Victory Capital Holdings Inc

NASDAQ:VCTR

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to the Victory Capital Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis.

[Matthew Dennis, executive]

Thank you. Before I turn the call over to David Brown, I'd like to remind you that during today's conference call, we may make a number of forward-looking statements. Please note that Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements.

Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the Investor Relations portion of our website at ir.vcm.com.

It's now my pleasure to turn the call over to David Brown, Chairman and CEO. David?

[David Brown, executive]

Thanks, Matt. Good morning, and welcome to Victory Capital's Second Quarter 2021 Earnings Conference Call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start by providing an overview of the very strong financial and operating performance we achieved in the quarter. Then I will cover our investment performance, which continues to be excellent.

After that, I will turn it over to Mike, who will review our second quarter financial results in greater detail. Following our prepared remarks, Mike, Matt and I will be available to take your questions.

The business overview begins on Slide 5. We made great progress against a number of our strategic objectives during the second quarter and ended the period with total assets under management of $162 billion and long-term assets under management of $159 billion. With solid execution by our distribution and marketing teams, we generated record high gross sales of more than $10 billion in the second quarter.

During our last call, I featured a number of highly rated products with significant open capacity that have been tracking assets as investors continue to recalibrate their portfolios. Products like our Morningstar 5-star rated Victory Floating Rate Fund and the Victory Market Neutral Income Fund have continued to attract assets in the current market environment. Combining this with many of our high-performing active equity strategies, new platform wins for products managed by our USAA Investments franchise, a robust pipeline and THB and Alderwood starting to gain traction. We have many reasons to maintain our optimism around our organic growth outlook as we move forward through 2021 and into 2022.

Our VictoryShares ETF platform generated positive net flows for the third consecutive quarter. Additionally, there were net flow improvements in our direct investor business that began in the middle of last year and continued through this quarter. All the aforementioned culminated in positive company-wide net long-term flows for the quarter. We are continuing to see the positive net long-term flow momentum in the third quarter as well, keeping in mind we are only a little more than a month into the quarter.

Investment performance remains strong and the investments we are making in distribution and marketing are continuing to yield positive results. Moreover, while we had a few mandates fund during the quarter, our one but not yet funded book of business continues to grow, reinforcing the positive organic growth outlook. Revenues grew 4% from the first quarter and were 22% higher than in the same quarter of last year. Adjusted net income with tax benefit per diluted share grew $1.18, which was up 4% from the first quarter and up 33% from last year's second quarter.

Our integrated operating platform continues to be efficient with adjusted EBITDA margins coming in above 50% for the fourth consecutive quarter. As we have guided, we allocated the vast majority of our excess cash flow to reducing debt. The $57 million of debt reduction in the quarter lowered our outstanding debt to $681 million at the end of June and improved our leverage ratio to 1.4x.

For the fifth consecutive quarter, we increased the cash dividend paid to our shareholders. With the latest increase to $0.15 per share, we have tripled the dividend compared to the $0.05 per share we distributed in the second quarter of last year. Given our steadily improving cash flow, we are generating sufficient cash to continue our pace of debt reduction while simultaneously returning a greater amount of capital to shareholders. We will continue to evaluate the pace of reducing debt versus increasing returning capital to shareholders as we move forward.

Turning to Page 6. I'll provide an update on our direct investor business and touch on some new product developments and several broader ESG initiatives. Our referral agreement with USAA continues to generate new investor accounts and the improving trajectory net flows associated with this channel has persisted. We are investing for the long-term success of our direct investor business and have been executing on our strategic investments in people, sales tools and other technical resources to maximize its potential. The second quarter was our best flow quarter for the direct investor business since the acquisition and customer satisfaction scores are exceeding targets.

Our contact center had 140,000 direct interactions with investors during the quarter, which are proving to be valuable touch points. Given this level of engagement, we recently created a new high net worth advisory group dedicated to serving the needs of more affluent investors. While it is still early, we are exceedingly pleased with the sales and services group has generated in a short period of time and our clients are benefiting from this personal attention, which has provided no additional cost to them.

This, as well as results from other trial initiatives, reinforces the confidence in our strategy for this unique part of our business. When we reach a normalized steady state with this business, we intend to report additional KPIs and future disclosures.

Turning to new product development. The private Cryptocurrency Index Fund that we announced in June was officially launched a few days ago. The fund provides accredited U.S. investors with an efficient and convenient way to gain diversified exposure to a basket of digital assets in a private fund that tracks the NASDAQ Crypto Index. The index developed by NASDAQ in collaboration with Hashdex dynamically rebalances its constituents on a cap weighted basis thereby reflecting a benchmark for digital assets.

