Victory Capital Holdings, Inc. (VCTR) Earnings Call Transcript & Summary

Good morning, and welcome to the Victory Capital Conference Call. [Operator Instructions] Following the company's prepared remarks, there will be a question-and-answer session. I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis.

Thank you, and good morning. Welcome to Victory Capital's conference call to discuss the signing of a Memorandum of Understanding between Victory Capital and Amundi. Statements made on this conference call that are not historical facts are forward-looking statements and speak only as of today's date and involve a number of risks and uncertainties that could cause actual results to differ materially from these statements. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Please refer to our press release that was issued early this morning as well as our recent SEC filings, including Forms 10-K and 10-Q for additional risk factors that could cause our actual results to differ materially from our forward-looking statements, all of which can be found on our website at ir.vcm.com. Furthermore, please note that the ultimate completion of a transaction remains subject to certain conditions, including regulatory approvals. With that, it is now my pleasure to turn the call over to David Brown, Chairman and CEO. David?

Thank you, Matt. Good morning, and welcome to Victory Capital's conference call to discuss the signing of a Memorandum of Understanding with Amundi. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. Following our prepared remarks, Mike, Matt and I will be available to take your questions. The presentation begins on Slide 3. This is a momentous day in the history of Victory Capital and marks the beginning of a new and exciting chapter for our firm. We are very pleased to disclose our plans to enter into a strategic and multidimensional transaction with Amundi that will positively transform our company in a number of ways. This transaction will be a significant milestone in our long-term growth strategy, and it is anticipated to generate significant value creation for our shareholders by way of enduring profitable growth as we look towards the future. One of our long-term strategic objectives has been to increase the globalization of our firm by expanding our distribution reach outside of the U.S. market to access a larger client base and also by obtaining additional access to high-quality investment products manufactured outside of the U.S. We accomplished both of these strategic objectives in a single transaction as a result of the planned global and reciprocal 15-year distribution agreements with Amundi. Through these agreements, Amundi will become the exclusive distributor of all Victory Capital products outside of the U.S., and Victory Capital will be the exclusive distributor of the Amundi products in the U.S. Moreover, Victory Capital will be the provider of U.S.-manufactured active asset management products for Amundi's distribution outside of the U.S. This opens a large and robust international distribution channel for our products to reach clients around the world through Amundi's extensive global distribution network, which has a local presence in 35 countries, and 1,000 third-party distributors reaching more than 100 million retail clients and more than 1,500 institutional clients. A second major dimension of the transaction is the contribution of Amundi's U.S. business into Victory Capital in exchange for a 26.1% economic interest in Victory Capital that carries voting rights of 4.9%. Amundi's stake in our firm aligns our respective economic interest and sets the foundation for success on the reciprocal distribution agreements. The combination of Amundi U.S. business into our business adds significant size, scale, enhances Victory's investment capabilities through the addition of complementary U.S. fixed income, equity and multi-asset strategies, and immediately diversifies our client base with an increased international presence, as more than 1/3 of a Amundi U.S.'s AUM is currently from non-U.S. clients. While the transaction is dynamically strategic, it is also very attractive financially. The combination of Amundi U.S. business onto our platform aligns very well with our proven M&A history and playbook. We anticipate low double-digit EPS accretion by the end of the first full year of ownership. In addition, since we are not using cash or debt as consideration, the incremental earnings will significantly reduce our already modest leverage ratio and provide significant additional strategic and capital flexibility. This will allow us to continue reinvesting in our business to drive organic growth as well as continue pursuing our inorganic growth initiatives and returning capital to shareholders in multiple forms. On Slide 4, we highlight the global and reciprocal 15-year distribution agreements. We are incredibly excited about the growth potential resulting from these long-term agreements. As most of you are aware, Amundi is a leading global asset manager with over $2.2 trillion in assets under management. They are the largest European-based asset manager, and globally, they are one of the top 10 largest asset managers measured by assets under management. Amundi's global distribution network is vast and includes distribution partnerships with leading bank networks possessing substantial market share throughout Europe, in addition to many other partner networks and joint ventures. Amundi has a strong distribution network relationship in Asia, particularly in China, India and South Korea, as well as the Middle East. A key objective for Amundi in this transaction is to help meet the demand of their clients and JV partners around the world for a deeper and broader U.S. product set. Collectively, these established relationships substantially expand our total addressable market materially by promoting our products in arguably one of the most robust distribution networks in the world for the asset management industry. Capturing just a small share of Amundi's global gross and net flows would materially impact our flow profile. Evidencing the power of the Amundi distribution network, Amundi U.S. has seen material growth in AUM from clients outside the U.S. by posting 5 consecutive years of positive non-U.S. net flows and sizable non-U.S. AUM growth. As the exclusive distributor of Amundi's active asset management products managed outside of the U.S. for the U.S. market, we are looking forward to expanding our existing product set with new high-performing investment capabilities. We believe that the opportunity to expand Victory Capital's geographic reach internationally, through both the distribution agreement and the existing non-U.S. client base of the Amundi U.S. business as well as access to the broader range of investment capabilities, will all be meaningful future AUM and revenue growth drivers for our business. Turning to Slide 5. The Amundi U.S. business dovetails very nicely with the Victory Capital investment platform. The addition of this business adds what will be our largest investment franchise and significantly enhances the size and scale of our overall business by adding $104 billion of assets under management with very competitive long-term investment performance. Amundi U.S. has approximately 100 investment professionals, managing assets for clients in dozens of countries. 