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Virtus Investment Partners Inc (VRTS 1.84%)
Q2Â 2020 Earnings Call
Jul 24, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, my name is Kevin and I'll be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website at www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference over to your host, Sean Rourke.
Sean P. Rourke -- Vice President of Investor Relations
Thank you, Kevin and good morning everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the second quarter of 2020. Our speakers today are George Aylward, President and CEO of Virtus and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we will have a Q&A period.
Before we begin, I'd direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies the webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements.
In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial measures and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on the website.
Now, I'd like to turn the call over to George. George?
George R. Aylward -- President and Chief Executive Officer
Thank you, Sean. Good morning, everyone. Thank you for joining us on our second quarter earnings conference call. We are pleased with the second quarter results, which included strong positive net flows, our highest level of sales, continued excellent investment performance, disciplined expense management and further reduction in debt and continued return of capital. We're especially pleased with the strong organic growth, which exceeded 11% on an annualized basis and the composition of the growth in broad base with contributions across product categories and investment strategies. The favorable trend that we've experienced in sales and flows reflect the distinctive and differentiated nature of our investment strategies, as well as the quality of our retail and institutional distribution.
I would also highlight our announcement earlier this month that we've entered into an agreement for a strategic partnership with Allianz Global Investors, which will add approximately $24 billion in assets under management and what we would expect to be a highly accretive transaction that will enhance our fund offerings, distribution capabilities, and growth opportunities.
So turning now to a review of the results. Long-term assets under management at June 30 recovered to near-peak levels, increasing sequentially by nearly $18 billion or 20% to $107.1 billion as a result of both market appreciation and positive net flows. Total assets, which include liquidity strategies ended the period at $108.5 billion. Sales momentum continued with a sequential increase of 30% to $9.1 billion, our highest level since becoming public with significant increases in open-end funds, retail separate accounts, and institutional. For the quarter, we had $2.5 billion of positive net flows with strong momentum across products and asset classes. This continue the favorable trend we've seen this year other than the disruption earlier in the year during the worst of the market dislocation.
Open-end net flows were positive $0.4 billion, primarily due to strong positive net flows in domestic equity. Retail separate accounts had positive net flows of $0.8 billion, led by the intermediary-sold channel, which has now generated 18 consecutive quarters of positive flows. Institutional net flows were positive $1.5 billion, with contributions from existing mandates and new accounts, reflecting the attractiveness of our investment strategies and continued traction from our investments in institutional distribution.
In terms of what we're seeing in July, month-to-date, the trends of the second quarter has continued. Solid sales, positive net flows in open-end funds, retail separate accounts, and institutional.
Our financial results for the quarter reflected the impact of last quarter's equity market declines as lower beginning-of-period assets led to a sequential decline in average assets, which had an unfavorable effect on investment management fees for the quarter. Largely also in the revenue decline was a significant decrease in expenses due to lower seasonal employment expenses, as well as lower travel and entertainment.
Operating income as adjusted of $40.5 million and the related margin of 34.3% increased from $40.1 million and 31.5%, respectively, in the first quarter. Earnings per share as adjusted declined a minus [Phonetic] 2% over the first quarter to $3.24, largely due to lower revenues, mostly offset by significantly lower other operating expenses and the impact of the seasonal employment expenses in the first quarter.
Turning now to capital. We continued our balanced prudent approach to capital management. During the quarter, we repurchased approximately 75,000 shares, or about 1% of shares outstanding, and continue the consistent pay down of our term loan ending the quarter with net debt-to-bank EBITDA of 0.3 times. Over the past year, we've reduced our debt by 25%.
With that, let me turn the call over to Mike to provide more detail on the results. Mike?
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At June 30, long-term assets were $107.1 billion, up 20% from $89.5 billion at March 31. The sequential increase reflected $15.2 billion of market appreciation and $2.5 billion of positive net flows. Nearly all asset classes contributed to AUM growth during the quarter, led by domestic equity, which increased 33%. Assets continue to be diversified by product type, with open-end funds, institutional and retail separate accounts, representing approximately 37%, 32% and 21% of long-term AUM, respectively.