Through our partnership with NASDAQ and Hashdex, Victory Capital will be the exclusive sponsor of private funds and other vehicles for U.S. investors based on NASDAQ's Crypto Index. Additionally, we also filed for an exchange-traded product tracking the index, which, based on our information, is the only registration currently filed for a multi-coin ETF for nonaccredited investors in the U.S. who are seeking diversified exposure to digital assets.

We have been busy executing on other new product initiatives as well and filed for 3 new active ESG ETFs. First is the THB Mid-Cap ESG ETF, which represents our first active equity ETF. Given the investment performance in THB's mid-cap strategy, our distribution teams are eager to be able to offer it in an ETF wrapper. We also filed registration statements for 2 active fixed income ESG ETFs that will be managed by our USAA Investments franchise with ESG factors incorporated into the investment decision-making process. We are accelerating our company-wide ESG initiatives on a number of fronts from actions that further advance our corporate social responsibility at the enterprise level to incorporating responsible investing practices and portfolios to satisfy clients' objectives.

To increase transparency around specific actions we are taking, we recently published our first corporate social responsibility report, which can be found on our website. I encourage you to download and read about the many ongoing activities underway and our future plans.

During the second quarter, we announced the Victory Scholars Program and our strategic alliance with Xavier University of Louisiana. We are providing direct financial support to students for expenses not covered by existing grants and awards. In addition, we provided the funding to see the university's first student-led investment club, providing hands-on learning opportunities. The primary goal of this alliance is to grow equity and social mobility for students of color and to ultimately build a more robust pipeline of diverse high-quality cadets to fill jobs across the financial services industry.

On the responsible investing side, we are proud to have been recently recognized by Morningstar for a proxy voting record. According to Morningstar, we ranked in the top 3 fund companies for our overall votes on climate transparency and climate governance issues.

On Slide 8, you can see that our investment performance remains exceptionally strong, with the majority of our assets under management outperforming their respective benchmarks for all measurement periods. 22 of our mutual funds and ETFs ranked in the top quartile of their respective peer groups for the trailing 1-year period ending on June 30, with various products managed by our franchises, including Integrity, THB and USAA Investments ranking in the top decile.

On a consolidated basis, 64% of our AUM outperformed their benchmark over the trailing 12 months and more than 70% outperformed over the critical 3-, 5- and 10-year periods. In addition, the majority of our strategies also outperformed benchmarks on an equal weighted basis. We are actively engaged with a number of prospective M&A targets. While we have no news to announce today, our strategic acquisition criteria has not changed, and we remain focused on opportunities that will make us a better company.

As I said last quarter and will reiterate again, we are moving potential targets to our diligence process with some being in the very later stages. Acquisitions are an important component of our overall corporate strategy and we prepared our balance sheet to be able to execute. I anticipate that over time, we will execute on a number of wonderful opportunities that will be very value-added to our business.

With that, I will turn it over to Mike for a more in-depth discussion of our financial results. Mike?

[Michael Policarpo, executive]

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 10. Revenue increased 4% from the first quarter, reaching $222 million in the second quarter of the year. Our operating margin expanded 78 basis points on a GAAP basis from 42.1% in the first quarter to 42.9% in the quarter just ended. The margin improvement was primarily due to seasonally higher payroll tax and benefits-related expenses in the first quarter of each calendar year.

Adjusted EBITDA margin remained above 50% for the fourth consecutive quarter and came in at 50.6% for the second quarter. Adjusted EBITDA set a new quarterly record of $112.2 million in the period, increasing 5% from $106.8 million in the first quarter. GAAP net income set a new record high at $69.3 million or $0.93 per diluted share, up from $65.2 million or $0.88 per diluted share in the first quarter. This was up more than 50% from the same quarter last year.

Adjusted net income with tax benefit of $1.18 per diluted share was another company high, up 4% from the first quarter and 33% higher than the $0.89 per diluted share reported for the second quarter of the prior year. As we guided on our capital management priorities, we continue to reduce debt, paying down $57 million in the quarter, which was a 14% increase from the $50 million of debt repaid in the first quarter. This reduced our leverage ratio to 1.4x by quarter end. Subsequent to quarter end, we have repaid an additional $35 million.

