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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Victory Capital Third Quarter 2021 Earnings Conference Call. [Operator Instructions.]
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. Before I turn the call over to David Brown, I’d like to remind you that during today’s conference call, we may make a number of forward-looking statements. Please note that Victory Capital’s actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today’s call.
Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market close yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the Investor Relations portion of our website at ir.vcm.com.
It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David?
Thanks, Matt. Good morning and welcome to Victory Capital’s Third Quarter 2021 Earnings Conference Call. 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.
We had a very successful and active third quarter in a number of areas and carried that momentum into the year’s final quarter with yesterday’s announcement of our agreement to acquire WestEnd advisors. I’ll start today by providing an overview of the launch of our alternative investment platform with the acquisition of New Energy Capital, which closed on November 1. Then we will cover our planned acquisition of WestEnd advisors, which will position us as a leader in the very attractive model delivery segment of the industry. Following that, I will highlight our excellent operating results achieved in the quarter and then cover investment performance, which continues to be strong. After that, I will turn it over to Mike who will review our third quarter financial results in greater detail. Following our prepared remarks, Mike, Matt and I will be available to take your questions.
Turning to slide five, we have had a desire to expand into alternative investments in private markets for several years. We have done a significant amount of market research over that time. We’ve spoken to the leaders of many alternative firms, and work with industry experts to gain knowledge and have the confidence to invest and compete in this space. The traditional side of our business has grown from 17 billion 8 years ago when we became an independent company to approximately 160 billion today.
Now with greater scale, financial stability, and a deeper understanding, we are well-positioned to diversify our business into alternatives. Leading up to this milestone, we’ve been making deliberate investments to prepare for success in the alternative space. Some examples are we recently developed a dedicated team of highly experienced fire A multifamily office sales specialists have made investments in certain technology and data to support this expansion.
Since its founding in 2004, [Indiscernible] business is focused exclusively on investing in the clean and renewable energy sectors. The fact that their focus happens to be on investing in projects and companies involved with the transition away from carbon based energy sources is a function of the team’s background and expertise. They have launched the manage credit, hybrid and equity funds so they have a wide range of investing experience in this space. They’ve always upheld an alpha first investing approach. With NEC, we added investment franchise that exemplifies investment performance excellence, shares victories, entrepreneurial and agile culture and lives every day guided by a client first philosophy.
Consistent with our franchise model on the traditional side of our business, we’ve created economic alignment with the NEC team through a revenue sharing arrangement and an earn out structure that is based on achieving targeted revenue growth. In addition, we will provide technology support and distribution in collaboration with NEC leadership. Alternative investments in private markets present an appealing new growth vertical for us and will complement the ongoing growth in our core traditional business.
With attractive margins, theories, asset flows, and long dated capital there’s a lot to like about alternatives. Longer term, we envision creating value by leveraging our product development capabilities to create new vehicles that can democratize access to private markets through retail investors. Rapid advances in technology are driving a convergence of private and public markets and Victor Capital is ideally situated to participate in this evolution. We see tremendous opportunity to broaden access for mass market investors to investment strategies that have previously only been available to accredited investors. Our guiding principles will remain the same with alternative investments. We will support investment autonomy, ensure that economic incentives are aligned for the present and the next generation of each investment team and we will focus on high quality franchises with proven investment processes and teams. With the closing of NEC now behind us we are starting to prepare for the next growth phase of that franchise.
Turning to slide 7. Yesterday, we announced that we reached a definitive agreement to acquire 100% of less than advisors which will become our 12th investment franchise in the fast long model segment of the industry. This transaction is also structured according to our guiding principles in that we have an earn out component of the purchase price that is based on achieving significant revenue growth targets and we will also have a revenue sharing arrangement in place. We intend to retain the entire employee base and add to their team in areas such as distribution, client service, and investments over time to support the significant growth opportunity that lies ahead of us. Our existing distribution team will be added to WestEnd activities by leveraging our wider geographical footprint and having more sales personnel in market to drive increasing penetration at platforms for less than currently in shelf space.
Compounding this growth will be our ability to leverage our team’s long standing relationships to assist in securing new shelf space with numerous financial intermediaries for WestEnd. As you can see from the graphics on this slide, there are three primary ETF strategies make up approximately 90% of our assets. All of those strategies have outperformed benchmarks for the latest 1, 3, 5, 7 and 10 year periods ended September 30. These returns are net of fees and demonstrate WestEnd investment value proposition for clients.
