Virtus Investment Partners Balances Growth With Outflows

Virtus Investment Partners ((VRTS)) has held its Q1 earnings call. Read on for the main highlights of the call.

Virtus Investment Partners’ latest earnings call struck a cautiously mixed tone, as management balanced solid product momentum against sizable asset and earnings pressure. Executives highlighted stronger sales, robust ETF growth, and the strategic Keystone acquisition as proof of business progress, yet persistent net outflows, lower AUM, and near-term leverage weighed heavily on the overall narrative.

Sales Growth Driven by Equities and Retail Channels

Total sales rose 8% to $5.8 billion from $5.3 billion, signaling that client demand is far from collapsing despite headline outflows. Growth was powered by a 26% jump in equity strategy sales and healthier activity across U.S. retail funds, retail separate accounts, and global funds, underscoring the firm’s distribution strength.

ETF Franchise Shows Strong Momentum

ETFs remained a clear bright spot, with ETF AUM increasing to $5.4 billion, up $200 million sequentially and 58% year over year. The segment generated $300 million of positive net flows and $600 million of sales during the quarter, positioning ETFs as a key growth engine within Virtus’ diversified platform.

Keystone Deal Expands Alternatives and Private Credit

Virtus closed a 56% investment in Keystone on March 1 with a $200 million payment, adding $2.3 billion of AUM and broadening its private credit and private markets footprint. As a result, alternatives now exceed 12% of total AUM, up from 9.7% last quarter and 9% a year ago, further tilting the mix toward higher-fee, less correlated strategies.

pockets of Positive Flows Offset Broader Redemptions

Despite firmwide outflows, several strategies attracted fresh money, including high-conviction growth equity, multi-sector fixed income, listed real assets, and event-driven strategies. ETFs and global funds also posted positive net flows, highlighting that pockets of the lineup continue to resonate with investors even as other areas face redemptions.

Flow Trends Show Improvement Late in the Quarter

Management emphasized that flow pressure eased meaningfully as the quarter progressed, with over 80% of net outflows occurring in the first two months. Net outflows moderated in March and into April, while ETF sales and net flows hit their strongest levels since September and institutional known wins modestly outpaced expected redemptions.

Capital Returns and Liquidity Remain Intact

The company continued to return capital, repurchasing about 73,463 shares for $10 million and paying its quarterly dividend. Virtus ended the quarter with $200 million of undrawn revolver capacity and $269 million of other investments, mainly seed capital, preserving financial flexibility despite funding the Keystone deal.

Investment Performance Supports Long-Term Story

Performance metrics remain a core talking point for management, which cited strong three-year results with 78% of fixed income and 71% of alternatives outperforming benchmarks. Over ten years, 54% of equity, 73% of fixed income, and 71% of alternatives strategies beat their benchmarks, providing an important foundation for future distribution and retention efforts.

Fee Rate Outlook Benefits from Keystone Mix Shift

Investment management fees as adjusted slipped 3% to $163.5 million as lower average AUM offset mix benefits, yet the average fee rate improved to 41.9 basis points from 40.6. Management now expects an average fee rate of 43–45 basis points in the second quarter, reflecting a full quarter contribution from Keystone’s higher-fee alternatives business.

Core Operating Margin More Resilient Ex-Seasonal Costs

Reported operating margin came in at 24%, depressed by seasonal employment expenses that concentrated costs in the quarter. Adjusting for these seasonal items, the operating margin was 30.3%, which management pointed to as a cleaner indicator of underlying profitability and cost discipline.

Heavy Net Outflows Drive AUM Decline

Total net outflows reached $8.4 billion, pulling assets under management down to $149 billion at March 31 from $159 billion, a roughly 6.3% decline. Average AUM fell 4% to $158.2 billion, pressuring both revenue and earnings and highlighting the scale of the asset-gathering challenge ahead.

Equity Redemptions and Style Headwinds Weigh on Flows

Outflows were concentrated in equities, as quality-oriented strategies continued to lag a market favoring different styles, prompting significant client redemptions. The quarter included a notable institutional global equity withdrawal and a $1.4 billion redemption from a lower-fee, model-only retail separate account, amplifying the headline outflow figures.

Product-Level Outflows Broad but Moderating in Funds

Institutional strategies posted $3.2 billion of net outflows, while retail separate accounts saw $3.9 billion of net redemptions, including the $1.4 billion model-only exit. Open-end fund net outflows improved to $1.3 billion from $2.5 billion in the prior quarter, and alternatives recorded $400 million of net outflows, driven primarily by managed futures strategies.

Earnings and Operating Income Under Pressure

Adjusted earnings per share declined to $5.38 from $7.16 in the previous quarter, reflecting both seasonal costs and lower average AUM. Adjusted operating income fell to $43.8 million from $61.1 million, reinforcing that near-term profitability is being squeezed even as management invests in growth and diversifying products.

Seasonal and Higher Employment Expenses Inflate Costs

Employment expenses as adjusted increased 11% sequentially to $116.2 million, largely because of $11.4 million in seasonal incentive-related payroll taxes and benefits. These items pushed employment expenses to 58.3% of revenues as adjusted, though excluding seasonal factors they would have represented about 52% of revenues, closer to management’s underlying cost profile.

Lower AUM Puts Pressure on Fee Revenue

Investment management fees as adjusted declined 3% to $163.5 million, with the drop driven primarily by lower average AUM across the franchise. Even though the average fee rate rose thanks to a richer product mix, it was not enough to fully offset the revenue impact of asset declines and net outflows.

Balance Sheet Impacted by Keystone and Higher Leverage

Cash and equivalents fell to $137 million as seasonal uses of cash and the Keystone payment drew down liquidity, while gross debt increased to $448 million from $399 million. Net debt rose to $311 million, around 1.1 times EBITDA, and the firm booked higher contingent consideration and noncontrolling interest liabilities tied to the Keystone structure and manager incentives.

Quarterly Tender Timing Skewed Keystone Flows

Keystone contributed only one month of sales but a full quarter of redemptions because of its quarterly tender structure, distorting the combined flow picture. Management argued that this timing mismatch made reported flows appear weaker in the period and that a full-quarter contribution should better reflect Keystone’s growth potential going forward.

Forward Guidance Points to Higher Fee Rate and Stable Costs

Looking ahead, management expects an average fee rate of roughly 43–45 basis points in the second quarter as Keystone’s full-quarter impact comes through. They forecast employment expenses as adjusted at about 51%–53% of revenues, other operating expenses of $31–$33 million per quarter, noncontrolling interests of $4–$5 million, and an effective tax rate near 14%–15%, framing a more normalized earnings run-rate after Q1’s seasonal distortions.

Virtus’ call painted a picture of a firm leaning into higher-fee products and ETFs while grappling with persistent equity outflows and AUM erosion. Investors will be watching whether improving late-quarter flows, the Keystone expansion, and a richer fee mix can eventually overcome style headwinds and translate into sustained asset growth and a recovery in earnings power.