Victory Capital Holdings, inc (VCTR) Q3 2021 Earnings Call Transcript

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Victory Capital Holdings, inc (VCTR 3.08%)
Q3 2021 Earnings Call
Nov 5, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

Matthew Dennis -- Chief of Staff, Director, Investor Relations

Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make a number of forward-looking statements. Please note that Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call.

Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market closed yesterday disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the Investor Relations portion of our website at ir.vcm.com. It's now my pleasure to turn the call over to David Brown, Chairman and CEO. David.

David C. Brown -- Chairman & Chief Executive Officer

Thanks, Matt. Good morning, and welcome to Victory Capital's Third Quarter 2021 Earnings Conference Call. I'm joined today by Mike Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations.

We had a very successful and active third quarter in a number of areas and carried that momentum into the year's final quarter with yesterday's announcement of our agreement to acquire WestEnd Advisors. I'll start today by providing an overview of the launch of our alternative investment platform with the acquisition of New Energy Capital, which closed on November 1.

Then I will cover our planned acquisition of WestEnd Advisors, which will position us as a leader in the very attractive model delivery segment of the industry. Following that, I will highlight our excellent operating results achieved in the quarter and then cover our investment performance, which continues to be strong. After that, I will turn it over to Mike, who will review our third quarter financial results in greater detail.

Following our prepared remarks, Mike, Matt and I will be available to take your questions.

Turning to Slide 5. We have had a desire to expand into alternative investments in private markets for several years and have done a significant amount of market research over that time.

We have spoken to the leaders of many alternative firms and worked with industry experts to gain knowledge and have the confidence to invest and compete in this space. The traditional side of our business has grown from $17 billion 8 years ago when we became an independent company to approximately $160 billion today.

Now with greater scale, financial stability and a deeper understanding, we are well positioned to diversify our business into alternatives. Leading up to this milestone, we've been making deliberate investments to prepare for success in the alternative space. Some examples are, we recently developed a dedicated team of highly experienced RIA multifamily office sales specialists and have made investments in certain technology and data to support this expansion.

Since its founding in 2004, NEC's business has focused exclusively on investing in the clean and renewable energy sectors. The fact that their focus happens to be on investing in projects and companies involved with the transition away from carbon-based energy sources is a function of the team's background and expertise.

They have launched and managed credit, hybrid and equity funds, so they have a wide range of investing experience in this space. They've always upheld an alpha-first investing approach. With NEC, we had an investment franchise that exemplifies investment performance excellence, shares Victory's entrepreneurial and agile culture and lives every day guided by a client-first philosophy.

Consistent with our franchise model on the traditional side of our business, we've created economic alignment with the NEC team through a revenue sharing arrangement and an earnout structure that is based on achieving targeted revenue growth. In addition, we will provide technology support and distribution and collaboration with NEC's leadership.

Alternative investments in private markets present an appealing new growth vertical for us and will complement the ongoing growth in our core traditional business. With attractive margins, fee rates, asset flows and long-dated capital, there is a lot to like about alternatives.

Longer term, we envision creating value by leveraging our product development capabilities to create new vehicles that can democratize access to private markets for retail investors. Rapid advances in technology are driving a convergence of private and public markets, and Victory Capital is ideally situated to participate in this evolution. We see tremendous opportunity to broaden access for mass market investors through investment strategies that have previously only been available to credit investors.

Our guiding principles will remain the same with alternative investments. We will support investment autonomy, ensure that economic incentives are aligned for the present and the next generation of each investment team and we will focus on high-quality franchises with proven investment processes and teams. With the closing of NEC now behind us, we are starting to prepare for the next growth phase of that franchise.

Turning to Slide 7. Yesterday, we announced that we reached a definitive agreement to acquire 100% of WestEnd Advisers, which will become our 12th investment franchise.

WestEnd is a leading third-party ETF model strategist with approximately $18 billion of assets. This acquisition is transformational for Victory Capital in that it provides us with a high-quality investment platform in the fast-growing model segment of the industry. This transaction is also structured according to our guiding principles, in that we have an earn-out component of the purchase price that is based on achieving significant revenue growth targets, and we will also have a revenue sharing arrangement in place. We intend to retain the entire employee base and add to their team in areas such as distribution, client service and investments over time to support the significant growth opportunity that lies ahead of us.