In terms of the asset classes, equity assets represented 69% of long-term AUM with 78% of that in domestic equity and 22% in international. Fixed-income assets declined as a percentage of total to 27%, primarily due to the sharp rise in equity markets during the period. We continue to generate strong relative investment performance across our strategies. As of June 30, approximately 84% of rated fund assets had 4 or 5 stars and 98% were in 3, 4 or 5-star funds. We currently have nine funds with AUM of $1 billion or more that are rated 4 or 5 stars, representing a diverse set of strategies from five different managers.
In addition to this very strong fund performance, 94% of institutional assets were beating their benchmarks on a five-year basis as of June 30. And 82% of assets were exceeding the median performance of their peer groups on the same five-year basis.
Turning to Slide 8, asset flows. Positive net flows of $2.5 billion in the second quarter represented a strong 11% annualized organic growth rate. For the trailing four quarters, net flows were positive $0.5 billion. In the second quarter, net flow contributions were diverse by product with positive net flows in open-end funds, retail separate accounts, and institutional, as well as being positive across multiple asset classes. And this marked the sixth consecutive quarter for positive equity net flows in aggregate. Net flows for open-end funds were positive $0.4 billion for the quarter, a marked improvement from net outflows in the prior quarter.
Looking at open-end fund flows by asset class. Domestic equity net flows were positive $1.2 billion, up from breakeven last quarter. Flows were positive across all domestic equity strategies with particular strength in mid cap, where net flows increased by over 100% sequentially to $0.6 billion. Fixed income fund net outflows were $0.3 billion, a significant improvement from $1.4 billion of net outflows in the first quarter. The second quarter net outflows were primarily in more credit-sensitive strategies, while investment-grade fixed income had positive net flows. International equity funds had net outflows of $0.6 billion as modest positive net flows in developed market strategies were more than offset by net outflows in emerging markets, which included a $0.3 billion model reallocation.
Total sales for the quarter were very strong, up 30% sequentially and 77% year-over-year to $9.1 billion, marking the second consecutive quarter that our sales have reached their highest level since becoming public. And on a year-to-date basis, sales have increased 52% over the prior year period. Sales growth in the quarter was driven by open-end funds, retail separate accounts, and institutional. Fund sales of $4.4 billion increased $0.5 billion or 13% sequentially with increases in both equity and fixed income. Equity fund sales increased 18% driven by a 45% increase in domestic equities, partially offset by a 24% decline in international. Fixed income sales were up 6% with increases in investment-grade strategies. Retail separate account sales of $1.5 billion were up 40% sequentially with strong sales growth across asset classes and investment strategies, including a 107% increase in domestic large cap strategies. Institutional sales of $3.1 billion increased by $1.6 billion from the first quarter due to flows into both existing and new mandates across multiple affiliates. This included meaningful flows into an existing sub-advisory mandate.
Turning to slide 9. Investment management fees, as adjusted, of $104.6 million decreased $7.7 million or 7% sequentially. The decline in investment management fees for the quarter, despite strong AUM growth, reflected the impact of lower beginning AUM on average assets, which declined sequentially by 7%. I would note that, end of quarter AUM was sharply higher than the average for the quarter. The average fee rate on long-term assets for the quarter was 46.8 basis points, unchanged sequentially and up 0.5 basis points from the prior year period.
With respect to open-end funds, the fee rate increased to 58.4 basis points from 57.8 basis points in the first quarter, reflecting the significant market-driven increase in equity assets and the ongoing positive fee rate differential between sales and redemptions. This quarter the blended fee rate on fund sales was 58 basis points, while the rate on redemptions was 54 basis points.
