Company Quick10K Filing
Virtus Investment Partners
Price114.29 EPS9
Shares8 P/E12
MCap939 P/FCF-9
Net Debt13 EBIT101
TEV952 TEV/EBIT9
TTM 2019-09-30, in MM, except price, ratios
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VRTS 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10-K Summary.
EX-2.3 vrts12312017ex-23.htm
EX-21.1 vrts12312017ex-211.htm
EX-23.1 vrts12312017ex-231.htm
EX-31.1 vrts12312017ex-311.htm
EX-31.2 vrts12312017ex-312.htm
EX-32.1 vrts12312017ex-321.htm

Virtus Investment Partners Earnings 2017-12-31

Balance SheetIncome StatementCash Flow
3.22.61.91.30.60.02012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.40.20.1-0.1-0.2-0.42012201420172020
Ops, Inv, Fin

10-K 1 vrts1231201710-k.htm 10-K VRTS 12.31.2017 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-K
 
 
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨
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 1-10994
 
 
 
 
 
virtuslogo10k.jpg
 VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 

Delaware
 
26-3962811
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(800) 248-7971
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
The NASDAQ Stock Market LLC
(including attached Preferred Share Purchase Rights)
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
 
 
 
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨ Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    ¨  Yes    x  No
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.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
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 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
 

x
   
  
Accelerated filer
  
¨
Non-accelerated filer
 

¨  (Do not check if a smaller reporting company)
  
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 Act).    ¨  Yes    x  No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold (based on the closing share price as quoted on the NASDAQ Global Market) as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $774,000,000. For purposes of this calculation, shares of common stock held or controlled by executive officers and directors of the registrant have been treated as shares held by affiliates.
There were 7,171,300 shares of the registrant’s common stock outstanding on February 14, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement which will be filed with the SEC in connection with the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.



Virtus Investment Partners, Inc.
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2017
 
 
 
Page
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
Item 15.
Item 16.

“We,” “us,” “our,” the “Company” and “Virtus,” as used in this Annual Report on Form 10-K (“Annual Report”), refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.




PART I
 
Item 1.
Business.
Organization
Virtus Investment Partners, Inc. (the “Company”), a Delaware corporation, commenced operations on November 1, 1995 through a reverse merger of the investment management subsidiary of Phoenix Life Insurance Company ("Phoenix") with Duff & Phelps Corporation. The Company was a majority-owned subsidiary of Phoenix from 1995 to 2001 and a wholly owned subsidiary from 2001 until 2008. On December 31, 2008, Phoenix distributed 100% of Virtus common stock to Phoenix stockholders in a spin-off transaction.
On June 1, 2017, the Company acquired RidgeWorth Investments ("RidgeWorth," the "Acquisition," or the "Acquired Business"), which provided investment management services through its affiliated managers to clients in North America, Europe and Asia. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the Acquisition.
Our Business
We provide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers and unaffiliated subadvisers, each having its own distinct investment style, autonomous investment process and individual brand. By offering a broad array of products, we believe we can appeal to a greater number of investors and have offerings across market cycles and through changes in investor preferences.

We offer investment strategies for individual and institutional investors in different product structures and through
multiple distribution channels. Our retail products include retail and variable insurance mutual funds ("retail mutual funds"), Undertakings for Collective Investments in Transferable Securities ("UCITS" and collectively with retail mutual funds the "Open-end funds"), closed-end funds, exchange traded funds ("ETFs") and separate accounts. For certain of our open-end mutual funds and ETFs, we employ unaffiliated subadvisers to provide investment services. We market our retail funds and UCITS through financial intermediaries. Our closed-end funds and ETFs trade on exchanges such as the New York Stock Exchange and NASDAQ. Our variable insurance funds are available as investment options in variable annuities and life insurance products distributed by life insurance companies. Retail separate accounts are available in intermediary programs, sponsored and distributed by unaffiliated brokerage firms, and private client accounts, offered to the high net-worth clients of one of our affiliated managers. Our institutional products include separate accounts for corporations, multi-employer retirement funds, public employee retirement systems, foundations and endowments as well as subadvisory services to unaffiliated mutual funds and collateral manager services for sponsored structured finance products.

Our earnings are primarily driven by asset-based fees charged for services relating to these products including investment management, fund administration, distribution and shareholder services. These fees are based on a percentage of assets under management (“AUM”) and are calculated using daily or weekly average assets, quarter-end assets, or average month-end assets depending on the product.

Our Investment Managers

We provide investment management services through our investment managers who are registered under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). The investment managers are responsible for portfolio management activities for our retail and institutional products operating under advisory or subadvisory agreements. We provide our affiliated managers with distribution, operational and administrative support, thereby allowing each manager to focus primarily on investment management. We also engage select unaffiliated managers for certain of our retail and exchange traded funds. We monitor our managers’ services by assessing their performance, style, consistency and the discipline with which they apply their investment process.

Our affiliated investment managers and their respective assets under management, styles and strategies are as follows:

Ceredex Value Advisors LLC provides investment management services to mutual funds and institutional investors and specializes in value-oriented strategies in large-, mid-, and small-cap equities. As of December 31, 2017, Ceredex had $10.1 billion in assets under management.


1


Duff & Phelps Investment Management Co. provides investment management services to mutual funds and institutional investors and specializes in equity income strategies investing in global listed infrastructure, U.S. and global real estate, energy, and international equities as well as MLPs. As of December 31, 2017, Duff & Phelps had $10.3 billion in assets under management.

Kayne Anderson Rudnick Investment Management, LLC provides investment management and wealth advisory solutions to mutual funds, institutional investors, financial intermediaries and high-net-worth individuals specializing in quality-oriented equity strategies across market capitalizations from small to large cap and in global, international and emerging strategies. As of December 31, 2017, Kayne had $18.8 billion in assets under management.

Newfleet Asset Management, LLC provides fixed income investment management services to mutual funds and institutional investors, specializing in multi-sector, enhanced core strategies and dedicated sector strategies such as bank loans and high yield. As of December 31, 2017, Newfleet Asset Management had $11.8 billion in assets under management.

Rampart Investment Management Company, LLC provides quantitative and options related portfolio management services to mutual funds, institutional investors and intermediaries. As of December 31, 2017, Rampart had $1.8 billion in assets under management.

Seix Investment Advisors, LLC provides fixed income portfolio management services to mutual funds, institutional and individual client accounts using high yield, investment grade taxable and tax-exempt, leveraged loans, and multi-sector strategies. As of December 31, 2017, Seix had $24.9 billion in assets under management.

Silvant Capital Management LLC provides investment management services to mutual funds and institutional investors and specializes in growth equity strategies, including large cap growth, concentrated large cap growth, large cap core growth, and small cap growth. As of December 31, 2017, Silvant had $1.1 billion in assets under management.

As of December 31, 2017, $11.0 billion in assets under management were managed by unaffiliated managers.


Our Investment Products
Our assets under management are in open-end funds (U.S. 1940 Act mutual funds and UCITS), closed-end funds, exchange traded funds, retail separate accounts (intermediary sponsored and private client), institutional accounts, and structured products.

Assets Under Management by Product as of
December 31, 2017
($ in billions)
 
Fund assets
 
Open-end funds
$
43.1

Closed-end funds
6.7

Exchange traded funds
1.0

Retail separate accounts
13.9

Institutional accounts
20.8

Structured products
3.3

Total Long-Term
88.8

Liquidity (1)
2.1

Total Assets Under Management
$
91.0


(1) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts.

Open-End Funds

As of December 31, 2017, we managed 88 open-end funds in U.S. 1940 Act mutual funds and UCITS, with total assets of $43.1 billion. Our open-end mutual funds are offered in a variety of asset classes (domestic and international equity, taxable and non-taxable fixed income, and alternative investments), market capitalizations (large, mid and small), styles (growth, blend and value) and investment approaches (fundamental, quantitative and thematic). Our Ireland domiciled UCITS are offered in select investment strategies to non-U.S. investors.

2



Summary information about our open-end funds as of December 31, 2017 is as follows:
Fund Type
 
Number of Funds Offered
 
Total Assets
 
Advisory Fee
Range (1)
 
 
 
 
($ in millions)
 
(%)
Fixed Income
 
28

 
$
18,171.9

 
1.85-0.21
US Equity
 
23

 
11,370.6

 
1.15-0.40
International/Global Equity
 
12

 
11,250.1

 
1.20-0.65
Alternatives
 
8

 
1,393.1

 
1.30-0.55
Asset Allocation
 
17

 
891.9

 
1.00-0.30
Total Open-End Funds
 
88

 
$
43,077.6

 
 

(1)
Percentage of average daily net assets of each fund. The percentages listed represent the range of management advisory fees paid by the funds, from the highest to the lowest. The range indicated includes the impact of breakpoints at which management advisory fees for certain of the funds in each fund type decrease as assets in the funds increase. Subadvisory fees paid on funds managed by unaffiliated subadvisers are not reflected in the percentages listed.


Closed-End Funds

We managed the following eight closed-end funds as of December 31, 2017, each of which is traded on the New York Stock Exchange, with total assets of $6.7 billion:
Fund Type/Name
Assets
 
Advisory
Fee
 
 
 
($ in millions)
 
%
 
 
Balanced
 
 
 
 
 
DNP Select Income Fund Inc.
$
3,824.3

 
0.60-0.50 

 
(1)
Virtus Global Dividend & Income Fund Inc.
439.2

 
0.70

 
(2)
Virtus Total Return Fund
395.7

 
0.85

 
(2)
Equity
 
 
 
 
 
Duff & Phelps Global Utility Income Fund Inc.
926.9

 
1.00

 
(1)
Alternatives
 
 
 
 
 
Duff & Phelps Select Energy MLP Fund
237.8

 
1.00

 
(2)
Fixed Income
 
 
 
 
 
Duff & Phelps Utility and Corporate Bond Trust Inc.
380.0

 
0.50

 
(1)
Virtus Global Multi-Sector Income Fund
263.1

 
0.95

 
(2)
DTF Tax-Free Income Inc.
199.2

 
0.50

 
(1)
Total Closed-End Funds
$
6,666.2

 
 
 
 
 
(1)
Percentage of average weekly net assets. A range indicates that the fund has breakpoints at which management advisory fees decrease as assets in the fund increase.
(2)
Percentage of average daily net assets of each fund.