Our existing distribution team will be additive to WestEnd's activities by leveraging our wider geographical footprint and having more sales personnel in market to drive increasing penetration at platforms where WestEnd currently has shelf space. Compounding this growth will be our ability to leverage our team's long-standing relationships to assist in securing new shelf space with numerous financial intermediaries for WestEnd. As you can see from the graphics on this slide, their three primary ETF strategies make up approximately 90% of our assets. All of those strategies have outperformed benchmarks for the latest 1, 3, 5, 7 and 10-year periods ended September 30. These returns are net of fees and demonstrate WestEnd's investment value proposition for clients.

Turning to Slide 8. WestEnd is well positioned to continue benefiting from multiple industry trends, which I will highlight in a moment. They are one of the largest third-party ETF model strategists in the industry. WestEnd does not use any proprietary products in their model portfolios. By using only third-party ETFs to gain the desired sector exposure, they avoid the types of conflicts faced by home-office models at broker-dealers and asset manager models that use their own proprietary products. Also, unlike proprietary models delivered by asset managers which tend to be more static, WestEnd models have active strategic and tactical components that feature sector exposure over style categories such as growth or value. WestEnd's approach also provides financial advisors with a valuable and independent solution.

WestEnd currently has recommended shelf space on the largest warehouses and has grown client assets to more than $1 billion at six different platforms. Through these and other platforms, they're working with approximately 3,000 advisors. To put this opportunity into context, today Victory is working with nearly 100,000 advisors, and we believe our current advisor relationships will be instrumental in increasing advisor penetration on these existing platforms for WestEnd.

Moreover, there's a great opportunity to expand WestEnd's presence to include the many platforms that our existing products are currently on and theirs are not. We view this transaction as an excellent means of further utilizing and monetizing the investments we have made over the past years to build out our distribution system.

Beyond their model delivery, which is typically used by advisors for a holistic or a completion solution providing another source of alpha, WestEnd delivers complementary services to help advisors grow and gain scale in their own practices. They provide valuable collateral around their investment thesis as well as market commentaries and other client-ready educational collateral that advisors can repurpose directly with their clients. This extra value-add is greatly appreciated by financial advisors as evidenced by WestEnd being named Envestnet Asset Manager and Strategist of the Year in 2021.

On Slide 9, we illustrate several secular industry trends that are creating strong tailwinds for ETF models. First, investors increased preference for competitively priced ETF vehicle wrappers for investment exposure. Second, more intermediaries are promoting adoption of model portfolios for regulatory reasons as well as to free up advisors to focus on client service and gathering assets rather than portfolio construction. Lastly, the ongoing migration of advisors away from commission-based business models to fee-based revenue models. All of this bodes well for continued accelerated organic growth for WestEnd, which is nicely positioned in the middle of these major industry trends that are evolving the asset and wealth management landscape.

Additional evidence of these material trends is illustrated on Slide 10. Overall model portfolios have grown 29% annually over the last 3 years. Inside of this shift, ETF models are growing faster than mutual fund models and have been gaining market share as the total market pie grows in size. Needless to say, we are very optimistic about this acquisition and how it will enhance our overall organic growth trajectory.

On Slide 11, you can see that WestEnd's growth has significantly exceeded that of the industry, with assets growing at more than 40% annually from the end of 2016 through 2020. In the first 9 months of 2021, assets increased another 53% with most of the growth coming from positive net inflows. The $3.5 billion of positive net flows generated by WestEnd in the first 9 months of this year represents more than 30% of their assets at the start of the year. Even with this rapid growth, they had very low single-digit penetration at most of the platforms where they currently have shelf space. This provides a very long runway for sustainable asset growth. This acquisition is also a sufficient size that we expect it will have a meaningful accretive impact on our overall net flows, and it will steepen our overall organic growth trajectory.

On Slide 12, we provide a summary of the financial structure and pro forma estimates of the acquisition, which illustrates the value creation opportunity for our shareholders alongside the compelling strategic rationale. We will be making a $480 million cash payment at closing. This will be financed through an incremental Term Loan B facility that is already fully committed.

