. A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers at June 30, 2021.

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, 2020.

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 June 30, 2021 and December 31, 2020, 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, 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.

On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15% interest in Alderwood and made a capital contribution of $1.5 million in cash. Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses. The Company has commitments to contribute additional capital of $4.5 million to Alderwood and $50 million to a private fund to be launched by Alderwood, upon the satisfaction of certain conditions. Until these conditions are satisfied, the Company does not have an obligation to contribute the additional capital and has not met the recognition criteria for a liability. On March 8, 2021, the Company announced that one of the conditions had been met. Alderwood Capital had received authorization from the Financial Conduct Authority of the United Kingdom and Alderwood’s private fund had been formally launched to investors. Refer to Note 15, Equity Method Investment, for further discussion regarding the investment.

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 approximately $162 billion at June 30, 2021. 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 $90.7 million at our weighted-average fee rate of 56 basis points for the quarter ended June 30, 2021. 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 $100.4 million at the Victory Funds’ and USAA Funds’ aggregate weighted-average fee rate of 62 basis points for the quarter ended June 30, 2021. 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 $55.1 million at the weighted-average fee rate across all of our institutional separate accounts of 34 basis points for the quarter ended June 30, 2021.

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 10% 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 $1.5 billion, which would cause an annualized increase or decrease in revenues of approximately $8.2 million at our weighted-average fee rate for the business of 56 basis points for the quarter ended June 30, 2021.

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 June 30, 2021, 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 June 30, 2021. 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 June 30, 2021, 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, 2020 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 to the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

In May 2021, the Company’s Board of Directors authorized a share repurchase program whereby the Company may 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. The amount and timing of purchases under the share repurchase program authorized in May 2021 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 program can be suspended or discontinued at any time and expires when $15 million shares of Class A common stock have been repurchased or on December 31, 2022.

During the three months ended June 30, 2021, the Company repurchased 288,130 shares of Class A common stock at a total cost of $8.3 million for an average price of $28.89 per share and $11.7 million was available for future repurchases under the current share repurchase program. As of June 30, 2021, a cumulative total of 3,757,662 shares of Class A common stock had been repurchased under programs authorized by the Company’s Board of Directors at a total cost of $63.3 million for an average price of $16.84 per share. 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 June 30, 2021.

					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)
April 1-30, 2021		132,070	$	27.76		132,070	$	1.4
May 1-31, 2021		84,840		29.06		84,840		13.9
June 1-30, 2021		71,220		30.77		71,220		11.7
Total		288,130	$	28.89		288,130

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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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 June 30, 2021 and December 31, 2020, (ii) Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020, (v) Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020 and the three months ended June 30, 2021 and 2020 and, (vi) Notes to Unaudited Condensed Consolidated Financial Statements for the three months ended June 30, 2021 and 2020.
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 6th day of August, 2021.

VICTORY CAPITAL HOLDINGS, INC.


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