3


Exchange Traded Funds

We managed the following 12 exchange traded funds with total assets under management of $1.0 billion at December 31, 2017:
Fund Name
Assets
 
Advisory
Fee (1)
 
 
($ in millions)
 
%
 
Infracap MLP ETF
$
614.6

 
0.075

 
Virtus Newfleet Multi-Sector Unconstrained Bond ETF
160.1

 
0.700

 
Virtus Newfleet Dynamic Credit ETF
105.0

 
0.550

 
Virtus LifeSci Biotech Products ETF
38.5

 
0.075

 
Virtus LifeSci Biotech Clinical Trials ETF
31.2

 
0.075

 
Virtus Cumberland Municipal Bond ETF
22.9

 
0.490

 
InfraCap REIT Preferred ETF
17.9

 
0.075

 
Virtus Glovista Emerging Markets ETF
15.0

 
0.680

 
iSectors Post-MPT Growth ETF
13.6

 
0.125

 
Reaves Utilities ETF
13.0

 
0.075

 
Virtus WMC Global Factor Opportunities ETF
5.1

 
0.550

 
Virtus Enhanced Short U.S. Equity ETF
2.3

 
0.490

 
 
$
1,039.2

 
 
 
(1)    Percentage of average daily net assets of each fund. Subadvisory fees paid on funds managed by unaffiliated subadvisers are not reflected in the percentages listed.

Retail Separate Accounts

Intermediary-Sold Managed Accounts

Intermediary-sold managed accounts are individual investment accounts that are primarily contracted through intermediaries as part of investment programs offered to retail investors.  At December 31, 2017, the Company had $10.3 billion of intermediary-sold managed accounts

High Net Worth Accounts

High net worth accounts are investment accounts offered by our affiliate, Kayne Anderson Rudnick, directly to individual investors.  Kayne Anderson Rudnick employs a staff of financial advisors who provide investment advisory services through both affiliated and unaffiliated investment managers.  As of December 31, 2017, Kayne Anderson managed $3.7 billion of assets in high net worth accounts.

Institutional Accounts

We offer a variety of equity and fixed income strategies to institutional clients, including corporations, multi-employer retirement funds, public employee retirement systems, foundations and endowments as well as subadvisory services to unaffiliated mutual funds. Our institutional assets under management totaled $20.8 billion as of December 31, 2017.

Structured Products

We act as collateral manager for structured finance products, that primarily consist of collateralized loan obligations ("CLOs"). As of December 31, 2017, we managed $3.3 billion in structured finance products.


4


Our Investment Management, Administration and Shareholder Services
Our investment management fees, administration fees and shareholder service fees earned in each of the last three years were as follows:
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
($ in thousands)
 
 
 
 
 
Investment management fees
 
 
 
 
 
Open-end funds
$
175,260

 
$
129,542

 
$
163,243

Closed-end funds
44,687

 
43,342

 
46,328

Exchange traded funds
2,315

 
1,273

 
423

Retail separate accounts
54,252

 
40,155

 
37,296

Institutional accounts
46,600

 
18,707

 
16,643

Structured products
6,302

 
2,211

 
932

Liquidity products
1,659

 

 

Total investment management fees
331,075

 
235,230

 
264,865

Administration fees
34,413

 
26,997

 
33,981

Shareholder service fees
14,583

 
11,264

 
14,266

Total
$
380,071

 
$
273,491

 
$
313,112



Investment Management Fees

We provide investment management services pursuant to investment management agreements through our affiliated investment advisers (each an “Adviser”). With respect to our funds, the Adviser provides overall management services to a fund, subject to supervision by the fund’s board of directors, pursuant to agreements that must be approved annually by each fund’s board of directors and which may be terminated without penalty upon written notice, or automatically, in certain situations, such as a “change in control” of the Adviser. We earn fees based on each fund’s average daily or weekly net assets with most fee schedules providing for rate declines or “breakpoints” as asset levels increase to certain thresholds. For funds managed by subadvisers, the agreement provides that the subadviser manage the day-to-day investment management of the fund’s portfolio and receive a management fee from the Adviser based on the percentage of average daily net assets in the funds they subadvise or a percentage of the Adviser’s management fee. Each fund bears all expenses associated with its operations. In some cases, to the extent total fund expenses exceed a specified percentage of a fund’s average net assets, the Adviser has agreed to reimburse the funds for such excess expenses. For certain of our exchange traded funds managed by unaffiliated subadvisers, the subadviser has agreed to pay the fund’s operating expenses.
For retail separate accounts and institutional accounts, fees are negotiated and based primarily on asset size, portfolio complexity and individual client requests. Fees for structured finance products, for which we act as the collateral manager, consist of senior, subordinated and, in certain instances, incentive management fees. Senior and subordinated management fees are calculated at a contractual fee rate applied against the end of the preceding quarter par value of the total collateral being managed with subordinated fees being recognized only after certain portfolio criteria are met. Incentive fees on certain of our CLOs are typically 20% of the excess cash flows available to holders of the subordinated notes, above a threshold level internal rate of return.

Administration Fees

We provide various administrative fund services to our open-end funds and certain of our closed-end funds. We earn fees based on each fund’s average daily or weekly net assets. These services include: record keeping, preparing and filing documents required to comply with securities laws, legal administration and compliance services, customer service, supervision of the activities of the funds’ service providers, tax services and treasury services as well as providing office space, equipment and personnel that may be necessary for managing and administering the business affairs of the funds.

Shareholder Service Fees

We provide shareholder services to our open-end mutual funds. We earn fees based on each fund’s average daily net assets. Shareholder services include maintaining shareholder accounts, processing shareholder transactions, preparing filings and performing necessary reporting, among other things. We engage third-party service providers to perform certain aspects of the shareholder services.

5



Our Distribution Services

We distribute our open-end funds and ETFs through financial intermediaries. We have broad access in the retail market, with distribution partners that include national and regional broker-dealers and independent financial advisory firms. Our sales efforts are supported by regional sales professionals, a national account relationship group, and a separate team for retirement and insurance products.

Our retail separate accounts are distributed through financial intermediaries and directly by teams at our affiliated managers. Our institutional services are marketed through relationships with consultants as well as directly to clients. We target key market segments, including foundations and endowments, corporate, public and private pension plans, and offer subadvisory services to unaffiliated mutual funds.

Our Broker-Dealer Services

We operate two broker-dealers that are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are members of the Financial Industry Regulatory Authority (“FINRA”). They serve as principal underwriters and distributors of our open-end mutual funds and ETFs. Our broker-dealers are subject to the Securities and Exchange Commission’s (“SEC”) net capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of broker-dealers.
Open-end mutual fund shares and UCITS fund shares are distributed by VP Distributors, LLC ("VPD") under sales agreements with unaffiliated financial intermediaries. VPD also markets advisory services to sponsors of retail separate accounts. ETF Distributors, LLC (“ETFD”) serves as the principal underwriter and distributor of our ETFs.

Our Competition
We face significant competition from a wide variety of financial institutions, including other investment management companies, as well as from proprietary products offered by our distribution partners such as banks, broker-dealers and financial planning firms. Competition in our businesses is based on several factors including investment performance, fees charged, access to distribution channels and service to financial advisers and their clients. Our competitors, many of which are larger than us, often offer similar products and use similar distribution sources and may also offer less expensive products, have greater access to key distribution channels, and have greater resources than we do.
Our Regulatory Matters
We are subject to regulation by the SEC, FINRA and other federal and state agencies and self-regulatory organizations. Each affiliated manager and unaffiliated subadviser is registered with the SEC under the Investment Advisers Act. Each open-end mutual fund, closed-end fund and ETF is registered with the SEC under the Investment Company Act of 1940 (the “Investment Company Act”). Our UCITs are subject to regulation by the Central Bank of Ireland (“CBI”), and the funds and each investment manager and sub-investment manager to the UCITs are registered with the CBI.
The financial services industry is highly regulated, and failure to comply with related laws and regulations can result in the revocation of registrations, the imposition of censures or fines, and the suspension or expulsion of a firm and/or its employees from the industry. All of our U.S.-domiciled open-end mutual funds are currently available-for-sale and are qualified in all 50 states, Washington, D.C., Puerto Rico, Guam and the U.S. Virgin Islands. Our Global Funds are sold through financial intermediaries to investors who are not citizens of or residents of the United States. Most aspects of our investment management business, including the business of the unaffiliated subadvisers, are subject to various U.S. federal and state laws and regulations.
Our officers, directors and employees may, from time to time, own securities that are also held by one or more of our funds. Our internal policies with respect to personal investments are established pursuant to the provisions of the Investment Company Act and/or the Investment Advisers Act. Employees, officers and directors who, in the function of their responsibilities to us, meet the requirements of the Investment Company Act, Investment Advisers Act and/or FINRA regulations must disclose personal securities holdings and trading activity. Employees, officers and directors with investment discretion or access to investment decisions are subject to additional restrictions with respect to the pre-clearance of the purchase or sale of securities over which they have investment discretion or beneficial interest. Other restrictions are imposed upon supervised persons with respect to personal transactions in securities that are held, recently sold, or contemplated for purchase by our mutual funds. All supervised persons are required to report holdings and transactions on an annual and quarterly basis pursuant to the provisions of the Investment Company Act and Investment Advisers Act. In addition, certain transactions are restricted so as to avoid the possibility of improper use of information relating to the management of client accounts.

6


Our Employees
As of December 31, 2017, we had 543 full-time equivalent employees. None of our employees are represented by a union.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as proxy statements, are available free of charge on our website located at www.virtus.com as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Reports, proxy statements and other information regarding issuers that file electronically with the SEC, including our filings, are also available to the public on the SEC’s website at http://www.sec.gov.
A copy of our Corporate Governance Principles, our Code of Conduct and the charters of our Audit Committee, Compensation Committee, Governance Committee and Risk and Finance Committee are posted under “Corporate Governance” in the Investor Relations section of our website, www.virtus.com, and are available in print to any person who requests copies by contacting Investor Relations by email to: investor.relations@virtus.com or by mail to Virtus Investment Partners, Inc., c/o Investor Relations, 100 Pearl Street, Hartford, CT 06103. Information contained on the website is not incorporated by reference or otherwise considered part of this document.


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Item 1A.
Risk Factors.
This section describes some of the potential risks relating to our business, such as market, liquidity, operational, reputation and regulatory risks. The risks described below are some of the more important factors that could affect our business. You should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K, in evaluating the Company and our common stock. If any of the risks described below actually occur, our business, revenues, profitability, results of operations, financial condition, cash flows, reputation and stock price could be materially adversely affected.
Risks Relating to Our Business

We earn substantially all of our revenues based on assets under management, which fluctuate based on many factors, and any reduction in assets under management would reduce our revenues and profitability. Assets under management fluctuate based on many factors including market conditions, investment performance and client withdrawals.