Slide 10 shows the five quarter trend in employment expenses. Total employment expenses, as adjusted, of $59 million decreased 12% sequentially. The decrease largely reflects the $7.7 million of seasonal employment expenses in the first quarter, as well as lower profit-based incentive compensation, partially offset by an increase in variable sales compensation due to higher commissionable sales. As a percentage of revenues, employment expenses were 49.9%, which reflected the impact of the higher retail sales, as well as lower average AUM.
For the third quarter, we anticipate that employment expenses as a percentage of revenues will track toward the high end or above the 46% to 48% range we have previously discussed, assuming current market levels and a continuation of strong sales trends.
Turning to Slide 11. Other operating expenses, as adjusted, were $17.4 million, down from $18.9 million in the prior quarter and included the annual equity grant to the Board of Directors of $0.8 million. Excluding the Board grant, other operating expenses, as adjusted, were $16.6 million or 14.1% of revenues. The sequential decline in other operating expenses was primarily due to lower travel and entertainment activities in the current environment. Looking forward, we continue to expect that other operating expenses in the short-term may remain below or at the low end of the previously stated $18 million to $20 million quarterly range, given limited visibility into a return to a more normalized operating environment.
Slide 12 illustrates the trend in earnings. Operating income, as adjusted, of $40.5 million increased $0.4 million or 1% sequentially due to the lower employment and other operating expenses, mostly offset by lower revenues. The operating margin, as adjusted, of 34.3% compared to 31.5% in the prior quarter. Interest and dividend income of $1.1 million declined from $3.4 million. The decline reflected lower yields on cash and reduced distributions on our seed and CLO investments. We believe this is an appropriate level for the third quarter. The effective tax rate, as adjusted, for the quarter was 27%, down from 29% in the prior quarter. We believe 27% is reasonable, all else being equal.
Net income, as adjusted, of $3.24 per diluted share decreased $0.08 or 2% sequentially, primarily due to lower revenues and lower interest and dividend income, mostly offset by the decline in employment and other operating expenses.
Regarding GAAP results, second quarter net income per share of $1.43 compared with a net loss of $0.58 per share in the first quarter and included the following items: $0.87 of CLO refinancing expenses; $0.48 of increased liability to reflect the fair value of the minority interest; and $0.22 of realized and unrealized losses on investments.
Slide 13 shows the trend of our capital position and related liquidity metrics. Working capital at June 30 of $156 million was essentially flat sequentially as debt repayments and return of capital to shareholders was offset by operating earnings. Gross debt outstanding at June 30 was $241 million as we repaid $17.5 million during the quarter. Over the past year, we have reduced gross debt by $75 million or 24%. The net debt-to-bank EBITDA ratio of 0.3 times at June 30 was down from 0.5 times at March 31 and 0.7 times a year ago due to EBITDA growth, lower debt and a higher cash balance. Gross debt to EBITDA was 1.1 times at quarter end, down from 1.5 times in the prior year.
Regarding return of capital to shareholders, we repurchased 74,897 shares of common stock for $7.5 million, representing 1% of beginning-of-quarter total outstanding shares and net settled 21,473 shares for $2 million.
With that, let me turn the call back over to George. George?
George R. Aylward -- President and Chief Executive Officer
Thanks, Mike. Before we take your questions, I would like to comment on the partnership with Allianz Global Investors. We are very excited about this relationship, which is unique and mutually beneficial partnership. For us, the partnership would increase our assets by approximately 22% at complementary and attractive investment offerings, enhance our distribution capabilities, and be highly accretive to earnings without requiring any payments at close. Allianz will gain access to our strong focused retail distribution and administrative capabilities to support growth and the partnership would allow them to focus more closely on their U.S. distribution efforts in institutional and other markets that are more closely aligned with their priorities. Upon completion, which is subject to certain approvals and that we expect to occur near the end of the year, we would add Allianz's approximately $24 billion of assets, based on June 30 AUM by assuming responsibilities as the investment advisor, distributor and/or administrator of their $16 billion of open-end funds, $5 billion of closed-end funds, and $3 billion of retail separate accounts.