Turning to slide 8, WestEnd is well positioned to continue benefiting from multiple industry trends, which I will highlight in a moment. They are one of the largest third party ETF model strategist in the industry. WestEnd does not use any proprietary products in their model portfolios. By using only third party ETFs to gain the desired sector exposure they avoid the types of conflict faced by home office models and broker dealers and asset manager models that use their own proprietary products. Also, unlike proprietary models delivered by asset managers, which tend to be more static,
WestEnd models have active strategic and tactical components that feature sector exposure over-styled categories such as growth or value. WestEnd approach also provides financial advisors with a valuable and independent solution. WestEnd currently has recommended shelf space on the largest warehouses and its grown client assets to more than 1 billion at six different platforms. Through these and other platforms, they’re working with approximately 3,000 advisors.
To put this opportunity into context today, Victory is working with nearly 100,000 advisors, and we believe our current advisor relationships will be instrumental in increasing advisor penetration on these existing platforms for WestEnd. Moreover, there’s a great opportunity to expand WestEnd presence to include the many platforms that are existing products are currently on and those that are not. We view this transaction as an excellent means of further utilizing and monetizing the investments we’ve made over the past years to build out our distribution system. Beyond their model delivery which is typically used by advisors for a holistic or completion solution, providing another source of alpha WestEnd delivers complimentary services to help advisors grow and gain scale in their own practices.
They provide valuable collateral around their investment thesis, as well as market commentaries and other client ready educational collateral that advisors can repurpose directly with their clients. This extra value add is greatly appreciated by financial advisors as evidenced by WestEnd being named investment asset manager and strategy of the year in 2021.
On slide 9, we will illustrate several secular industry trends that are creating strong tailwind for ETF models. First, investors increased preference for competitively priced ETFs equal wrappers for investment exposure. Second, more intermediaries are promoting adoption of model portfolios for regulatory reasons, as well as to free up advisors to focus on client service and gathering assets rather than portfolio construction. Lastly, the ongoing migration of advisors away from commission based business models to fee based revenue models. All this bodes well for continued accelerate organic growth for WestEnd which is nicely positioned in the middle of these major industry trends that are evolving the asset and wealth management landscape.
Additional evidence of these material trends is illustrated on slide 10. Overall model portfolios have grown 29% annually over the last three years. Inside of this shift ETF models are growing faster than mutual fund models and have been gaining market share as the total market pie grows in size. Needless to say, we are very optimistic about this acquisition and how it will enhance our overall organic growth trajectory. On slide 11, you can see that WestEnd growth has significantly exceeded that of the industry with access growing at more than 40% annually from the end of 2016 through 2020.
In the first nine months of 2021, assets increased another 53% with most of the growth coming from positive net inflows. The 3.5 billion of positive net flows generated by WestEnd in the first nine months of this year represents more than 30% of their assets at the start of the year. Even with this rapid growth they have very low single digit penetration in most of the platforms where they currently have shelf space didn’t provide a very long runway for sustainable asset growth. This acquisition is also of sufficient size that we expect it will have a meaningful accretive impact on our overall net flows, and it will steepen our overall organic growth trajectory.
On slide 12, we provide a summary of the financial structure and pro forma estimates of the acquisition, which illustrate the value creation opportunity for shareholders alongside the compelling strategic rationale. We’ll be making a $480 million cash payment at closing. This will be financed through an incremental term loan being facility that is already fully committed. We do not anticipate any significant changes with this incremental facility from our current term load. WestEnd will add approximately 9% of EPS accretion in year one, which erode double digit accretion in year two and by year four, we expect the accretion to exceed 20% or well over $1 per diluted share. Over the same timeframe, we expect WestEnd will generate strong positive net flows fueling this growth. A final aspect to point out is that this acquisition is strategic and thus we do not anticipate any significant cost reductions to be generated from the transaction. We may very well achieve some minor cost reductions from leveraging our operational platform. However, to be conservative, we’ve not included any cost synergies in our projections. There also should be minimal integration costs incurred.