Additionally, we returned a total of $18.3 million to shareholders in the form of cash dividends and share repurchases. During the quarter, we repurchased approximately 288,000 shares and our Board approved a 25% increase in the dividend to $0.15 per share payable on September 27 to shareholders of record on September 10.

Turning to Slide 11. Total AUM rose 5% during the quarter to $161.9 billion from a combination of market action and positive net flows. AUM is up 25% from the same time last year with our long-term AUM ending the second quarter at $158.7 billion.

On Slide 12, we cover long-term asset flows. Gross sales increased sharply in the quarter. We achieved a 49% increase in long-term gross sales compared with the first quarter and nearly doubled the level of gross sales during the same quarter a year ago. You can see the steady progress of our improving net flows depicted by the yellow line in this chart. After the fourth consecutive quarter of improvement, net long-term flows turned positive in the second quarter.

The improvement in our net flows has been broad-based as we generated better net flows in the direct investor channel, the institutional channel and in the intermediary retail retirement channel, where we continue to increase shelf space for our fixed income products managed by our USAA Investments franchise. For example, Schwab recently added the USAA Income Fund to its select list and 6 retirement platforms added products managed by USAA investments to their menus or select lists during the second quarter.

Turning to Slide 13. Quarter-over-quarter revenues increased by 4% on higher average AUM. As we discussed on our prior call, a small amount of performance fees slightly boosted the average fee rate in the first quarter of the year. This, combined with slightly higher quarter-over-quarter waivers and reimbursements in the second quarter, contributed to the sequential decline in average fee rate.

Additionally, certain noninvestment management related revenues such as fund administration, distribution and TA fees, while higher on an absolute dollar basis, declined as a percentage of assets due to asset growth, vehicle mix and the fixed nature of some of these revenue streams. There was no quarter-over-quarter change associated with the fulcrum fees on certain USAA mutual funds. Those fees reduced our IA fee rate by 0.4 of a basis point in both the first and second quarters of 2021. Hence, we have significant remaining upside potential here. Beyond reaching breakeven, which would add 0.4 of a basis point to our company-wide realized average fee rate, we have the opportunity to earn positive fulcrum fees with the potential to increase our company-wide average fee rate by 1 to 2 basis points.

As we have stated in the past, fee rate realization is less of a focus to us than profitability. We're happy to see our AUM increase in lower fee products, provided the margins meet our minimum criteria. The quarter-over-quarter and year-over-year margin increase in the second quarter nicely reiterates this point.

Moving to Slide 14. You can see our total expenses increased less than 2% from the first quarter. Lower quarter-over-quarter compensation expenses were more than offset by higher acquisition, restructuring and integration expenses, which increased by $2.1 million in the quarter. The noncash change in consideration payable for the USAA acquisition earnout increased to $5.7 million, up from $2.5 million in the first quarter. This more than offset a $1 million quarter-over-quarter decline in other acquisition, restructuring and integration costs.

Non-personnel related operating expenses, which are highly variable, were up $2.8 million or 5%, reflecting the increased level of AUM in addition to the continued investments we are making in technology, data and distribution to drive future growth.

You can see from the chart that cash compensation as a percentage of revenue was relatively steady and a decline quarter-over-quarter reflects the seasonality of certain payroll tax and benefits costs. Also, as usual, the deferred compensation mark-to-market of $1.8 million was 100% offset by the unrealized gain on those investments below the operating line and other income.

The non-GAAP metrics for the quarter are presented on Slide 15. Adjusted net income with tax benefit per diluted share of $1.18 was up 4% from the first quarter and up 33% from $0.89 per diluted share reported in last year's same quarter. Adjusted net income of $87.2 million achieved in the quarter included a $6.9 million tax benefit. Adjusted EBITDA margin widened compared with the first quarter. We are continuing to make investments in the business, and thus, we are still maintaining our adjusted EBITDA margin guidance of approximately 49%. As we've discussed in the past, this can fluctuate quarter-over-quarter and even year-over-year depending on AUM levels and the timing and structure of our investments in the platform.

Moving to our balance sheet and capital management activities on Slide 17. Our interest and other financing costs are highlighted to illustrate the substantial decline in our absolute cost of debt since we originated the term loan in the third quarter of 2019 when we closed the USAA acquisition. The result of rapidly paying down the debt, combined with lowering of our interest rate, has driven a run rate debt servicing cost down by nearly 2/3 over the past 2 years.

As a reminder, our term loan is free of restrictive covenants and all required payments have been made for the remaining term of the loan, and we have not drawn on our $100 million fully committed revolver. In the second quarter, cash generated from operating activities of $85 million was 14x our cost of debt in the quarter.

