10-Q 1 vrts0630201810-q.htm 10-Q VRTS JUNE 30, 2018

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
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: 001-10994

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) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)

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. YES x 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). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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 Exchange Act). YES ¨ NO x
The number of shares outstanding of the registrant’s common stock was 7,166,139 as of July 27, 2018.

Table of Contents
VIRTUS INVESTMENT PARTNERS, INC.
INDEX

|  | Page
Part I. FINANCIAL INFORMATION
Item 1. | Financial Statements (Unaudited) |
| Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2018 and December 31, 2017 | 1
| Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017 | 2
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017 | 3
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017 | 4
| Condensed Consolidated Statements of Changes in Equity (Unaudited) for the Six Months Ended June 30, 2018 and 2017 | 5
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 6
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39
Item 4. | Controls and Procedures | 39
Part II. OTHER INFORMATION
Item 1. | Legal Proceedings | 40
Item 1A. | Risk Factors | 41
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 41
Item 6. | Exhibits | 42
| Signatures | 43

"We," "us," "our," "the Company," and "Virtus" as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.

Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

| June 30, 2018 |  | December 31, 2017
($ in thousands, except share data) |  |  |
Assets: |  |  |
Cash and cash equivalents | $ | 138,827 |  |  | $ | 132,150 |
Investments | 87,209 |  |  | 108,492 |
Accounts receivable, net | 67,810 |  |  | 65,648 |
Assets of consolidated investment products ("CIP") |  |  |
Cash and cash equivalents of CIP | 40,755 |  |  | 101,315 |
Cash pledged or on deposit of CIP | 946 |  |  | 817 |
Investments of CIP | 1,775,069 |  |  | 1,597,752 |
Other assets of CIP | 34,605 |  |  | 33,486 |
Furniture, equipment and leasehold improvements, net | 11,409 |  |  | 10,833 |
Intangible assets, net | 291,894 |  |  | 301,954 |
Goodwill | 170,153 |  |  | 170,153 |
Deferred taxes, net | 31,133 |  |  | 32,428 |
Other assets | 40,090 |  |  | 35,771 |
Total assets | $ | 2,689,900 |  |  | $ | 2,590,799 |
Liabilities and Equity |  |  |
Liabilities: |  |  |
Accrued compensation and benefits | $ | 45,187 |  |  | $ | 86,658 |
Accounts payable and accrued liabilities | 25,805 |  |  | 29,607 |
Dividends payable | 6,688 |  |  | 6,528 |
Debt | 245,147 |  |  | 248,320 |
Other liabilities | 39,236 |  |  | 39,895 |
Liabilities of CIP |  |  |
Notes payable of CIP | 1,569,663 |  |  | 1,457,435 |
Securities purchased payable and other liabilities of CIP | 114,388 |  |  | 112,954 |
Total liabilities | 2,046,114 |  |  | 1,981,397 |
Commitments and Contingencies (Note 14) |  |  |
Redeemable noncontrolling interests of CIP | 3,420 |  |  | 4,178 |
Equity: |  |  |
Equity attributable to stockholders: |  |  |
Series D mandatory convertible preferred stock, $0.01 par value, 1,150,000 shares authorized, issued and outstanding at June 30, 2018 and December 31, 2017 | 110,843 |  |  | 110,843 |
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 10,523,050 shares issued and 7,166,139 shares outstanding at June 30, 2018 and 10,455,934 shares issued and 7,159,645 shares outstanding at December 31, 2017 | 105 |  |  | 105 |
Additional paid-in capital | 1,213,341 |  |  | 1,216,173 |
Retained earnings (accumulated deficit) | (340,024 | ) |  | (386,216 | )
Accumulated other comprehensive income (loss) | (622 | ) |  | (600 | )
Treasury stock, at cost, 3,356,911 shares at June 30, 2018 and 3,296,289 shares at December 31, 2017, respectively | (359,248 | ) |  | (351,748 | )
Total equity attributable to stockholders | 624,395 |  |  | 588,557 |
Noncontrolling interests of CIP | 15,971 |  |  | 16,667 |
Total equity | 640,366 |  |  | 605,224 |
Total liabilities and equity | $ | 2,689,900 |  |  | $ | 2,590,799 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
($ in thousands, except per share data) |  |  |  |  |  |  |
Revenues |  |  |  |  |  |  |
Investment management fees | $ | 103,168 |  |  | $ | 74,062 |  |  | $ | 203,644 |  |  | $ | 133,333 |
Distribution and service fees | 13,549 |  |  | 10,439 |  |  | 26,156 |  |  | 21,222 |
Administration and shareholder service fees | 15,967 |  |  | 9,476 |  |  | 31,705 |  |  | 18,457 |
Other income and fees | 248 |  |  | 155 |  |  | 455 |  |  | 896 |
Total revenues | 132,932 |  |  | 94,132 |  |  | 261,960 |  |  | 173,908 |
Operating Expenses |  |  |  |  |  |  |
Employment expenses | 54,868 |  |  | 42,992 |  |  | 115,564 |  |  | 82,633 |
Distribution and other asset-based expenses | 23,721 |  |  | 15,764 |  |  | 46,012 |  |  | 31,087 |
Other operating expenses | 19,128 |  |  | 20,236 |  |  | 35,990 |  |  | 33,462 |
Operating expenses of consolidated investment products ("CIP") | 1,783 |  |  | 473 |  |  | 2,294 |  |  | 1,115 |
Restructuring and severance | — |  |  | 8,894 |  |  | — |  |  | 8,894 |
Depreciation and other amortization | 1,100 |  |  | 776 |  |  | 2,115 |  |  | 1,440 |
Amortization expense | 5,024 |  |  | 1,813 |  |  | 10,060 |  |  | 2,046 |
Total operating expenses | 105,624 |  |  | 90,948 |  |  | 212,035 |  |  | 160,677 |
Operating Income (Loss) | 27,308 |  |  | 3,184 |  |  | 49,925 |  |  | 13,231 |
Other Income (Expense) |  |  |  |  |  |  |
Realized and unrealized gain (loss) on investments, net | 960 |  |  | 1,287 |  |  | 1,398 |  |  | 1,584 |
Realized and unrealized gain (loss) of CIP, net | (1,779 | ) |  | (1,424 | ) |  | 480 |  |  | 3,020 |
Other income (expense), net | 455 |  |  | 47 |  |  | 1,774 |  |  | 693 |
Total other income (expense), net | (364 | ) |  | (90 | ) |  | 3,652 |  |  | 5,297 |
Interest Income (Expense) |  |  |  |  |  |  |
Interest expense | (4,469 | ) |  | (3,739 | ) |  | (8,327 | ) |  | (3,982 | )
Interest and dividend income | 1,818 |  |  | 446 |  |  | 2,539 |  |  | 634 |
Interest and dividend income of investments of CIP | 23,679 |  |  | 5,102 |  |  | 45,082 |  |  | 10,758 |
Interest expense of CIP | (15,278 | ) |  | (2,995 | ) |  | (29,827 | ) |  | (5,852 | )
Total interest income (expense), net | 5,750 |  |  | (1,186 | ) |  | 9,467 |  |  | 1,558 |
Income (Loss) Before Income Taxes | 32,694 |  |  | 1,908 |  |  | 63,044 |  |  | 20,086 |
Income tax expense (benefit) | 9,465 |  |  | 1,880 |  |  | 15,988 |  |  | 6,313 |
Net Income (Loss) | 23,229 |  |  | 28 |  |  | 47,056 |  |  | 13,773 |
Noncontrolling interests | (159 | ) |  | (333 | ) |  | (686 | ) |  | (1,051 | )
Net Income (Loss) Attributable to Stockholders | 23,070 |  |  | (305 | ) |  | 46,370 |  |  | 12,722 |
Preferred stockholder dividends | (2,084 | ) |  | (2,084 | ) |  | (4,168 | ) |  | (4,168 | )
Net Income (Loss) Attributable to Common Stockholders | $ | 20,986 |  |  | $ | (2,389 | ) |  | $ | 42,202 |  |  | $ | 8,554 |
Earnings (Loss) per Share—Basic | $ | 2.91 |  |  | $ | (0.34 | ) |  | $ | 5.86 |  |  | $ | 1.26 |
Earnings (Loss) per Share—Diluted | $ | 2.75 |  |  | $ | (0.34 | ) |  | $ | 5.52 |  |  | $ | 1.22 |
Cash Dividends Declared per Preferred Share | $ | 1.81 |  |  | $ | 1.81 |  |  | $ | 3.63 |  |  | $ | 3.63 |
Cash Dividends Declared per Common Share | $ | 0.45 |  |  | $ | 0.45 |  |  | $ | 0.90 |  |  | $ | 0.90 |
Weighted Average Shares Outstanding—Basic (in thousands) | 7,211 |  |  | 7,064 |  |  | 7,204 |  |  | 6,804 |
Weighted Average Shares Outstanding—Diluted (in thousands) | 8,401 |  |  | 7,064 |  |  | 8,396 |  |  | 7,020 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
2

Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
($ in thousands) |  |  |  |  |  |  |
Net Income (Loss) | $ | 23,229 |  |  | $ | 28 |  |  | $ | 47,056 |  |  | $ | 13,773 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |
Foreign currency translation adjustment, net of tax of $6 and $2 for the three and six months ended June 30, 2018, respectively. | (18 | ) |  | 2 |  |  | (8 | ) |  | 2 |
Unrealized gain (loss) on available-for-sale securities, net of tax of ($20) and ($29) for the three months ended June 30, 2018 and 2017, respectively, and $77 and ($83) for the six months ended June 30, 2018 and 2017, respectively | 57 |  |  | 46 |  |  | (192 | ) |  | 134 |
Other comprehensive income (loss) | 39 |  |  | 48 |  |  | (200 | ) |  | 136 |
Comprehensive income (loss) | 23,268 |  |  | 76 |  |  | 46,856 |  |  | 13,909 |
Comprehensive (income) loss attributable to noncontrolling interests | (159 | ) |  | (333 | ) |  | (686 | ) |  | (1,051 | )
Comprehensive Income (Loss) Attributable to Stockholders | $ | 23,109 |  |  | $ | (257 | ) |  | $ | 46,170 |  |  | $ | 12,858 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

| Six Months Ended June 30,
| 2018 |  | 2017
($ in thousands) |  |  |
Cash Flows from Operating Activities: |  |  |
Net income (loss) | $ | 47,056 |  |  | $ | 13,773 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |
Depreciation expense, intangible asset and other amortization | 13,641 |  |  | 4,894 |
Stock-based compensation | 12,073 |  |  | 9,490 |
Amortization of deferred commissions | 1,646 |  |  | 1,072 |
Payments of deferred commissions | (2,600 | ) |  | (1,389 | )
Equity in earnings of equity method investments | (1,801 | ) |  | (679 | )
Realized and unrealized (gains) losses on trading securities, net | (1,398 | ) |  | (1,584 | )
Distributions from equity method investments | 669 |  |  | — |
Sales (purchases) of trading securities, net | 6,150 |  |  | 5,558 |
Deferred taxes, net | 1,374 |  |  | (576 | )
Changes in operating assets and liabilities: |  |  |
Accounts receivable, net and other assets | (5,469 | ) |  | (7,359 | )
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities | (45,713 | ) |  | (22,465 | )
Operating activities of consolidated investment products ("CIP"): |  |  |
Realized and unrealized (gains) losses on investments of CIP, net | (608 | ) |  | (2,879 | )
Purchases of investments by CIP | (641,236 | ) |  | (150,500 | )
Sales of investments by CIP | 465,213 |  |  | 205,347 |
Net purchases of short term investments by CIP | 97 |  |  | 265 |
Sales (purchases) of securities sold short by CIP, net | 187 |  |  | 153 |
Change in other assets of CIP | (829 | ) |  | 1,589 |
Change in liabilities of CIP | (2,965 | ) |  | (208 | )
Net cash provided by (used in) operating activities | (154,513 | ) |  | 54,502 |
Cash Flows from Investing Activities: |  |  |
Capital expenditures | (2,274 | ) |  | (678 | )
Change in cash and cash equivalents of CIP due to consolidation, net | — |  |  | 5,466 |
Acquisition of business (cash paid $471.4 million, less cash acquired $77.6 million) | — |  |  | (393,784 | )
Sale of available-for-sale securities | 37,785 |  |  | — |
Purchases of available-for-sale securities | (20,188 | ) |  | (130 | )
Net cash provided by (used in) investing activities | 15,323 |  |  | (389,126 | )
Cash Flows from Financing Activities: |  |  |
Issuance of debt | — |  |  | 260,000 |
Repayments on debt | (1,300 | ) |  | (30,271 | )
Payment of deferred financing costs | (3,548 | ) |  | (15,520 | )
Proceeds from issuance of mandatory convertible preferred stock, net of issuance costs | — |  |  | 111,004 |
Proceeds from issuance of common stock, net of issuance costs | — |  |  | 109,487 |
Common stock dividends paid | (6,735 | ) |  | (6,060 | )
Preferred stock dividends paid | (4,168 | ) |  | (2,084 | )
Repurchases of common shares | (7,500 | ) |  | — |
Stock options exercised | 698 |  |  | 86 |
Taxes paid related to net share settlement of restricted stock units | (5,238 | ) |  | (3,029 | )
Contributions (redemptions) of noncontrolling interests, net | (2,140 | ) |  | 7,733 |
Financing activities of CIP: |  |  |
Proceeds from issuance of notes payable by CIP | 784,867 |  |  | — |
Repayment of notes payable by CIP | (669,500 | ) |  | (500 | )
Net cash provided by (used in) financing activities | 85,436 |  |  | 430,846 |
Net increase (decrease) in cash and cash equivalents | (53,754 | ) |  | 96,222 |
Cash and cash equivalents, beginning of period | 234,282 |  |  | 83,671 |
Cash and Cash Equivalent, End of Period | $ | 180,528 |  |  | $ | 179,893 |
Non-Cash Investing Activities: |  |  |
Change in accrual for capital expenditures | $ | (439 | ) |  | $ | (174 | )
Non-Cash Financing Activities: |  |  |
Increase (decrease) to noncontrolling interest due to consolidation (deconsolidation) of CIP, net | $ | — |  |  | $ | 11,286 |
Stock issued for acquisition of business | $ | — |  |  | $ | 21,738 |
Contingent consideration for acquisition of business | $ | — |  |  | $ | 51,690 |
Common stock dividends payable | $ | 3,225 |  |  | $ | 3,248 |
Preferred stock dividends payable | $ | 2,084 |  |  | $ | 2,084 |
Accrued stock issuance costs | $ | — |  |  | $ | 334 |