Turning to the quarterly business overview that begins on slide 14, we ended the quarter with 160 billion of AUM. Earlier this year, I featured a number of our products with significant open capacity that have been attracting assets as investors continue to recalibrate portfolios. This is less than a record long term gross sales of 22.4 billion in the first nine months of the year, which is 28% higher than during the same period last year. A few examples of the products are MorningStar five star rated Victory floating rate fund and the Victory market neutral income funds, which have continued to experience positive net flows in the current market environment. Additionally, our victory shares ETF platform generated positive net flows for the fourth consecutive quarter. Moreover, the net flow improvements in our direct investor business have persisted into the most recent quarter.
All this culminating in our second consecutive quarter of positive net flows. Revenues grew 2% sequentially, around 20% versus the same quarter of last year. Adjusted net income of tax benefit per diluted share grew to a record $1.25 which was up 6% in the second quarter and up 25% from last year third quarter. Our integrated operating platform continues to demonstrate the efficiency of our model with adjusted EBITDA margins coming in above 50% for five consecutive quarters. We continue to reduce debt during the quarter. At the same time, we accumulated cash to fund the NEC acquisition and other cash needs including the second USAA earn out payment. Yesterday, we also announced that our board declared the six consecutive increases in our quarterly cash dividend raising at 13% to $0.17 per share.
On slide 15, our view to direct investor business and new product developments. During the quarter or contact center fielded approximately 110,000 investor calls with an average speed of answer of less than one minute with superior customer satisfaction scores. As I mentioned earlier, flows improved for the past five consecutive quarters in our direct investor business which is encouraging as we continue to build out enhancements and look forward to adding many new features and products during 2022. Our referral agreement with USAA continues to support new account growth. On average, we’ve had more than 5000 accounts per month since the acquisition. Inclusive in this number our new clients acquired outside of the referral agreement and we are encouraged about the long term opportunity that is in front of us with regard to account growth. Our 529 plan has also been a positive contributor adding new accounts.
During the first nine months of 2021 and since the acquisition 2019 the 529 plan has been net flow positive. In third quarter we also launched a mobile app for direct investors. It has gotten off to a strong start, and has already been downloaded from the Apple and Android stores by approximately 100,000 users. By enhancing the ways in which direct investors can digitally engage with us, we’re simultaneously increasing investor satisfaction or enhancing our operating efficiency. Regarding new product development, in August, we launched a private crypto fund, part of our exclusive agreement with NASDAQ and global crypto focused asset manager hash tags. This is a differentiated product that provides accredited investors with access to a diversified basket of digital assets with competitive pricing and no lockups. The fun tracks the NASDAQ crypto index ticker NCI, which is a multi coin crypto index that employs strict eligibility criteria and rebalances constituents quarterly. The structure creates beta like exposure to these assets for investors in a dynamic and adaptable manner. Earlier in the current quarter, we also launched three actively managed ESG focused ETFs.
Turning to perhaps the most important page in the presentation, our strong investment performance is illustrated on slide 17. Our investment franchises continue to generate attractive investment returns for our clients during the third quarter. The number of mutual funds in ETFs with a four or five star rating from MorningStar increased to 45 at the end of September, and approximately two thirds of our AUM is in mutual funds and ETFs with four or five star ratings, which is an increase from last quarter. For the trailing 12 months ended in September 21 of the mutual funds we manage ranked in the top quartile of their peer groups.
With that, I’ll turn it over to Mike for a more in depth discussion of the financials. Mike?
Thanks, Dave. And good morning, everyone. The financial results review begins on slide 19. Revenue was up 2% sequentially from the second quarter, reaching $226.3 million. This was a 20% increase over the same quarter in 2020. Adjusted EBITDA margin plus 50.8% up 20 basis points from the second quarter and up 10 basis points from the third quarter of last year. Year-to-date adjusted EBITDA margin was 50.5%, which is a 290 basis point improvement over the comparable period in 2020. GAAP net income and earnings per share set new quarterly records at $74.2 million and $1 per diluted share respectively, and adjusted net income with tax benefits, was the record $92.6 million or $1.25 per diluted share, which is up 6% sequentially, and up 25% year-over-year. Continue to reduce that paying down $35 million in the first half of the quarter before we began accumulating cash in preparation for the NEC transaction close as the quarter progressed. We repaid a total of $454 million of debt since the acquisition of the USA mutual funds and 529 businesses just over two years ago.
The return total of $19 million of capital to shareholders in the form of cash dividends and share repurchases in the quarter, which brings the year-to-date total capital return to just over $51 million. Lastly, the 13% higher quarterly cash dividend of $0.17 per share, is payable on December 27 to shareholders of record on December 10.