36% of their AUM is from outside of the U.S. The transaction also immediately increases Victory Capital's non-U.S. client base, which represents 14% of our pro forma AUM compared to just 3% currently. This added diversification advances our strategy of maintaining a business that is well diversified by asset class, investment style, geography and client investment behavior. I would note that their investment platform has minimal overlap with our existing investment strategies, adding new capabilities in a number of areas in fixed income and U.S. equity growth. Following the completion of this acquisition, fixed income will represent 24% of our pro forma AUM, up from 14% currently. This transaction will also enhance efficiencies across our platform by spreading our investments over a larger asset and revenue base. It will also allow us to significantly deepen our coverage of the U.S. intermediary market through the addition of distribution talent, resources, data access, technology and new distribution partner relationships. We are also very enthused about the prospect of revitalizing the story, Pioneer Investments brand, which has a long history, represents investment excellence, enjoys a very good name recognition in the U.S. market. As with prior acquisitions, we will work to minimize disruptions to the investment process and client experience. I would also like to make it very clear that we fully intend to maintain a significant presence in Boston. Turning to Slide 6. As I mentioned before, this transaction also has a very compelling financial side. The negotiated valuation of the Amundi U.S. business results in an attractive multiple that is in line with other U.S.-based asset management peers. Subject to further diligence, we are anticipating low double-digit accretion to our adjusted EPS, following the first full year of ownership. We are confident in our ability to realize both expense and revenue synergies from this transaction, and we estimate the post-expense synergy adjusted multiple to be between 4x and 5x 2024 run rate EBITDA for the business, reinforcing the attractive financial profile of this transaction. We expect to realize annualized expense synergies of approximately $100 million, with much of that being generated from vendor consolidations, improved economies of scale and the elimination of redundancies. We expect annual expense synergies to be fully realized within 2 years with a significant portion achieved within the first year. The distribution agreements with Amundi will provide additional lasting benefit and be key drivers of future revenue synergies. The products of the Amundi U.S. business have sold very well in Amundi's global distribution network and through its joint ventures resulting in gross sales averaging more than $12 billion per year for the past 5 years. Net flows from non-U.S. clients have also been positive each year over that same period. The transaction will also significantly reduce our net leverage ratio through the onboarding of the earnings without incurring any debt. We project our net leverage ratio will be in the lower-to-mid 1s to EBITDA as a result of additional earnings, annual expense synergies and cash flow without incurring any debt. We view having Amundi as a strategic shareholder as creating parallel economic alignment for our respectable organizations, and we look forward to a long and mutually beneficial relationship. The transaction consideration is in the form of 4.9% building shares with the remaining 21.2% in non-voting shares with equal economic rights as common shares. Additionally, at closing, Amundi will designate 2 individuals to join our Board. As with all our previous acquisitions, we believe the strategic components of this transaction makes our company significantly better, while the financial aspects yield powerful additional benefits. On Slide 7, we drill down a bit on the overall relationship we are forming with Amundi. And working with the team of Amundi, we have come to appreciate that we share a lot of the same business principles. Our cultures are very comparable to respect to our views on the asset management industry and our beliefs about what it takes to have enduring success, given ongoing secular trends in the industry. We share a client-centric approach and a deep commitment to delivering excellent long-term investment results. Moreover, we are both committed to creating shareholder value. As I mentioned a moment ago, as a result of the transaction, our balance sheet will strengthen, allowing us to continue pursuing strategic inorganic growth initiatives. Amundi is very supportive of us continuing our long history of M&A activity as they have pursued a similar path over time. When we engage with prospective acquisition targets, the potential of accessing our distribution capabilities is typically one of the primary motives of the seller. Following the close of this transaction, we will have a much larger and reinforced U.S. distribution capability and access to one of the most robust international distribution networks in the industry. This is likely to position us very well to be the platform of choice for high-performing investment organizations. On Slide 8, you can see that when the transaction closes, it will meaningly diversify our asset class mix. We will also see an immediate increase in our offshore AUM with 14% of pro forma assets projected to be from clients outside of the U.S. And under the global distribution agreement, we would expect that proportion to grow larger in the future. And wrapping up on Slide 9, we've included a high-level anticipated time line. The project reaching a definitive agreement by the end of June. After that, we expect closing to occur by the end of the year. With that, we will now take questions.