| June 30, 2018 |  | December 31, 2017
($ in thousands) |  |  |
Reconciliation of cash and cash equivalents |  |  |
Cash and cash equivalents | $ | 138,827 |  |  | $ | 132,150 |
Cash of consolidated investment products | 40,755 |  |  | 101,315 |
Cash pledged or on deposit of consolidated investment products | 946 |  |  | 817 |
Cash and cash equivalents at end of period | $ | 180,528 |  |  | $ | 234,282 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)

| Common Stock |  | Preferred Stock |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Accumulated Other Comprehensive Income (Loss) |  | Treasury Stock |  | Total Attributed To Stockholders |  | Non- controlling Interests |  | Total Equity |  | Redeemable Non- controlling Interests
($ in thousands, except per share data) | Shares |  | Par Value |  | Shares |  | Amount |  | Shares |  | Amount |
Balances at December 31, 2016 | 5,889,013 |  |  | $ | 91 |  |  | — |  |  | $ | — |  |  | $ | 1,090,331 |  |  | $ | (424,279 | ) |  | $ | (224 | ) |  | 3,230,045 |  |  | $ | (344,246 | ) |  | $ | 321,673 |  |  | $ | — |  |  | $ | 321,673 |  |  | $ | 37,266 |
Adjustment for adoption of ASU 2016-09 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,051 |  |  | — |  |  | — |  |  | — |  |  | 1,051 |  |  | — |  |  | 1,051 |  |  | — |
Net income (loss) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,722 |  |  | — |  |  | — |  |  | — |  |  | 12,722 |  |  | — |  |  | 12,722 |  |  | 1,051 |
Net unrealized gain (loss) on securities available-for-sale | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 134 |  |  | — |  |  | — |  |  | 134 |  |  | — |  |  | 134 |  |  | — |
Foreign currency translation adjustments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | — |  |  | — |  |  | 2 |  |  | — |  |  | 2 |  |  | — |
Activity of noncontrolling interests, net | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,731 |  |  | 15,731 |  |  | 19,019 |
Issuance of mandatory convertible preferred stock, net of offering costs | — |  |  | — |  |  | 1,150,000 |  |  | 110,837 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 110,837 |  |  | — |  |  | 110,837 |  |  | — |
Cash dividends declared ($3.625 per preferred share) | — |  |  | — |  |  | — |  |  | — |  |  | (4,168 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,168 | ) |  | — |  |  | (4,168 | ) |  | — |
Issuance of common stock for acquisition of business | 213,669 |  |  | 2 |  |  | — |  |  | — |  |  | 21,738 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 21,740 |  |  | — |  |  | 21,740 |  |  | — |
Issuance of common stock, net of offering costs | 1,046,500 |  |  | 10 |  |  | — |  |  | — |  |  | 109,310 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 109,320 |  |  | — |  |  | 109,320 |  |  | — |
Cash dividends declared ($0.90 per common share) | — |  |  | — |  |  | — |  |  | — |  |  | (6,670 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,670 | ) |  | — |  |  | (6,670 | ) |  | — |
Issuance of common shares related to employee stock transactions | 68,726 |  |  | 1 |  |  | — |  |  | — |  |  | 816 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 817 |  |  | — |  |  | 817 |  |  | — |
Taxes paid on stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | (3,029 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,029 | ) |  | — |  |  | (3,029 | ) |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 9,173 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 9,173 |  |  | — |  |  | 9,173 |  |  | — |
Balances at June 30, 2017 | 7,217,908 |  |  | $ | 104 |  |  | 1,150,000 |  |  | $ | 110,837 |  |  | $ | 1,217,501 |  |  | $ | (410,506 | ) |  | $ | (88 | ) |  | 3,230,045 |  |  | $ | (344,246 | ) |  | $ | 573,602 |  |  | $ | 15,731 |  |  | $ | 589,333 |  |  | $ | 57,336 |
Balances at December 31, 2017 | 7,159,645 |  |  | $ | 105 |  |  | 1,150,000 |  |  | $ | 110,843 |  |  | $ | 1,216,173 |  |  | $ | (386,216 | ) |  | $ | (600 | ) |  | 3,296,289 |  |  | $ | (351,748 | ) |  | $ | 588,557 |  |  | $ | 16,667 |  |  | $ | 605,224 |  |  | $ | 4,178 |
Adjustment for adoption of ASU 2016-01 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (178 | ) |  | 178 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Net income (loss) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 46,370 |  |  | — |  |  | — |  |  | — |  |  | 46,370 |  |  | 766 |  |  | 47,136 |  |  | (80 | )
Net unrealized gain (loss) on securities available-for-sale | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (192 | ) |  | — |  |  | — |  |  | (192 | ) |  | — |  |  | (192 | ) |  | — |
Foreign currency translation adjustments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (8 | ) |  | — |  |  | — |  |  | (8 | ) |  | — |  |  | (8 | ) |  | — |
Activity of noncontrolling interests, net | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,462 | ) |  | (1,462 | ) |  | (678 | )
Cash dividends declared ($3.625 per preferred share) | — |  |  | — |  |  | — |  |  | — |  |  | (4,168 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,168 | ) |  | — |  |  | (4,168 | ) |  | — |
Cash dividends declared ($0.90 per common share) | — |  |  | — |  |  | — |  |  | — |  |  | (6,877 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,877 | ) |  | — |  |  | (6,877 | ) |  | — |
Repurchases of common shares | (60,622 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 60,622 |  |  | (7,500 | ) |  | (7,500 | ) |  | — |  |  | (7,500 | ) |  | — |
Issuance of common shares related to employee stock transactions | 67,116 |  |  | — |  |  | — |  |  | — |  |  | 1,378 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,378 |  |  | — |  |  | 1,378 |  |  | — |
Taxes paid on stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | (5,238 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (5,238 | ) |  |  |  | (5,238 | ) |  | — |
Stock-based compensation | — |  |  | — |  |  | — |  |  | — |  |  | 12,073 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,073 |  |  | — |  |  | 12,073 |  |  | — |
Balances at June 30, 2018 | 7,166,139 |  |  | $ | 105 |  |  | 1,150,000 |  |  | $ | 110,843 |  |  | $ | 1,213,341 |  |  | $ | (340,024 | ) |  | $ | (622 | ) |  | 3,356,911 |  |  | $ | (359,248 | ) |  | $ | 624,395 |  |  | $ | 15,971 |  |  | $ | 640,366 |  |  | $ | 3,420 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. ("the Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of U.S. 1940 Act mutual funds and Undertaking for Collective Investment in Transferable Securities ("UCITS") (collectively, "open-end funds"), closed-end funds, exchange traded funds ("ETFs") and retail separate accounts. Institutional investment management services are provided to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments, structured products and as a subadviser to unaffiliated mutual funds.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2017 Annual Report on Form 10-K.
The Company has reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. The reclassifications were not material to the condensed consolidated financial statements.
New Accounting Standards Implemented
On January 1, 2018, t he Company adopted the new Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), pursuant to Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, and all the related amendments ("the new revenue standard") using the modified retrospective approach. The core principle of the new revenue standard is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. Based on the revised criteria in the new revenue standard for determining whether the Company is acting as a principal or agent, certain costs that were previously presented on a net of revenue basis are now presented on a gross basis. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. No cumulative-effect adjustment to the balance sheet was necessary upon the adoption of ASC 606. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). On January 1, 2018, t he Company adopted amendments to ASC 825 - Financial Instruments pursuant to ASU 2016-01. This standard requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income. The Company recorded a $0.2 million cumulative-effect adjustment to the balance sheet upon adoption.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). On January 1, 2018, t he Company adopted amendments to ASC 230 - Statement of Cash Flows ("ASC 230") on a retrospective basis pursuant to ASU 2016-15. This standard clarifies the treatment of several cash flow activities. ASU 2016-15 also clarifies that when cash
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receipts and cash payments have aspects of more than one classification of cash flows and cannot be separated, classification will depend on the predominant source or use. T he adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). On January 1, 2018, the Company adopted amendments to ASC 230 on a retrospective basis pursuant to ASU 2016-18. This standard requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning and ending cash on the statement of cash flows. Restricted cash includes cash pledged or on deposit with brokers of consolidated investment products. Cash, cash equivalents and restricted cash reported on the condensed consolidated statements of cash flows now includes $0.8 million, $0.9 million and $1.0 million of cash pledged or on deposit of consolidated investment products as of December 31, 2017, June 30, 2017, and December 31, 2016, respectively, as well as previously reported cash and cash equivalents. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). On January 1, 2018, t he Company adopted amendments to ASC 805 - Business Combinations ("ASC 805") pursuant to ASU 2017-01, and will a pply the standard prospectively. This standard provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). On January 1, 2018, t he Company adopted amendments to ASC 350 - Intangibles Goodwill and Other pursuant to ASU 2017-04, and will a pply the standard prospectively for all future annual and interim goodwill impairment tests . Under ASU 2017-04, a goodwill impairment is defined to be the amount by which a reporting unit’s carrying value exceeds its fair value. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). In March 2018, the Company adopted the amendments to ASC 740 - Income Taxes pursuant to ASU 2018-05. The standard adds various Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment on a timely basis. SAB 118 allows disclosure stating that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate of the income tax effects. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and have recorded provisional amounts in our condensed consolidated financial statements as of June 30, 2018 and December 31, 2017.
New Accounting Standards Not Yet Implemented
In July 2018, the FASB issued ASU 2018-09, Codification Improvements ("ASU 2018-09"). This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB ASC areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while other updates provide for a transition period for adoption over the next fiscal year beginning after December 15, 2018. The Company is currently evaluating the potential impact of the guidance but does not expect the adoption of this standard to have a material impact on the Company's condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The standard provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 - Leases with updated guidance on accounting for leases and requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous guidance did not require lease assets and
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liabilities to be recognized for most leases. Furthermore, this standard permits companies to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of ASU 2016-02. Both standards are effective for fiscal years beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its condensed consolidated financial statements but expects to record a right-of-use asset and a related lease obligation in the Company's condensed consolidated balance sheet upon adoption.
3. Revenues
Adoption of ASC 606, Revenue from Contracts with Customers
The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which investment management, distribution and service and administration and shareholder service fees are calculated, are variable in nature and subject to factors outside of the Company's control such as deposits, withdrawals and market performance. Because of this, they are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.
Revenue Disaggregated by Source
The following table summarizes revenue by source:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 (1) |  | 2018 |  | 2017 (1)
($ in thousands) |  |  |  |  |  |  |
Investment management fees |  |  |  |  |  |  |
Open-end funds | $ | 57,192 |  |  | $ | 39,186 |  |  | $ | 111,566 |  |  | $ | 69,712 |
Closed-end funds | 10,168 |  |  | 11,174 |  |  | 20,547 |  |  | 22,253 |
Retail separate accounts | 17,091 |  |  | 12,759 |  |  | 33,620 |  |  | 24,192 |
Institutional accounts | 15,778 |  |  | 8,790 |  |  | 31,596 |  |  | 13,931 |
Structured products | 2,068 |  |  | 1,163 |  |  | 4,394 |  |  | 1,662 |
Other products | 871 |  |  | 990 |  |  | 1,921 |  |  | 1,583 |
Total investment management fees | 103,168 |  |  | 74,062 |  |  | 203,644 |  |  | 133,333 |
Distribution and service fees | 13,549 |  |  | 10,439 |  |  | 26,156 |  |  | 21,222 |
Administration and shareholder service fees | 15,967 |  |  | 9,476 |  |  | 31,705 |  |  | 18,457 |
Other income and fees | 248 |  |  | 155 |  |  | 455 |  |  | 896 |
Total revenues | $ | 132,932 |  |  | $ | 94,132 |  |  | $ | 261,960 |  |  | $ | 173,908 |

(1) | Prior period amounts have not been adjusted and are reported in accordance with historical accounting under ASC 605, Revenue Recognition.