Turning to slide 20, total AUM declined 1% during the quarter to $159.9 billion. This was driven by negative market action that was partially offset by positive net flows in the quarter. AUM is up 21% from the same time last year, with our long term AUM ending the quarter at $156.7 billion. The business continues to be highly diversified by clients as evidenced by the bar chart on this page. We have three deep distribution channels, with each representing over 25% of our firm AUM. On 21 we cover long term asset flows. Gross sales declined sequentially, primarily due to a couple of previously disclosed institutional mandates that were funded in the second quarter and seasonal volatility. More importantly, year-over-year, gross long term sales improved 12% in the third quarter to $5.7 billion, compared with $5.1 billion in last year’s third quarter. Year-to-date gross long term sales were $22.4 billion which is a 20 8% improvement over gross long term sales of $17.5 billion in the same 2020 period.
As Dave mentioned, this was our second consecutive quarter of positive net long term flows. Year-to-date net long term outflows are approximately $0.5 billion which is a significant improvement from the $9.4 billion of long term outflows in the first nine months of last year. Year-to-date flows have been well diversified by investment franchise, distribution channel and client side. More specifically, we’ve seen better net flows in our direct investor business, strong sales of many of our high performing products and have picked up this year in institutional activity.
Turning to slide 22, quarter-over-quarter revenues increased by 2% and year-over-year revenue was up 20% due to higher average AUM in each respective period. Average fee rates in the quarter were 55.3 basis points, which was down nine tenths of basis points from the second quarter. Gross investment management fees were eight tenths of a basis point lower due to channel and asset mix. Net management fees were helped by better flow complete performance and lower fun waivers and reimbursements in the quarter. This was partially offset by higher money market yields support. While we have seen improvement in the fulcrum fees on the USA mutual funds, the impact to the quarter was negative three tenths of a basis point.
There is upside as we have mentioned previously on our fee rates on both the fulcrum fees and as we see improvements in the rate environment on our money market fund yield support which was negative nine tenths of basis points in the quarter. Fund administration, distribution and TA fees were down two tenths of a basis point versus the second quarter based on channel and product vehicle mix. Fee rates will fluctuate quarter-to-quarter based on client and asset mix. It is important to note that our margins did increase during a period in which our fee rates contracted highlighting the power of our operating model.
As we look ahead, the management fee rate realized by less than is approximately 30 basis points, which is below our current average management fee rate and given that there are no associated fund admin distribution for TA fees associated with less than model business, we expect product mix ship will result in lower average consolidated fee rates following the close of that transaction. That said, as we’ve repeatedly stated, we’re much more focused on margins than theory. Our business model was designed to maximize efficiencies and enable us to earn healthy margins on very competitively priced products. This is evident in the current year with the uptick in margins and net income despite lower realized fee rates.
Moving to slide 23, you can see our total expenses increased 1% from the second quarter in line with higher AUM revenue and earnings. Lower quarter-over-quarter cash compensation expenses were offset by higher acquisition, restructuring and integration expenses, which increased by $1.9 million in the quarter related to the NEC and USA Asset Management acquisitions. As a percentage of revenue, cash compensation remained steady at 23%. Shifting to our non-GAAP metrics for the quarter, please turn to slide 24. Adjusted net income a tax benefit per diluted share increased to $1.25 up 6% from the second quarter, and 25% higher than last year same quarter. Adjusted net income of $92.6 million achieved in the quarter included the $6.9 million tax benefit.
Year-to-date adjusted net income of tax benefits grew more than 27% to $263 million or $3.55 per diluted share. Adjusted EBITDA margins widened slightly compared with the second quarter. We are continuing to make investments in the business and that’s we will maintain our adjusted EBITDA margin guidance of approximately 49%. As we’ve discussed in the past, this can fluctuate quarter-over-quarter or even year-over-year depending on AUM levels and the timing of the investments being made to drive future growth. Taking a look at our financial condition on slide 25 you can see that we have been actively preparing our balance sheet to provide capacity in support of our inorganic growth strategy.
Our interest rates and our absolute cost of debt have declined dramatically since we originated the term loan a little over two years ago. This is the result of reducing outstanding debt and two re-pricing that lowered the spread with pay on the debt, as well as lower LIBOR.