Allianz would continue to manage the majority of the assets, approximately $16 billion, as a select sub-advisor, while their Value Equity team, which manages approximately $8 billion will join us as a new affiliate similar to our other boutique managers. In addition to adding significant scale, the partnership would further diversify our investment strategies, adding multi-asset, thematic equity and alternative strategies that are differentiated from our current offerings and provide the potential for greater opportunity for clients through changing market cycles. Investment performance on these assets has been outstanding. Of the open-end fund AUM, 88% is in the 10 largest rated fund, seven of which are rated 4 or 5 stars by Morningstar. On a pro forma basis, we would have a total of 41 4-star or 5-star funds, representing over 82% of our fund AUM. We will also enhance our growth opportunities by expanding our offerings of funds in retail separate accounts through our broad national distribution and warehouses and independent brokers making us a more meaningful distribution partner and leveraging Allianz's investment capabilities to evaluate new products for U.S. retail investors.
Regarding the financial impact, the agreement is structured with alignment of economic interest over time. It will not require any payment at close. Based on June 30 assets under management, we would expect the relationship would be immediately accretive to earnings per share, as adjusted, and well in excess of 20%. We will be providing additional financial details and updates as we get closer to the closing of the partnership.
So with that, we'll now take your questions. Kevin, would you open up the lines, please?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Jeremy Campbell, Barclays.
Jeremy Campbell -- Barclays -- Analyst
Hey, thanks.
George R. Aylward -- President and Chief Executive Officer
Good morning.
Jeremy Campbell -- Barclays -- Analyst
So, George, the Allianz partnership is really kind of interesting and innovative. Wondering if you can give us some high level background on how the deal came about. And maybe if you view this as a little bit more of a one-off unique situation or if there is potential further demand from other asset managers looking to partner on retail distribution.
George R. Aylward -- President and Chief Executive Officer
Sure. I mean the way I would sort of characterize, without going into specific details, is this is a partnership, not a transaction. This is about growth and alignment of interests. This is a going forward transaction. So this is not a deal where a party is looking to do a transaction and get a check. This is about two companies working together to create growth and profitability and partner on that going forward. So I think in that way, it is a very aligned structure, I think, of one that fits the relative nature of what each of us are trying to achieve. So we think it is a very good way of approaching it. It is a little unusual, but I think it's sort of reflective of what we're -- each is sort of looking for in terms of growth in the future.
I think also, it expresses -- I can't speak for Allianz, but I would say it expresses their confidence in themselves and their managers and their ability to generate good performance and their confidence that we can help grow those assets. So clearly the structure of the deal is much more aligned for them to have the opportunity to continue to participate in that. So I think that is something that actually gives us more confidence. Right? So I think it's really -- it's a good structure. It's a good alignment of interest. I think it's good for everyone involved both Allianz, Virtus, our shareholders, their shareholders, and just as importantly, all the fund shareholders that are involved here.
Either, is this a one-off or would there be others like this? This is unusual. So every circumstance is a little different. I would not expect you to think that every deal you will see going forward to be structured like this because each one has a different need or a different fit in terms of what they're looking to achieve and in some instances there are transactions that really -- particularly if there is a third-party seller that does require an upfront capital structure as opposed to a capital-light or back-end capital type of structure. But if you do hear of any other opportunities of other people interested in doing this deal, you have my contact information and I encourage you to give that information to them. I'm available 24/7.
Jeremy Campbell -- Barclays -- Analyst
Great. And then, Mike, maybe this one's for you. Thanks for the little bit peek behind the curtain on the deal accretion expectations here. Can you just give us a little bit of color on the expected incremental margin that like kind of funnels into that ballpark you forecast? I mean, I'd imagine that excluding the Value team, there really isn't much in the way of incremental expenses to the distribution side on the partnership piece of the equation.