We do not anticipate any significant changes with this incremental facility from our current term loan. WestEnd will add approximately 9% of EPS accretion in year 1, which will grow double-digit accretion in year 2. And by year 4, we expect accretion to exceed 20% or well over $1 per diluted share. Over the same time frame, we expect WestEnd will generate strong positive net flows fueling this growth. A final aspect to point out is that this acquisition is strategic and thus, we do not anticipate any significant cost reductions to be generated from the transaction. We may very well achieve some minor cost reductions from leveraging our operational platform. However, to be conservative, we have not included any cost synergies in our projections. There also should be minimal integration costs incurred.

Turning to the quarterly business overview that begins on Slide 14. We ended the quarter with $160 billion of AUM. Earlier this year, I featured a number of our products with significant open capacity that have been attracting assets as investors continue to recalibrate portfolios. This has led to record long-term gross sales of $22.4 billion in the first 9 months of the year, which is 28% higher than during the same period last year.

A few examples of the products are a Morningstar 5-star-rated Victory floating rate fund and the Victory Market Neutral Income Fund, which have continued to experience positive net flows in the current market environment. Additionally, our VictoryShares ETF platform generated positive net flows for the fourth consecutive quarter. Moreover, the net flow improvements in our direct investor business have persisted into the most recent quarter. All this culminated in our second consecutive quarter of positive net flows. Revenues grew 2% sequentially and were up 20% versus the same quarter of last year.

Adjusted net income with tax benefit per diluted share grew to a record $1.25, which was up 6% from the second quarter and up 25% from last year's third quarter. Our integrated operating platform continues to demonstrate the efficiency of our model with adjusted EBITDA margins coming in above 50% for five consecutive quarters. We continued to reduce debt during the quarter. At the same time, we accumulated cash to fund the NEC acquisition and other cash needs, including the second USAA earn-out payment. Yesterday, we also announced that our Board declared the sixth consecutive increase in our quarterly cash dividend, raising it 13% to $0.17 per share.

On Slide 15, I'll review the direct investor business and new product developments. During the quarter, our contact center fielded approximately 110,000 investor calls with an average speed to answer of less than 1 minute, with superior customer satisfaction scores.

As I mentioned earlier, flows improved for the past five consecutive quarters in our direct investor business, which is encouraging as we continue to build out enhancements and look forward to adding many new features and products during 2022. Our referral agreement with USAA continues to support new account growth. On average, we've added more than 5,000 accounts per month since the acquisition. Inclusive in this number are new clients acquired outside of the referral agreement, and we are encouraged about the long-term opportunity that is in front of us with regard to account growth.

Our 529 plan has also been a positive contributor, adding new accounts. During the first nine months of 2021 and since the acquisition in 2019, the 529 plan has been net flow positive. In the third quarter, we also launched our mobile app for direct investors. It has gotten off to a strong start and has already been downloaded from the Apple and Android stores by approximately 100,000 users. By enhancing the ways in which direct investors can digitally engage with us, we are simultaneously increasing investor satisfaction while enhancing our operating efficiency.

Regarding new product development. In August, we launched a private crypto fund, part of our exclusive agreement with NASDAQ, and global crypto-focused asset manager, Hashdex. This is a differentiated product that provides the credit investors with access to a diversified basket of digital assets with competitive pricing and no lockups. The fund tracks the NASDAQ Crypto Index, ticker NCI, which is a multi-coin crypto index that employs strict eligibility criteria and rebalances constituents quarterly. This structure creates beta-like exposure to these assets for investors in a dynamic and adaptable manner. Earlier in the current quarter, we also launched three actively managed ESG-focused ETFs.

Turning to perhaps the most important page in the presentation, our strong investment performance is illustrated on Slide 17. Our investment franchises continued to generate attractive investment returns for our clients during the third quarter. The number of mutual funds and ETFs with a 4 or 5-star rating from Morningstar increased to 45 at the end of September and approximately two-thirds of our AUM is in mutual funds and ETFs with 4 or 5-star ratings, which is an increase from last quarter. For the trailing 12 months ended in September, 21 of the mutual funds we manage ranked in the top quartile of their peer groups.

With that, I will turn it over to Mike for a more in-depth discussion of the financials. Mike.

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 19. Revenue was up 2% sequentially from the second quarter, reaching $226.3 million. This was a 20% increase over the same quarter in 2020. Adjusted EBITDA margin was 50.8%, up 20 basis points from the second quarter and up 10 basis points from the third quarter of last year.