Our primary cash needs for the business in the final quarter of this year include consideration for the NEC acquisition, which was paid at closing earlier this week. The second earn out payment for the USA acquisition, which is once again a full earn out payments of $37.5 million due to revenue exceeding projections, and the WestEnd acquisition, which is being financed with an incremental term loan be facility that as Dave mentioned earlier, is fully committed. Marketing for the debt deal will commence next week as we are on track to close the WestEnd acquisition by year end.
We do not anticipate any significant changes to the term loan associated with the incremental facility. On a pro forma basis the term loan extension will increase our leverage ratio to approximately 2.3 times based on estimated run rates of closing. This is lower leverage versus when we entered into the original term loan two years ago. Our pro forma run rate EBITDA from this transaction is projected to be in excess of $500 million or approximately 30% higher than EBITDA run rate of $385 million at the time of origination.
If in the past, we intend to deploy the majority of this higher cash generation to reduce debt. Additional capital management activities are detailed on slide 26. Cash flow from operations was approximately $100 million in the quarter. After repaying $107 million in debt in the first half we paid down an additional $35 million early in the third quarter, returned the total of $19 million to shareholders through share repurchases and dividends during the quarter. We repurchase an additional 189,000 shares in the third quarter, and an average price of $33.29 per share. This increase the year-to-date share repurchases to 763,000 shares to the end of September at an average cost of $28.46 per share. We also announced the sixth consecutive increase in our quarterly cash dividend yesterday which is up 13% from the dividend paid in the third quarter.
That concludes our prepared remarks. I’ll turn it back over to the operator for questions.
[Operator Instructions] Your first question comes from Robert Lee with KBW.
Thanks for taking my questions. I guess maybe my first question is on less than so just curious. I mean, they’re, how you’re thinking about your the distribution leverage you can add or maybe what they can bring to you and I guess they already seem to be in many of the larger or mid size distribution platforms already have presence there, pretty good growth. So no, I mean how much do you think you could possibly accelerate and then maybe by the same token, what is this a deal to your overall SMA business? Is this to what extent do you think this helps maybe the rest of your platform or products that you may have in the SMA market?
Good morning, it’s Dave, and thanks for your question. The WestEnd is, let me start by saying WestEnd is a transformational transaction for us. It sort of put us into a segment of the industry that’s growing very quickly. There is a huge shift going on at the intermediary platforms evolving to models, evolving to more fee based type of accounts. And so for WestEnd the opportunity set to partner with us is to really have first more sales professionals in the field that have a wider geographical reach. So when you think about one of the stats we gave in the prepared remarks of, they do business with 3,000 advisors and we do business with 100,000 advisors. There’s an unbelievable opportunity just to get more advisors to learn about WestEnd. And there are a lot of platforms that they don’t do business with that we do business with.
So we’ll be able to introduce their product set to that group of platforms, and then within the platforms they do business with today will be able to introduce their product to more of the advisors. As we said, in our prepared remarks we are keeping 100% of their employees, their entire distribution force, our distribution force is unbelievably excited, as they learned about this yesterday and I think there’s a real opportunity to accelerate what they’ve already done. And they’ve done a tremendous job of growing their business and establishing their business to be one of the largest third party ETF model providers in the industry. As far as our existing business, there’s a real opportunity for us to cross sell products with advisors to get introduced to advisors that maybe we’re not doing business with today. But we look at this as all additives and this really allows us to utilize and really monetize the investments we’ve made in distribution even further than what we’re doing today.
And then maybe just a quick follow up. I’m assuming post transaction there was no change and what your how you’re thinking about cash and capital management just barely place is kind of paid down at a steady pace and kind of reload, so I would say that there’s a change.
Exactly, no change in our overall capital policy. The strategy we’ve employed over the last few years is to use the primary free cash flow, to pay down debt, and then to have a flexible balance sheet to take advantage of the consolidation that’s happening in the industry and to put ourselves in a position to be flexible and nimble. And when you think about what we’ve accomplished in 2021 with announcing NEC and closing it, and then the anticipation of the close of WestEnd before the end of the year that’s really available to us because of the flexibility of our balance sheet and how prepared it is.
Your next question comes from Alex Blostein with Goldman Sachs.