[Operator Instructions] Our first question comes from the line of Alex Blostein of Goldman Sachs.

Congrats on the transaction announcement here. I was hoping maybe we could start with a couple of financial questions. I know you talked about the pro forma EBITDA synergized kind of multiples you paid, which obviously seem pretty attractive. But maybe help us with the kind of the breakdown of Amundi U.S. revenues and run rate EBITDA, and just a sense for kind of timing and cadence of $100 million cost synergies that you're planning to realize.

It's Mike. I appreciate the question. With respect to the synergies, I think we have a pretty well-tested playbook from an integration perspective that we've used on other transactions or experienced. We highlighted $100 million of expense synergies within 2 years post the transaction close, really with a significant portion within the first year. This transaction really will allow us to kind of recognize additional economies of scale in our platform and allow us to continue to reinvest in distribution as well. We'll continue to kind of highlight the timing of those. But again, we're confident with what we put out there with respect to really recognizing those synergies quickly, but efficiently as well.

Great. And just in terms of the revenue and EBITDA run rate for Amundi U.S.?

Yes. So there are -- they have about $104 billion in AUM. Their revenue realization is probably a couple basis points lower than ours. So think about that in the high 40s. And then their current margins from a run rate perspective are kind of in the mid-20s. And when we think about the consolidation opportunity, the integration opportunity, from a long-term perspective, we'll continue to keep our guidance at the 49% range.

Got it. Super helpful. And then a little bit more on the strategic side, the distribution partnership that you guys are striking with Amundi on the back of this. It sounds quite interesting. Can you help us understand, maybe the incentives that we put in place on their side to distribute Victory's product and vice versa? Are there any actual exchange of payment that will occur on the back of that? Or this is just part of the whole kind of strategic arrangement given their equity ownership in the business.

Alex, it's Dave. Let me start off and say on the distribution agreements. It's going to be a 15-year agreement. And I think the biggest incentive will be their 26.1% economic interest in our business. It's the reason why we structured the transaction the way we did to make sure that there was economic alignment at the high end or at the top end. At the point of sale, there will be exchange of payment very similar to what you would expect in an adviser, sub-adviser relationship. So there'll be some exchange of payment there but very standard, an arm's length. But I think what the driver will be is that you will have an ownership stake by Amundi in Victory. And then on top of that, we solve or address an issue for Amundi in the sense that we're going to have a wider offering of U.S. products, which I think will help them very much. So we'll continue doing what we're doing and Amundi U.S. will continue doing what they're doing and what will come together is a much better and more complete U.S. offering for Amundi to go out and service their clients outside the U.S., which I think will help them. So there'll be lots of financial incentives, there'll be ownership incentives and then there'll be just competitive incentives as well.

Very helpful. All right. Congrats again.

Our next question comes from the line of Etienne Ricard from BMO Capital Markets.

Congrats on the announcement. With fixed income to account for a quarter of Victory's AUM, what new capabilities are you adding? And how do you expect this will resonate with your institutional client base?

With the added fixed income capabilities, they are complementary to what we have today in a number of areas. We'll expand the capabilities to include multi-sector, which is not something that we have today. We'll add some securitized products as well. And then we'll also add additional capabilities on kind of the core, plus core areas that we think are complementary to what we have today, which really will allow us to kind of extend and expand the platform of fixed income offerings, really at a time where we expect fixed income to continue to play and start to play a larger role in client portfolios.