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Yeah. And I think the major inputs into the level that we referred to of being well in excess of 20% are obviously the fee rate on the $24 billion of assets under management, so an average fee rate sort of in the range of 35 to 40 basis points. And then incremental margins, we've talked historically of 50% to 60% of incremental margins and that varies depending on the nature of the assets under management. And here in the structure, as George alluded to, we can largely leverage the existing infrastructure that we have in place from both an administrative and distribution standpoint. So we'll sort of be in that range of incremental margin, and certainly, as we alluded to in the prepared remarks, we'll update you on -- as we get closer to the close on some of the specifics.
Jeremy Campbell -- Barclays -- Analyst
Great, thanks a lot, guys. I appreciate it.
George R. Aylward -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Mike Carrier with Bank of America.
Michael Carrier -- Bank of America Securities -- Analyst
Good morning and thanks for taking the questions. Maybe just one more on the partnership and maybe partnering that with just your capital position. So you guys have been at this -- on paying down debt, going out to a comfortable position on your net debt level. With this partnership, I know you mentioned no upfront payment, but how will that maybe impact your debt level or that -- your net debt position over the next, I don't know, if it's three to five years in terms of payments? And then given that, when you think about capital priorities, are you still in a pretty good position that you have flexibility to look at other opportunities as they arrives?
George R. Aylward -- President and Chief Executive Officer
Sure. So on the first part of the question, and I think I understand it correctly, so again, the way this will be structured is a participation in effectively net revenues earned. It will always -- whatever we pay will be a subset of what we receive. So if you're sort of trying to understand is there going to be any kind of a mismatch of that or like outstanding debt that reduces our available capital, theoretically no. Right? Because there will always be a net cash contribution as long as there's assets and as long as we continue to sell those. So I think again in terms of the impact it has on our capital structure, again, we view it as incredibly favorable, right? Because it does not really create any locked-in obligation or an obligation mismatch between the receipt of cash-in. So in many ways, I think that is a great -- it's a great structure for us to have.
And on your second part. Yes, we've been very thoughtful around our capital. We were very pleased that as we went through the dislocations in the first quarter, that because we have been thoughtful and cautious with our capital and not being too over-levered, that we were able to not only navigate through that period and maintain things like our dividend, as well as our stock repurchases, as well as our consistent pay down of debt, we also were opportunistically able to reduce even a little bit more debt, and to have gone through a quarter like that and have working capital sort of be flat quarter-over-quarter. So, as Mike indicated, our working capital is sort of unchanged. We view that as a testament to the thoughtful approach we take to the balance sheet. So I think we do have a good balance sheet. It got us through this environment, which was what was intended to do. We do see opportunities going forward to continue to look for ways to grow the business, right? Our primary focus, and even going back to the Allianz, will be how do we create sustainable growth and the creation of long-term value over the years and ultimately having that flexibility in our capital, we view as a past.
Michael Carrier -- Bank of America Securities -- Analyst
Great. I guess that makes sense. And then just on the flow stream. So, understand you guys have good performance, some products in demand and industry trends you've had coming, kind of rebalancing and reallocations that it looks like you guys have benefited from. But it still seems like a pretty significant pickup, though. Just trying to understand anything lumpy there and then one of the areas that it seems like it has been a little bit more active from an industry standpoint is on the closed-end funds side. And just more curious, obviously the work-from-home has put a little bit of stop [Phonetic] for marketing. But over the next 12 months, if you see opportunities in that area as well.
George R. Aylward -- President and Chief Executive Officer
Sure. And on the flows and we're -- we're happy. We're happy with our ability to continue to generate on a relative basis. Good flows, obviously, the second quarter 11% organic growth rate. We're very, very pleased with that. But I actually think the more important and the more interesting underlying statistic is really that other than that period of dislocation in that mid-March to very beginning of April, we've actually consistently been in positive flows, which we think is very -- is a very good sign. A lot of it really is, we have some great managers and across the board from SGA to Kayne to Duff. I mean, all of them have really done a great job and I include the others as well. Because you really can't do any of that unless you really have good performance, predictable performance, a differentiated strategy, differentiated capabilities. So that's really the foundational element that there -- upon which you need to build.