The majority of our revenues are generated from asset-based fees from investment management products and services to individuals and institutions. Therefore, if assets under management decline, our fee revenues would decline, reducing profitability as some of our expenses are fixed. Assets under management could decline, due to a variety of factors, including, but not limited to, the following:

General domestic and global economic and political conditions can influence assets under management. Changes in interest rates, the availability and cost of credit, inflation rates, economic uncertainty, changes in laws, trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts and security operations) and other conditions may impact the equity and credit markets which may influence our assets under management. Capital and credit markets can experience substantial volatility. Employment rates, continued economic weakness and budgetary challenges in parts of the world, the prospective impact of the United Kingdom’s withdrawal from the European Union, regional turmoil in the Middle East, concern over growth prospects in China and emerging markets, growing debt loads for certain countries, and uncertainty about the consequences of governments eventually withdrawing monetary stimulus all indicate that economic and political conditions remain unpredictable. If the security markets decline or experience volatility, our assets under management and our revenues could be negatively impacted. Changes in currency exchange rates such as an increase in the value of the U.S. dollar relative to non-U.S. currencies could result in a decrease in the U.S. dollar value of assets under management that are denominated in non-U.S. currencies. In addition, diminishing investor confidence in the markets and/or adverse market conditions could result in a decrease in investor risk tolerance. Such a decrease could prompt investors to reduce their rate of investment or to fully withdraw from markets, which could lower our overall assets under management and have an adverse effect on our revenues, earnings and growth prospects.

The volatility in the markets in the recent past has highlighted the interconnection of the global markets and demonstrated how the deteriorating financial condition of one institution may materially adversely impact the performance of other institutions. Our assets under management have exposure to many different industries and counterparties and may be exposed to credit, operational or other risk due to the default by a counterparty or client or in the event of a market failure or disruption. In the event of extreme circumstances, including economic, political or business crises, such as a widespread systemic failure in the global financial system or failures of firms that have significant obligations as counterparties, we may suffer significant declines in assets under management and severe liquidity or valuation issues.

The value of assets under management can decline due to price declines in specific securities, market segments or geographic areas where those assets are invested. Funds and portfolios that we manage focused on certain geographic markets and industry sectors are particularly vulnerable to political, social and economic events in those markets and sectors. If these markets or industries decline or experience volatility, this could have a negative impact on our assets under management and our revenues. For example, certain non-U.S. markets, particularly emerging markets, are not as developed or as efficient as the U.S. financial markets and, as a result, may be less liquid, less regulated and significantly more volatile than the U.S. financial markets. Liquidity in such markets may be adversely impacted by factors including political or economic events, government policies, expropriation, volume trading limits by foreign investors, and social or civil unrest. These factors may negatively impact the market value of an investment or our ability to dispose of it.


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Any real or perceived negative absolute or relative performance could negatively impact the maintenance and growth of assets under management. Sales and redemptions of our investment strategies can be affected by investment performance relative to other competing investment strategies or to established benchmarks. Our investment management strategies are rated, ranked or assessed by independent third-parties, distribution partners, and industry periodicals and services. These assessments often influence the investment decisions of clients. If the performance or assessment of our investment strategies is seen as underperforming relative to peers, it could result in an increase in the withdrawal of assets by existing clients and the inability to attract additional investments from existing and new clients. In addition, certain of our investment strategies have capacity constraints, as there is a limit to the number of securities available for the strategy to operate effectively. In those instances, we may choose to limit access to new or existing investors. In addition, certain mutual funds employ the use of leverage as part of their investment strategies, which will increase or decrease assets under management, and the risk associated with the investment, as the proceeds from the use of leverage are invested in accordance with the funds’ investment strategies.

Changes in interest rates can have adverse effects on our assets under management. Increases in interest rates from their historically low levels may adversely affect the net asset values of our assets under management. Furthermore, increases in interest rates may result in reduced prices in equity markets. Conversely, decreases in interest rates could lead to outflows in fixed income assets that we manage as investors seek higher yields. Any of these effects could lower our assets under management and revenues and, if our revenues decline without a commensurate reduction in our expenses, would lead to a reduction in our net income.

Any of these factors could cause our assets under management to decline and have an adverse impact on our results of operations and financial condition. Additionally we may be unable to effect appropriate expense reductions in a timely manner in response to these adverse impacts.

Our investment advisory agreements are subject to withdrawal, renegotiation or termination on short notice which could negatively impact our business.
Our clients include the boards of directors for our sponsored mutual funds, managed account program sponsors, private clients and institutional clients. Our investment management agreements with these clients may be terminated on short notice without penalty. As a result, there would be little impediment to these sponsors or clients terminating our agreements. Our clients may renegotiate their investment contracts or reduce the assets we manage for them due to a number of reasons including but not limited to investment performance, reputational, regulatory or compliance issues, loss of key investment management or other personnel or a change in management of third-party distributors or others with whom we have relationships. The directors of our sponsored funds may deem it to be in the best interests of a fund’s shareholders to make decisions adverse to us, such as reducing the compensation paid to us, requesting that we subsidize fund expenses over certain thresholds, or imposing restrictions on our management of the fund. Under the Investment Company Act, investment advisory agreements automatically terminate in the event of an assignment, which may occur if, among other events, the Company undergoes a change in control, such as any person acquiring 25% voting rights of our common stock. If an assignment were to occur, we cannot be certain that the fund’s board of directors and its stockholders would approve a new investment advisory agreement. In addition, investment advisory agreements for the separate accounts we manage may not be assigned without the consent of the client. If an assignment occurs, we cannot be certain that the Company will be able to obtain the necessary fund approvals or the necessary consents from our clients. The withdrawal, renegotiation or termination of any investment management contract relating to a material portion of assets under management would have an adverse impact on our results of operations and financial condition.

Any damage to our reputation could harm our business and lead to a reduction in our revenues and profitability.
Maintaining a positive reputation with the investment community and other constituencies is critical to our success. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate even if they are without merit or satisfactorily addressed. Our reputation may be impacted by many factors, including but not limited to: poor performance; litigation; conflicts of interests; regulatory inquiries, investigations or findings; operational failures (including cyber breaches); intentional or unintentional misrepresentation of our products or services; material weaknesses in our internal controls; or employee misconduct or rumors. Any damage to our reputation could impede our ability to attract and retain clients and key personnel, adversely impact relationships with third-party distributors and other business partners, and lead to a reduction in the amount of our assets under management, any of which could adversely affect our results of operations and financial condition.


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We manage client assets under agreements that have investment guidelines or other contractual requirements, and any failure to comply could result in claims, losses or regulatory sanctions, which could negatively impact our revenues and profitability.
The agreements under which we manage client assets often have established investment guidelines or other contractual requirements with which we are required to comply in providing our investment management services. Although we maintain various compliance procedures and other controls to prevent, detect and correct such errors, any failure or allegation of a failure to comply with these guidelines or other requirement could result in client claims, reputational damage, withdrawal of assets, and potential regulatory sanctions, any of which could have an adverse impact on our results of operations and financial condition.

Our indebtedness contains covenants that require annual principal repayments and other provisions that could adversely affect our financial position or results of operations
We incur indebtedness for a variety of business reasons, including in relation to financing acquisitions. The indebtedness we incur can take many forms including but not limited to term loans or revolving lines of credit which customarily contain covenants. For example, under our Credit Agreement, we are required to use a portion of our cash flow to service interest and make required annual principal payments, which will restrict our cash flow available to pursue business growth opportunities. The Credit Agreement also contains covenants that limit our ability to return capital to shareholders. In addition, our indebtedness may make it more difficult for us to withstand or respond to adverse or changing business, regulatory and economic conditions.

At December 31, 2017, the Company had $259.4 million of total debt outstanding, excluding debt of consolidated investment products, and $100.0 million in unused capacity on a credit facility. On February 15, 2018, the Company amended its Credit Agreement, which resulted in the availability of $105.0 million of additional term loan financing and is expected to be drawn at the closing of our acquisition of a majority interest in Sustainable Growth Advisers LLC ("SGA"), although there can be no assurances the SGA transaction will close. The amendment to the Credit Agreement removed the previous financial maintenance covenant on the Term Loan and replaced the existing financial maintenance covenant on our credit facility with a net leverage ratio financial maintenance covenant that applies when $30.0 million or more of debt is outstanding on the credit facility. We cannot provide assurances that at all times in the future we will satisfy all such covenants or obtain any required waiver or amendment, in which event all indebtedness could become immediately due. Any or all of the above factors could materially adversely affect our financial position or results of operations.

Our business relies on the ability to attract and retain key employees, and the loss of such employees could negatively affect our financial performance.
The success of our business is dependent to a large extent on our ability to attract and retain key employees such as senior executives, portfolio managers, securities analysts and sales personnel. Competition in the job market for these professionals is generally intense, and compensation levels in the industry are highly competitive. Our industry is also characterized by the movement of investment managers among different firms.

If we are unable to continue to attract and retain key employees, or if compensation costs required to attract and retain key employees increase, our performance, including our competitive position, could be materially adversely affected. Additionally, we utilize Company equity awards as part of our compensation plans and as a means for recruiting and retaining key employees. Declines in our stock price could result in deterioration of the value of equity awards granted, thus lessening the effectiveness of using stock-based awards to retain key employees.

In certain circumstances, the departure of key employees could cause higher redemption rates in certain strategies or the loss of certain client accounts. Any inability to retain key employees, attract qualified employees, or replace key employees in a timely manner, could lead to a reduction in the amount of our assets under management, which could have a material adverse effect on our revenues and profitability. In addition, there could be additional costs to replace, retain or attract new talent that could result in a decrease in our profitability and have an adverse impact on our results of operations and financial condition.

The highly competitive nature of the asset management industry may require us to reduce our fees, or increase amounts paid to financial intermediaries, any of which could result in a reduction of our revenues and profitability.
We face significant competition from a wide variety of financial institutions, including other investment management companies, as well as from proprietary products offered by our distribution partners such as banks, broker-dealers and financial planning firms. Competition in our businesses is based on several factors including investment performance, fees charged, access to distribution channels, and service to financial advisers. Our competitors, many of which are larger than we are, often offer similar products, use similar distribution sources, offer less expensive products, have greater access to key distribution channels, and have greater resources, geographic footprints and name recognition than we do. Additionally, certain products and asset classes which we do not currently offer, such as passive or index-based products, are becoming increasingly popular

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with investors. Existing clients may withdraw their assets in order to invest in these products, and we may be unable to attract additional investments from existing and new clients, which would lead to a decline in our assets under management and market share.

Our profits are highly dependent on the fee levels for our products and services. In recent years, there has been a trend in certain segments of our markets toward lower fees and lower-fee products, such as passive products. Competition could cause us to reduce the fees that we charge for our products and services. In order to maintain appropriate fee levels in a competitive environment, we must be able to continue to provide clients with investment products and services that are viewed as appropriate in relation to the fees charged. If our clients, including our fund boards, were to view our fees as being high relative to the market or the returns provided by our investment products, we may choose or be required to reduce our fee levels or we may experience significant redemptions in our assets under management, which could have an adverse impact on our results of operations and financial condition.