Investment Management Fees
The Company provides investment management services pursuant to investment management agreements through its affiliated investment advisers (each an "Adviser"). Investment management services represent a series of distinct daily service periods which are performed over time. With respect to the Company's funds, the Company earns fees based on each fund’s average daily or weekly net assets which are generally received and calculated on a monthly basis. The Company has recorded its management fees net of investment management fees paid to unaffiliated subadvisers, as the Company considers itself an agent of the fund as it relates to the day-to-day investment management services performed by unaffiliated subadvisers. With respect to services performed by the unaffiliated subadviser, the Company's performance obligation is to arrange for the provision of that service, and it does not control the specified service before that service is performed. Amounts paid to unaffiliated subadvisers for the three and six months ended June 30, 2018 were $12.3 million and $25.2 million, respectively.
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Retail separate account fees are calculated based on the end of the preceding or current quarter's asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Fees for structured finance products, for which the Company acts 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 the Company's CLOs are typically 20% of the excess cash flows available to holders of the subordinated notes, above a threshold level internal rate of return.
Distribution and Service Fees
Distribution and service fees are asset-based fees earned from open-end funds for distribution services. Depending on the fund type or share class, these fees primarily consist of an asset-based fee (12b-1 fee) that is charged to the fund over a period of years to cover allowable sales and marketing expenses for the fund or front-end sales charges which are based on a percentage of the offering price. Asset-based distribution and service fees are primarily based on percentages of the average daily net assets value and are paid monthly pursuant to the terms of the respective distribution and service fee contracts.
Distribution and service fees represent two performance obligations comprised of distribution and related shareholder servicing activities. Distribution services are generally satisfied upon the sale of a fund share. Shareholder servicing activities are generally services satisfied over time.
The Company distributes its open-end funds through unaffiliated financial intermediaries that comprise national and regional broker dealers. These unaffiliated financial intermediaries provide distribution and shareholder service activities on behalf of the Company. The Company passes related distribution and service fees to these unaffiliated financial intermediaries for these services and considers itself the principal in these arrangements as it has control of the services prior to the services being transferred to the customer. These payments are classified within distribution and other asset-based expenses.
Administration & Shareholder Service Fees
The Company provides administrative fund services to its open-end funds and certain of its closed-end funds and shareholder services to its open-end funds. Administration and shareholder services are performed over time. The Company earns fees based on each fund’s average daily or weekly net assets which are calculated and paid monthly. Administrative fund 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 services include maintaining shareholder accounts, processing shareholder transactions, preparing filings and performing necessary reporting, among other things.
Financial Statement Impact of the Adoption of ASC 606
The adoption of ASC 606 resulted in a change from the Company’s treatment under ASC 605 whereby front-end sales charges earned for the sale execution of certain share classes were presented net of the amounts retained by unaffiliated third-party dealers and banks. These front-end sales charges earned are now presented on a gross basis under ASC 606.
The impact of adoption of ASC 606 on the Company's condensed consolidated statement of operations was as follows:

| Three Months Ended June 30, 2018 |  | Six Months Ended June 30, 2018
($ in Thousands) | As Reported |  | Balance Under Prior ASC 605 |  | Effect of Change Higher/(Lower) |  | As Reported |  | Balance Under Prior ASC 605 |  | Effect of Change Higher/(Lower)
Revenues |  |  |  |  |  |  |  |  |  |  |
Distribution and service fees | $ | 13,549 |  |  | $ | 11,455 |  |  | $ | 2,094 |  |  | $ | 26,156 |  |  | $ | 22,826 |  |  | $ | 3,330 |
Operating Expenses |  |  |  |  |  |  |  |  |  |  |
Distribution and other asset-based expenses | $ | 23,721 |  |  | $ | 21,627 |  |  | $ | 2,094 |  |  | $ | 46,012 |  |  | $ | 42,682 |  |  | $ | 3,330 |

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4. Business Combinations
RidgeWorth Investments
On June 1, 2017, the Company acquired RidgeWorth Investments (the "Acquisition" or the "Acquired Business"), a multi-boutique asset manager with approximately $40.1 billion in assets under management, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies.
The total purchase price of the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. The Company accounted for the acquisition in accordance with ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Acquisition. No incremental measurement period adjustments were recorded in the three and six months ended June 30, 2018, the measurement period was complete on June 1, 2018.
The following table summarizes the identified acquired assets and liabilities assumed as of the acquisition date:

| June 1, 2017
($ in thousands) |
Assets: |
Cash and cash equivalents | $ | 39,343 |
Investments | 5,516 |
Accounts receivable | 20,311 |
Assets of consolidated investment products ("CIP") |
Cash and cash equivalents of CIP | 38,261 |
Investments of CIP | 899,274 |
Other assets of CIP | 19,158 |
Furniture, equipment and leasehold improvements | 5,505 |
Intangible assets | 275,700 |
Goodwill | 163,365 |
Deferred taxes, net | 6,590 |
Other assets | 3,003 |
Total Assets | 1,476,026 |
Liabilities |
Accrued compensation and benefits | 18,263 |
Accounts payable and accrued liabilities | 11,858 |
Other liabilities | 2,601 |
Liabilities of consolidated investment products ("CIP") |
Notes payable of CIP | 770,160 |
Securities purchased payable and other liabilities of CIP | 109,881 |
Noncontrolling Interests of CIP | 16,181 |
Total Liabilities & Noncontrolling Interests | 928,944 |
Total Net Assets Acquired | $ | 547,082 |

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Income of the Acquired Business subsequent to the effective closing date of the Acquisition of June 1, 2017 within the quarter ended June 30, 2017, was as follows:

| One Month Ended
| June 30, 2017
($ in thousands) |
Total Revenues | $ | 11,536 |
Restructuring and severance | $ | 8,396 |
All other operating expenses | $ | 8,564 |
Operating Income (Loss) | $ | (5,424 | )
Income (Loss) Before Income Taxes | $ | (5,398 | )

The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2016. The unaudited pro forma information also reflects adjustment for transaction and integration expenses as if the Acquisition had been consummated on January 1, 2016. This unaudited information should not be relied upon as being indicative of historical results that would have been obtained if the Acquisition had occurred on that date, nor of the results that may be obtained in the future.

| Three Months Ended |  | Six Months Ended
| June 30, 2017 |  | June 30, 2017
($ in thousands, except per share amounts) |  |  |
Total Revenues | $ | 119,803 |  |  | $ | 237,395 |
Net Income (Loss) Attributable to Common Stockholders | $ | (2,724 | ) |  | $ | 9,982 |
Basic EPS | $ | (0.39 | ) |  | $ | 1.47 |
Diluted EPS | $ | (0.39 | ) |  | $ | 1.42 |

Identifiable Intangible Assets Acquired
In connection with the allocation of the purchase price, we identified the following intangible assets:

| June 1, 2017
| Approximate Fair Value |  | Weighted Average of Useful Life
($ in thousands) |  |  |
Definite-lived intangible assets: |  |  |
Mutual fund investment contracts | $ | 189,200 |  |  | 16.0 years
Institutional and retail separate account investment contracts | 77,000 |  |  | 10.4 years
Trademarks/Trade names | 800 |  |  | 10.0 years
Total definite-lived intangible assets | 267,000 |  |  |
Indefinite-lived intangible assets: |  |  |
Trade names | 8,700 |  |  | N/A
Total identifiable intangible assets | $ | 275,700 |  |  |

Sustainable Growth Advisers, LP
On February 1, 2018, the Company entered into an agreement to acquire a majority interest in Sustainable Growth Advisers, LP ("SGA"), an investment manager specializing in U.S. and global growth equity portfolios (the "Transaction"). The Transaction closed effective July 1, 2018.
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5. Intangible Assets, Net
Intangible assets, net are summarized as follows:

| June 30, 2018 |  | December 31, 2017
($ in thousands) |  |  |
Definite-lived intangible assets: |  |  |
Investment contracts | $ | 425,747 |  |  | $ | 425,747 |
Accumulated amortization | (177,369 | ) |  | (167,309 | )
Definite-lived intangible assets, net | 248,378 |  |  | 258,438 |
Indefinite-lived intangible assets | 43,516 |  |  | 43,516 |
Total intangible assets, net | $ | 291,894 |  |  | $ | 301,954 |

Activity in intangible assets, net is as follows:

| Six Months Ended June 30,
| 2018 |  | 2017
($ in thousands) |  |  |
Intangible assets, net |  |  |
Balance, beginning of period | $ | 301,954 |  |  | $ | 38,427 |
Additions (1) | — |  |  | 275,700 |
Amortization | (10,060 | ) |  | (2,046 | )
Balance, end of period | $ | 291,894 |  |  | $ | 312,081 |

(1) See Note 4 for details on the acquired intangible assets related to the Acquisition.
Estimated amortization expense of intangible assets for the remainder of fiscal year 2018 and succeeding fiscal years is as follows:

($ in thousands) |  |
Fiscal Year |  | Amount
2018 |  | $ | 10,049 |
2019 |  | 20,043 |
2020 |  | 19,878 |
2021 |  | 19,867 |
2022 |  | 19,742 |
2023 and thereafter |  | 158,799 |
|  | $ | 248,378 |

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6. Investments
At June 30, 2018 and December 31, 2017, the Company's investments were as follows:

| June 30, 2018 |  | December 31, 2017
($ in thousands) |  |  |
Marketable securities | $ | 61,401 |  |  | $ | 66,424 |
Equity method investments | 12,230 |  |  | 11,098 |
Nonqualified retirement plan assets | 6,909 |  |  | 6,706 |
Investments in collateralized loan obligations | 5,744 |  |  | 23,339 |
Other investments | 925 |  |  | 925 |
Total investments | $ | 87,209 |  |  | $ | 108,492 |

Marketable Securities
Marketable securities consist primarily of investments in the Company's sponsored mutual funds, excluding the investments in consolidated investment products discussed in Note 15. The composition of the Company’s marketable securities is summarized as follows:
June 30, 2018

| Cost |  | Unrealized Loss |  | Unrealized Gain |  | Fair Value
($ in thousands) |  |  |  |  |  |  |
Marketable securities: |  |  |  |  |  |  |
Sponsored funds | $ | 40,235 |  |  | $ | (895 | ) |  | $ | 1,333 |  |  | $ | 40,673 |
Equity securities | 14,018 |  |  | (10 | ) |  | 3,000 |  |  | 17,008 |
Sponsored closed-end funds | 3,778 |  |  | (360 | ) |  | 302 |  |  | 3,720 |
Total marketable securities | $ | 58,031 |  |  | $ | (1,265 | ) |  | $ | 4,635 |  |  | $ | 61,401 |

December 31, 2017

| Cost |  | Unrealized Loss |  | Unrealized Gain |  | Fair Value
($ in thousands) |  |  |  |  |  |  |
Marketable securities: |  |  |  |  |  |  |
Sponsored funds | $ | 47,084 |  |  | $ | (1,294 | ) |  | $ | 1,059 |  |  | $ | 46,849 |
Equity securities | 13,141 |  |  | (2 | ) |  | 2,671 |  |  | 15,810 |
Sponsored closed-end funds | 3,761 |  |  | (302 | ) |  | 306 |  |  | 3,765 |
Total marketable securities | $ | 63,986 |  |  | $ | (1,598 | ) |  | $ | 4,036 |  |  | $ | 66,424 |

For the three and six months ended June 30, 2018, the Company recognized net realized gains of $1.7 million and $1.3 million, respectively, on marketable securities. For the three and six months ended June 30, 2017, the Company recognized net realized losses of $1.8 million and $1.9 million, respectively, on marketable securities.
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7. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated investment products, which are separately discussed in Note 15, as of June 30, 2018 and December 31, 2017 by fair value hierarchy level were as follows:
June 30, 2018

| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 99,441 |  |  | $ | — |  |  | $ | — |  |  | $ | 99,441 |
Marketable securities: |  |  |  |  |  |  |
Sponsored funds | 40,673 |  |  | — |  |  | — |  |  | 40,673 |
Equity securities | 17,008 |  |  | — |  |  | — |  |  | 17,008 |
Sponsored closed-end funds | 3,720 |  |  | — |  |  | — |  |  | 3,720 |
Other investments: |  |  |  |  |  |  |
Investments in collateralized loan obligations | — |  |  | — |  |  | 5,744 |  |  | 5,744 |
Nonqualified retirement plan assets | 6,909 |  |  | — |  |  | — |  |  | 6,909 |
Total assets measured at fair value | $ | 167,751 |  |  | $ | — |  |  | $ | 5,744 |  |  | $ | 173,495 |

December 31, 2017

| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 72,993 |  |  | $ | — |  |  | $ | — |  |  | $ | 72,993 |
Marketable securities: |  |  |  |  |  |  |
Sponsored funds | 46,849 |  |  | — |  |  | — |  |  | 46,849 |
Equity securities | 15,810 |  |  | — |  |  | — |  |  | 15,810 |
Sponsored closed-end funds | 3,765 |  |  | — |  |  | — |  |  | 3,765 |
Other investments |  |  |  |  |  |  |
Investment in collateralized loan obligations | — |  |  | 18,900 |  |  | 4,439 |  |  | 23,339 |
Nonqualified retirement plan assets | 6,706 |  |  | — |  |  | — |  |  | 6,706 |
Total assets measured at fair value | $ | 146,123 |  |  | $ | 18,900 |  |  | $ | 4,439 |  |  | $ | 169,462 |

The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:
Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Sponsored funds represent investments in open-end mutual funds, closed-end funds and ETFs for which the Company acts as the investment manager. The fair value of open-end mutual funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds and ETFs are determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Investments in collateralized loan obligations represent investments in CLOs for which the Company provides investment management services. The investments in collateralized loan obligations are measured at fair value based on independent third-party valuations and are categorized as Level 2 or Level 3.
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Nonqualified retirement plan assets represent open-end mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
Transfers into and out of levels are reflected when: (1) significant inputs used for the fair value measurement, including market inputs or performance attributes, become observable or unobservable; or (2) if the book value no longer represents fair value. There were no transfers between levels during the three and six months ended June 30, 2018 and 2017.
The following table is a reconciliation of assets for Level 3 investments for which significant unobservable inputs were used to determine fair value.

| Three Months Ended June 30, |  | Six Months Ended June 30,
($ in thousands) | 2018 |  | 2017 |  | 2018 |  | 2017
Level 3 Investments (a) |  |  |  |  |  |  |
Balance at beginning of period | $ | 5,532 |  |  | $ | — |  |  | $ | 4,439 |  |  | $ | — |
Acquired in period | — |  |  | 2,916 |  |  | 1,326 |  |  | 2,916 |
Change in unrealized gain (loss), net | 212 |  |  | 7 |  |  | (21 | ) |  | 7 |
Balance at end of period | $ | 5,744 |  |  | $ | 2,923 |  |  | $ | 5,744 |  |  | $ | 2,923 |
(a) The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment.