I do think we have been effective, very effective on the distribution side. Retail world has gotten a little more challenging. Right? So the relationship-based wholesaling of the past is currently on hold, but that's why relationships are really important, right, because if you're in a work-from-home environment and you can no longer knock on doors, it's really important that your distribution force has the established relationships where they can get those Zoom calls or the other contact. So we think we've been able to effectively navigate through the use of technology and the leveraging of strong trusting relationship we built over the years with our sales force, which generally has above average years of experience. So we think we've been able to put those together to effectively, on a relative basis I think, have good -- very good sales hitting two record quarters in a row, as well as on the net flow side.
And what the future holds, things will continue to evolve. I think everyone is getting used to navigating in this environment and I think going forward, there'll be a hybrid model of this. But again, I think in some ways, this will end up being a really good learning experience, particularly in the retail channel, where I think both on the intermediary side, as well as on the fund side, the wholesaler side, I think everyone has learned a lot about how to be even more effective and how to be able to share information and thoughtfulness in a way that will hopefully ultimately benefit our mutual clients, which are the ones who entrust their money into either the funds of separate accounts or institutional account.
Michael Carrier -- Bank of America Securities -- Analyst
All right, thanks a lot.
Operator
Our next question comes from Michael Cyprys of Morgan Stanley.
Michael Cyprys -- Morgan Stanley -- Analyst
Hey, George. Hey, Michael. Good morning.
George R. Aylward -- President and Chief Executive Officer
Good morning.
Michael Cyprys -- Morgan Stanley -- Analyst
Congratulations on the AGI transaction. It looks like the price flexes based on revenue, it sounds like, or AUM, or maybe just revenue. So I was hoping you could maybe unpack how to think about what portion -- is there a sort of like a floor minimum amount that would be paid and how we should be thinking about the sort of break points and the degree of flexibility there that, that contingent payment flex is. So revenues are down 10% in terms of what's being acquired here. Does that contingent payment flex pro rata? So kind of a lower 10% payment that's made I suppose on a subsequent basis, are there any catch-ups on prior payments that are made? How should we be thinking about how that works?
George R. Aylward -- President and Chief Executive Officer
Sure. And we're going to give more details and more updates on specifics as we go through the year prior to close. But I would really think about this as participation -- a participatory structure, right? So for dollars coming in, the percentage of those dollars will be the amount that you would consider from an accounting perspective to be consideration of some type. So we'll always be a total alignment. So if no dollar comes in, no dollar goes out. There is no minimum. So there is no floor. This is a true alignment of interests, participation in effectively the net revenue type of earnings. So again there won't be that mismatch and that's what I was inartfully trying to answer before on the prior question, as it related to capital, because it's always going to be a portion of whatever comes in.
So there won't be the things to think about it in terms of watermarks or catch-up payments, if that's what you're asking. Now it is participation in the profits we jointly generate through the growth of the assets, through their managing those assets and us distributing those assets. So I really do think it's a good alignment of interest, and we'll give more details in terms of the timing of payments. But it will be just infrequently, once a year after the anniversary of the closing. So we'll have more thoughtfulness in details to give you as we get closer to the closing.
Michael Cyprys -- Morgan Stanley -- Analyst
Great. And then just on the accretion. I think you had said, well in excess...
George R. Aylward -- President and Chief Executive Officer
I'm sorry, you broke up there. Kevin, is the line open for Michael?
Michael Cyprys -- Morgan Stanley -- Analyst
Hello, can you guys hear me?
George R. Aylward -- President and Chief Executive Officer
Mike, we lost you there.
Michael Cyprys -- Morgan Stanley -- Analyst
Sorry about that.
George R. Aylward -- President and Chief Executive Officer
So you might have to repeat the entire question.