We are subject to an extensive and complex regulatory environment, and changes in regulations or failure to comply with regulations could adversely affect our revenues and profitability.
The investment management industry in which we operate is subject to extensive and frequently changing regulation. We are regulated by the Securities and Exchange Commission ("SEC") under the Exchange Act, the Investment Company Act and the Investment Advisers Act, and we are subject to regulation by the Commodities Futures Trading Commission under the Commodities Exchange Act. Our Global Funds and advisers are subject to regulation by the CBI. We are also regulated by FINRA, the Department of Labor under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), as well as other federal and state laws and regulations.

The regulatory environment in which we operate changes often and has seen increased focus in recent years. For example, in fiscal 2016 the SEC adopted a new rule addressing liquidity risk management by registered open-end funds, with implementation of the rule expected in 2018. The SEC also recently proposed rules regarding the use of derivatives by registered open- and closed-end funds. If the liquidity risk management rule is implemented in its current form and the use of derivatives rules are adopted substantially as proposed, they could negatively impact the provision of investment services or limit opportunities for certain funds that we manage and increase our management and administration costs, with potential adverse effects on our revenues, expenses and results of operations.

Although we spend extensive time and resources on compliance efforts designed to ensure compliance with all applicable laws and regulations, if we or our affiliates fail to properly modify and update our compliance procedures in a timely manner in this changing and highly complex regulatory environment, we may be subject to various legal proceedings, including civil litigation, governmental investigations and enforcement actions, that could result in fines, penalties, suspensions of individual employees, or limitations on particular business activities, any of which could have an adverse impact on our results of operations and financial condition.

Changes in tax laws and unanticipated tax obligations could have an adverse impact on our financial condition, results of operations and cash flow.
We are subject to federal and state income taxes in the United States. Tax authorities may disagree with certain positions we have taken or implement changes in tax policy, which may result in the assessment of additional taxes. We regularly assess the appropriateness of our tax positions and reporting. We cannot provide assurance, however, that we will accurately predict the outcomes of audits, and the actual outcomes of these audits could be unfavorable. In addition, our ability to use net operating loss carryforwards and other tax attributes available to us will be dependent on our ability to generate taxable income.

We utilize unaffiliated firms in providing investment management services, and any matters that have an adverse impact on their business, or any change in our relationships with them, could lead to a reduction in assets under management, which would adversely affect our revenues and profitability.
We utilize unaffiliated subadvisers as investment managers for certain of our retail products, and we have licensing arrangements with unaffiliated data providers. Because we typically have no ownership interests in these unaffiliated firms, we do not control the business activities of such firms. Problems stemming from the business activities of these unaffiliated firms may negatively impact or disrupt such firms’ operations or expose them to disciplinary action or reputational harm. Furthermore, any such matters at these unaffiliated firms may have an adverse impact on our business or reputation or expose us to regulatory scrutiny, including with respect to our oversight of such firms.

We periodically negotiate provisions and renewals of these relationships, and we cannot provide assurance that such terms will remain acceptable to us or the unaffiliated firms. These relationships can also be terminated upon short notice without penalty. In addition, the departure of key employees at unaffiliated subadvisers or data providers could cause higher redemption rates for certain assets under management or the loss of certain client accounts. An interruption or termination of unaffiliated

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firm relationships could affect our ability to market our products and result in a reduction in assets under management, which could have an adverse impact on our results of operations and financial condition.

We distribute through intermediaries, and changes in key distribution relationships could reduce our revenues, increase our costs and adversely affect our profitability.
Our primary source of distribution for retail products is through intermediaries that include third-party financial institutions, such as: major wire houses; national, regional and independent broker-dealers and financial advisors; banks and financial planners; and registered investment advisors. Our success is highly dependent on access to these various distribution systems. These distributors are generally not contractually required to distribute our products and typically offer their clients various investment products and services, including proprietary products and services, in addition to and in competition with our products and services. While we compensate these intermediaries for selling our products and services pursuant to contractual agreements, we may not be able to retain access to these channels at all or at similar pricing. Increasing competition for these distribution channels could cause our distribution costs to rise, which could have a material adverse effect on our business, revenues and profitability. To the extent that existing or future intermediaries prefer to do business with our competitors, the sales of our products as well as our market share, revenues and profitability could decline.

We and our third-party service providers rely on numerous technology systems, and any temporary business interruption, security breach or system failures could negatively impact our business and profitability.
Our technology systems, and those of third-party service providers are critical to our operations. The ability to consistently and reliably obtain accurate securities pricing information, process client portfolio and fund shareholder transactions, and provide reports and other customer service to fund shareholders and clients in other accounts managed by us is an essential part of our business. Any delays or inaccuracies in obtaining pricing information, processing such transactions or such reports, other breaches and errors, and any inadequacies in other customer service could result in reimbursement obligations or other liabilities or alienate customers and potentially give rise to claims against us. Our customer service capability, as well as our ability to obtain prompt and accurate securities pricing information and to process transactions and reports, is highly dependent on third-party service providers’ information systems. Any failure or interruption of those systems, whether resulting from technology or infrastructure breakdowns, defects or external causes such as fire, natural disaster, computer viruses, acts of terrorism or power disruptions, could result in financial loss, negatively impact our reputation and negatively affect our ability to do business. Although we, and our third-party service providers, have disaster recovery plans in place, we may experience temporary interruptions if a natural or man-made disaster or prolonged power outage were to occur, which could have an adverse impact on our results of operations and financial condition.

In addition, like other companies, our computer systems are regularly subject to, and expected to continue to be the target of, computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. Over time, the sophistication of cyber threats continues to increase, and any controls we put in place and preventative actions we take to reduce the risk of cyber incidents and protect our information systems may be insufficient to detect or prevent unauthorized access, cyber-attacks or other security breaches to our computer systems or those of third parties with whom we do business. Breach of our technology systems, or of those of third parties with whom we do business through cyber-attacks, or failure to manage and secure our technology environment could result in interruptions or malfunctions in the operations of our business, loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by a breach, additional costs to mitigate against future incidents, and litigation costs resulting from an incident.

We and certain of our third-party vendors receive and store personal information as well as non-public business information. Although we and our third-party vendors take precautions, we may still be vulnerable to hacking or other unauthorized use. A breach of the systems or hardware could result in an unauthorized access to our proprietary business or client data or release of this type of data, which could subject us to legal liability or regulatory action under data protection and privacy laws, which may result in fines or penalties, the termination of existing client contracts, costly mitigation activities and harm to our reputation. This could have an adverse impact on our results of operations and financial condition.

A relatively large percentage of our common stock is concentrated with a small number of shareholders, which could increase the volatility in our stock trading and affect our share price.
A large percentage of our common stock is held by a limited number of shareholders. If our larger shareholders decide to liquidate their positions, it could cause significant fluctuation in the share price of our common stock. Public companies with a relatively concentrated level of institutional shareholders, such as we have, often have difficulty generating trading volume in their stock, which may increase the volatility in the price of our common stock.


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Civil litigation and government investigations or proceedings could adversely affect our business.
Many aspects of our business involve substantial risks of liability, and there have been substantial incidences of litigation and regulatory investigations in the financial services industry in recent years, including customer claims as well as class action suits seeking substantial damages. From time to time, we and/or our funds may be named as defendants or co-defendants in lawsuits or be involved in disputes that involve the threat of lawsuits seeking substantial damages. We and/or our funds are also involved from time to time in governmental and self-regulatory organization investigations and proceedings. For example, in fiscal 2015, two putative class action complaints were filed against us and certain of our officers and affiliates, alleging violation of certain provisions of federal securities laws. See Item 3. Legal Proceedings for further description of these class action complaints.

Any of these lawsuits, investigations or proceedings could result in reputational damage, loss of clients and assets, settlements, awards, injunctions, fines, penalties, increased costs and expenses in resolving a claim, diversion of employee resources and resultant financial losses. Predicting the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages, or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be material to our operating results or cash flows for a particular period, depending on our results for that period, or could cause us significant reputational harm, which could harm our business prospects.

We depend to a large extent on our business relationships and our reputation to attract and retain clients. As a result, allegations of improper conduct by private litigants, including investors in our funds, or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the asset management industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses. We may incur substantial legal expenses in defending against proceedings commenced by a client, regulatory authority or other private litigant. Substantial legal liability levied on us could cause significant reputational harm and have an adverse impact on our results of operations and financial condition.

We have a significant portion of our assets invested in marketable securities which exposes us to earnings volatility, as the value of these investments fluctuate, as well as risk of capital loss.
We use capital to seed new investment strategies and make new investments to introduce new products or enhance distribution access of existing products.  At December 31, 2017, the Company had $118.4 million of seed capital investments, comprising $62.7 million of marketable securities and $55.7 million of net interests in consolidated investment products (“CIPs”), and $108.3 million of investments in CLOs that comprise $85.0 million of net interests in CIPs and $23.3 million of marketable securities. These investments are in a variety of asset classes including alternative, fixed income and equity strategies.  Many of these investments employ a long-term investment strategy and entail an optimal investment period spanning several years. Accordingly, during this investment period, the Company’s capital utilized in these investments may not be available for other corporate purposes at all or without significantly diminishing our investment return. We cannot provide assurance that these investments will perform as expected. Moreover, increases or decreases in the value of these investments will increase the volatility of our earnings, and a decline in the value of these investments would result in the loss of capital and have an adverse impact on our results of operations and financial condition.

Our intended quarterly distributions may not be paid as intended or at all.
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 Credit Agreement and the Mandatory Convertible Preferred Stock that we issued on February 1, 2017) and obligations, legal, tax, regulatory and other restrictions that may have implications on the payment of distributions by us to our shareholders or by our subsidiaries to us, and such other factors as we may deem relevant. Our ability to pay dividends in excess of our current quarterly dividends is subject to restrictions under the terms of our Credit Agreement. We cannot make any assurances that any distributions will be paid.


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We may need to raise additional capital in the future, and resources may not be available to us in sufficient amounts or on acceptable terms, which could have an adverse impact on our business.
Our ability to meet our future cash needs is dependent upon our ability to generate cash. Although we have successfully generated sufficient cash in the past, we may not do so in the future. As of December 31, 2017, we maintained $132.2 million in cash and cash equivalents, $118.4 million in seed capital investments and $108.3 million in other investments and had $100.0 million available under our credit facility. Also at December 31, 2017 we had $259.4 million in debt outstanding excluding the notes payable of our consolidated investment products for which risk of loss to the Company is limited to our $85.0 million investment in such products. See Footnote 18 of our consolidated financial statements for additional information on the notes payable of the consolidated investment products. Our ability to access capital markets efficiently depends on a number of factors, including the state of credit and equity markets, interest rates and credit spreads. We may need to raise capital to fund new business initiatives in the future, and financing may not be available to us in sufficient amounts, on acceptable terms, or at all. If we are unable to access sufficient capital on acceptable terms, our business could be adversely impacted.