8. Equity Transactions
On May 15, 2018, the Company declared a quarterly cash dividend of $0.45 per common share to be paid on August 15, 2018 to shareholders of record at the close of business on July 31, 2018. The Company also declared a quarterly cash dividend of $1.8125 per share on the Company's 7.25% mandatory convertible preferred stock ("MCPS") to be paid on August 1, 2018 to shareholders of record at the close of business on July 16, 2018.
As of June 30, 2018, there were 823,134 shares available to be repurchased from a total of 4,180,045 shares of Company common stock that had been approved by the Company's Board of Directors. The Company may repurchase shares of its common stock from time to time at its discretion through open market repurchases, privately negotiated transactions and/or other mechanisms, depending on price and prevailing market and business conditions. During the six months ended June 30, 2018, the Company repurchased 60,622 common shares at a weighted average price of $123.69 per share for a total cost, including fees and expenses, of $7.5 million.
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9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2018 and 2017 were as follows:

| Unrealized Net Gains and (Losses) on Securities Available-for-Sale |  | Foreign Currency Translation Adjustments
($ in thousands) |  |  |
Balance at December 31, 2017 | $ | (612 | ) |  | $ | 12 |
Unrealized net gain (loss) on securities available-for-sale, net of tax of $77 | (192 | ) |  | — |
Foreign currency translation adjustments, net of tax of $2 | — |  |  | (8 | )
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of ($61) (1) | 178 |  |  | — |
Net current-period other comprehensive income (loss) | (14 | ) |  | (8 | )
Balance at June 30, 2018 | $ | (626 | ) |  | $ | 4 |
| Unrealized Net Gains and (Losses) on Securities Available-for-Sale |  | Foreign Currency Translation Adjustments
($ in thousands) |  |  |
Balance at December 31, 2016 | $ | (224 | ) |  | $ | — |
Unrealized net gain (loss) on securities available-for-sale, net of tax of $(83) | 134 |  |  | — |
Foreign currency translation adjustments | — |  |  | 2 |
Net current-period other comprehensive income (loss) | 134 |  |  | 2 |
Balance at June 30, 2017 | $ | (90 | ) |  | $ | 2 |

(1) | On January 1, 2018, t he Company adopted amendments to ASC 825 pursuant to ASU 2016-01. This standard requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income.

10. Stock-Based Compensation
The Company's Amended and Restated Omnibus Incentive and Equity Plan (the "Plan") provides for the grant of equity-based awards, including restricted stock units ("RSUs"), stock options and unrestricted shares of common stock. As of June 30, 2018, a maximum of 2,400,000 shares of common stock were authorized for issuance under the Plan, and 300,637 shares remained available for issuance. Shares that are issued upon exercise of stock options and vesting of RSUs are newly issued shares from the Plan and are not issued from treasury stock. The Company recognized total stock compensation expense of $12.1 million and $9.5 million for the six months ended June 30, 2018 and 2017, respectively.
Restricted Stock Units
Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. The fair value of each RSU is estimated using the intrinsic value method, which is based on the fair market value price on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market condition are valued using a simulation valuation model.
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RSU activity for the six months ended June 30, 2018 is summarized as follows:

| Number of Shares |  | Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017 | 483,021 |  |  | $ | 104.16 |
Granted | 175,284 |  |  | $ | 133.37 |
Settled | (80,032 | ) |  | $ | 110.81 |
Outstanding at June 30, 2018 | 578,273 |  |  | $ | 112.16 |

For the six months ended June 30, 2018 and 2017, a total of 30,598 and 28,444 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $5.2 million and $3.0 million for the six months ended June 30, 2018 and 2017, respectively, in minimum employee tax withholding obligations related to RSUs withheld. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.
During the six months ended June 30, 2018, the Company granted 23,356 performance based stock awards ("PSUs") which contain performance-based metrics in addition to a service condition. Compensation expense for these PSUs is recognized over a three-year service period based upon the value determined using a combination of the intrinsic value method, for awards that contain a performance metric that represents a "performance condition" in accordance with ASC 718, and the Monte Carlo simulation valuation model, for awards under the performance metric that represents a "market condition" under ASC 718. Compensation expense for the awards that contain a market condition is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the market condition. Compensation expense for the awards with a performance condition is recorded each period based upon a probability assessment of the expected outcome of the performance metric with a final adjustment upon the final outcome. For the six months ended June 30, 2018, total stock-based compensation expense for PSUs was $4.3 million.
As of June 30, 2018, unamortized stock-based compensation expense for unvested RSUs and PSUs was $42.3 million, with a weighted-average remaining amortization period of 1.8 years.
Stock Options
Stock options generally cliff vest after three years and have a contractual life of 10 years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant.
Stock option activity for the six months ended June 30, 2018 is summarized as follows:

| Number of Shares |  | Weighted Average Exercise Price
Outstanding at December 31, 2017 | 109,808 |  |  | $ | 16.44 |
Exercised | (22,245 | ) |  | $ | 31.38 |
Outstanding at June 30, 2018 | 87,563 |  |  | $ | 12.64 |

11. Earnings per Share
Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period, excluding dilution for potential common stock issuances. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, including: (1) shares issuable upon the vesting of RSUs and common stock option exercises using the treasury stock method; and (2) shares issuable upon the conversion of the Company's MCPS, as determined under the if-converted method. For purposes of calculating diluted EPS, preferred stock dividends have been subtracted from net income (loss) in periods in which utilizing the if-converted method would be anti-dilutive.
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The computation of basic and diluted EPS is as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
($ in thousands, except per share amounts) |  |  |  |  |  |  |
Net Income (Loss) | $ | 23,229 |  |  | $ | 28 |  |  | $ | 47,056 |  |  | $ | 13,773 |
Noncontrolling interests | (159 | ) |  | (333 | ) |  | (686 | ) |  | (1,051 | )
Net Income (Loss) Attributable to Stockholders | 23,070 |  |  | (305 | ) |  | 46,370 |  |  | 12,722 |
Preferred stock dividends | (2,084 | ) |  | (2,084 | ) |  | (4,168 | ) |  | (4,168 | )
Net Income (Loss) Attributable to Common Stockholders | $ | 20,986 |  |  | $ | (2,389 | ) |  | $ | 42,202 |  |  | $ | 8,554 |
Shares (in thousands): |  |  |  |  |  |  |
Basic: Weighted-average number of common shares outstanding | 7,211 |  |  | 7,064 |  |  | 7,204 |  |  | 6,804 |
Plus: Incremental shares from assumed conversion of dilutive instruments | 1,190 |  |  | — |  |  | 1,192 |  |  | 216 |
Diluted: Weighted-average number of common shares outstanding | 8,401 |  |  | 7,064 |  |  | 8,396 |  |  | 7,020 |
Earnings (Loss) per Share—Basic | $ | 2.91 |  |  | $ | (0.34 | ) |  | $ | 5.86 |  |  | $ | 1.26 |
Earnings (Loss) per Share—Diluted | $ | 2.75 |  |  | $ | (0.34 | ) |  | $ | 5.52 |  |  | $ | 1.22 |

The following table details the securities that have been excluded from the above computation of weighted-average number of shares for diluted EPS, because the effect would be anti-dilutive.

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
(in thousands) |  |  |  |  |  |  |
Restricted stock units and stock options | 44 |  |  | 202 |  |  | 29 |  |  | 1 |
Preferred stock | — |  |  | 1,037 |  |  | — |  |  | 859 |
Total anti-dilutive securities | 44 |  |  | 1,239 |  |  | 29 |  |  | 860 |

12. Income Taxes
In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted, as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and at each interim period thereafter.
The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 25.4% and 31.4% for the six months ended June 30, 2018 and 2017, respectively. The decrease in the estimated effective tax rate was primarily due to the Tax Cuts and Jobs Act enacted on December 22, 2017, which included a reduction of the statutory federal corporate income tax rate to 21% from 35%. This decrease in tax rates was partially offset by a decrease in the tax benefit associated with valuation allowance changes related to the Company's investments.
13. Debt
C redit Agreement
On February 15, 2018 (the "Effective Date") the Company entered into Amendment No. 1 (the "Amendment") to its Credit Agreement, dated as of June 1, 2017, with Morgan Stanley Senior Funding, Inc., as administrative agent and the lenders from time to time party thereto (the Credit Agreement as amended by the Amendment is hereinafter referred to as the "Credit Agreement"). The Amendment provided commitments for an additional $105.0 million of term loans ("Additional Term
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Loans") which were subject to, among other customary conditions, the substantially concurrent consummation of the Company’s agreement to acquire (i) 70% of the outstanding limited partnership interests of SGA and (ii) 100% of the outstanding membership interests of SGIA, LLC, the general partner of SGA. On July 2, 2018, the Company borrowed the $105.0 million of additional term loans and used the proceeds, in combination with balance sheet resources, to fund the Transaction.
The applicable margin on amounts outstanding under the Credit Agreement, commencing as of the Effective Date, is 2.50%, in the case of LIBOR-based loans, and 1.50% in the case of alternate base rate loans, in each case subject to a 25 basis point reduction based on the secured net leverage ratio (as defined in the Credit Agreement) of the Company as of the last day of the preceding fiscal quarter being not greater than 1.00 to 1.00, as reflected in certain financial reports required under the Credit Agreement. The Additional Term Loans were subject to a delayed draw fee accruing for the period (i) from the date which is 31 days after the Effective Date to the date which is 60 days after the Effective Date, at 1.25% per annum and (ii) thereafter, at 2.50% per annum until the funding of the Additional Term Loans on July 2, 2018.
The Amendment also eliminated a maximum Total Net Leverage Ratio (as defined in the Credit Agreement) financial maintenance covenant as applied to term loans under the Credit Agreement. The Credit Agreement includes, for the benefit of revolving lenders, a financial maintenance covenant that the Company will not permit the Total Net Leverage Ratio to exceed 2.50:1.00 as of the last day of any fiscal quarter, provided that this covenant will apply only if on such day the aggregate principal amount of outstanding revolving loans and letters of credit exceeds 30% of the aggregate revolving commitments as of such day.
At June 30, 2018, $258.1 million was outstanding under the Term Loan and no amounts were outstanding under the Company's $100.0 million revolving credit facility.
14. Commitments and Contingencies
Legal Matters
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, indemnities 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.
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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. 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. 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. The parties executed a final settlement agreement on May 18, 2018. On June 28, 2018, the Court entered an order preliminarily approving the settlement and scheduling a hearing for final approval on October 24, 2018. Upon final 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.
15. Consolidation
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest, which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity.
The Company also evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either: (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support; or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance, (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
In the normal course of its business, the Company sponsors various investment products, some of which are consolidated by the Company. Consolidated investment products include both VOEs, made up primarily of open-end funds in which the Company holds a controlling financial interest, and VIEs, which primarily consist of collateralized loan obligations ("CLOs") of which the Company is considered the primary beneficiary. The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to stockholders. The Company’s risk with respect to these investment products is limited to its beneficial interests in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products beyond the Company’s investments in, and fees generated from, these products.
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The following table presents the balances of the consolidated investment products that, after intercompany eliminations, are reflected in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017:

| As of
| June 30, 2018 |  | December 31, 2017
|  |  | VIEs |  |  |  | VIEs
| VOEs |  | CLOs |  | Other |  | VOEs |  | CLOs |  | Other
($ in thousands) |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 910 |  |  | $ | 40,327 |  |  | $ | 464 |  |  | $ | 820 |  |  | $ | 82,823 |  |  | $ | 18,489 |
Investments | 28,756 |  |  | 1,722,625 |  |  | 23,688 |  |  | 34,623 |  |  | 1,555,879 |  |  | 7,250 |
Other assets | 257 |  |  | 33,937 |  |  | 411 |  |  | 767 |  |  | 32,671 |  |  | 48 |
Notes payable | — |  |  | (1,569,663 | ) |  | — |  |  | — |  |  | (1,457,435 | ) |  | — |
Securities purchased payable and other liabilities | (1,073 | ) |  | (112,701 | ) |  | (614 | ) |  | (1,319 | ) |  | (110,871 | ) |  | (764 | )
Noncontrolling interests | (3,381 | ) |  | (15,971 | ) |  | (39 | ) |  | (4,178 | ) |  | (16,667 | ) |  | — |
The Company’s net interests in consolidated investment vehicles | $ | 25,469 |  |  | $ | 98,554 |  |  | $ | 23,910 |  |  | $ | 30,713 |  |  | $ | 86,400 |  |  | $ | 25,023 |