Michael Cyprys -- Morgan Stanley -- Analyst
Glad you guys can hear me now. So just on the accretion, you guys had said, well in excess of 20% but I imagine that, that does not reflect the contingent payment that would be made. So I just want to try and get an understanding of, if one were to think about the magnitude of that contingent payment, how much would that sort of accretion then come down to, if you were to sort of deduct for that. Would that be more like in the high-single-digits or low-teens area? Just trying to get a framing on the magnitude of that contingency on the payment side and over what timeframe would that be made over. I was thinking about eight years, but I was hearing maybe five for some others. So just how should we be thinking about that?
George R. Aylward -- President and Chief Executive Officer
Yeah, so in terms -- so the well in excess of 20% accretion -- so, again, using June 30 assets and then as we sort of think about it in terms of how it will fit into our net income and our earnings per share that we generate and report, and again as Mike indicated, we don't technically need a lot of resources, because we're leveraging a lot of our own infrastructure, but this is really about growth. So some of the flex in that number of how much in excess of 20% will be, will be related to what we think are the opportunities for us to invest in maximizing our growth opportunities. So we're very excited about the economics of that and I'll let Mike get into some details, but again there is no contingent payment. Right? They will participate in a percentage of earnings that are generated over a period of time. So it'll -- again, it'll always be a positive number. Mike?
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Yeah. I guess just thinking through the contingent payments, that would show up as a financing activity, really it's a liquidity activity rather than what we've been referring to in terms of the EPS accretion of it well in excess of 20%. So that will show up as a financing activity and a liquidity measure. So we wouldn't address that in terms of the accretion through the P&L that we've been talking about. And again when this gets recorded from an accounting purposes, you'll see a present value of any of these payments be recorded as a liability on the balance sheet at the time of close. And again, there are many inputs that'll go into that which again we'll provide as we get closer to close.
George R. Aylward -- President and Chief Executive Officer
And if you're -- in terms of -- it's like free cash flow accretion. It will be free cash flow accretive. Again, if your question was, is it going to be in the 20%-plus level? The answer to that is no. And as we go forward, you'll get more information, interim, including periods of time to help you [Technical Issues]that.
Michael Cyprys -- Morgan Stanley -- Analyst
Right. That's what I was getting at. What's the free cash flow accretion? Is that more or like high-single-digits or more low-teens? Just any way to frame the magnitude even more?
George R. Aylward -- President and Chief Executive Officer
Yeah. When we give more information you'll be able to triangulate in on that. But it will be an attractive number. But we'll not be well in excess of 20%.
Michael Cyprys -- Morgan Stanley -- Analyst
Okay, thank you.
Operator
Our next question comes from Sumeet Mody with Piper Sandler.
Sumeet Mody -- Piper Sandler -- Analyst
Thanks, good morning guys. Just noticed the fee rate on separate accounts remained pretty elevated in the quarter after that nice increase in the first. So maybe for Mike, just wanted to get an idea of what's driving that and if we should think about that rate remaining elevated for the rest of the year.
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Yeah. Again, we talked about some of the inputs that had impacted the fee rate being the equity markets and the flows and on separate accounts, we've seen strength predominantly in domestic equity there. So I view this quarter as good a fee rate as any from a modeling perspective, all else being equal, with the equity market levels where they're at.
Sumeet Mody -- Piper Sandler -- Analyst
Okay, all right. And just one other on interest and dividend income. I just wanted to get a feel for kind of how to think about that one, the remainder of the year, kind of, in relation to the CLO book. I know, last quarter you talked about the kind of $1 million to $1.5 million range, but kind of what the improvement of CLO is since the end of March. I mean is it fair to assume, with the rebound in CLOs that, that portion, kind of, would improve interest and dividend income or is there like a portion of the CLO book that's kind of exposed troubled sectors maybe combined with the deferred sub fees that could keep that more subdued for the year?
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Yeah, and I think in the prepared remarks, we suggested that the current level was appropriate for the third quarter. So I would continue to use that from a modeling perspective and we're very close to the CLO market and we'll continue to monitor that and update you as appropriate. But in the immediate term, I think this current quarter is appropriate.