Our common stock ranks junior to the Mandatory Convertible Preferred Stock with respect to dividends and amounts payable in the event of our liquidation and ranks junior to our indebtedness which may limit any payment or other distribution of assets to holders of our common stock in the event we are liquidated.
Our common stock ranks junior to the Mandatory Convertible Preferred Stock, with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution or winding-up. This means that, unless accumulated dividends have been paid or set aside for payment on all outstanding Mandatory Convertible Preferred Stock for all completed dividend periods, no dividends may be declared or paid on our common stock. Likewise, in the event of our voluntary or involuntary liquidation, dissolution or winding-up, no distribution of our assets may be made to holders of our common stock until we have paid to holders of the Mandatory Convertible Preferred Stock a liquidation preference equal to $100.00 per share plus accrued and unpaid dividends (whether or not declared).

Additionally, in the event of our liquidation, dissolution or winding up, our common stock would rank below all debt claims against us. As a result, holders of our common stock will not be entitled to receive any payment or other distribution of assets until after all of our obligations to our debt holders have been satisfied.

We have corporate governance provisions that may make an acquisition of us more difficult.
Certain provisions of our certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. In addition, the provisions of Section 203 of the Delaware General Corporation Law also restrict certain business combinations with interested stockholders.

Our insurance policies may not cover all losses and costs to which we may be exposed.
We carry insurance in amounts and under terms that we believe are appropriate. Our insurance may not cover all liabilities and losses to which we may be exposed. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or pay higher premiums, which could have an adverse impact on our results of operations and financial condition.

We have goodwill and intangible assets on our balance which could become impaired.
Our goodwill and intangible assets are subject to annual impairment reviews. We also have definite-lived intangibles assets on our balance sheet that are subject to impairment testing if indicators of impairment are identified. A variety of factors could cause such book values to become impaired, which would adversely affect our results of operations.

We may engage in significant strategic transactions that may not achieve the expected benefits or could expose us to additional risks.
We regularly review, and from time to time have discussions on and engage in, potential significant transactions, including potential acquisitions, consolidations, joint ventures or similar transactions, some of which may be material. We cannot provide assurance that we will be successful in negotiating the required agreements or successfully close transactions after signing such agreements. In addition, in entering into such transactions, we may expect to achieve certain financial benefits, including such things as cost or revenue synergies, and we may not ultimately be able to realize such benefits.

Any strategic transaction may also involve a number of other risks, including additional demands on our staff, unanticipated problems regarding integration of operating facilities, technologies and new employees, and the existence of liabilities or contingencies not disclosed to, or otherwise unknown by, us prior to closing a transaction. In addition, any business we acquire may underperform relative to expectations or may lose customers or employees.

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On February 1, 2018, for example, the Company entered into an agreement to acquire a majority interest in SGA, an investment manager specializing in U.S. and global growth equity portfolios. We cannot provide assurance that we will be successful in negotiating the required agreements or successfully close transactions after signing such agreements including the SGA acquisition or any other future strategic transactions.




SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” "intent," "plan," “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” “opportunity,” “predict,” “would,” “potential,” “future,” “forecast,” “guarantee,” “assume,” “likely,” “target” or similar statements or variations of such terms.

Our forward-looking statements are based on a series of expectations, assumptions and projections about our Company and the markets in which we operate, are not guarantees of future results or performance and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net asset inflows and outflows, operating cash flows, business plans and ability to borrow, for all future periods. All of our forward-looking statements contained in this Annual Report on Form 10-K are as of the date of this Annual Report on Form 10-K only.
We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Annual Report on Form 10-K, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this Annual Report on Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Annual Report on Form 10-K.
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K as well as the following risks and uncertainties resulting from: (a) any reduction in our assets under management; (b) the withdrawal, renegotiation or termination of investment advisory agreements; (c) damage to our reputation; (d) failure to comply with investment guidelines or other contractual requirements; (e) inability to satisfy financial covenants and payments related to our indebtedness; (f) the inability to attract and retain key personnel; (g) challenges from the competition we face in our business; (h) adverse regulatory and legal developments; (i) unfavorable changes in tax laws or limitations; (j) adverse developments related to unaffiliated subadvisers; (k) negative implications of changes in key distribution relationships; (l) interruptions in or failure to provide critical technological service by us or third parties; (m) volatility associated with our common and preferred stock; (n) adverse civil litigation and government investigations or proceedings; (o) the risk of loss on our investments; (p) the inability to make quarterly common and preferred stock distributions; (q) the lack of sufficient capital on satisfactory terms; (r) losses or costs not covered by insurance; (u) the risk that our goodwill or intangible assets could become impaired; (v) the inability to achieve expected acquisition-related financial benefits and other risks and uncertainties. Any occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to in this Annual Report on Form 10-K or our other periodic reports filed with the SEC could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity. You are urged to carefully consider all such factors.

Item 1B.
Unresolved Staff Comments.
None.


15


Item 2.
Properties.

We lease our principal offices, which are located at 100 Pearl St., Hartford, CT 06103. In addition, we lease office space in California, Florida, Georgia, Illinois, Massachusetts, New Jersey and New York.
 
Item 3.
Legal Proceedings.

The Company is regularly involved in litigation and arbitration as well as examinations, inquiries and investigations by various regulatory bodies, including the SEC, involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.

The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.

In re Virtus Investment Partners, Inc. Securities Litigation; formerly Tom Cummins v. Virtus Investment Partners Inc. et al

On February 20, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed by an individual shareholder against the Company and certain of the Company’s current officers (the “defendants”) in the United States District Court for the Southern District of New York (the “Court”). On April 21, 2015, three plaintiffs, including the original plaintiff, filed motions to be appointed lead plaintiff and, on June 9, 2015, the Court appointed Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, the plaintiffs filed a Consolidated Class Action Complaint (the “Consolidated Complaint”) amending the originally filed complaint, which was purportedly filed on behalf of all purchasers of the Company’s common stock between January 25, 2013 and May 11, 2015 (the “Class Period”). The Consolidated Complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed material adverse facts relating to certain funds formerly subadvised by F-Squared Investments Inc (“F-Squared”). The Consolidated Complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. The plaintiffs seek to recover unspecified damages. A motion to dismiss the Consolidated Complaint was filed on behalf of the Company and the other defendants on October 21, 2015. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss, narrowing plaintiffs' claims under Sections 10(b) and 20(a) of the Exchange Act and dismissing one of the defendants from the suit. The remaining defendants' Answer to the Consolidated Complaint was filed on August 5, 2016. Plaintiffs' motion for class certification was granted on May 15, 2017. Discovery has since been completed. On October 6, 2017, defendants moved for summary judgment. Briefing on the motion for summary judgment was completed on December 22, 2017, and oral argument was held on January 18, 2018, where the Court reserved decision. The Company believes that the suit is without merit, nonetheless, on February 6, 2018, it reached an agreement in principle with the plaintiffs, subject to Court approval, settling all claims in the litigation, in order to avoid the cost, distraction, disruption, and inherent litigation uncertainty. Upon approval by the Court, which the Company believes is likely, the resolution of this matter will not have a material impact on the Company’s results of operations, cash flows or its consolidated financial condition.

    

16


Mark Youngers v. Virtus Investment Partners, Inc. et al

On May 8, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed in the United States District Court for the Central District of California (the "District Court") by an individual who alleges he is a former shareholder of one of the Virtus mutual funds formerly subadvised by F-Squared and formerly known as the AlphaSector Funds. The complaint alleges claims against the Company, certain of the Company’s officers and affiliates, and certain other parties (the “defendants”). The complaint was purportedly filed on behalf of purchasers of the AlphaSector Funds between May 8, 2010 and December 22, 2014, inclusive (the “Class Period”). The complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed or omitted material facts necessary to make the statements made not misleading. On June 7, 2015, a group of three individuals, including the original plaintiff, filed a motion to be appointed lead plaintiff, and on July 27, 2015, the District Court appointed movants as lead plaintiff. On October 1, 2015, the plaintiffs filed a First Amended Class Action Complaint which, among other things, added a derivative claim for breach of fiduciary duty on behalf of Virtus Opportunities Trust. On October 19, 2015, the District Court entered an order transferring the action to the Southern District of New York (the "Court"). On January 4, 2016, the plaintiffs filed a Second Amended Complaint. A motion to dismiss was filed on behalf of the Company and affiliated defendants on February 1, 2016. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss. The Court dismissed four causes of action entirely and a fifth cause of action with respect to a portion of the Class Period. The Court also dismissed all claims against ten defendants named in the Complaint. The Court held that the plaintiffs may pursue certain securities claims under Sections 10(b) and 20(a) of the Exchange Act and Section 12 of the Securities Act of 1933. The remaining defendants filed an Answer to the Second Amended Complaint on August 5, 2016. A Stipulation of Voluntary Dismissal of the claim under Section 12 of the Securities Act was filed on September 15, 2016. The defendants filed a motion to certify an interlocutory appeal of the July 1, 2016 order to the Court of Appeals for the Second Circuit on August 26, 2016. The motion was denied on January 6, 2017. Plaintiffs' motion for class certification was denied on May 15, 2017. On December 4, 2017, the Court denied plaintiffs' motion seeking leave to amend their complaint to address deficiencies identified by the Court in its orders dismissing, in part, plaintiffs' Second Amended Complaint and denying class certification. On December 22, 2017, plaintiffs voluntarily dismissed all remaining claims against the Company with prejudice and waived all rights to appeal.


Item 4.
Mine Safety Disclosures.
Not applicable.

17


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NASDAQ Global Market under the trading symbol “VRTS.” As of February 14, 2018, we had 7,171,300 shares of common stock outstanding that were held by approximately 56,512 holders of record. The table below sets forth the quarterly high and low sales prices of our common stock on the NASDAQ Global Market, and the amount of dividends declared, for each quarter in the last two fiscal years. 
 