Okay. And how do you plan to minimize the integration risk from this transaction, especially as it relates to the 36% of AUM that is sourced from international clients.

Sure. Yes, I think as we've demonstrated, we have a pretty solid and robust kind of integration playbook. First and foremost, our goal and objective is to make sure that we do minimize client impact and investment team impact. And we do that through really methodical and kind of thoughtful approach to the integration. With respect to the non-U.S. clients, as Dave mentioned, the reciprocal global distribution agreements allow us to partner with Amundi globally to support those clients. So we wouldn't expect to see any significant impact from the integration. All of the current Amundi U.S. investment teams will be -- remain in place. There will be no changes to who's managing the money, which is critical as you think about integration risk.

Our next question comes from the line of Ken Worthington of JPMorgan.

Two for me. First, I assume that the legacy Victory funds will be sold through Amundi's non-U.S. distribution. Does Victory have to launch new structures such as SICAVs and OEICs and other locally registered product to take advantage of this distribution arrangement? And if so, how long does that take? And are your track records portable to these new structures.

Ken, it's Mike. Yes, with respect to the distribution of the Victory products globally through Amundi's network, they have a vast and robust infrastructure to support SICAVs, UCITS and the like. So the structuring really is part of the partnership with Amundi. So Victory will not have to establish structures. We'll be able to leverage the existing structures that are in place today. A lot of the Amundi U.S. products are actually offered through these same structures globally, that 1/3 of the assets that Amundi U.S. has outside -- from a client perspective, outside the U.S. are set up and established through existing structures. So we'll work with Amundi to find the right strategies that make sense from a client demand perspective, and we'll establish those with them really as we move forward post the transaction as part of the integration. As for the ability to leverage track records, we'll work through that, but we would expect that we'll be able to hit the ground running from a distribution perspective as we educate really the global sales team of Amundi.

And I would add, Ken, it's Dave. I would add that keep in mind that the Amundi U.S. business is really successful in selling their products outside of the U.S. They have over $30 billion placed outside the U.S. They have a full infrastructure supporting that. And it's one of the great parts of their business that we see that we want to leverage because it's up and running. And I think I said in my prepared remarks that they are averaging about $12 billion of gross flows a year over the last 5 years, and have been net flow positive in that part of their business over the last 5 years.

And then I guess along the same lines, you mentioned gross flows a couple of times, what were net flows maybe last year for the entire business that you're acquiring?

Okay. We haven't disclosed that and neither has Amundi. I can tell you that they have great momentum this year in their flow profile. And we're excited about bringing their products onto kind of our distribution and having their distribution in place and thinking about having a much larger distribution force in the U.S. One of the great things about this transaction is, is to take our distribution capabilities and the Amundi U.S. distribution capabilities in the U.S. and put them together and ultimately have a larger, better resourced, more partnered relationship sales force that I think is going to have a pretty major impact on the legacy Victory business as well as the legacy Amundi U.S. business.

Our next question comes from the line of Craig Siegenthaler from Bank of America.

Congrats on the deal. And I'm sorry if I missed this, I just got back from a breakfast, but what is the share lockup time line on a Amundi's 26% stake after the year-end closing this year.

It's Dave. It would be standard. We haven't disclosed that yet. But I would tell you, it would be a standard traditional lockup that you would see in a transaction like this multiyear.

Got it. And I see they get 2 Board seats. Do -- are the voting rights on their shares equivalent to other shares? Or is it going to be a second share class?

They'll have 2 Board seats, so 2 traditional standard Board seats on our Corporate Board. They'll have a 26.1% economic stake. And with that 26.1% economic stake, 4.9% voting rights. And so they'll be able to vote as a shareholder at 4.9%.

Got it. And actually, just 1 follow-up. So we do see there was, I think, $12 billion per year in sort of gross flows over the last few years. But to Ken's question, it looks like you're not disclosing net flows. Can you give us any color on how redemptions have trended over the last few years? Because with that response, we're sort of wondering kind of how high they are.

Well, let me give you a little more information. They are actually in positive flows this year as an organization. And so when I think about 2024, their U.S. businesses and positive flows across the board when you net it out. So I think that, as I said before, that we are combining this business into our business, it has great flow momentum.

Our next question comes from the line of Adam Beatty from UBS.