Year-to-date, adjusted EBITDA margin was 50.5%, which is a 290 basis point improvement over the comparable period in 2020. GAAP net income and earnings per share set new quarterly records at $74.2 million and $1 per diluted share, respectively. And adjusted net income with tax benefit was a record $92.6 million or $1.25 per diluted share, which is up 6% sequentially and up 25% year-over-year. We continued to reduce debt, paying down $35 million in the first half of the quarter before we began accumulating cash in preparation for the NEC transaction close as the quarter progressed.

We repaid a total of $454 million of debt since the acquisition of USAA Mutual Funds and 529 business just over 2 years ago. We returned a total of $19 million of capital to shareholders in the form of cash dividends and share repurchases in the quarter, which brings the year-to-date total capital returned to just over $51 million. Lastly, the 13% higher quarterly cash dividend of $0.17 per share is payable on December 27 to shareholders of record on December 10.

Turning to Slide 20. Total AUM declined 1% during the quarter to $159.9 billion. This was driven by negative market action that was partially offset by positive net flows in the quarter. AUM is up 21% from the same time last year with our long-term AUM ending the quarter at $156.7 billion. The business continues to be highly diversified by clients as evidenced by the bar chart on this page. We have three deep distribution channels with each representing over 25% of our firm AUM.

On 21, we cover long-term asset flows. Gross sales declined sequentially, primarily due to a couple of previously disclosed institutional mandates that were funded in the second quarter and seasonal volatility. More importantly, year-over-year, gross long-term sales improved 12% in the third quarter to $5.7 billion compared with $5.1 billion in last year's third quarter. Year-to-date gross long-term sales were $22.4 billion, which is a 28% improvement over gross long-term sales of $17.5 billion in the same 2020 period. As Dave mentioned, this was our second consecutive quarter of positive net long-term flows.

Year-to-date, net long-term outflows are approximately $0.5 billion, which is a significant improvement from the $9.4 billion of long-term outflows in the first 9 months of last year. Year-to-date, flows have been well diversified by investment franchise, distribution channel and client type. More specifically, we have seen better net flows in our direct investor business, strong sales of many of our high-performing products and have picked up this year in institutional activity.

Turning to Slide 22. Quarter-over-quarter revenues increased by 2% and year-over-year revenue was up 20% due to higher averaged AUM in each respective period. Average fee rates in the quarter was 55.3 basis points, which was down 0.9 of a basis point from the second quarter. Gross investment management fees were 0.8 basis points lower due to channel and asset mix. Net management fees were helped by better fulcrum fee performance and lower fund waivers and reimbursements in the quarter. This was partially offset by higher money market yield support.

While we have seen improvement in the fulcrum fees on the USAA Mutual funds, the impact for the quarter was negative 0.3 basis points. There is upside, as we have mentioned previously on our fee rate on both the fulcrum fees and as we see improvements in the rate environment on our money market fund yield support, which was negative 0.9 basis point in the quarter.

Fund administration, distribution and TA fees were down 0.2 basis points versus the second quarter based on channel and product vehicle mix. Fee rates will fluctuate quarter-to-quarter based on client and asset mix. It is important to note that our margins did increase during a period in which our fee rates contracted highlighting the power of our operating model.

As we look ahead, the management fee rate realized by WestEnd is approximately 30 basis points, which is below our current average management fee rate. And given that there are no associated fund admin distribution for TA fees associated with WestEnd's model business, we expect product mix shift will result in lower average consolidated fee rates following the close of that transaction. That said, as we've repeatedly stated, we are much more focused on margins than fee rate.

Our business model is designed to maximize efficiencies and enable us to earn healthy margins on very competitively priced products. This is evident in the current year with the uptick in margins and net income despite lower realized fee rates.

Moving to Slide 23. You can see our total expenses increased 1% from the second quarter in line with higher AUM, revenue and earnings. Lower quarter-over-quarter cash compensation expenses were offset by higher acquisition, restructuring and integration expenses, which increased by $1.9 million in the quarter related to the NEC and USAA Asset Management acquisitions. As a percentage of revenue, cash compensation remained steady at 23%.