Year Ended
 
Year Ended
December 31, 2017
 
December 31, 2016
Quarter Ended
High
 
Low
 
Dividends
Declared per Common Share
 
High
 
Low
 
Dividends
Declared per Common Share
First Quarter
$
126.60

 
$
99.85

 
$
0.45

 
$
120.09

 
$
73.33

 
$
0.45

Second Quarter
$
113.50

 
$
97.60

 
$
0.45

 
$
83.57

 
$
66.12

 
$
0.45

Third Quarter
$
118.75

 
$
103.81

 
$
0.45

 
$
104.73

 
$
69.78

 
$
0.45

Fourth Quarter
$
124.65

 
$
106.55

 
$
0.45

 
$
128.10

 
$
92.80

 
$
0.45

On February 14, 2018, our board of directors declared a quarterly cash dividend of $0.45 per common share to be paid on May 15, 2018 to shareholders of record at the close of business on April 30, 2018 and a $1.8125 dividend per share on our mandatory convertible preferred stock, to be paid on May 1, 2018 to shareholders of record at the close of business on April 16, 2017.
There have been no non-cash dividends on our common stock with respect to the periods presented. In making decisions regarding our quarterly dividend, 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 and obligations, legal, tax, regulatory and other restrictions that may have implications on the payment of distributions by us to our common shareholders or by our subsidiaries to us, and such other factors as we may deem relevant. We cannot provide any assurances that any distributions, whether quarterly or otherwise, will be paid.
Our ability to pay dividends in excess of our current quarterly dividend will be subject to restrictions under the terms of our Credit Agreement. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the mandatory convertible preferred stock that we issued February 1, 2017 and the Credit Agreement entered into on June 1, 2017, as amended on February 15, 2018.
Issuer Purchases of Equity Securities

As of December 31, 2017, 4,180,045 shares of our common stock have been authorized to be repurchased under a share repurchase program approved by our Board of Directors, and 883,756 shares remain available for repurchase. Under the terms of the program, we may repurchase shares of our common stock from time to time at our discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. The program, which has no specified term, may be suspended or terminated at any time.

During the year ended December 31, 2017, we repurchased a total of 66,244 common shares for approximately $7.5 million. We did not make any repurchases during the fourth quarter of fiscal 2017.

There were no unregistered sales of equity securities during the fourth quarter of fiscal 2017. Shares of our common stock purchased by participants in our Employee Stock Purchase Plan were delivered to participant accounts via open market purchases at fair value by the third-party administrator under the plan. We do not reserve shares for this plan or discount the purchase price of the shares.



18


Item 6.
Selected Financial Data.
The following table sets forth our selected consolidated financial and other data at the dates and for the periods indicated. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
($ in thousands, except per share data)
Years Ended December 31,
 
2017 (1)(3)
 
2016 (1)
 
2015 (1)
 
2014 (2)
 
2013 (2)
Results of Operations
 
 
 
 
 
 
 
 
 
Revenues
$
425,607

 
$
322,554

 
$
381,977

 
$
450,598

 
$
389,215

Operating expenses
367,572

 
271,740

 
301,599

 
319,878

 
275,711

Operating income
58,035

 
50,814

 
80,378

 
130,720

 
113,504

Income tax expense (benefit)
40,490

 
21,044

 
36,972

 
39,349

 
44,778

Net income
39,939

 
48,763

 
30,671

 
96,965

 
77,130

Net income (loss) attributable to common stockholders
28,676

 
48,502

 
35,106

 
97,700

 
75,190

Earnings (loss) per share—basic
4.09

 
6.34

 
3.99

 
10.75

 
9.18

Earnings (loss) per share—diluted
3.96

 
6.20

 
3.92

 
10.51

 
8.92

Cash dividends declared per preferred share
7.25

 

 

 

 

Cash dividends declared per common share
1.80

 
1.80

 
1.80

 
1.35

 

 
As of December 31,
 
2017 (1)(3)
 
2016 (1)
 
2015 (2)
 
2014 (2)
 
2013 (2)
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
132,150

 
$
64,588

 
$
87,574

 
$
202,847

 
$
271,014

Investments
108,492

 
89,371

 
56,738

 
63,448

 
37,258

Investments of consolidated investment products
1,597,752

 
489,042

 
522,820

 
236,652

 
139,054

Goodwill and other intangible assets, net
472,107

 
45,215

 
47,588

 
47,043

 
49,893

Total assets
2,590,799

 
824,388

 
859,729

 
698,773

 
644,954

Accrued compensation and benefits
86,658

 
47,885

 
49,617

 
54,815

 
53,140

Debt
248,320

 
30,000

 

 

 

Debt of consolidated investment products

 

 
152,597

 

 

Notes payable of consolidated investment product
1,457,435

 
328,761

 

 

 

Total liabilities
1,981,397

 
465,449

 
276,408

 
112,350

 
109,900

Redeemable noncontrolling interests
4,178

 
37,266

 
73,864

 
23,071

 
42,186

Mandatory convertible preferred stock
110,843

 

 

 

 

Total equity
605,224

 
321,673

 
509,457

 
563,352

 
492,868

 
As of December 31,
 
2017
 
2016
 
2015
 
2014
 
2012
($ in millions)
 
 
 
 
 
 
 
 
 
Assets Under Management
 
 
 
 
 
 
 
 
 
Total assets under management
$
90,963

 
$
45,366

 
$
47,385

 
$
56,702

 
$
57,740

Total long-term assets under management
$
88,835

 
$
45,366

 
$
47,385

 
$
56,702

 
$
56,152

 
(1)
Derived from audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2)
Derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.
(3)
On June 1, 2017, we completed the acquisition of RidgeWorth Investments. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the RidgeWorth acquisition.

19


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview

Our Business

We provide investment management and related services to individuals and institutions. We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual brand. By offering a broad array of products, we believe we can appeal to a greater number of investors and have offerings across market cycles and through changes in investor preferences. Our earnings are primarily driven by asset-based fees charged for services relating to these various products including investment management, fund administration, distribution and shareholder services.

We offer investment strategies for individual and institutional investors in different product structures and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by a collection of differentiated investment managers. We have offerings in various asset classes (domestic and international equity, fixed income, and alternative), market capitalizations (large, mid and small), styles (growth, blend and value) and investment approaches (fundamental, quantitative and thematic). Our retail products include open-end funds and ETFs, where we also use unaffiliated managers, as well as closed-end funds and retail separate accounts. Our institutional products include a variety of equity and fixed income strategies for corporations, multi-employer retirement funds, public employee retirement systems, foundations, and endowments. We also offer subadvisory services for unaffiliated mutual funds and collateral manager services for structured finance products.

We distribute our open-end funds and ETFs principally through financial intermediaries. We have broad distribution access in the retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisors, banks and insurance companies. In many of these firms, we have a number of products that are on preferred “recommended” lists and on fee-based advisory programs. Our sales efforts are supported by regional sales professionals, a national account relationship group, and separate teams for ETFs and the retirement and insurance channels. Our retail separate accounts are distributed through financial intermediaries and directly by teams at an affiliated manager.

Our institutional services are marketed through relationships with consultants as well as directly to clients. We target key market segments, including foundations and endowments, corporate, public and private pension plans, and subadvisory relationships.

Acquisition of RidgeWorth

On June 1, 2017, we acquired RidgeWorth Investments (the "Acquisition"), a multi-boutique investment management firm that managed approximately $40.1 billion in assets as of June 1, 2017, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies. The Acquisition significantly increased our assets under management, expanded the number of affiliated managers and provided a wider range of strategies for institutional and individual investors and broader distribution and client service resources.

Total consideration for the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. At closing, we paid $471.4 million in cash, issued 213,669 shares of our common stock with a value of $21.7 million, and recorded $2.3 million in deferred cash consideration and $51.7 million in contingent consideration, which was paid in the fourth quarter of 2017 after all transaction contingencies were met.

Market Developments

The U.S. and global equity markets increased in value in 2017, as evidenced by increases in major indices. The MSCI World Index ended the year at 2,103, up 20.0% from 1,753 at the start of the year. The Dow Jones Industrial Average ended at 24,719, up 25.1% from 19,763 at the beginning of the year, and the Standard & Poor’s 500 Index ended the year at 2,674, up 19.4% from 2,239. The major U.S. bond index, the Barclays U.S. Aggregate Bond Index, increased 3.5% in 2017 ending the year at 2,046 compared to 1,976 at the beginning of the year.

The financial markets have had - and are likely to continue to have - a significant impact on the value of our assets under management and on the level of our sales and flows. The capital and financial markets could experience fluctuation, volatility and declines, as they have in the past, which could impact investment returns and asset flows among investment products as

20


well as investor choices and preferences among investment products. The changes in our assets under management may also be affected by the factors discussed in Item 1A of this Annual Report on Form 10-K “Risk Factors.”

Financial Highlights

Net income per diluted share was $3.96 in 2017, down $2.24 or 36.1% from $6.20 per diluted share in 2016. Net income per diluted share includes $13.1 million of income tax expense related to new tax legislation and $26.3 million of acquisition and integration costs.
Total sales (inflows) were $15.4 billion in 2017 compared with $10.9 billion in 2016. Net outflows were $0.2 billion in 2017 compared with $4.7 billion in 2016.
Assets under management were $91.0 billion at December 31, 2017 compared with $45.4 billion at December 31, 2016.

Assets Under Management

At December 31, 2017, total assets under management were $91.0 billion, representing an increase of $45.6 billion, or 100.5% from December 31, 2016. The increase was primarily due to the Acquisition, which added $40.1 billion as of June 1, 2017, as well as market appreciation of $9.0 billion, which offset net outflows of $0.2 billion. Long-term assets under management, which exclude liquidity strategies, were $88.8 billion at December 31, 2017, up 95.6% from $45.4 billion at the end of the prior year.

Average long-term assets under management, which exclude assets in liquidity strategies and represent our fee-earning assets, were $72.3 billion for the twelve months ended December 31, 2017, an increase of $27.0 billion, or 59.5%, from $45.3 billion for the twelve months ended December 31, 2016. The one-year increase in long-term average assets under management was primarily due to the Acquisition and the cumulative impact of market appreciation.

Certain mutual funds employ the use of leverage as part of their investment strategies. The addition or reduction of leverage will increase or decrease our assets under management, as the proceeds from the use of leverage are invested in accordance with the funds' investment strategies. For the periods ended December 31, 2017, 2016 and 2015, we had assets under management from the use of leverage of $1.9 billion, $1.9 billion and $1.6 billion, respectively, which represented 2.0%, 4.1% and 3.5% of our total assets under management, respectively.


Investment Performance - Open End Funds

The following table presents our open end funds' three-year average return and the corresponding three-year benchmark index return as of December 31, 2017. Also presented with each fund is its Lipper Peer Group and its three-year ranking within that peer group.