Sumeet Mody -- Piper Sandler -- Analyst
Got it, OK. Thanks.
Operator
Our next question is a follow-up question from Michael Cyprys with Morgan Stanley.
Michael Cyprys -- Morgan Stanley -- Analyst
Hey, thanks for taking the follow-up. Just wanted to dig in a little bit more on the institutional strength that we saw in the quarter. I was hoping you could help us frame maybe how much of the sales were coming from existing clients that are already in those sort of strategies versus existing clients that maybe now you're cross selling other products to, versus new clients that are coming in the door that are new to the firm entirely. And just any sort of color on how that has been evolving and maybe sort of any sort of approaches and color you can share around sort of the cross-sell products.
George R. Aylward -- President and Chief Executive Officer
Sure. Well, I'll hit it first, then Mike will give you some additional thoughts on it. So what was nice about it, it was nice and broad, right? So it included multiple affiliates, multiple strategies and included both new mandates, as well as meaningful inputs into existing mandates. So that's sort of a nice -- for us, in terms of our evolution of institutional business, which has gone from a limited number of affiliates to multiple affiliates, and then the sporadic nature has gotten more and more consistent. So as I sort of think about it over the last, I don't know, eight,12,15 quarters, it's sort of been a nice cumulative building of more consistency, more broadness, and I think the second quarter had a nice illustration whether between the managers, as well as the types of strategies.
I don't know what the next quarter will look like, but it's good to see it and the way we look at our pipeline, it sort of feels like we're getting to a much more mature place. It's still a lumpy business and I know what we'd do, there will be quarters where there'll be big ins and big outs. But I'll let Mike give some thoughts and perspective on the specific question.
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Yeah. And -- we -- in the prepared remarks, we did indicate that there were meaningful flows into an existing sub-advisory mandate. And certainly that was good to see and SGA certainly has broad relationships and has contributed through an important relationship with one of our distribution partners that contributed nicely in the quarter. And then, as George alluded to, we have new mandates at both, up in Kayne, one of which was a new mandate into a strategy where the client had a separate -- very good experience with payments funded at different strategy. And we also had a new mandate that came about. So we're seeing traction. It's broad-based and new mandates, as well as existing account. So, as you know, that business can be lumpy, but we're pleased with the traction over the last several quarters and, as we alluded to in the prepared remarks, what we've seen thus far in July, it gives us optimism as well.
Michael Cyprys -- Morgan Stanley -- Analyst
Great. And any additional color you're able to share on retail SME intermediary, sold strength that we're seeing? It sounds like that's continuing into July here. Just maybe how many platforms would you say that that's sort of coming from and how diversified across strategies? Any color you could share around that channel, that would be helpful.
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Sure, it's Mike. And we have had 17 consecutive quarters of positive flows on the retail separate accounts and again it's broad-based. We've had success through several of our affiliates, Kayne, SGA and Seix on the fixed income side. So, predominantly to growth and over time, as has been in the domestic equity offerings, our SMID offerings have been very strong. And it is broad-based on a number of the major distribution platforms, where again it's indicative of the strength of the investment performance that's been across across those offerings. So it is a multiple distribution partners and again has been consistent over time.
Michael Cyprys -- Morgan Stanley -- Analyst
Great, thank you.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Aylward.
George R. Aylward -- President and Chief Executive Officer
Great. Now, I want to thank everyone today. Hope everyone is staying safe and healthy and look forward to talking to you in the future. In the meantime, if you have any questions, please reach out. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 44 minutes
Call participants:
Sean P. Rourke -- Vice President of Investor Relations
George R. Aylward -- President and Chief Executive Officer
Michael A. Angerthal -- Executive Vice President and Chief Financial Officer
Jeremy Campbell -- Barclays -- Analyst
Michael Carrier -- Bank of America Securities -- Analyst
Michael Cyprys -- Morgan Stanley -- Analyst
Sumeet Mody -- Piper Sandler -- Analyst