Thanks for taking the question. A couple questions on NEC. Curious if you could expand a bit on the different products and really the wrappers that they currently have to distribute their product, sort of anything on the open ended side, anything on the professional side, just to get a better understanding for the duration of capital there? And then how quickly do Victor’s distribution could start to add to sort of the organic growth profile on that entity.
So today, NEC really has only private, only has a private fund option available to accredited investors, or qualified investors. Our vision for that business is to continue down that path. And also as we said, make it available to a larger investing base through some of our wrappers that we have today invest in development. We think it’s a great opportunity to really take return streams and really access to private markets and make that available to the masses. I think you’ve seen a lot in the last few weeks with some of the announcements in the industry that we’ve seen. There’s a real opportunity to do that and we think we’re well positioned to do that.
And then on the WestEnd, I think I heard you guys say to 30 basis point for your business. How stable has that been reading all the time, probably over the last couple of years? And as you think about sort of the forward on the tier, what’s the competitive mode for this entity, you think that will prevent fee from coming down as they might I guess we’ll see what maybe some of the other wrappers are ultimately, more kind of passive one to be across?
Alex good morning it’s Mike. Thanks for the question. The WestEnd fee rates as we said in the prepared remarks are about 30 basis points. And they’ve been consistent really since the beginning of their access of their products to the retail platforms that they sit on. We believe going forward but the fee rates have remained stable. They provide really active ETF model portfolios on these platforms, and they’re differentiated in both their structure and how they provide their investment thesis, and so we feel pretty confident that going forward. The basis points that they’re charging that have been consistent will remain the same because of the differentiation that they provide within these platforms.
Your next question comes from Cullen Johnson with B. Riley Securities.
Thanks for taking my questions. So new energies currently about billions not yet immediate, huge fee, but you could probably see some positive net flows there with that start to support the fee rate at the margin, assuming some meaningful AUM growth in that segment?
Hey, Cullen its Mike. Yes, I made a billion dollars it probably won’t provide significant support since we’re 160 billion overall. But as we have said NEC fee rates are typical to private equity, private credit structures. And we do expect that we’ll continue to raise assets going forward with that. From a math perspective, it’s just a little bit too small to provide significant support. But we do feel like the opportunity set for organic growth with NEC is pretty substantive going forward. And it does create the opportunity for us now with an alternatives platform to attract additional alternative products to put within the operating platform.
And then just looking at expenses, the distribution and after base expansion, I guess, kind of late 2019, early 2020, we saw it may be closer to the 50 million range. But lately, it’s been running low 40s, low to mid 40s. Is that probably a fair way to think about that value in the intermediate term here?
Yes. I think the current kind of run rates are definitely the opportunities that go?
Your next question comes from Kenneth Lee with RBC Capital Markets.
Hi, thanks for taking my question. One on the WestEnd remarks, wondering capabilities versus I guess just further growth as tax.
It’s Dave. WestEnd existing distribution penetration, their existing distribution, people combine it with ours and we think putting that together is going to be pretty powerful going forward. We’re anticipating the same type of growth that they’ve achieved over the last four years going forward and accelerating. This is really hitting a couple, as we’ve talked about a couple key points in the industry, their secular tailwinds that we think we’re going to be right in the middle of and then with our distribution and really allowing us to utilize all the investments we’ve made in our distribution we think it’s going to grow quite significantly, but we have not segmented out what exactly Victory is going to do.
Specialist sales are just wondering at a high level, what sorts of changes do you think are needed for your distribution platform in order to start distributing alternative products more widely going forward? Thanks.
It’s Dave, again. We’ve been making those changes already. I think we’ve talked about really preparing and evolving our distribution platform and our overall platform. So some of those changes have occurred with investments in technology and data and some of the different pieces of our distribution. We will evolve going forward in our institutional channel, in our intermediary channel, but there won’t be major changes needed. The alternatives platform like we said, we have studied alternatives for years. We’ve talked to a lot of industry leaders.
We’ve prepared our platform and we think it’s a great opportunity going forward and I think as the buyers have evolved for these kinds of products, I think we’re really well-positioned to take advantage of those with the resources we have today and the continued evolution. The alternatives platform for us our approach is going to be exactly what we’ve done with our traditional platform. We built it over a number of years. We built it a hypothetically, we built it efficiently. I think we built it smartly. And I think the success speaks for itself. And that will be the same path we'll take on the alternative side. We're no rush. We're looking for high quality franchises that are really value added to clients’ portfolios. NEC is a perfect example and I think what will guide us our principles but from a distribution perspective, specifically we're a good ways there and we will evolve the rest of the way as we continue to expand it out.