Shifting to our non-GAAP metrics for the quarter, please turn to Slide 24. Adjusted net income with tax benefit per diluted share increased to $1.25, up 6% from the second quarter and 25% higher than in last year's same quarter. Adjusted net income of $92.6 million achieved in the quarter included a $6.9 million tax benefit. Year-to-date, adjusted net income with tax benefit grew more than 27% to $263 million or $3.55 per diluted share. Adjusted EBITDA margins widened slightly compared with the second quarter. We are continuing to make investments in the business, and thus we will maintain our adjusted EBITDA margin guidance of approximately 49%. As we've discussed in the past, this can fluctuate quarter-over-quarter or even year-over-year depending on AUM levels and the timing of the investments being made to drive future growth.

Taking a look at our financial condition on Slide 25, you can see that we have been actively preparing our balance sheet to provide capacity in support of our inorganic growth strategy. Our interest rate and our absolute cost of debt have declined dramatically since we originated the term loan a little over 2 years ago. This is the result of reducing the outstanding debt and two repricings that lowered the spread we pay on the debt as well as lower LIBOR. Our primary cash needs for the business in the final quarter of this year include consideration for the NEC acquisition which was paid at closing earlier this week, the second earnout payment for the USAA acquisition, which is once again a full earnout payment of $37.5 million due to revenue exceeding projections.

And the WestEnd acquisition, which is being financed with an incremental Term Loan B facility that, as Dave mentioned earlier, is fully committed. Marketing for the debt deal will commence next week as we are on track to close the WestEnd acquisition by year-end. We do not anticipate any significant changes to the term loan associated with the incremental facility.

On a pro forma basis, the term loan extension will increase our leverage ratio to approximately 2.3 times based on estimated run rates at closing. This is lower leverage versus when we entered into the original term loan 2 years ago. Our pro forma run rate EBITDA from this transaction is projected to be in excess of $500 million or approximately 30% higher than the EBITDA run rate of $385 million at the time of origination. As in the past, we intend to deploy the majority of this higher cash generation to reduce debt.

Additional capital management activities are detailed on Slide 26. Cash flow from operations was approximately $100 million in the quarter. After repaying $107 million in debt in the first half, we paid down an additional $35 million early in the third quarter, returned a total of $19 million to shareholders through share repurchases and dividends during the quarter. We repurchased an additional 189,000 shares in the third quarter at an average price of $33.29 per share. This increased year-to-date share repurchases to 763,000 shares through the end of September at an average cost of $28.46 per share.

We also announced the sixth consecutive increase in our quarterly cash dividend yesterday, which is up 13% from the dividend paid in the third quarter.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Robert Lee with KBW.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Great. Thanks. Good morning. Thanks for taking my questions. I guess maybe my first question is on WestEnd. So I'm just curious, I mean, how you're thinking about the distribution leverage you can add or maybe what they could bring to you? I guess they already seem to be in many of the larger or mid-size distribution platforms, so already have a presence there, pretty good growth. So I mean, how much do you think you could possibly accelerate? And then maybe by the same token, what does this do to your overall SMA business? Is this -- to what extent do you think this helps maybe the rest of your platform of products that you may have in the SMA market?

David C. Brown -- Chairman & Chief Executive Officer

Good morning. It's Dave, and thanks for your question. WestEnd is -- let me start by saying WestEnd is a transformational transaction for us. It's going to put us into a segment of the industry that's growing very quickly. There's a huge shift going on at the intermediary platforms evolving to models, evolving to more fee-based type of accounts.

And so for WestEnd, the opportunity set to partner with us is to really have first more sales professionals in the field to have a wider geographical reach. So when you think about one of the stats we gave in the prepared remarks of they do business with 3,000 advisors, and we do business with 100,000 advisors, there's an unbelievable opportunity just to get more advisors to learn about WestEnd. And there are a lot of platforms that they don't do business with, that we do business with. So we'll be able to introduce their product set to that group of platforms. And then within the platforms they do business with today, we'll be able to introduce their product to more of the advisors.