Additional capital management activities are detailed on Slide 18. Our growing cash flow generation has allowed us to accelerate debt repayments and increase the amount of capital we are returning to shareholders. After repaying $50 million of debt in the first quarter, we paid down additional $57 million in the second quarter, which lowered our leverage ratio to 1.4x. Subsequent to quarter end, we paid down another $35 million, bringing year-to-date debt reduction to $142 million. This compares to a total of $164 million we paid down for all of 2020. At the same time, we returned a total of $18.3 million to shareholders through share repurchases and dividends.

In the second quarter, we repurchased 288,000 shares. In May, we exhausted our former $15 million share repurchase authorization and the Board authorized a new program of the same $15 million size that expires at the end of 2022. We also announced our fifth consecutive quarterly cash dividend increase yesterday.

The Board authorized a $0.15 per share dividend, which is up 25% from the dividend paid in the second quarter. Since the second quarter of last year, we have tripled the quarterly dividend paid to shareholders while simultaneously accelerating debt repayments.

That concludes our prepared remarks. I'll now turn it back over to the operator for questions.

[Operator]

[Operator Instructions] We have our first question from the line of Alex Blostein from Goldman Sachs.

[Alexander Blostein, analyst]

Dave, I was hoping we could start with your commentary on M&A. You mentioned there are a number of potential targets that are in very late stages, I think, as you described it within your pipeline. Can you expand on maybe the size and capabilities of the managers that are kind of in this later stage bucket?

[David Brown, executive]

Sure, Alex. I would say that really you could bucket them in 2 buckets. The first being, think of it as the impactful acquisitions, very similar to the THB and the Alderwood. So smaller, very strategic brings us potentially organic growth, a different product and really maybe gets us into a different distribution channel. And I'd say that's one bucket, and there are opportunities there.

And then I'd say kind of on the other end of the spectrum, I would say, transformational. Think of, in the past, a USAA acquisition for us, which is of significant size and scale and brings us numerous things and probably uses more capital than the impactful.

I'd also add maybe another twist to it, which is we have been evaluating managers in the alternative space. That's an area of interest. We've talked about that in the past. And when you think about our platform and our business and eventually the retailization of alternatives, meaning bringing alternatives to a buyer or a buyer set where you're thinking about buying alternatives and maybe retirement accounts or in smaller investment accounts, we think that there could be some really potential opportunities there that could be very value-added to our business. So we are evaluating those as well. So I'd really say it's 2 buckets, but with maybe a little twist on -- with the alternatives.

[Alexander Blostein, analyst]

Great. And then second question around the organic growth. And great to see an improvement in the net flow picture, obviously, now positive for the quarter. Can you spend a minute on maybe sustainability of flows? And I heard you sort of mentioned that it's pretty broad-based, but maybe some specifics around net flows across the 3 categories that you described, so kind of self-directed, intermediary and institutional channel. And maybe as a follow-up on that, I know institutional has been gaining traction for you guys, maybe comments around the pipeline institutional would be also helpful.

[David Brown, executive]

Sure. So let me start off with -- if you go back and look at the last few quarters, we've had an improving trajectory and that has continued. And I think I've used the term, turning the corner, and I feel like we've turned the corner on flows. It is broad-based. And I think all organic growth really starts with, are you delivering for your clients? So do you have good investment performance? And we do and especially in areas that matter. And if you think about some of the investments we've made over the past year or so, think about the fixed income side with USAA investments.

We built that distribution quite significantly. And we've highlighted that last quarter, we highlighted some of it this quarter. That's starting to come in our institutional pipeline, as we mentioned, some has funded, but it has continued to build and that's really broad-based as well. You think about some of the acquisitions we did over the last 12 months with THB and the investment we made in Alderwood. We have not monetized those yet. Those are coming online. And I think those are a great opportunity going forward.

And lastly, I'd say on the direct side, we have seen improvement over the last few quarters, and we continue to see improvement. And as we continue to build out that business and really build a digital marketplace, we think there's great opportunity there. So it has been broad-based, and you can see from our gross flows that we had quite a significant jump. There's a little bit of noise in that. But if you really peel it back, there's been quite an increase in gross flows. And I would imagine us when I think about going forward in '21 and into '22 that, that would continue.

[Operator]

The next one, we have Kenneth Lee from RBC Capital Markets.