Your next question comes from Owen Lau with Oppenheimer.
Good morning. Thank you for taking my question. Could you please talk about your appetite for further acquisition in the near term? How should investors think about the pace of the acquisition? Will you take a pause while you're finding the right target, or you're in active dialogue with potential sellers and getting close to the finish line? Thank you.
Hi, Dave again. I would say 21 is going to turn out to be a really active year for us from an acquisition perspective. THD, NEC, and now less than all should close before the end of the year. And that's on the heels of the investment we've made in other words. And I think one thing to point out is really the last four transactions are all what I would term as growth transactions. All areas where we're investing in growth and I think 22 is going to be a year where we're going to really see the impact of that growth on all four of those. As you think about Alderwood fundraising in 22, and THP, starting to really come online, and then NEC, fundraising and 22, as well and then and then the impact of WestEnd, I think you'll see a real impact on our business. When it comes to activity, I've said this quarter-over-quarter, we are active. We will be able to immediately go to another acquisition after we close WestEnd we'll pay down debt very quickly. We have lots of different ways to structure transactions, and we're talking to a lot of folks today.
Our platform is really appealing and I would anticipate that we continue this pace. We're not going to rush anything. There will be pockets of time, where we don't do anything. But it doesn't mean the dialogue is going to stop. But I can tell you that we are active, we are talking to groups actively and there are a lot of great opportunities out there for us. Our guiding principle on acquisitions is pretty simple. It has to make our company better. And I think what we've done has made our company significantly better. And that'll be the approach we use going forward.
Got it. That's very helpful. And then could you please also give us more color of your crypto strategy? What do you see in terms of the institutional adoption of future assets these days? Thank you.
I did not understand the question. Can you repeat it?
Sorry. I just want to see whether you can give us more color of the crypto strategy. Anything related to digital assets? And what do you see in terms of the institutional adoption of digital assets?
Sure. So we launched the crypto product a few months ago. We have seen really good interest. We're in an education phase with a number of our potential clients. We've had some clients purchase the product and I think, when we think about the institutional side, we are in an educational part of the process, given that it's a new asset class. I think longer term, you're going to see institutions use the crypto asset class as a diversifier as an enhancement to a larger portfolio. We've seen an instance a large institution actually buy crypto, which I think is the first step. So we have high hopes for it. We're talking about it with a lot of clients. It's resonating. And we're really in the process of educating which I think is the step before actually purchasing.
Your next question comes from Michael Cyprys with Morgan Stanley.
Thanks for taking the question. And just on the model portfolio space, certainly a growing part of the industry, but it's getting a little crowded too. So can you just talk about what WestEnd is doing differently in the marketplace that is resulting in the growth? And can you also talk about the competitive advantage landscape? How you see that evolving? And what do they need to do, right, in order to be a winner and five years?
Hi, it's Dave. Well, first their investment process, they are active. They've had excellent investment performance over a long period of time. They are well experienced. They give excellent client service really value added to the advisors when they're taking what they do and packaging that up for the advisors for themselves and the advisors to use for their clients. They have a very tax efficient portfolio utilizing ETS. They don't utilize any of their proprietary products. So this is truly a third party makeup of ETFs where they're able to be selective on how they're getting their exposure to different sectors.
If you look at the landscape and you look at what they have to offer, it's really either a holistic solution for an advisor or a complement to an overall portfolio whether maybe 10% to 30% of a portfolio and when you think about how they performed over the different market cycles and also couple that with the tax efficiency and what they're doing from a education of the advisor giving collateral to the advisor it's a really compelling proposition. Going forward I think it's going to be what they're doing today there could be some product expansion that we have discussed which I think could be quite interesting as well but I think they're very-very well-positioned crowded when you look at the overall model industry but they they're in a certain part of the industry where I think they really been able to stand out or will continue to be able to stand out with what they're doing.
Great and then just on the burnout, can you help quantify what the range of potential burn out payments could be? How significant is that? Could it be as large as the upfront payment and what sort of metrics need to be met for that to be fully paid versus partially paid?