As we said in our prepared remarks, we are keeping 100% of their employees, their entire distribution force. Our distribution force is unbelievably excited as they learned about this yesterday. And I think there's a real opportunity to accelerate what they've already done. And they've done a tremendous job growing their business and establishing their business, to be one of the largest third-party ETF model providers in the industry. As far as our existing business, there's a real opportunity for us to cross-sell products with advisors, to get introduced to advisors that maybe we're not doing business with today. But we look at this as all additive and this really allows us to utilize and really monetize the investments we've made in distribution even further than what we're doing today.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Great. And then maybe just a quick follow-up. I'm assuming post transaction, there's no change in how you're thinking about cash and capital management just got in place, is kind of paid down at a steady pace to kind of reload, so I'd assume that doesn't change?

David C. Brown -- Chairman & Chief Executive Officer

Exactly. No change in our overall capital policy. The strategy we've employed over the last few years is to use the primary free cash flow to pay down debt and then to have a flexible balance sheet to take advantage of the consolidation that's happening in the industry, and to put ourselves in a position to be flexible and nimble. And when you think about what we've accomplished in 2021 with announcing NEC and closing it and then the anticipation of the close of WestEnd before the end of the year, that's really available to us because of the flexibility of our balance sheet and how prepared it is.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Great. Thanks for taking my questions.

Operator

Your next question comes from Alex Blostein with Goldman Sachs.

Alexander Blostein -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Thanks for taking the question. Couple of questions on NEC. Curious if you could expand a bit on the different products and really the wrappers that they currently have to distribute their product sort of anything on the open-ended side, anything on the perpetual side, just to get a better understanding for the duration [Phonetic] of capital there? And then how quickly do you think Victory's distribution could start to add to sort of the organic growth profile on that entity?

David C. Brown -- Chairman & Chief Executive Officer

Hi, Alex. So today, NEC really has only a private -- only has a private fund option available to accredited investors or qualified investors. Our vision for that business is to continue down that path. And also, as we said, make it available to a larger investing base through some of our wrappers that we have today that's in development. We think it's a great opportunity to really take return streams and really access to private markets and make that available to the masses.

I think you've seen a lot in the last few weeks with some of the announcements in the industry that we've seen there's a real opportunity to do that, and we think we're well positioned to do that.

Alexander Blostein -- Goldman Sachs -- Analyst

Got you. Okay. Great. And then on WestEnd, I think I've heard you guys say it's a 30 basis point fee rate business. How stable has that fee rate been over time, call it, over the last couple of years? And as you think about sort of the forward on the fee rates here, what's the competitive moat for this entity you think that will prevent fee rates from coming down as they might, I guess, as we've seen with maybe some of the other wrappers are ultimately more kind of passive point in the vehicles.

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Hey, Alex, good morning. It's Mike. Thanks for the question. The WestEnd fee rates, as we said in the prepared remarks, are about 30 basis points. And they've been consistent really since the beginning of their access of their products to the retail platforms that they sit on. We believe going forward that the fee rates will remain stable, they provide really active ETF model portfolios on these platforms, and they're differentiated in both their structure and how they provide their investment thesis. And so we feel pretty confident that going forward, the basis points that they're charging that have been consistent will remain the same because of the differentiation that they provide within these platforms.

Alexander Blostein -- Goldman Sachs -- Analyst

Got it. Great. Thank you very much.

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Sure.

Operator

Your next question comes from Cullen Johnson with B. Riley Securities.

Cullen Johnson -- B Riley FBR -- Analyst

Hey, thanks. Good morning. Thanks for taking my questions. So New Energy is currently about $1 billion, so not yet -- maybe a huge piece of AUM, but you could probably see some positive net flows there. Would that start to support the fee rate at the margin assuming some meaningful AUM growth in that segment?

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Hey, Cullen, it's Mike. Yes, at $1 billion, it probably won't provide significant support since we're $160 billion overall. But as we have said, NEC's fee rates are typical to private equity, private credit structures. And we do expect that we'll continue to raise assets going forward with that.

From a math perspective, it's just a little bit too small to provide significant support. But we do feel like the opportunity set for organic growth with NEC is pretty substantive going forward. And it does create the opportunity for us now with an alternatives platform to attract additional alternative products to put within the operating platform.

Cullen Johnson -- B Riley FBR -- Analyst

Got it. That's helpful. And then just looking at expenses, distribution and asset-based expense, I guess kind of late 2019, early 2020, you saw it may be closer to the $50 million range, but lately it's been running low 40s -- low to mid-40s. Is that probably a fair way to think about that value in the intermediate term here?