[Kenneth Lee, analyst]

Just staying on the topic of net flows, wondering if there's any kind of items that you want to call out in terms of meaningful contributors to the solutions business inflows that you saw in the quarter.

[David Brown, executive]

Yes. I'll take that. It's Dave. Our solutions business is really pretty widespread. Think of it as really an investment engine for us. We have our ETF platform within the solutions. So as we highlighted, I think it's the third straight quarter of growth for ETF platform. We've launched -- filed for 3 new ETFs plus the crypto ETF.

So we think that's an area of growth. It's been growing. There have been some customized portfolios that we've taken on which accounts for some of the growth. But we've talked about this for a while. The solutions platform is an area where we think we can grow going forward, it's growing today. And we think with what investors are looking for, we're able to solve a lot of issues in portfolios with that group.

[Kenneth Lee, analyst]

Great. And just one follow-up, if I may. You talked about starting up a high net worth advisory unit within the direct investor business. Wondering if you could just further elaborate longer-term plans and potential benefits that you could see from this unit down the line?

[David Brown, executive]

Sure. It's really a group that's giving customized client service to what we define as high net worth investors in the direct investor business. it's early on. It's a high-touch service. And as we look at the profile of those high net worth and clients in the direct investor business, we thought it made a lot of sense to carve out a group. Again, I think there's great opportunity there to expand wallet share with that group to gain new high net worth investors. And we're in the early stages of that initiative and many other initiatives in the direct investor business. That's an area where if we look out a year or so, we anticipate that to be a driver of organic growth for us as well.

[Operator]

The next one, we have Robert Lee from KBW.

[Robert Lee, analyst]

Maybe just sticking with flows, just kind of curious, I mean, fixed income performance has been good. You've pointed out they're getting it on more platforms, the Schwab select list. But I guess this quarter is kind of at least on the flow base is kind of felt like it slipped back. So can you maybe just call out if there were some particular onetime items? Or how should we think of kind of the pickup in redemptions there this quarter just given kind of the positive underlying trends?

[David Brown, executive]

Sure. It's Dave, again. We had one large client internalize their fixed income capabilities that we were managing for them. So I think there's a lot of noise in that total gross number. If you're able to see the detail, you would see that, that has picked up and especially with building out the distribution over the last few quarters, we anticipate ex that onetime item, you'll see some momentum there on the fixed side. We're very encouraged with that platform with the asset class.

If you go back a number of years, that's been an asset class that has attracted net flow positive flows. We have tremendous investment performance. We have a great team there in the USAA Investment franchise and INCORE, so we're really excited about that. And that's been an area that, again, we have built out kind of brick-by-brick on the distribution side. And that's an area where we look forward, we think that's going to contribute to organic growth as well.

[Robert Lee, analyst]

Okay. Great. And then maybe just as a quick follow-up. I mean, as you pointed out, I mean, profitability has improved nicely. You have your EBITDA margins now 50%, give or take, a tiny bit. So I understand you don't manage to a specific margin. But how should we think of the ability to continue to kind of scale from here? Are there some additional kind of investments you're kind of planning on over the coming quarters or so that may not put pressure on it, but may kind of limit additional expansion if -- assuming revenues can continue to trend higher?

[Michael Policarpo, executive]

Rob, this is Mike. Yes, that's a good question. As you said, this is our fourth consecutive quarter of 50-plus percent margins. For us, that's not surprising based on the business model we have and the scalability of what we've built across our centralized model. We have, in the past and continued and in our prepared remarks, we'll continue to guide to 49% long term. We are making significant investments in the business, and that is included in our current 50.6% margins as well.

But the areas that we are investing really around data, our distribution and the digitization of our distribution across marketing and really all 3 distinct distribution channels that we have. And so we'll continue to make those investments, and you'll see those as we move forward. We'll have quarters, I think, still going -- well, we'll have quarters going forward that will be above the 49% margins, but that's still a long-term range. We think the business is scalable, absent a large transformational acquisition. We'll continue to operate in the same level of margins that we are today.

[Operator]

Next one would be Cullen Johnson from B. Riley Securities.

[Cullen Johnson, analyst]

First one here, just kind of looking at the new crypto ETF product. The registration statement has been filed with the SEC. Can you just remind us where the SEC stands broadly on the issue? Have they broadly given the okay for crypto ETF types of products, and you think it'd be relatively low approval burden from here?