Congratulations. Just wanted to ask about a little more detail on U.S. distribution. Just in terms of -- obviously, it looks like there's going to be some synergies in terms of the overlap that you have, maybe among institutional clients or retail, and perhaps more importantly, the non-overlap and what the revenue synergy opportunity might look like there?

Yes. On the U.S. side, I think that we have a pretty competitive institutional offering from a sales perspective on the Victory side. I think that Amundi U.S. is a nice complementary group. And I think that we, most likely and probably, will have limited overlap on that side. I think on the intermediary side, there will be some overlap. But from what we understand, and the information that we have and the work we've done, I think there's limited overlap there. And so when we really think about the distribution force in the U.S., the intermediary group is going to have more people, it's going to have more resources. We're going to be using data more. We're going to be using technology more. We're going to have a larger marketing group and ultimately more people selling. And then on the institutional side, I would say the same thing. And so we look at this as a larger sales force combined selling the products that we have in the U.S., and that is going to be a good thing for our organization. It will make us more competitive. And we'll also be larger and have the size and scale to compete even more than we're competing today.

Yes, makes sense. Sounds pretty additive. And then I just wanted to drill down on products a little bit in the fixed income and the equity side of Amundi U.S. Just maybe you could give us some color on the largest products, kind of what that adds your offering suite and maybe what's been selling best most recently?

If you go on the fixed income side, I think Mike covered this on an earlier question. We're going to have a number of new products like multi-sector, global high yield and a few other categories, they have -- Amundi U.S. has about almost half of their business today in fixed income, and it's really spread in a number of different areas. On the equity side, they have a number of large-cap offerings with really, really good investment performance that's selling well outside the U.S. as global portfolios look for U.S. exposure. And that's about a little bit under half of their total assets. And then they have about $6 billion in a multi-asset category that probably goes very well with our solutions platform.

Our final question of the day comes from Michael Cyprys of Morgan Stanley.

Maybe just circling back on the international distribution arrangement and opportunity. I was hoping you could maybe speak to which of Victory's strategy do you think have the most appeal overseas? And in particular, which country or channel are you most confident in the scope for flows for those Victory strategies overseas and how should we think about the timing from when you'd expect to start to see traction? Would that be in '25 or '26, how do you think about that?

Michael, it's Dave. Let me start off with where we think we would see some traction. We bring products today that Amundi doesn't have access to in the U.S. around small cap and mid-cap U.S., and a few other categories. So I would imagine that those kinds of products would go well into the portfolios that they're helping to manage. And we also -- some of our fixed income as well. Amundi's assets, about 75% of the assets that they have under management in Europe and the other 20% is in Asia. And I would imagine that a lot of the opportunity will follow the asset sizing as well. But when you really look down in the future and you think about Asia and you think about what's happening there. I think that will change over time, where you'll see more opportunity moving from Europe into Asia. As far as timing, as Mike said, I think that mid '25 is where you'll start to see some of the impact. It will take a little bit of time to onboard and to get things going. But it isn't going to take years and years and years because Amundi U.S. has a pretty robust and dynamic infrastructure to sell outside of the U.S. And we would plan to leverage that, invest in that. And whatever they're doing today, hopefully give them more resources to do even better in the future.

Great. And then just on the U.S. side, maybe you could just speak to of the Amundi's U.S. strategies are you most excited about in terms of scope for flows as you look out over the next couple of years? And maybe you could talk about some of the steps that you think you can take to accelerate the growth of Amundi's U.S. business and what the time frame might be for seeing traction on helping them accelerate growth from here?

I think post close, the U.S. is our home market. We know that market very well. So I don't think there will be a lag in timing. I don't want to single out any of their products. They have excellent investment performance across the firm. 75% of their assets are 4 and 5 star. I think they were the fourth best Fund Family this year ranked by Barron's over a 5-year period. So this is a really, really high-performing investment platform. I really think all of their products are competitive and some of it will be just what's in demand from the market. But I'm excited about all of them. So I wouldn't single out one. I would just say this is an unbelievable investment platform. They've had investment excellence for a long period of time. This is a firm. It's the legacy pioneer firm that's been around for 95 years, I believe. And so this is a firm that manages client assets with excellence. And I think having that as a product offering is going to be great for our clients and for future clients.

Thank you. This concludes today's conference call. We thank you all for participating, and you may now disconnect.