Mike good morning. It's Mike. Yes we are now is the upfront purchase is a majority 40 of the total potential purchase price. So the earn outs really is a minority of the purchase price and what I'd say is it's burned out and it's up to the potential to earn it out over five and a half years post the transaction and how it will be earned is really based on revenue growth over that period and then revenue growth just from sizing perspective really will be needs to be in line with their kind of recent growth trends that they've experienced to earn the full earn out. It is a cap turnout and we look at it as should they hit the cap on the earn outs it will be self funding from the cap perspective based on the growth that's delivered.
Your next question comes from Ken Worthington with JPMorgan.
I want to get deeper into alternatives. How do you see filling out your alternative suite of products and what alternative areas are sort of must haves if you're going to meet your vision for this business and what is price change sort of looks like for alternative asset manager acquisition then it seems like such a hot area that pricing could possibly be a challenge to growing that business. Is that possibly the case and can use deal structure to mitigate high prices?
Hi Ken. So the answer the first part of your question as far as filling out the different buckets and alternatives we really start with the client portfolio and think about areas where clients will allocate and we can compete. So we don't really look at it where we must have this kind of capability or that kind of capability. Some areas that we're interested in are definitely private credit, direct lending. We thought about real estate and so those are areas that are interesting to us but I wouldn't say any of them are must haves. We really do start from the client side and really where we think we can add value and can compete.
From a deal cost or pricing perspective, I would say when we beat alternative managers the managers that want to partner with us are really thinking about growth going forward, they are thinking about how do we get access to a much larger client base given our distribution reach and I think that when you have those kinds of conversations upfront pricing is important and you have to be competitive and yes it's more expensive. Strong sharing definitely can get you there but I think it's more of a holistic discussion of what does the future look like and what is the future opportunity to create value and earnings and so the firm's that are looking to know if you will cash out or not or monetize are probably not the kinds of firms that are we're a good partner with I think it's the firm's that are really looking at now how to get access to a larger client base, how do I get to the next levels and organizations, but we don't see pricing today something that we can overcome with structuring with the ability to pay fair prices and really with showing our formula what we have to offer.
Thank you and then in terms of structure following up on Alex's question you implied or talked about bringing some of these alternative products to non-accredited investors and you're working on sort of product structure. How small investments do you think your wrappers could handle it? How far down market do you anticipate being able to go with the alternative platform? Is this is something where you get down to $50,000 for investments, could be 20, could be 10, could be 5 like how small can you support in terms of structure for these alternative products that you envision?
I think that is a complicated answer and what I would say it really depends on the specific factions or stances of the product, how you package the product but I think the longer term opportunity set for us is to go down to the smallest investor all the way to the largest investor and I think that is a great opportunity it's why you're seeing some of the transactions you've seen announced in the last few weeks and I think we are well positioned to take advantage of that but a lot of the facts and circumstances, but I don't see if you will a bottom cap that would prohibit you from taking a certain type of product and a certain situation down to a very small investment which we very additive to that investor is in a properly allocated portfolio.
Your final question comes from Robert Lee with KBW.
Thank you. Thanks for taking my follow up and I apologize if you may cover some of the slides. I had to jump off the call a little bit but just on going back to WestEnd and some of the inputs to the guidance and accretion so the 30 day basis points but you name it just a refresh kind of what kind of baked in growth you have a demand and it would seem just given the moving pieces that no, it's maybe a higher that even though it's very basic points it may be a higher than average EBITDA margin or that really will tax deferred goodwill -- will be a pretty significant. Thanks.
Thanks, Rob. It's Mike. Yes, as we mentioned, the rates on WestEnd are 30 basis points. What I would say is it will be accretive to our overall margins. WestEnd is a highly scale business to-date and as we think about integrating being them into the victory operating a distribution platform we were really be able to utilize efficiently our platform and would expect that there will be minimal incremental investments that we'll need to make it to support the growth that we foresee and Dave had mentioned before that we really see a lot of complimentary opportunities with our distribution with the relationships that we have, that we look at supporting the levels of growth that WestEnd has accomplished on their own there's tremendous upside to that as well as we move forward.
That concludes the Q&A portion of today's call. I'd like to turn the call back over to Mr. David Brown for closing remarks.
Thank you. And thank you for joining us this morning. We look forward to keeping you up-to-date on the execution of our strategy and hope to see you next week we'll be meeting with investors at the Bank of America's banking and financials conference or next month we'll be attending the Goldman Sachs, U.S. financial service conference. Have a wonderful day. Thank you.
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