[David Brown, executive]

Yes. So it's Dave. They have not approved any of the ETFs yet to my knowledge. What we actually launched was a private fund that's available today to accredited investors in the U.S. And our take on this asset class is that it's a viable asset class. We've had many conversations with many clients, and there are many clients that want exposure to this asset class. We've partnered with NASDAQ and Hashdex, 2, I'd say, leading organizations, one, everybody knows NASDAQ; and two, Hashdex in the crypto world is a leader and has been managing crypto portfolios for a number of years.

So we have a live product today that's available in a private setting and the ETF that will eventually hopefully get approved over time with others. We think we'll just expand out our opportunity set there. We're really excited about this. One of the unique things about our offering is it's a collection of coins. It's not a single coin. So it's not a Bitcoin ETF or a Bitcoin product. It's actually an index. It's the NASDAQ Crypto Index that's rebalanced every quarter. And today, within the index, there are a number of coins. So if you're looking at getting exposure to the asset class, this is a way to do it where you're almost getting, if you will, a benchmark type exposure.

And as I said in my prepared remarks, we believe we're the first ones to file an ETF with this kind of product. So we're excited about it. And over the last couple of days, there's been a lot of discussion from various folks at the SEC around regulation. And we actually welcome the regulation. I think with regulation comes institutionalization, so it gives many investors confidence to invest in this asset class. So we welcome the regulation. We actually are very happy about it. And we think as the SEC goes through and creates rules and regulation and even tax rules around this from the IRS, I think it's going to be great for the asset class. And we think it's something that's sustainable. We don't know the size of it. I'm not sure anybody knows the size of the opportunity, but we know we think we have a great product and a great offering and we can be really competitive.

[Cullen Johnson, analyst]

Great. That's helpful. And then kind of sticking with crypto, just recognizing these products are maybe still in their infancy, do you have any kind of idea of what level of management fees these products might be capable of commanding just as we try to loosely gauge their revenue generation potential? Might it be -- maybe a little bit higher closer to a fixed income type product or than -- or maybe lower or closer to like a large cap equity. Any color there would be helpful.

[David Brown, executive]

I think the fee rate and what the establishment of the fee rate in different products in different markets has not been established yet. I would imagine the fee rate would be higher than your traditional fixed income product. But that has -- but I think that, that's yet to be determined as this asset class continues to kind of gain traction and mature.

For us, we want to be relevant in clients' portfolios. We've always tried to be on the side of charging a fair fee. And we think that this product will have the same characteristics of that -- of what we've done with other products.

[Operator]

The next one, we have Ken Worthington from JPMorgan.

[Kenneth Worthington, analyst]

So Victory continues to integrate a number of acquisitions. Maybe talk about your current top priorities on your list of things to accomplish still with regard to USAA and the other more recent deals that you've closed.

[Michael Policarpo, executive]

So from an integration perspective, we have completed everything that we've set out to with respect to USAA and THB. While THB was a smaller acquisition, it was onboarded quite quickly and has been successful. They're managing money and executing as we expect. I think as we've said, we've executed on the financial side with respect to the USAA acquisition and the THB acquisition. And we spent quite a bit of time on our last call talking about the pipes that we're building out for distribution.

I think that's the element that we're still executing on and want to continue to drive the strong investment performance from the USAA fixed income franchise through those distribution platforms, both on the retail, retirement and institutional segments of our business. So we're still looking to execute on that further. And then we've also spent some time talking about the digital platform that we've built out. It's now live and has been for 6 or 7 months on our platform. And we're continuing to look at and enhance the opportunities to drive incremental wallet share.

We talked a little bit about the high net worth group that we formed within that. And we've also looked at enhancing the offerings from a product perspective to include more offerings to those clients as well as we build out kind of the overall marketplace for them. So those are things that are still happening, as we speak, and will continue to as we move forward. And we're excited about the opportunities to be able to monetize those and really drive incremental growth through that platform, both on the USAA fixed income side and the direct investor business.

[David Brown, executive]

Ken, it's Dave. I would add one more thing. If you think about the staging. I mean, as Mike said, we fully integrated the acquisitions, THB and USAA and have effectively gotten the cost out that we had guided. And I think the next stage of that is to actually go and recognize the organic growth. We're starting to see that with the USAA Investments franchise. We talked about the direct investor business. I think those that are yet to come. That piece is yet to come. The THB, we've owned the business for a quarter. We've launched one of our ETFs, active ETFs that we launched is a THB ETF, the first actual mid-cap ESG ETF that's been launched or at least been filed.

And I think THB, we've yet to really monetize that from a growth perspective. And so that's yet to come. So when you think about where we are, it's integrated into our business, it's part of our business, but the growth aspect, we have not recognized yet.