21


 
 
 
Three-Year:
Three-Year
 
 
Benchmark Index
Average Return (1)
Benchmark Index
Fund Type/Name
Assets
Lipper Peer Group
Peer Group Ranking (2)
Return (3)
Retail Funds
($ in millions)
 
(%)
(%)
   Alternatives
 
 
 
 
Virtus Duff & Phelps Real Estate Securities Fund
$874.3
FTSE NAREIT Equity REITs Index
5.12
5.62
 
 
Real Estate Funds
41
 
Virtus Duff & Phelps Global Real Estate Securities Fund
202.6
FTSE EPRA NAREIT Developed Rental Index
6.28
4.44
 
 
Global Real Estate Funds
12
 
Virtus Duff & Phelps Global Infrastructure Fund
118.6
Global Infrastructure Linked Benchmark (4)
5.87
4.79
 
 
Global Infrastructure Funds
35
 
Virtus Duff & Phelps International Real Estate Securities Fund
26.6
FTSE EPRA/NAREIT Developed Rental ex US Index (net)
7.11
5.38
 
 
International Real Estate Funds
26
 
   Asset Allocation
 
 
 
 
Virtus Strategic Allocation Fund
477.9
Strategic Allocation Fund Linked Benchmark (5)
4.91
8.34
 
 
Mixed-Asset Target Allocation Moderate Funds
79
 
Virtus Tactical Allocation Fund
145.7
Tactical Allocation Fund Linked Benchmark (6)
5.1
8.23
 
 
Mixed-Asset Target Allocation Moderate Funds
73
 
Virtus Rampart Multi-Asset Trend Fund
85.1
Dow Jones Global Moderate Portfolio Index
1.41
6.99
 
 
Flexible Portfolio Funds
91
 
Virtus Herzfeld Fund
67.7
60% MSCI AC World Index (net) /
40% Bloomberg Barclays U.S. Aggregate
8.75
6.57
 
 
Aggregate
4
 
   Equity
 
 
 
 
Virtus Ceredex Mid-Cap Value Equity Fund
2,955.3
Russell Midcap Value Index
8.05
9.00
 
 
Multi-Cap Value Funds
54
 
Virtus Ceredex Large-Cap Value Equity Fund
1,992.1
Russell 1000 Value Index
8.57
8.65
 
 
Large-Cap Value Funds
47
 
Virtus KAR Small-Cap Growth Fund
1,814.0
Russell 2000 Growth Index
20.04
10.28
 
 
Small-Cap Growth Funds
1
 
Virtus KAR Small-Cap Core Fund
830.2
Russell 2000(R) Index
16.99
9.96
 
 
Small-Cap Growth Funds
2
 
Virtus Ceredex Small-Cap Value Equity Fund
814.3
Russell 2000(R) Value Index
10.28
9.55
 
 
Small-Cap Core Funds
29
 
Virtus Rampart Equity Trend Fund
519.7
S&P 500(R) Index
2.21
11.41
 
 
Large-Cap Core Funds
99
 
Virtus KAR Capital Growth Fund
495.6
Russell 1000(R) Growth Index
13.31
13.79
 
 
Large-Cap Growth Funds
22
 
Virtus KAR Small-Cap Value Fund
474.1
Russell 2000 Value Index
13.47
9.55
 
 
Small-Cap Growth Funds
12
 

22



 
 
 
Three-Year:
Three-Year
 
 
Benchmark Index
Average Return (1)
Benchmark Index
Fund Type/Name
Assets
Lipper Peer Group
Peer Group Ranking (2)
Return (3)
Retail Funds
($ in millions)
 
(%)
(%)
   Equity (continued)
 
 
 
 
Virtus Rampart Sector Trend Fund
271.0
S&P 500(R) Index
2.73
11.41
 
 
Large-Cap Core Funds
100
 
Virtus Rampart Enhanced Core Equity Fund
193.5
S&P 500(R) Index
12.19
11.41
 
 
Large-Cap Core Funds
8
 
Virtus KAR Mid-Cap Core Fund
129.3
Russell Midcap(R) Index
12.5
9.58
 
 
Mid-Cap Growth Funds
8
 
Virtus Silvant Large-Cap Growth Stock Fund
125.2
Russell 1000(R) Growth Index
9.64
13.79
 
 
Large-Cap Growth Funds
87
 
Virtus KAR Mid-Cap Growth Fund
97.5
Russell Midcap(R) Growth Index
11.75
10.30
 
 
Mid-Cap Growth Funds
17
 
Virtus Horizon Wealth Masters Fund
73.3
S&P 500(R) Index
8.18
9.58
 
 
Mid-Cap Core Funds
58
 
Virtus Silvant Small-Cap Growth Stock Fund
29.9
Russell 2000(R) Growth Index
6.59
10.28
 
 
Small-Cap Growth Funds
85
 
Virtus Zevenbergen Innovative Growth Stock Fund
23.1
Russell 3000(R) Growth Index
12.05
13.51
 
 
Multi-Cap Growth Funds
31
 
   Fixed Income
 
 
 
 
Virtus Newfleet Multi-Sector Short Term Bond Fund
7,333.1
BofA Merrill Lynch 1-3 Year A-BBB Corporate Index
3.21
1.86
 
 
Short-Intermediate Investment Grade Debt Funds
2
 
Virtus Seix Floating Rate High Income Fund
5,979.7
Credit Suisse Leveraged Loan Index
4.49
4.50
 
 
Loan Participation Funds
22
 
Virtus Seix Total Return Bond Fund
870.0
Bloomberg Barclays U.S. Aggregate Bond Index
1.97
2.24
 
 
Core Bond Funds
63
 
Virtus Newfleet Senior Floating Rate Fund
537.1
S&P/LSTA Leveraged Loan Index
3.84
4.44
 
 
Loan Participation Funds
49
 
Virtus Seix Investment Grade Tax-Exempt Bond Fund
476.9
Bloomberg Barclays Municipal 1-15 Yr Blend (1-17) Index
2.06
2.37
 
 
Intermediate Municipal Debt Funds
53
 
Virtus Seix High Yield Fund
452.1
ICE BofAML US High Yield BB-B Constrained Index
4.85
6.06
 
 
High Yield Funds
60
 


23


 
 
 
Three-Year:
Three-Year
 
 
Benchmark Index
Average Return (1)
Benchmark Index
Fund Type/Name
Assets
Lipper Peer Group
Peer Group Ranking (2)
Return (3)
Retail Funds
($ in millions)
 
(%)
(%)
   Fixed Income (continued)
 
 
 
 
Virtus Seix High Income Fund
441.4
Bloomberg Barclays U.S. Corporate High Yield Bond Index
5.84
6.35
 
 
High Yield Funds
22
 
Virtus Newfleet Multi-Sector Intermediate Bond Fund
377.5
Bloomberg Barclays U.S. Aggregate Bond Index
5.29
2.24
 
 
Multi-Sector Income Funds
13
 
Virtus Newfleet Low Duration Income
372.6
Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index
2.15
1.49
 
 
Short Investment Grade Debt Funds
12
 
Virtus Seix Core Bond Fund
201.1
Bloomberg Barclays U.S. Aggregate Bond Index
2.05
2.24
 
 
Core Bond Funds
58
 
Virtus Newfleet Tax Exempt Bond Fund
160.8
Virtus Tax-Exempt Bond Fund Linked Benchmark (7)
2.37
2.60
 
 
General & Insured Municipal Debt Funds
69
 
Virtus Contrarian Value Fund
146.5
Russell Midcap(R) Value Index
2.83
9.00
 
 
Multi-Cap Value Funds
98
 
Virtus Seix Georgia Tax-Exempt Bond Fund
89.0
Bloomberg Barclays Municipal Bond Index
2.57
2.98
 
 
Other States Municipal Debt Funds
24
 
Virtus Newfleet Credit Opportunities Fund
87.6
50% Bloomberg Barclays U.S. High-Yield Bond Index/
50% Credit Suisse Leveraged Loan Index
N/A
N/A
 
 
High Yield Funds
N/A
 
Virtus Seix High Grade Municipal Bond Fund
83.7
Bloomberg Barclays Municipal Bond Index
3.1
2.98
 
 
General & Insured Municipal Debt Funds
34
 
Virtus Newfleet Bond Fund
72.4
Bloomberg Barclays U.S. Aggregate Bond Index
3.28
2.40
 
 
Core Plus Bond Funds
20
 
Virtus Newfleet High Yield Fund
69.4
Bloomberg Barclays U.S. High-Yield 2% Issuer Capped Bond Index
5.27
6.36
 
 
High Yield Funds
42
 
Virtus Seix Virginia Intermediate Muni-Bond Fund
41.0
Bloomberg Barclays Municipal 1-15 Yr Blend (1-17) Index
2.34
2.37
 
 
Other States Intermediate Muni Debt Funds
8
 
Virtus Seix Short-Term Municipal Bond Fund
33.0
Bloomberg Barclays Municipal 1-5 Yr Index
0.58
0.96
 
 
Short Municipal Debt Funds
47
 

24


 
 
 
Three-Year:
Three-Year
 
 
Benchmark Index
Average Return (1)
Benchmark Index
Fund Type/Name
Assets
Lipper Peer Group
Peer Group Ranking (2)
Return (3)
Retail Funds
($ in millions)
 
(%)
(%)
   Fixed Income (continued)
 
 
 
 
Virtus Newfleet CA Tax-Exempt Bond Fund
27.0
Bloomberg Barclays California Municipal Bond Index
2.94
2.97
 
 
California Municipal Debt Funds
60
 
Virtus Seix U.S. Mortgage Fund
25.2
Bloomberg Barclays U.S. Mortgage Backed Securities Index
1.73
1.88
 
 
U. S. Mortgage Funds
56
 
Virtus Seix North Carolina Tax-Exempt Bond Fund
22.4
Bloomberg Barclays Municipal Bond Index
2.5
2.98
 
 
Other States Municipal Debt Funds
26
 
Virtus Seix Corporate Bond Fund
15.1
Bloomberg Barclays U.S. Corporate Investment Grade Bond Index
4.46
3.90
 
 
Corporate Debt Funds BBB-Rated
19
 
Virtus Seix Short-Term Bond Fund
11.3
Bloomberg Barclays 1-3 Yr U.S. Government/Credit Bond Index
0.59
0.93
 
 
Short Investment Grade Debt Funds
87
 
   International/Global
 
 
 
 
Virtus Vontobel Emerging Markets Opportunities Fund
8,785.5
MSCI Emerging Markets Index (net)
7.65
9.10
 
 
Emerging Market Funds
64
 
Virtus Vontobel Foreign Opportunities Fund
1,524.9
MSCI EAFE(R) Index (net)
9.53
7.80
 
 
International Large-Cap Growth
14
 
Virtus KAR International Small-Cap Fund
318.2
MSCI AC World Ex U.S. Small Cap Index (net)
15.52
11.96
 
 
International Small/Mid-Cap Growth
9
 
Virtus Vontobel Global Opportunities Fund
234.6
MSCI AC World Index (net)
12.12
9.30
 