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Yes, I think the current kind of run rates are definitely the opportunity set going forward for kind of our distribution and AUM related expenses. In 2020, we had with the transaction within USAA, some declining as we were able to execute on some incremental synergies with respect to those expenses.

Cullen Johnson -- B Riley FBR -- Analyst

Got it. That's helpful. Those are all my questions. Thanks.

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Sure.

Operator

Your next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. One on the WestEnd. In terms of the projections you talked about in the prepared remarks, wondering how much of the projections are assuming a certain amount of expansion based on benefit from Victory Capital's distribution capabilities versus I guess just further growth within the current platforms or clients that WestEnd already has? Thanks.

David C. Brown -- Chairman & Chief Executive Officer

It's Dave. Hard to segment that out. I think what we thought about is we are going to take WestEnd's existing distribution penetration, their existing distribution people combine it with ours. And we think putting that together is going to be pretty powerful going forward. We're anticipating the same type of growth that they've achieved over the last 4 years going forward and that accelerating. This is really hitting a couple -- as we've talked about, a couple key points in the industry.

There are secular tailwinds that we think we're going to be right in the middle of and then with our distribution and really it -- really allowing us to utilize all the investments we've made in our distribution. We think it's going to grow quite significantly. But we have not segmented out what exactly Victory is going to bring versus what WestEnd would bring. But we know putting it together, it's going to be pretty powerful.

Kenneth Lee -- RBC Capital Markets -- Analyst

That's helpful. And just one follow-up, if I may. And perhaps this is a little bit more broadly in terms of alternative products. And as you build out the capabilities in offering alternative products, I wonder if you could just talk a little bit more about what kind of changes do you envision for your distribution platform? I think you talked about within your prepared remarks some additions of more specialized sales. But just wondering at a high level, what sort of changes do you think are needed for your distribution platform in order to start distributing alternative products more widely going forward? Thanks.

David C. Brown -- Chairman & Chief Executive Officer

Yes. It's Dave again. Well, we've been making those changes already. I think we've talked about really preparing and evolving our distribution platform and our overall platform. So some of those changes have occurred with investments in technology and data and some of the different pieces of our distribution, we'll evolve going forward in our institutional channel, in our intermediary channel. But there won't be major changes needed.

The alternatives platform, like we said, we have studied alternatives for years, we've talked to a lot of industry leaders, we've prepared our platform. And we think it's a great opportunity going forward. And I think as the buyers evolve for these kinds of products, I think we're really well positioned to take advantage of it with the resources we have today and the continued evolution. The alternatives platform for us, our approach is going to be exactly what we've done with our traditional platform. We built it over a number of years, we built it methodically, we built it efficiently. I think we've built it smartly.

And I think the success speaks for itself, and that will be the same path we'll take on the alternative side. We're in no rush. We're looking for high quality franchises that are really value-added to clients' portfolios. NEC is a perfect example. And I think what will guide us is our principles. But from a distribution perspective specifically, we're in good ways there and we will evolve the rest of the way as we continue to expand it out.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. Helpful. Thanks again.

Operator

Your next question comes from Owen Lau with Oppenheimer.

Kwun Lau -- Oppenheimer -- Analyst

Good morning. Thank you for taking my question. Could you please talk about your appetite for further acquisition in the near term? How should investors think about the pace of the acquisition? Will you take a pause while you're finding the right target or you're in active dialogue with potential sellers and getting close to the finish line? Thank you.

David C. Brown -- Chairman & Chief Executive Officer

Hi. It's Dave again. I would say '21 is going to turn out to be a really active year for us from an acquisition perspective. THB, NEC and now WestEnd, all should close before the end of the year [Technical Issues] the last four transactions are all what I would term as growth transactions, all areas where we're investing in growth. And I think '22 is going to be a year where we're going to really see the impact of that growth on all four of those. As you think about Alderwood fundraising in '22 and THB starting to really come online and then NEC fundraising in '22 as well and then the impact of WestEnd, I think you'll see a real impact to our business.