[Kenneth Worthington, analyst]

And you've got to be pretty wide [Technical Difficulty] is THB plugged into all of the distributors that the other franchises use within Victory? Or are you 20% there? Are you 80% there? Are you 100% there? I assume it's not there yet, but my assumption is it takes a while to get those products registered on these different platforms. So I was curious to see how far along that process you are?

[David Brown, executive]

Yes. So for THB, that's historically been an institutional product. So if you think about the retail intermediary side, we're in early stages there, introducing it to the different large platforms having research type meetings, have had some success there. But we have ways to go with very positive early indications, some product development side. We talked about the ETF filing. And then on the institutional side, introducing to consultants and existing clients is well on its way.

But we're in early innings there. I don't think it's fair to put a percentage on it. Early innings, but with very, very good feedback from potential clients and platforms.

[Operator]

Next is Michael Cyprys from Morgan Stanley.

[Michael Cyprys, analyst]

I was just hoping you could talk a little bit about your separately managed account platforms. Could you just update us on how much of assets you have there today and how meaningful the flows? Is that contributing? And maybe just more broadly, how many strategies do you have on that today? And maybe you could talk a little bit how you're thinking about building that out and adding more strategies to the SMA platform?

[David Brown, executive]

Yes. So it's a smaller portion of our business today. I would say we have a handful of strategies that are available in the SMA platform. We've had some recent placements with our SMA strategies. It's a smaller portion of our business. It's an area of growth and opportunity for us. It's an area we're focusing on. I would tell you with THB, that's one of the product development or structuring development opportunities.

We know that one of the larger platforms have verbally told us that THB will join the platform in an SMA format. So that's an area of growth for us and an area of opportunity. We see the industry data and see the growth of that specific structure. And we have a few products that we're seeing some growth, and we have a few products that we'll launch on to that part of the market. And I think over time, that will be a much bigger part of our business.

[Michael Cyprys, analyst]

Great. And just on capital management, you've continued to raise the dividend here for a number of quarters. Can you just talk a little bit about how you're thinking about that and what the right payout ratio could make sense for Victory? And more broadly on capital management, you've been able to pay down debt, buy back stock. Maybe you could talk a little bit about how you approach that. What influences those decisions on -- which way you go and how far you go down each path?

[Michael Policarpo, executive]

Sure. Mike, I think we've always outlined our capital allocation strategy to match the business strategy. And for us, that is to be able to execute accretive M&A. So we've always sought to have flexibility with respect to our capital allocation strategy. And I think we've done that. As you said, we've been very focused on creating the balance sheet flexibility to create the opportunity to do M&A. We're ready to do that. We've been active in paying down the debt. As you've said, we've paid down $142 million year-to-date. We've paid down over 41% of the original debt from the USAA transaction. So that's been a focus for us to create that flexibility, which we've done.

At the same time, as we've been paying down debt and we've been able to lower the cost of debt, we've been able to take those savings and drive shareholder return through buybacks and through increased dividends. Over the last 5 quarters, we've increased the dividend. We're triple what we're paying today that we announced yesterday compared to a year ago, and we'll continue to evaluate that. I think we've increased our shareholder return quarter-over-quarter by close to 30%.

So we've been able to drive because of the strong free cash flow and the execution from a financial perspective to increase that leg, if you will, of shareholder return. We don't look at a specific payout ratio. I think as we evaluate the capital allocation policy and the things that we're doing ongoing on a quarterly basis, we're doing that based on facts and circumstances at the time based on looking at our ability to execute on M&A and how we need to do that. As we've talked about, we've got a number of tools to be able to do that. But we also look at the current leverage levels in the business.

They've come down dramatically from 2.7x in July of 2019 to 1.4x today. The cost of debt and then just our ongoing execution from a business perspective. And we'll continue to look at that going forward. I would expect that as we look at where we are today from a leverage perspective, we'll continue to evaluate increasing shareholder returns. And most likely, we'll do that through dividends as we've done over the last several quarters.

[Operator]

The next one, we have the line of Owen Lau from Oppenheimer.

[Kwun Sum Lau, analyst]

So I want to go back to the crypto private fund. Can you please talk about the traction of that private fund? What's the demand there? And what concerns your clients have expressed that may have prevented them from investing in digital assets? I mean if you can talk more about your conversation with clients, that would be great.