Consolidated CLOs
The majority of the Company's consolidated investment products that are VIEs are CLOs. At June 30, 2018, the Company consolidated five CLOs including one CLO currently in warehouse-stage. The financial information of certain CLOs is included in the Company's condensed consolidated financial statements one-month in arrears based upon the availability of financial information. Majority-owned consolidated private funds, whose primary purpose is to invest in CLOs for which the Company serves as the collateral manager, are also included.
Investments of CLOs
The CLOs investments of $1.7 billion at June 30, 2018 represent bank loan investments, which comprise the majority of the CLOs' portfolio asset collateral and are senior secured corporate loans across a variety of industries. These bank loan investments mature at various dates between 2018 and 2026 and pay interest at LIBOR plus a spread of up to 10.0%. At June 30, 2018, the fair value of the senior bank loans exceeded the unpaid principal balance by $12.1 million. At June 30, 2018, there were no collateral assets in default.
Notes Payable of CLOs
The CLOs have issued notes payable with a total value, at par, of $1.7 billion, consisting of senior secured floating rate notes payable with a par value of $1.4 billion, warehouse facility debt with a par value of $91.0 million and subordinated notes with a par value of $172.3 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.8% to 7.00%. The principal amounts outstanding of the note obligations issued by the CLOs mature on dates ranging from November 2018 to October 2029. The CLOs may elect to reinvest any prepayments received on bank loan investments between October 2019 and October 2021, depending on the CLO. Generally, subsequent prepayments received after the reinvestment period must be used to pay down the note obligations.
The Company’s beneficial interests and maximum exposure to loss related to these consolidated CLOs is limited to: (i) ownership in the subordinated notes and (ii) accrued management fees. The secured notes and warehouse facility debt of the consolidated CLOs have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at June 30, 2018, as shown in the table below:
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| As of
| June 30, 2018
($ in thousands) |
Subordinated notes | $ | 97,566 |
Accrued investment management fees | 988 |
Total Beneficial Interests | $ | 98,554 |

The following table represents income and expenses of the consolidated CLOs included in the Company’s condensed consolidated statements of operations for the period indicated:

| Six Months Ended June 30,
($ in thousands) | 2018
Income: |
Realized and unrealized gain (loss), net | $ | 1,935 |
Interest income | 44,259 |
Total Income | 46,194 |
Expenses: |
Other operating expenses | 1,830 |
Interest expense | 29,827 |
Total Expense | 31,657 |
Noncontrolling interest | (767 | )
Net Income (loss) attributable to CIPs | $ | 13,770 |

As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation:

| Six Months Ended June 30,
($ in thousands) | 2018
Distributions received and unrealized gains on the subordinated notes held by the Company | $ | 10,380 |
Investment management fees | 3,390 |
Total Economic Interests | $ | 13,770 |

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Fair Value Measurements of Consolidated Investment Products
The assets and liabilities of the consolidated investment products measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 by fair value hierarchy level were as follows:
As of June 30, 2018

| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 39,937 |  |  | $ | — |  |  | $ | — |  |  | $ | 39,937 |
Debt investments | — |  |  | 1,740,396 |  |  | 3,514 |  |  | 1,743,910 |
Equity investments | 29,241 |  |  | 1,918 |  |  | — |  |  | 31,159 |
Total Assets Measured at Fair Value | $ | 69,178 |  |  | $ | 1,742,314 |  |  | $ | 3,514 |  |  | $ | 1,815,006 |
Liabilities |  |  |  |  |  |  |
Notes payable | $ | — |  |  | $ | 1,569,663 |  |  | $ | — |  |  | $ | 1,569,663 |
Short sales | 804 |  |  | — |  |  | — |  |  | 804 |
Total Liabilities Measured at Fair Value | $ | 804 |  |  | $ | 1,569,663 |  |  | $ | — |  |  | $ | 1,570,467 |

As of December 31, 2017

| Level 1 |  | Level 2 |  | Level 3 |  | Total
($ in thousands) |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Cash equivalents | $ | 82,769 |  |  | $ | — |  |  | $ | — |  |  | $ | 82,769 |
Debt investments | — |  |  | 1,527,845 |  |  | 33,887 |  |  | 1,561,732 |
Equity investments | 35,126 |  |  | — |  |  | 894 |  |  | 36,020 |
Total Assets Measured at Fair Value | $ | 117,895 |  |  | $ | 1,527,845 |  |  | $ | 34,781 |  |  | $ | 1,680,521 |
Liabilities |  |  |  |  |  |  |
Notes payable | $ | — |  |  | $ | 1,457,435 |  |  | $ | — |  |  | $ | 1,457,435 |
Derivatives | 2 |  |  | — |  |  | — |  |  | 2 |
Short sales | 719 |  |  | — |  |  | — |  |  | 719 |
Total Liabilities Measured at Fair Value | $ | 721 |  |  | $ | 1,457,435 |  |  | $ | — |  |  | $ | 1,458,156 |

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment products measured at fair value:
Cash equivalents represent investments in money ma rket funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Debt and equity investments represent the underlying debt, equity and other securities held in consolidated investment products. Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1. Level 2 investments represent most debt securities, including bank loans and certain equity securities (including non-U.S. securities), for which closing prices are not readily available or are deemed to not reflect readil y available market prices, and are valued using an independent pricing service. Debt investments, including bank loan investments, are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analysis or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy. Level 3 investments include debt securities that are not widely traded, are illiquid, or are priced by dealers based on pricing models used by market makers in the security.
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For the six months ended June 30, 2018 and 2017, no securities held by consolidated investment products were transferred from Level 2 to Level 1. For the six months ended June 30, 2018 and 2017, no securities held by consolidated investment products were transferred from Level 1 to Level 2.
Notes payable represent notes issued by consolidated investments products that are CLOs and are measured using the measurement alternative in ASU 2014-13. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of: (a) the fair value of the beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services.
Short sales are transactions in which a security is sold which is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the condensed consolidated balance sheets within other liabilities of consolidated investment products and are classified as Level 1 based on the underlying equity security.
The securities purchase payable at June 30, 2018 and December 31, 2017 approximated fair value due to the short-term nature of the instruments.
The following table is a reconciliation of assets of consolidated investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value:

| Six Months Ended June 30,
($ in thousands) | 2018 |  | 2017
Level 3 Debt and Equity securities (a) |  |  |
Balance at beginning of period | $ | 34,781 |  |  | $ | 25 |
Realized gains (losses), net | 1,993 |  |  | (4 | )
Change in unrealized gains (losses), net | 575 |  |  | — |
Acquired in business combination | — |  |  | 9,150 |
Purchases | 7,122 |  |  | 100 |
Paydowns | — |  |  | — |
Amortization | 19 |  |  | — |
Sales | (13,884 | ) |  | (121 | )
Transfers to Level 2 | (30,606 | ) |  | — |
Transfers from Level 2 | 3,514 |  |  | — |
Balance at end of period | $ | 3,514 |  |  | $ | 9,150 |

(a) | The investments that are categorized as Level 3 were valued utilizing third-party pricing information without adjustment. All transfers are deemed to occur at the end of period. Transfers between Level 2 and Level 3 are due to trading activities at period end.

Nonconsolidated VIEs
The Company serves as the collateral manager for other collateralized loan and collateralized bond obligations (collectively, "CDOs") that are not consolidated. The assets and liabilities of these CDOs reside in bankruptcy remote, special purpose entities in which the Company has no ownership, nor holds any notes issued by the CDOs, and provides neither recourse nor guarantees. The Company has determined that the investment management fees it receives for serving as collateral manager for these CDOs did not represent a variable interest as: (1) the fees the Company earns are compensation for services provided and are commensurate with the level of effort required to provide the investment management services; (2) the Company does not hold other interests in the CDOs that individually, or in the aggregate, would absorb more than an insignificant amount of the CDO's expected losses or receive more than an insignificant amount of the CDO's expected residual return; and (3) the investment management arrangement only includes terms, conditions and amounts that are customarily present in arrangements for similar services negotiated at arm's length.
The Company has interests in certain other entities that are VIEs that the Company does not consolidate as it is not the primary beneficiary of those entities. The Company is not the primary beneficiary as its interest in these entities does not provide the Company with the power to direct the activities that most significantly impact the entities' economic performance.
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At June 30, 2018, the carrying value and maximum risk of loss related to the Company's interest in these VIEs was $59.8 million.
16. Subsequent Events
On July 1, 2018 the Company closed on its majority investment in Sustainable Growth Advisers, an investment manager with $11.3 billion in assets under management at June 30, 2018. The transaction was financed with balance sheet resources and $105.0 million of term loan debt, which was drawn at the closing.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q 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 (the "Exchange Act"). 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 statements contained in this Quarterly Report on Form 10-Q are as of the date of this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report.
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 our 2017 Annual Report on Form 10-K, as well as the following risks and uncertainties: (a) any reduction in our assets under management; (b) 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) 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) risk of loss on our investments; (p) inability to make quarterly common and preferred stock distributions; (q) lack of sufficient capital on satisfactory terms; (r) losses or costs not covered by insurance; (s) impairment of goodwill or intangible assets; (t) inability to achieve expected acquisition-related 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 above, in our 2017 Annual Report on Form 10-K or in any of our filings with the Securities and Exchange Commission ("SEC") could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.
Certain other factors which may impact our continuing operations, prospects, financial results and liquidity, or which may cause actual results to differ from such forward-looking statements, are discussed or included in the Company’s periodic reports filed with the SEC and are available on our website at www.virtus.com under "Investor Relations." You are urged to carefully consider all such factors.
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.
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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.
Financial Highlights

• | Net earnings per diluted share was $2.75 in the second quarter of 2018 as compared to a net loss per diluted share of $(0.34) in the second quarter of 2017.

• | Total sales (inflows) were $6.6 billion in the second quarter of 2018, an increase of $3.2 billion, or 92.4%, from $3.5 billion in the second quarter of 2017. Net flows were $1.3 billion in the second quarter of 2018 compared to $(0.2) billion in the second quarter of 2017.

• | Long-term assets under management were $89.8 billion at June 30, 2018, an increase of $4.8 billion from June 30, 2017.

Sustainable Growth Advisers, LP
On July 1, 2018 the Company closed on its majority investment in Sustainable Growth Advisers, an investment manager with $11.3 billion in assets under management at June 30, 2018. The transaction was financed with balance sheet resources and $105.0 million of term loan debt, which was drawn at the closing.
RidgeWorth Investments
On June 1, 2017, we acquired RidgeWorth Investments (the "Acquisition" or "Acquired Business"), a multi-boutique investment management firm that managed approximately $40.1 billion in assets under management as of June 1, 2017, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies.
Assets Under Management
At June 30, 2018, total assets under management were $91.6 billion, representing an increase of $3.0 billion, or 3.4%, from June 30, 2017 and an increase of $0.7 billion, or 0.7%, from December 31, 2017. The increase in total assets under management from June 30, 2017 and from December 31, 2017 was primarily due to market performance.
Average long-term assets under management, which represent the majority of our fee-earning asset levels, were $88.8 billion for the six months ended June 30, 2018, an increase of $35.3 billion, or 65.9%, from $53.5 billion for the six months ended June 30, 2017. The increase in average long-term assets under management compared to June 30, 2017 was primarily due to the Acquired Business and market performance.
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Operating Results
In the second quarter of 2018, total revenues increased 41.2% to $132.9 million from $94.1 million in the second quarter of 2017, primarily as a result of additional revenues from the Acquired Business. Operating income increased $24.1 million to $27.3 million in the second quarter of 2018 compared to $3.2 million in the second quarter of 2017. The second quarter of 2017 included $8.9 million related to restructuring and severance costs primarily associated with the Acquisition.
Assets Under Management by Product
The following table summarizes our assets under management by product:

| As of June 30, |  | Change
| 2018 |  | 2017 |  | $ |  | %
($ in millions) |  |  |  |  |  |  |
Open-End Funds (1) | $ | 44,419.3 |  |  | $ | 41,452.8 |  |  | $ | 2,966.5 |  |  | 7.2 | %
Closed-End Funds | 6,295.0 |  |  | 6,707.2 |  |  | (412.2 | ) |  | (6.1 | )%
Exchange Traded Funds | 1,029.9 |  |  | 968.8 |  |  | 61.1 |  |  | 6.3 | %
Retail Separate Accounts | 14,678.4 |  |  | 12,351.1 |  |  | 2,327.3 |  |  | 18.8 | %
Institutional Accounts | 19,726.6 |  |  | 20,639.1 |  |  | (912.5 | ) |  | (4.4 | )%
Structured Products | 3,684.4 |  |  | 2,899.8 |  |  | 784.6 |  |  | 27.1 | %
Total Long-Term | 89,833.6 |  |  | 85,018.8 |  |  | 4,814.8 |  |  | 5.7 | %
Liquidity (2) | 1,784.9 |  |  | 3,570.6 |  |  | (1,785.7 | ) |  | (50.0 | )%
Total | $ | 91,618.5 |  |  | $ | 88,589.4 |  |  | $ | 3,029.1 |  |  | 3.4 | %
Average Assets Under Management (3) | $ | 90,577.9 |  |  | $ | 54,197.7 |  |  | $ | 36,380.2 |  |  | 67.1 | %
Average Long-Term Assets Under Management (3) | $ | 88,834.4 |  |  | $ | 53,533.4 |  |  | $ | 35,301.0 |  |  | 65.9 | %

(1) | Represents assets under management of U.S. 1940 Act mutual funds and Undertakings for Collective Investments in Transferable Securities ("UCITS")