 
Global Large-Cap Growth
16
 
Virtus WCM International Equity Fund
98.2
MSCI EAFE(R) Index (net)
10.68
7.83
 
 
International Large-Cap Growth
14
 
Virtus KAR Global Quality Dividend Fund
55.6
Russell Developed Large Cap Index
6.11
10.78
 
 
Global Equity Income Funds
66
 
Virtus KAR Emerging Markets Small-Cap Fund
14.1
MSCI Emerging Markets Small Cap Index (net)
8.3
8.44
 
 
Emerging Markets Funds
55
 
 Virtus Rampart Global Equity Trend Fund
13.7
MSCI AC World Index (net)
2.41
9.30
 
 
Global Multi-Cap Growth
99
 
Virtus Vontobel Greater European Opportunities Fund
11.6
MSCI Europe Index (net)
8.12
6.69
 
 
European Region Funds
29
 

25


 
 
 
Three-Year:
Three-Year
 
 
Benchmark Index
Average Return (1)
Benchmark Index
Fund Type/Name
Assets
Lipper Peer Group
Peer Group Ranking (2)
Return (3)
Retail Funds
($ in millions)
 
(%)
(%)
Global Funds
 
 
 
 
Virtus G.F. Multi-Sector Short Duration Bond Fund
82.6
Bloomberg Barclays U.S. Intermediate Aggregate Bond Index
2.06
1.82
 
 
N/A
43
 
Virtus G.F. U.S. Small Cap Focus Fund
14.7
Russell 2000(R) Index
16.34
9.96
 
 
N/A
1
 
Variable Insurance Funds
 
 
 
 
Virtus KAR Capital Growth Series
224.3
Russell 1000(R) Growth Index
13.8
13.79
 
 
Multi-Cap Growth Funds
9
 
Virtus Duff & Phelps International Series
183.5
MSCI EAFE(R) Index (net)
0.71
7.80
 
 
International Large-Cap Growth
97
 
Virtus Newfleet Multi-Sector Intermediate Bond Series
131.7
Bloomberg Barclays U.S. Aggregate Bond Index
4.82
2.24
 
 
General Bond Funds
10
 
 Virtus Rampart Enhanced Core Equity Series
111.5
S&P 500(R) Index
7.01
11.41
 
 
Multi-Cap Core Funds
93
 
Virtus Strategic Allocation Series
96.7
Strategic Allocation Series Linked Benchmark
4.31
8.34
 
 
Mixed-Asset Target Allocation Moderate Funds
92
 
Virtus KAR Small-Cap Value Series
94.6
Russell 2000(R) Value Index
14.46
9.55
 
 
Small-Cap Growth Funds
7
 
Virtus KAR Small-Cap Growth Series
81.6
Russell 2000(R) Growth Index
21.34
10.28
 
 
Small-Cap Growth Funds
3
 
Virtus Duff & Phelps Real Estate Securities Series
77.8
FTSE NAREIT Equity REITs Index
5.04
5.62
 
 
Real Estate Funds
40
 
Other Funds (8)
159.7
 
 
 
 
$43,077.6
 
 
 

(1)
Represents the average annual total return performance of the largest share class as measured by net assets for which performance data is available. Performance shown does not include the effect of applicable sales charges, if any. Had any applicable sales charges been reflected, performance would be lower than shown above.
(2)
Represents the peer ranking of the fund’s average annual total return according to Lipper. Fund returns are reported net of fees.
(3)
Represents the average annual total return of the benchmark index. Benchmark indices are unmanaged, their returns do not reflect any fees, expenses or sales charges, and they are not available for direct investment.
(4)
The Global Infrastructure Linked Benchmark consists of the FTSE Developed Core Infrastructure 50/50 Index (net). The Global Infrastructure Linked Benchmark prior to October 1, 2016 consisted of the MSCI World Infrastructure Sector Capped Index.
(5)
The Strategic Allocation Fund Linked Benchmark consists of 45% Russell 1000(R) Growth Index, 15% MSCI EAFE(R) Index and 40% Barclays U.S. Aggregate Bond Index. The Strategic Allocation Fund Linked Benchmark prior to September 7, 2016 consisted of 60% S&P 500(R) Index and 40% Barclays U.S. Aggregate Bond Index.
(6)
The Tactical Allocation Fund Linked Benchmark consists of 45% Russell 1000(R) Growth Index, 15% MSCI EAFE(R) Index and 40% Barclays U.S. Aggregate Bond Index. The Tactical Allocation Fund Linked Benchmark prior to September 7, 2016 consisted of 50% S&P 500(R) Index and 50% Barclays U.S. Aggregate Bond Index.
(7)
The Virtus Tax-Exempt Bond Linked Benchmark consists of the Bank of America Merrill Lynch 1-22 Year U.S. Municipal Securities Index, a subset of the Bank of America Merrill Lynch U.S. Municipal Securities Index.

26


(8)
Represents all funds that do not yet have a three-year average return based on their inception date, or funds with assets of less than $10.0 million.
Past performance does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.

Operating Results

In 2017, total revenues increased 31.9% or $103.1 million to $425.6 million from $322.6 million in 2016 primarily due to $77.1 million of additional revenues as a result of the Acquisition. Operating income increased by 14.2% or $7.2 million to $58.0 million in 2017 from $50.8 million in 2016, primarily due to increased revenue from new affiliated managers as a result of the Acquisition and the impact from market appreciation, partially offset by increased amortization of intangible assets and operating expenses of $11.4 million and $26.3 million, respectively, related to acquisition and integration costs.

Assets Under Management by Product

The following table summarizes our assets under management by product:
  
 
As of December 31,
 
Change
 
2017
 
2016
 
2015
 
2017 vs.
2016
 
%
 
2016 vs.
2015
 
%
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fund assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Open-End Funds (1)
$
43,077.6

 
$
23,432.8

 
$
28,882.1

 
$
19,644.8

 
83.8
 %
 
$
(5,449.3
)
 
(18.9
)%
Closed-End Funds
6,666.2

 
6,757.4

 
6,222.3

 
(91.2
)
 
(1.3
)%
 
535.1

 
8.6
 %
Exchange Traded Funds
1,039.2

 
596.8

 
340.8

 
442.4

 
74.1
 %
 
256.0

 
75.1
 %
Retail Separate Accounts
13,936.8

 
8,473.5

 
6,784.4

 
5,463.3

 
64.5
 %
 
1,689.1

 
24.9
 %
Institutional Accounts
20,815.9

 
5,492.7

 
4,799.7

 
15,323.2

 
279.0
 %
 
693.0

 
14.4
 %
Structured Products
3,298.8

 
613.1

 
356.0

 
2,685.7

 
438.1
 %
 
257.1

 
72.2
 %
Total Long-Term
88,834.5

 
45,366.3

 
47,385.3

 
43,468.2

 
95.8
 %
 
(2,019.0
)
 
(4.3
)%
Liquidity (3)
2,128.7

 

 

 
2,128.7

 
n/m

 

 
n/m

Total Assets Under Management
$
90,963.2

 
$
45,366.3

 
$
47,385.3

 
$
45,596.9

 
100.5
 %
 
$
(2,019.0
)
 
(4.3
)%
Average Assets Under Management (2)
$
70,212.4

 
$
45,325.2

 
$
52,310.5

 
$
24,887.2

 
54.9
 %
 
$
(6,985.3
)
 
(13.4
)%
Average Long-Term Assets Under Management (2)
$
72,286.1

 
$
45,325.2

 
$
52,310.5

 
$
26,960.9

 
59.5
 %
 
$
(6,985.3
)
 
(13.4
)%

(1)
Represents assets under management of U.S. 1940 Act mutual funds and UCITS

(2)     Averages are calculated as follows:
- Funds - average daily or weekly balances
- Retail Separate Accounts - prior quarter ending balance or average of month-end balances in quarter
- Institutional Accounts - average of month-end balances in quarter

(3)     Represents assets under management in liquidity strategies, including open-end funds and institutional accounts


Asset Flows by Product

The following table summarizes asset flows by product:

27


Asset Flows by Product
 
 
 
 
 
 
 
 
 
 
 
($ in millions)
Years Ended December 31,
 
2017
 
2016
 
2015
Open-End Funds (1)
 
 
 
 
 
Beginning balance
$
23,432.8

 
$
28,882.1

 
$
37,514.2

Inflows
9,776.9

 
7,070.1

 
10,046.8

Outflows
(10,561.0
)
 
(13,117.7
)
 
(17,010.5
)
Net flows
(784.1
)
 
(6,047.6
)
 
(6,963.7
)
Market performance
5,107.0

 
898.7

 
(1,511.5
)
Other (2)
15,321.9

 
(300.4
)
 
(156.9
)
Ending balance
$
43,077.6

 
$
23,432.8

 
$
28,882.1

Closed-End Funds
 
 
 
 
 
Beginning balance
$
6,757.4

 
$
6,222.3

 
$
7,581.4

Inflows

 

 

Outflows
(112.8
)
 
(103.3
)
 

Net flows
(112.8
)
 
(103.3
)
 

Market performance
444.4

 
794.9

 
(811.9
)
Other (2)
(422.8
)
 
(156.5
)
 
(547.2
)
Ending balance
$
6,666.2

 
$
6,757.4

 
$
6,222.3

Exchange Traded Funds
 
 
 
 
 
Beginning balance
$
596.8

 
$
340.8

 
$

Inflows
732.6

 
382.8

 
342.8

Outflows
(152.6
)
 
(124.8
)
 
(49.0
)
Net flows
580.0

 
258.0

 
293.8

Market performance
21.5

 
20.3

 
(27.9
)
Other (2)
(159.1
)
 
(22.3
)
 
74.9

Ending balance
$
1,039.2

 
$
596.8

 
$
340.8

Retail Separate Accounts
 
 
 
 
 
Beginning balance
$
8,473.5

 
$
6,784.4

 
$
6,884.8

Inflows
2,730.3

 
1,825.5

 
1,291.9

Outflows
(1,746.2
)
 
(1,156.9
)
 
(1,428.6
)
Net flows
984.1

 
668.6

 
(136.7
)
Market performance
1,996.1

 
1,023.5

 
70.7

Other (2)
2,483.1

 
(3.0
)
 
(34.4
)
Ending balance
$
13,936.8

 
$
8,473.5

 
$
6,784.4

Institutional Accounts
 
 
 
 
 
Beginning balance
$
5,492.7

 
$
4,799.7

 
$
4,296.5

Inflows
1,684.4

 
1,345.3

 
1,008.3

Outflows
(2,698.1
)
 
(1,039.3
)
 
(526.1
)
Net flows
(1,013.7
)
 
306.0

 
482.2