[David Brown, executive]

So we just launched it just a few days ago. So we're very, very early stages on actually having the product. Just generally speaking, I think that there has been a discussion with clients around what percentage should I allocate to this asset class. And so the sizing of the investment based on an overall portfolio. I think the second aspect of it is, do I want a single coin or do I want a basket of coins, and as I've mentioned earlier, our product is a basket of coins.

And then the third is around really security and viability. And when I think about security and viability, it's one of the reasons we've partnered with NASDAQ and partnered with Hashdex. These are leading organizations, and there's all kinds of checks and balances and for these coins to get into our basket. So those, I'd say, are the 3 big pieces of the conversations.

It's very early in our marketing efforts. It's encouraging the conversations we've had. And I think as this asset class gets better understood, and I'll go back to what I said earlier, I think as the SEC and the IRS and other agencies start to regulate this asset class, it becomes much more investable. And I think as it becomes much more investable, I think you'll see demand for it in lots of different areas. I think it's very early on in investing in this asset class. It's very misunderstood.

But in things that are early and asset classes that are early typically start out this way and as people understand them, as people can put them into portfolios and size them and decide how they want to have the exposure, you see lots of clients coming into it after you get over that initial hump, and I think we're still in very early stages. And quite honestly, for us, this is a really innovative entrepreneurial product for us, and we're really happy to be early in this process.

[Kwun Sum Lau, analyst]

Got it. Then other than private fund and ETF, you say any other area that you think Victory may also participate in this area -- in this digital assets area? Or it should mainly be like in the ETF and private fund space?

[David Brown, executive]

I think we're evaluating a lot of different structures. We're evaluating different ways in addition to the index to have our clients get exposure to digital assets. We'll continue to have discussions and based on those discussions, we'll develop product. But I would anticipate that we would have additional products and potentially additional structures in the digital asset space.

[Operator]

We have a follow-up question from the line of Michael Cyprys from Morgan Stanley.

[Michael Cyprys, analyst]

Just on the USAA direct channel and the digital and mobile rollout that you have coming, I was hoping you could just update us on your strategy there. Maybe you could talk a little bit about mobile engagement with customers. Where exactly that stands today? And where you'd like this capability set to be when you look out over the next couple of years? What are your aspirations there? And strategically, if you could talk about how you're executing to accomplish that?

[David Brown, executive]

Sure. So our goal has been to create a digital marketplace and expand our digital marketplace beyond just neutral funds and 529 Plan. And we've started to do that with adding Victory funds, adding a fixed income SMA capability, adding a portfolio of planning capability. We have perfected, I think, our client service over a period of time in a sense that we've got very good client service scores. I think we have very good client service. And as we move forward, I would expect us to expand our product offerings there. I would also expect us to expand our educational offerings in areas in financial literacy and in areas specific, potentially, to military.

So over the next few years, I look at this channel or this direct investor business as an area where we can increase wallet share with our existing clients. We can gain new clients, we can provide excellent service, a wide range of investment choices and we can help people really guide their financials -- guide them through their financial future with lots of different products and do it with really servicing in ways that the clients select either through the phone, live through the phone or through chatting or through just digital interaction where you're going on a website and investing kind of from a self-servicing perspective.

It's an area that -- and Mike has said this earlier that we have invested in, we'll continue to invest in. There are lots of green shoots in this business. I called out that our 529 Plan has had registration growth, net registration growth, net flow growth since we've acquired it, and there are many other areas like that.

Going into 2022, I would imagine that we would be putting out KPIs on the business. We've talked about that. So there's some more transparency as the business starts to normalize and we get to more of a final state.

[Michael Cyprys, analyst]

And just in terms of action items or to do, I guess, what sort of on the come would you say over the next 6 months, 12 months or so in terms of what you're looking to bring to market versus what you have already? I think there was some reference to mobile coming this summer. Do I have that right?

[David Brown, executive]

Yes. So our mobile is -- will be live here this month. And I would tell you, there's product development coming behind the scenes. There's data and technology and digital marketing coming and digital really client service. But when I look at it from a client perspective, there'll be more product choices continuing to have great service. And the mobile will be live here this month as well.

[Operator]

There are no further questions at this time. Mr. David Brown, please continue.

[David Brown, executive]

Thank you for joining us this morning and for your interest in Victory Capital. On Tuesday of next week, we'll be presenting at the UBS Financial Services Conference. And next month, we'll be attending the Barclays Global Financial Services Conference on September 14. We hope to see you there virtually and look forward to keeping you updated on our progress. Have a great day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.