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

(3) | 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 and Structured Products - average of month-end balances in quarter
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Asset Flows by Product
The following table summarizes asset flows by product:

| Three Months Ended June 30, |  | Six Months Ended June 30,
($ in millions) | 2018 |  | 2017 |  | 2018 |  | 2017
Open-End Funds (1) |  |  |  |  |  |  |
Beginning balance | $ | 43,202.5 |  |  | $ | 24,716.8 |  |  | $ | 43,077.6 |  |  | $ | 23,432.8 |
Inflows | 4,356.6 |  |  | 2,253.9 |  |  | 8,140.2 |  |  | 4,286.6 |
Outflows | (3,220.6 | ) |  | (2,278.6 | ) |  | (6,882.8 | ) |  | (4,413.3 | )
Net flows | 1,136.0 |  |  | (24.7 | ) |  | 1,257.4 |  |  | (126.7 | )
Market performance | 170.5 |  |  | 1,212.3 |  |  | 240.3 |  |  | 2,656.8 |
Other (2) | (89.7 | ) |  | 15,548.4 |  |  | (156.0 | ) |  | 15,489.9 |
Ending balance | $ | 44,419.3 |  |  | $ | 41,452.8 |  |  | $ | 44,419.3 |  |  | $ | 41,452.8 |
Closed-End Funds |  |  |  |  |  |  |
Beginning balance | $ | 6,132.7 |  |  | $ | 6,814.3 |  |  | $ | 6,666.2 |  |  | $ | 6,757.4 |
Inflows | 0.5 |  |  | — |  |  | 0.5 |  |  | — |
Outflows | — |  |  | (31.2 | ) |  | — |  |  | (112.8 | )
Net flows | 0.5 |  |  | (31.2 | ) |  | 0.5 |  |  | (112.8 | )
Market performance | 250.0 |  |  | 16.4 |  |  | (156.1 | ) |  | 297.2 |
Other (2) | (88.2 | ) |  | (92.3 | ) |  | (215.6 | ) |  | (234.6 | )
Ending balance | $ | 6,295.0 |  |  | $ | 6,707.2 |  |  | $ | 6,295.0 |  |  | $ | 6,707.2 |
Exchange Traded Funds |  |  |  |  |  |  |
Beginning balance | $ | 980.2 |  |  | $ | 863.3 |  |  | $ | 1,039.2 |  |  | $ | 596.8 |
Inflows | 86.5 |  |  | 185.1 |  |  | 226.0 |  |  | 450.8 |
Outflows | (71.7 | ) |  | (51.3 | ) |  | (134.9 | ) |  | (74.3 | )
Net flows | 14.8 |  |  | 133.8 |  |  | 91.1 |  |  | 376.5 |
Market performance | 65.2 |  |  | (8.5 | ) |  | (12.3 | ) |  | 26.1 |
Other (2) | (30.3 | ) |  | (19.8 | ) |  | (88.1 | ) |  | (30.6 | )
Ending balance | $ | 1,029.9 |  |  | $ | 968.8 |  |  | $ | 1,029.9 |  |  | $ | 968.8 |
Retail Separate Accounts |  |  |  |  |  |  |
Beginning balance | $ | 14,012.3 |  |  | $ | 9,312.1 |  |  | $ | 13,936.8 |  |  | $ | 8,473.5 |
Inflows | 736.7 |  |  | 656.2 |  |  | 1,438.0 |  |  | 1,345.4 |
Outflows | (575.3 | ) |  | (455.7 | ) |  | (1,361.8 | ) |  | (753.6 | )
Net flows | 161.4 |  |  | 200.5 |  |  | 76.2 |  |  | 591.8 |
Market performance | 499.7 |  |  | 341.6 |  |  | 660.4 |  |  | 795.4 |
Other (2) | 5.0 |  |  | 2,496.9 |  |  | 5.0 |  |  | 2,490.4 |
Ending balance | $ | 14,678.4 |  |  | $ | 12,351.1 |  |  | $ | 14,678.4 |  |  | $ | 12,351.1 |
Institutional Accounts |  |  |  |  |  |  |
Beginning balance | $ | 19,411.2 |  |  | $ | 5,711.3 |  |  | $ | 20,815.9 |  |  | $ | 5,492.7 |
Inflows | 1,425.0 |  |  | 357.1 |  |  | 1,848.0 |  |  | 634.8 |
Outflows | (1,465.8 | ) |  | (612.1 | ) |  | (3,115.5 | ) |  | (804.0 | )
Net flows | (40.8 | ) |  | (255.0 | ) |  | (1,267.5 | ) |  | (169.2 | )
Market performance | 486.4 |  |  | 168.1 |  |  | 313.7 |  |  | 306.4 |
Other (2) | (130.2 | ) |  | 15,014.7 |  |  | (135.5 | ) |  | 15,009.2 |
Ending balance | $ | 19,726.6 |  |  | $ | 20,639.1 |  |  | $ | 19,726.6 |  |  | $ | 20,639.1 |
Structured Products |  |  |  |  |  |  |
Beginning balance | $ | 3,704.6 |  |  | $ | 602.0 |  |  | $ | 3,298.8 |  |  | $ | 613.1 |
Inflows | 37.8 |  |  | — |  |  | 421.4 |  |  | — |
Outflows | (20.4 | ) |  | (224.0 | ) |  | (20.4 | ) |  | (240.7 | )
Net flows | 17.4 |  |  | (224.0 | ) |  | 401.0 |  |  | (240.7 | )
Market performance | 45.3 |  |  | 13.5 |  |  | 83.2 |  |  | 23.8 |
Other (2) | (82.9 | ) |  | 2,508.3 |  |  | (98.6 | ) |  | 2,503.6 |
Ending balance | $ | 3,684.4 |  |  | $ | 2,899.8 |  |  | $ | 3,684.4 |  |  | $ | 2,899.8 |

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Total Long-Term |  |  |  |  |  |  |
Beginning balance | $ | 87,443.5 |  |  | $ | 48,019.8 |  |  | $ | 88,834.5 |  |  | $ | 45,366.3 |
Inflows | 6,643.1 |  |  | 3,452.3 |  |  | 12,074.1 |  |  | 6,717.6 |
Outflows | (5,353.8 | ) |  | (3,652.9 | ) |  | (11,515.4 | ) |  | (6,398.7 | )
Net flows | 1,289.3 |  |  | (200.6 | ) |  | 558.7 |  |  | 318.9 |
Market performance | 1,517.1 |  |  | 1,743.4 |  |  | 1,129.2 |  |  | 4,105.7 |
Other (2) | (416.3 | ) |  | 35,456.2 |  |  | (688.8 | ) |  | 35,227.9 |
Ending balance | $ | 89,833.6 |  |  | $ | 85,018.8 |  |  | $ | 89,833.6 |  |  | $ | 85,018.8 |
Liquidity (3) |  |  |  |  |  |  |
Beginning balance | $ | 1,641.6 |  |  | $ | — |  |  | $ | 2,128.7 |  |  | $ | — |
Other (2) | 143.3 |  |  | 3,570.6 |  |  | (343.8 | ) |  | 3,570.6 |
Ending balance | $ | 1,784.9 |  |  | $ | 3,570.6 |  |  | $ | 1,784.9 |  |  | $ | 3,570.6 |
Total |  |  |  |  |  |  |
Beginning balance | $ | 89,085.1 |  |  | $ | 48,019.8 |  |  | $ | 90,963.2 |  |  | $ | 45,366.3 |
Inflows | 6,643.1 |  |  | 3,452.3 |  |  | 12,074.1 |  |  | 6,717.6 |
Outflows | (5,353.8 | ) |  | (3,652.9 | ) |  | (11,515.4 | ) |  | (6,398.7 | )
Net flows | 1,289.3 |  |  | (200.6 | ) |  | 558.7 |  |  | 318.9 |
Market performance | 1,517.1 |  |  | 1,743.4 |  |  | 1,129.2 |  |  | 4,105.7 |
Other (2) | (273.0 | ) |  | 39,026.8 |  |  | (1,032.6 | ) |  | 38,798.5 |
Ending balance | $ | 91,618.5 |  |  | $ | 88,589.4 |  |  | $ | 91,618.5 |  |  | $ | 88,589.4 |

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

(2) | Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from liquidity strategies, and the impact on net flows from non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), structured products reset transactions and the use of leverage

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

The following table summarizes our assets under management by asset class:

| As of June 30, |  | Change |  | % of Total
| 2018 |  | 2017 |  | $ |  | % |  | 2018 |  | 2017
($ in millions) |  |  |  |  |  |  |  |  |  |  |
Asset Class |  |  |  |  |  |  |  |  |  |  |
Equity | $ | 48,894.8 |  |  | $ | 41,672.6 |  |  | $ | 7,222.2 |  |  | 17.3 | % |  | 53.4 | % |  | 47.0 | %
Fixed income | 37,176.0 |  |  | 39,102.1 |  |  | (1,926.1 | ) |  | (4.9 | )% |  | 40.6 | % |  | 44.2 | %
Alternatives (1) | 3,762.8 |  |  | 4,244.1 |  |  | (481.3 | ) |  | (11.3 | )% |  | 4.1 | % |  | 4.8 | %
Liquidity (2) | 1,784.9 |  |  | 3,570.6 |  |  | (1,785.7 | ) |  | (50.0 | )% |  | 1.9 | % |  | 4.0 | %
Total | $ | 91,618.5 |  |  | $ | 88,589.4 |  |  | $ | 3,029.1 |  |  | 3.4 | % |  | 100.0 | % |  | 100.0 | %

(1) | Consists of real estate securities, master-limited partnerships, option strategies and other

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

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Average Assets Under Management and Average Basis Points
The following table summarizes the average management fees earned in basis points and average assets under management:

| Three Months Ended June 30,
($ in millions, except average fee earned data which is in basis points) | Average Fees Earned |  | Average Assets Under Management (2)
| 2018 |  | 2017 |  | 2018 |  | 2017
Products |  |  |  |  |
Open-End Funds (1) | 51.8 |  |  | 50.7 |  |  | $ | 44,000.8 |  |  | $ | 30,651.6 |
Closed-End Funds | 66.1 |  |  | 65.8 |  |  | 6,167.0 |  |  | 6,809.6 |
Exchange Traded Funds | 14.7 |  |  | 27.2 |  |  | 1,026.8 |  |  | 900.8 |
Retail Separate Accounts | 48.4 |  |  | 49.7 |  |  | 13,999.0 |  |  | 10,143.7 |
Institutional Accounts | 31.7 |  |  | 32.7 |  |  | 19,942.3 |  |  | 10,795.1 |
Structured Products | 36.2 |  |  | 33.5 |  |  | 3,681.5 |  |  | 1,392.9 |
All Long-Term Products | 46.7 |  |  | 48.3 |  |  | 88,817.4 |  |  | 60,693.7 |
Liquidity (3) | 9.5 |  |  | 11.4 |  |  | 1,699.3 |  |  | 1,328.6 |
All Products | 46.0 |  |  | 47.5 |  |  | $ | 90,516.7 |  |  | $ | 62,022.3 |
| Six Months Ended June 30,
($ in millions, except average fee earned data which is in basis points) | Average Fees Earned |  | Average Assets Under Management (2)
| 2018 |  | 2017 |  | 2018 |  | 2017
Products |  |  |  |  |
Open-End Funds (1) | 51.1 |  |  | 50.7 |  |  | $ | 43,876.1 |  |  | $ | 27,404.7 |
Closed-End Funds | 66.2 |  |  | 66.0 |  |  | 6,256.5 |  |  | 6,797.9 |
Exchange Traded Funds | 16.4 |  |  | 29.3 |  |  | 1,036.3 |  |  | 830.0 |
Retail Separate Accounts | 48.0 |  |  | 51.7 |  |  | 13,961.2 |  |  | 9,303.6 |
Institutional Accounts | 31.8 |  |  | 34.3 |  |  | 20,054.0 |  |  | 8,199.1 |
Structured Products | 37.7 |  |  | 33.6 |  |  | 3,650.3 |  |  | 998.1 |
All Long-Term Products | 46.3 |  |  | 49.6 |  |  | 88,834.4 |  |  | 53,533.4 |
Liquidity (3) | 10.7 |  |  | 11.5 |  |  | 1,743.5 |  |  | 664.3 |
All Products | 45.7 |  |  | 49.2 |  |  | $ | 90,577.9 |  |  | $ | 54,197.7 |

(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 and Structured Products - average of month-end balances in quarter

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

Average fees earned represent investment management fees net of fees paid to third-party service providers for investment management related services and investment management fees earned from consolidated investment products, divided by average net assets. Open-end mutual fund, closed-end fund and exchange traded fund fees are calculated based on average daily or weekly net assets. Retail separate account fees are calculated based on the end of the preceding or current quarter’s asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Structured product fees are calculated based on a combination of the underlying cash flows and the principal value of the product. Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to funds.
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The average fee rate earned on long-term products for the three and six months ended June 30, 2018 decreased by 1.6 and 3.3 basis points, respectively, compared to the same periods in the prior year, primarily due to the impact on the average fees earned as a result of the assets from the Acquired Business having a lower blended fee rate. The product categories most impacted by the Acquisition were institutional accounts and retail separate accounts, where the additional assets were primarily in fixed income strategies. The decrease in the average fee rate earnings for exchange traded funds was primarily due to higher expense reimbursements on newly-launched funds.
Results of Operations
Summary Financial Data

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | % |  | 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Results of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment management fees | $ | 103,168 |  |  | $ | 74,062 |  |  | $ | 29,106 |  |  | 39.3 | % |  | $ | 203,644 |  |  | $ | 133,333 |  |  | $ | 70,311 |  |  | 52.7 | %
Other revenues | 29,764 |  |  | 20,070 |  |  | 9,694 |  |  | 48.3 | % |  | 58,316 |  |  | 40,575 |  |  | 17,741 |  |  | 43.7 | %
Total revenues | 132,932 |  |  | 94,132 |  |  | 38,800 |  |  | 41.2 | % |  | 261,960 |  |  | 173,908 |  |  | 88,052 |  |  | 50.6 | %
Total operating expenses | 105,624 |  |  | 90,948 |  |  | 14,676 |  |  | 16.1 | % |  | 212,035 |  |  | 160,677 |  |  | 51,358 |  |  | 32.0 | %
Operating income (loss) | 27,308 |  |  | 3,184 |  |  | 24,124 |  |  | 757.7 | % |  | 49,925 |  |  | 13,231 |  |  | 36,694 |  |  | 277.3 | %
Other income (expense), net | (364 | ) |  | (90 | ) |  | (274 | ) |  | 304.4 | % |  | 3,652 |  |  | 5,297 |  |  | (1,645 | ) |  | (31.1 | )%
Interest income (expense), net | 5,750 |  |  | (1,186 | ) |  | 6,936 |  |  | (584.8 | )% |  | 9,467 |  |  | 1,558 |  |  | 7,909 |  |  | 507.6 | %
Income (loss) before income taxes | 32,694 |  |  | 1,908 |  |  | 30,786 |  |  | NM |  | 63,044 |  |  | 20,086 |  |  | 42,958 |  |  | 213.9 | %
Income tax expense (benefit) | 9,465 |  |  | 1,880 |  |  | 7,585 |  |  | 403.5 | % |  | 15,988 |  |  | 6,313 |  |  | 9,675 |  |  | 153.3 | %
Net income (loss) | 23,229 |  |  | 28 |  |  | 23,201 |  |  | NM |  | 47,056 |  |  | 13,773 |  |  | 33,283 |  |  | 241.7 | %
Noncontrolling interests | (159 | ) |  | (333 | ) |  | 174 |  |  | (52.3 | )% |  | (686 | ) |  | (1,051 | ) |  | 365 |  |  | (34.7 | )%
Net Income (Loss) Attributable to Stockholders | 23,070 |  |  | (305 | ) |  | 23,375 |  |  | NM |  | 46,370 |  |  | 12,722 |  |  | 33,648 |  |  | 264.5 | %
Preferred stockholder dividends | (2,084 | ) |  | (2,084 | ) |  | — |  |  | — | % |  | (4,168 | ) |  | (4,168 | ) |  | — |  |  | — | %
Net Income (Loss) Attributable to Common Stockholders | $ | 20,986 |  |  | $ | (2,389 | ) |  | $ | 23,375 |  |  | NM |  | $ | 42,202 |  |  | $ | 8,554 |  |  | $ | 33,648 |  |  | 393.4 | %

NM - Not Meaningful
Revenues
Revenues by source were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | % |  | 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |  |  |  |  |
Investment management fees |  |  |  |  |  |  |  |  |  |  |
Open-end funds | $ | 57,192 |  |  | $ | 39,186 |  |  | $ | 18,006 |  |  | 46.0 | % |  | $ | 111,566 |  |  | $ | 69,712 |  |  | $ | 41,854 |  |  | 60.0 | %
Closed-end funds | 10,168 |  |  | 11,174 |  |  | (1,006 | ) |  | (9.0 | )% |  | 20,547 |  |  | 22,253 |  |  | (1,706 | ) |  | (7.7 | )%
Retail separate accounts | 17,091 |  |  | 12,759 |  |  | 4,332 |  |  | 34.0 | % |  | 33,620 |  |  | 24,192 |  |  | 9,428 |  |  | 39.0 | %
Institutional accounts | 15,778 |  |  | 8,790 |  |  | 6,988 |  |  | 79.5 | % |  | 31,596 |  |  | 13,931 |  |  | 17,665 |  |  | 126.8 | %
Structured products | 2,068 |  |  | 1,163 |  |  | 905 |  |  | 77.8 | % |  | 4,394 |  |  | 1,662 |  |  | 2,732 |  |  | 164.4 | %
Other products | 871 |  |  | 990 |  |  | (119 | ) |  | (12.0 | )% |  | 1,921 |  |  | 1,583 |  |  | 338 |  |  | 21.4 | %
Total investment management fees | 103,168 |  |  | 74,062 |  |  | 29,106 |  |  | 39.3 | % |  | 203,644 |  |  | 133,333 |  |  | 70,311 |  |  | 52.7 | %
Distribution and service fees | 13,549 |  |  | 10,439 |  |  | 3,110 |  |  | 29.8 | % |  | 26,156 |  |  | 21,222 |  |  | 4,934 |  |  | 23.2 | %
Administration and shareholder service fees | 15,967 |  |  | 9,476 |  |  | 6,491 |  |  | 68.5 | % |  | 31,705 |  |  | 18,457 |  |  | 13,248 |  |  | 71.8 | %
Other income and fees | 248 |  |  | 155 |  |  | 93 |  |  | 60.0 | % |  | 455 |  |  | 896 |  |  | (441 | ) |  | (49.2 | )%
Total revenues | $ | 132,932 |  |  | $ | 94,132 |  |  | $ | 38,800 |  |  | 41.2 | % |  | $ | 261,960 |  |  | $ | 173,908 |  |  | $ | 88,052 |  |  | 50.6 | %

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Investment Management Fees
Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments. Investment management fees increased by $29.1 million, or 39.3%, and $70.3 million, or 52.7%, for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year due to an increase in average assets of $36.4 billion, or 67.1%, for the six months ended June 30, 2018, primarily as a result of the Acquired Business. Also contributing to the increase was positive market performance over the trailing four quarters.
Distribution and Service Fees
Distribution and service fees, which are asset-based fees earned from open-end funds for marketing and distribution services, increased by $3.1 million, or 29.8%, and $4.9 million, or 23.2%, for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year, primarily due to the adoption of ASC 606 Revenue from Contracts with Customers. The adoption of this ASC resulted in a change from the Company’s prior presentation whereby front-end sales charges earned for the sale execution of certain share classes were presented net of the amounts retained by unaffiliated third-party dealers and banks. These front-end sales charges earned are now presented on a gross basis.
Administration and Shareholder Servicing Fees
Administration and shareholder servicing fees represent fees earned for fund administration and shareholder services from our open-end mutual funds and certain of our closed-end funds. Fund administration and shareholder servicing fees increased by $6.5 million, or 68.5%, and $13.2 million, or 71.8%, for the three and six months ended June 30, 2018 compared to the same periods in the prior year. These increases were primarily due to $5.0 million and $10.0 million in additional administration and shareholder servicing fees in the three and six months ended June 30, 2018, respectively, as a result of the Acquired Business, which were largely offset by higher fund expense reimbursements included in net investment management fees.
Other Income and Fees
Other income and fees primarily represent contingent sales charges earned from investor redemptions of certain shares sold without a front-end sales charge. Other income and fees increased $0.1 million, or 60.0%, and decreased $0.4 million, or 49.2%, for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The decrease in the comparable six month period was primarily due to $0.5 million in other income related to the recovery of costs from a third-party service provider during the first quarter of 2017 that did not recur in 2018.
Operating Expenses
Operating expenses by category were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | % |  | 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Employment expenses | $ | 54,868 |  |  | $ | 42,992 |  |  | $ | 11,876 |  |  | 27.6 | % |  | $ | 115,564 |  |  | $ | 82,633 |  |  | $ | 32,931 |  |  | 39.9 | %
Distribution and other asset-based expenses | 23,721 |  |  | 15,764 |  |  | 7,957 |  |  | 50.5 | % |  | 46,012 |  |  | 31,087 |  |  | 14,925 |  |  | 48.0 | %
Other operating expenses | 20,911 |  |  | 20,709 |  |  | 202 |  |  | 1.0 | % |  | 38,284 |  |  | 34,577 |  |  | 3,707 |  |  | 10.7 | %
Restructuring and severance | — |  |  | 8,894 |  |  | (8,894 | ) |  | (100.0 | )% |  | — |  |  | 8,894 |  |  | (8,894 | ) |  | (100.0 | )%
Depreciation and amortization expense | 6,124 |  |  | 2,589 |  |  | 3,535 |  |  | 136.5 | % |  | 12,175 |  |  | 3,486 |  |  | 8,689 |  |  | 249.3 | %
Total operating expenses | $ | 105,624 |  |  | $ | 90,948 |  |  | $ | 14,676 |  |  | 16.1 | % |  | $ | 212,035 |  |  | $ | 160,677 |  |  | $ | 51,358 |  |  | 32.0 | %

Employment Expenses
Employment expenses consist of fixed and variable compensation and related employee benefit costs. Employment expenses for the three and six months ended June 30, 2018 were $54.9 million and $115.6 million, respectively, which
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represented an increase of $11.9 million, or 27.6%, and $32.9 million, or 39.9%, respectively, compared to the same periods in the prior year. The increase reflected the addition of employees from the Acquired Business and higher profit-based compensation, due to increased profits at our affiliates.
Distribution and Other Asset-Based Expenses
Distribution and other asset-based expenses consist primarily of payments to third-party distribution partners for providing services to investors in our funds and payments to third-party service providers for investment management-related services. These payments are primarily based on percentages of assets under management or revenues. These expenses also include the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to shareholders. The deferred sales commissions are amortized on a straight-line basis over the periods in which commissions are generally recovered from distribution fee revenues and contingent sales charges received from shareholders of the funds upon redemption of their shares. Distribution and other asset-based expenses increased by $8.0 million, or 50.5%, and $14.9 million, or 48.0%, in the three and six months ended June 30, 2018, respectively, as compared to the same periods in the prior year, primarily due to increased asset-based sub-transfer agent expenses related to services provided to mutual funds from the Acquired Business and the adoption of ASC 606 Revenue from Contracts with Customers. The adoption of this ASC resulted in the gross presentation of front-end sales charges earned and paid on certain open-end mutual fund share classes. The front-end sales charges paid to our third-party distribution partners and are classified as distribution and other asset-based expenses.
Other Operating Expenses
Other operating expenses primarily consist of investment research and technology costs, professional fees, travel and distribution related costs, rent and occupancy expenses, operating expenses of our consolidated investment products and other miscellaneous costs. Other operating expenses for the three and six months ended June 30, 2018 increased by $0.2 million, or 1.0%, and $3.7 million, or 10.7%, respectively, as compared to the same periods in the prior year, primarily due to increased other operating expenses as a result of the Acquisition.
Restructuring and Severance Expense
During both the three and six months ended June 30, 2017, we incurred $8.9 million in severance costs, of which $8.6 million related to staff reductions in connection with the Acquisition and $0.3 million related to our outsourcing of certain middle office activities.
Depreciation and Amortization Expense
Depreciation and amortization expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements, as well as the amortization of acquired investment advisory contracts, recorded as definite-lived intangible assets, both over their estimated useful lives. Depreciation and amortization expense increased by $3.5 million and $8.7 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year, primarily due to the increase in definite lived intangible assets as a result of the Acquisition.
Other Income (Expense), net
Other Income (Expense), net by category was as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | % |  | 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Realized and unrealized gain (loss) on investments, net | $ | 960 |  |  | $ | 1,287 |  |  | $ | (327 | ) |  | (25.4 | )% |  | $ | 1,398 |  |  | $ | 1,584 |  |  | $ | (186 | ) |  | (11.7 | )%
Realized and unrealized gain (loss) of CIP, net | (1,779 | ) |  | (1,424 | ) |  | (355 | ) |  | 24.9 | % |  | 480 |  |  | 3,020 |  |  | (2,540 | ) |  | (84.1 | )%
Other income (expense), net | 455 |  |  | 47 |  |  | 408 |  |  | 868.1 | % |  | 1,774 |  |  | 693 |  |  | 1,081 |  |  | 156.0 | %
Total Other Income (Expense), net | $ | (364 | ) |  | $ | (90 | ) |  | $ | (274 | ) |  | 304.4 | % |  | $ | 3,652 |  |  | $ | 5,297 |  |  | $ | (1,645 | ) |  | (31.1 | )%

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Realized and unrealized gain (loss) on investments, net
Realized and unrealized gain (loss) on investments, net decreased during the three and six months ended June 30, 2018 by $0.3 million, or 25.4%, and $0.2 million, or 11.7%, respectively, as compared to the same periods in the prior year. The unrealized and realized gains for the three and six months ended June 30, 2018 are primarily related to our marketable securities in domestic equity strategies. The unrealized and realized gains for the three and six months ended June 30, 2017 are primarily related to our marketable securities in international equity strategies.
Realized and unrealized gain (loss) of consolidated investment products, net
Realized and unrealized gain (loss) of our consolidated investment products, net, increased $0.4 million, or 24.9% and decreased $2.5 million, or 84.1%, during the three and six months ended June 30, 2018, respectively, as compared to the same periods in the prior year. These changes are primarily attributable to realized and unrealized losses on the investments of our CIPs of $8.0 million and $5.0 million for the three and six months ended June 30, 2018, respectively, partially offset by $7.6 million and $2.5 million in changes on the notes payable, respectively, as compared to the same periods in the prior year.
Other income (expense), net
Other income (expense), net increased during the three and six months ended June 30, 2018 by $0.4 million, or 868.1%, and $1.1 million, or 156.0%, respectively, as compared to the same periods in the prior year. The increases were due to higher earnings on equity method investments.
Interest Income (Expense), net
Interest income (expense), net by category were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | % |  | 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense | $ | (4,469 | ) |  | $ | (3,739 | ) |  | $ | (730 | ) |  | 19.5 | % |  | $ | (8,327 | ) |  | $ | (3,982 | ) |  | $ | (4,345 | ) |  | 109.1 | %
Interest and dividend income | 1,818 |  |  | 446 |  |  | 1,372 |  |  | 307.6 | % |  | 2,539 |  |  | 634 |  |  | 1,905 |  |  | 300.5 | %
Interest and dividend income of investments of CIP | 23,679 |  |  | 5,102 |  |  | 18,577 |  |  | 364.1 | % |  | 45,082 |  |  | 10,758 |  |  | 34,324 |  |  | 319.1 | %
Interest expense of CIP | (15,278 | ) |  | (2,995 | ) |  | (12,283 | ) |  | 410.1 | % |  | (29,827 | ) |  | (5,852 | ) |  | (23,975 | ) |  | 409.7 | %
Total Interest Income (Expense), net | $ | 5,750 |  |  | $ | (1,186 | ) |  | $ | 6,936 |  |  | (584.8 | )% |  | $ | 9,467 |  |  | $ | 1,558 |  |  | $ | 7,909 |  |  | 507.6 | %

Interest Expense
Interest expense increased $0.7 million and $4.3 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increases were due to the higher average level of debt outstanding compared to the same periods in the prior year as the Company's Term Loan was issued on June 1, 2017.
Interest and Dividend Income
Interest and dividend income increased $1.4 million, or 307.6%, and $1.9 million, or 300.5%, for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase was due to a higher concentration of our investments in CLOs as compared to the corresponding periods in the prior year.
Interest and Dividend Income of Investments of Consolidated Investment Products
Interest and dividend income of investments of consolidated investment products increased $18.6 million and $34.3 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase was due to a higher balance of our investments of consolidated investment products during the three and six months ended June 30, 2018 compared to the same periods in the prior year.
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Interest Expense of Consolidated Investment Products
Interest expense of consolidated investment products represents interest expense on the notes payable of the consolidated investment products. Interest expense of consolidated investment products increased by $12.3 million, or 410.1%, and $24.0 million, or 409.7%, for the three and six months ended June 30, 2018, respectively, primarily due to higher average debt balances for our consolidated investment products as compared to the same periods in the prior year.
Income Tax Expense (Benefit)
The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 25.4% and 31.4% for the six months ended June 30, 2018 and 2017, respectively. The decrease in the estimated effective tax rate was primarily due to the Tax Cuts and Jobs Act enacted on December 22, 2017 which included the reduction of the statutory federal corporate income tax rate to 21% from 35%. This decrease in tax rates was partially offset by a decrease in the tax benefit associated with valuation allowance changes related to our investments.
Liquidity and Capital Resources
Certain Financial Data
The following table summarizes certain financial data relating to our liquidity and capital resources:

| June 30, 2018 |  | December 31, 2017 |  | Change
| 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |
Balance Sheet Data |  |  |  |  |  |  |
Cash and cash equivalents | $ | 138,827 |  |  | $ | 132,150 |  |  | $ | 6,677 |  |  | 5.1 | %
Investments | 87,209 |  |  | 108,492 |  |  | (21,283 | ) |  | (19.6 | )%
Debt | 245,147 |  |  | 248,320 |  |  | (3,173 | ) |  | (1.3 | )%
Total equity | 640,366 |  |  | 605,224 |  |  | 35,142 |  |  | 5.8 | %

| Six Months Ended June 30, |  | Change
| 2018 |  | 2017 |  | 2018 vs. 2017 |  | %
($ in thousands) |  |  |  |  |  |  |
Cash Flow Data |  |  |  |  |  |  |
Provided by (Used In): |  |  |  |  |  |  |
Operating Activities | $ | (154,513 | ) |  | $ | 54,502 |  |  | $ | (209,015 | ) |  | (383.5 | )%
Investing Activities | 15,323 |  |  | (389,126 | ) |  | 404,449 |  |  | (103.9 | )%
Financing Activities | 85,436 |  |  | 430,846 |  |  | (345,410 | ) |  | (80.2 | )%

Overview
At June 30, 2018, we had $138.8 million of cash and cash equivalents and $61.4 million of investments in marketable securities compared to $132.2 million and $66.4 million, respectively, at December 31, 2017. At June 30, 2018, we had $258.1 million outstanding under our term loan maturing June 1, 2024 (the "Term Loan") and no outstanding borrowings under our $100.0 million revolving credit facility (the "Credit Facility").
On February 15, 2018, we amended our Credit Agreement which resulted in $105.0 million of additional term loan commitments to fund, in part, the proposed acquisition of a majority interest in SGA. In addition, the amended Credit Agreement removed the financial maintenance covenant on the Term Loan and replaced the existing financial maintenance covenant on the $100.0 million Credit Facility with a net leverage ratio covenant, defined as net debt divided by EBITDA, set at 2.5 to 1, that is in place when $30.0 million or more has been drawn down on the revolving credit facility. As of June 30, 2018, we had $119.2 million of net debt, which resulted in a net leverage ratio of 0.66:1.0. Effective July 1, 2018, we closed on our acquisition of a majority interest in SGA. The acquisition was funded with $105.0 million in additional term loan commitments and existing balance sheet resources.
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Uses of Capital
Our main uses of capital related to operating activities include payments of annual incentive compensation, income tax payments, principal and interest payments on debt, and other operating expenses which primarily consist of investment research and technology costs, professional fees, distribution costs and occupancy costs. Annual incentive compensation, which is one of the largest annual operating cash expenditures, is paid in the first quarter of the year. In the first quarters of 2018 and 2017, we paid $74.1 million and $39.7 million, respectively, in incentive compensation earned during the years ended December 31, 2017 and 2016, respectively.
In addition to operating activities, other uses of cash could include (i) investments in our organic growth, including our distribution efforts and launches of new products; (ii) seeding or investing in new products, including seeding funds or sponsoring CLO issuances; (iii) principal and interest payments on debt outstanding through scheduled amortization, excess cash flow payment requirements and discretionary paydowns; (iv) dividend payments to preferred and common stockholders; (v) investments in our infrastructure; (vi) investments in inorganic growth opportunities as they arise, (vii) integration costs, including severance, related to potential acquisitions, if any, and (viii) potential share repurchases. Although we continuously monitor working capital to ensure adequate resources are available for near-term liquidity requirements, our liquidity could be impacted by contingencies, including any legal or regulatory matters.
Capital and Reserve Requirements
We operate two broker-dealer subsidiaries registered with the SEC which are subject to certain rules regarding minimum net capital. The broker-dealers are required to maintain a ratio of "aggregate indebtedness" to "net capital," as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital. Failure to meet these requirements could result in adverse consequences to us including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital or interruption of our business. At both June 30, 2018 and December 31, 2017, the ratio of aggregate indebtedness to net capital of our broker-dealers was below the maximum allowed, and net capital was significantly greater than the required minimum.
Balance Sheet
Cash and cash equivalents consist of cash in banks and money market fund investments. Investments consist primarily
of investments in our affiliated mutual funds. Consolidated investment products primarily represent investment products to which we provide investment management services and where we have either a controlling financial interest or we are considered the primary beneficiary of an investment product that is a considered a variable interest entity.
Operating Cash Flow
Net cash used in operating activities of $154.5 million for the six months ended June 30, 2018 increased by $209.0 million from net cash provided by operating activities of $54.5 million for the same period in the prior year primary due to an increase in net purchases of investments of our consolidated investment products.
Investing Cash Flow
Net cash used in investing activities consists primarily of capital expenditures and other investing activities related to our business operations. Net cash provided by investing activities of $15.3 million for the six months ended June 30, 2018 increased by $404.4 million from net cash used in investing activities of $389.1 million in the same period for the prior year. The primary investing activities for the six months ended June 30, 2018 was $17.6 million of net cash provided by the sale of investments in unconsolidated CLOs. The primary investing activities for the six months ended June 30, 2017 was $393.8 million of cash used for the Acquisition.
Financing Cash Flow
Cash flows provided by financing activities consist primarily of the issuance of common and preferred stock, return of capital through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions and contributions to noncontrolling interests related to our consolidated investment products. Net cash provided by financing activities decreased $345.4 million to $85.4 million provided by financing activities for the six months ended June 30, 2018 as compared to net cash provided by financing activities of $430.8 million for the six months ended June 30, 2017. The primary reason for the decrease was due to cash raised of $220.5 million related to the issuance of preferred
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stock and common stock and net borrowings of $214.2 million in the prior year, partially offset by an increase of $115.9 of net proceeds from the issuance of notes payable by consolidated investment products in the current year period.
C redit Agreement
On February 15, 2018 (the "Effective Date") we entered into the Amendment to the Credit Agreement. The Amendment provided commitments for an additional $105.0 million of term loans ("Additional Term Loans") which were subject to, among other customary conditions, the substantially concurrent consummation of our agreement to acquire (i) 70% of the outstanding limited partnership interests of SGA and (ii) 100% of the outstanding membership interests of SGIA, LLC, the general partner of SGA. On July 2, 2018, the Company borrowed the $105.0 million of additional term loans and used the proceeds, in combination with balance sheet resources, to fund the Transaction.
The applicable margin on amounts outstanding under the Credit Agreement, commencing as of the Effective Date, is 2.50%, in the case of LIBOR-based loans, and 1.50% in the case of alternate base rate loans, in each case subject to a 25 basis point reduction based on our secured net leverage ratio (as defined in the Credit Agreement) as of the last day of the preceding fiscal quarter being not greater than 1.00 to 1.00, as reflected in certain financial reports required under the Credit Agreement. The Additional Term Loans were subject to a delayed draw fee accruing for the period (i) from the date which is 31 days after the Effective Date to the date which is 60 days after the Effective Date, at 1.25% per annum and (ii) thereafter, at 2.50% per annum until the funding of the Additional Term Loans on July 2, 2018.
The Amendment also eliminated a maximum Total Net Leverage Ratio (as defined in the Credit Agreement) financial maintenance covenant as applied to term loans under the Credit Agreement. The Credit Agreement includes, for the benefit of revolving lenders, a financial maintenance covenant that we will not permit the Total Net Leverage Ratio to exceed 2.50:1.00 as of the last day of any fiscal quarter; provided that this covenant will apply only if on such day the aggregate principal amount of outstanding revolving loans and letters of credit exceeds 30% of the aggregate revolving commitments as of such day.
At June 30, 2018, $258.1 million was outstanding under the Term Loan, and no amounts were outstanding under the Credit Facility. The Term Loan amortizes at the rate of 1.00% per annum payable in equal quarterly installments and will be mandatorily repaid with: (a) 50% of the Company’s excess cash flow, as defined in the Credit Agreement, on an annual basis, beginning with the fiscal year ended December 31, 2018, stepping down to 25% if the Company’s secured net leverage ratio declines below 1.0, and further stepping down to 0% if the Company’s secured net leverage ratio declines below 0.5; (b) the net proceeds of certain asset sales, casualty or condemnation events, subject to customary reinvestment rights; and (c) the proceeds of any indebtedness incurred other than indebtedness permitted to be incurred by the Credit Agreement.
Contractual Obligations
Our contractual obligations are summarized in our 2017 Annual Report on Form 10-K. As of June 30, 2018, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2017.
Critical Accounting Policies and Estimates
Our financial statements and the accompanying notes are prepared in accordance with generally accepted accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K. A complete description of our significant accounting policies is included in our 2017 Annual Report on Form 10-K. We have updated our revenue recognition policies in conjunction with our adoption of ASC 606 as further described in Note 3 to the accompanying condensed consolidated financial statements. Otherwise, there were no additional changes in our critical accounting policies in the three months ended June 30, 2018.
Recently Issued Accounting Pronouncements
For a discussion of accounting standards, see Note 2 within our condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. During the three and six months ended June 30, 2018, there were no material changes to the information contained in Part II, Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Legal Matters
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, indemnities 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. 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. 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. The parties executed a final settlement agreement on May 18, 2018. On June 28, 2018, the Court entered an order preliminarily approving the settlement and scheduling a hearing for final approval on October 24, 2018. Upon final 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.
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Item 1A. Risk Factors
The reader should carefully consider, in connection with the other information in this report, the Company’s risk factors previously reported in our 2017 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of June 30, 2018, 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 823,134 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.
The following table sets forth information regarding our share repurchases in each month during the quarter ended June 30, 2018:

Period | Total number of shares purchased |  | Average price paid per share (1) |  | Total number of shares purchased as part of publicly announced plans or programs (2) |  | Maximum number of shares that may yet be purchased under the plans or programs (2)
April 1-30, 2018 | — |  |  | $ | — |  |  | — |  |  | 883,756 |
May 1-31, 2018 | 60,622 |  |  | $ | 123.69 |  |  | 60,622 |  |  | 823,134 |
June 1-30, 2018 | — |  |  | $ | — |  |  | — |  |  | 823,134 |
Total | 60,622 |  |  |  |  | 60,622 |  |  |
(1) Average price paid per share is calculated on a settlement basis and excludes commissions.
(2) The share repurchases above were completed pursuant to a program announced in the fourth quarter of 2010 and most recently expanded in December 2017. This repurchase program is not subject to an expiration date.

There were no unregistered sales of equity securities during the period covered by this Quarterly Report. 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.
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Item 6. Exhibits

Exhibit Number |  | Description
31.1 |  | Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 |  | Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 |  | Certification of the Registrant’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 |  | The following information formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2018 and December 31, 2017, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2018 and 2017, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 and 2017 and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 8, 2018

| VIRTUS INVESTMENT PARTNERS, INC.
| (Registrant)
| By: | /s/ Michael A. Angerthal
|  | Michael A. Angerthal
|  | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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