When it comes to activity, I've said this quarter-over-quarter, we are active, we will be able to immediately go to another acquisition. After we close WestEnd, we'll pay down debt very quickly. We have lots of different ways to structure transactions, and we're talking to a lot of folks today. Our platform is really appealing, and I would anticipate that we continue this pace. We're not going to rush anything. There will be pockets of time where we don't do anything, but it doesn't mean the dialogue is going to stop.

But I can tell you that we are active, we are talking to groups actively, and there are a lot of great opportunities out there for us. Our guiding principle on acquisitions is pretty simple. It has to make our company better and I think what we've done has made our company significantly better, and that will be the approach we use going forward.

Kwun Lau -- Oppenheimer -- Analyst

Got it. That's very helpful. And then could you please also give us more color of your crypto strategy? What do you see in terms of the institutional adoption of digital assets these days? Thank you.

David C. Brown -- Chairman & Chief Executive Officer

I did not understand the question. Can you repeat it?

Kwun Lau -- Oppenheimer -- Analyst

Sorry, I just wanted to see whether you can give us more color of your Crytpo strategy, anything related to digital assets? And what do you see in terms of the institutional adoption of digital assets?

David C. Brown -- Chairman & Chief Executive Officer

Sure. So we launched the Crypto product a few months ago. We have seen really good interest. We're in an education phase with a number of our potential clients. We've had some clients purchase the product. And I think when we think about the institutional side, we are in an educational part of the process given that it's a new asset class.

I think longer term, you're going to see institutions use the Crypto asset class as a diversifier, as an enhancement to a larger portfolio. We've seen an instance a large institution actually buy Crypto, which I think is the first step. So we have high hopes for it. We're talking about it with a lot of clients. It's resonating. And we're really in the process of educating, which I think is the step before actually purchasing.

Kwun Lau -- Oppenheimer -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. Thanks for taking the question. Just on the model portfolio space, certainly a growing part of the industry, but it's getting a little crowded too. So can you just talk about what WestEnd is doing differently in the marketplace that is resulting in the growth? And can you also talk about the competitive landscape, how do you see that evolving? And what do they need to do right in order to be a winner in 5 years?

David C. Brown -- Chairman & Chief Executive Officer

Hi. It's Dave. Well, first, their investment process, they are active. They've had excellent investment performance over a long period of time. They're well experienced. They give excellent client service, really value-added to the advisors when they're taking what they do and packaging that up for the advisors, for themselves and the advisors to use for their clients. They have a very tax-efficient portfolio utilizing ETFs, they don't utilize any of their proprietary products. So this is truly a third-party makeup of ETFs where they're able to be selective on how they're getting their exposure to different sectors.

If you look at the landscape and you look at what they have to offer, it's really either a holistic solution for an advisor or a complement to an overall portfolio where they're maybe 10% to 30% of the portfolio. And when you think about how they've performed over the different market cycles, and also couple that with the tax efficiency and what they're doing from an education of the advisor, giving collateral to the advisor, it's a really compelling proposition.

Going forward, I think it's going to be what they're doing today. There could be some product expansion that we have discussed, which I think could be quite interesting as well. But I think they're very well positioned, crowded when you look at the overall model industry, but they're in a certain part of the industry where I think they really have been able to stand out and will continue to be able to stand out with what they're doing.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. And then just on the earnout, can you help quantify what the range of potential earnout payments could be? How significant is that? Could it be as large as the upfront payment? And what sort of metrics need to be met for that to be fully paid versus partially paid?

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Mike, good morning. It's Mike. Yes, the earnout is -- I mean, the upfront purchase is a majority of the total potential purchase price, so the earnout really is the minority of the purchase price. And what I'd say is it's earned out and it's up to the potential to earn it out over 5.5 years post the transaction. And how that will be earned is really based on material revenue growth over that period. And then revenue growth just from a sizing perspective really will be and needs to be in line with their kind of recent growth trends that they've experienced to earn the full earnout. It is a capped turnout, and we look at it as should they hit the cap on the earnout, it will be self-funding from a cash flow perspective based on the growth that's delivered.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Thanks for taking my questions.

Operator

Your next question comes from Ken Worthington with JPMorgan.

Kenneth Worthington -- JPMorgan -- Analyst

Hi. Good morning. I want to dig deeper into alternatives. How do you see filling out your alternative suite of products and what alternative areas are sort of must have if you're going to meet your vision for this business? And what does pricing sort of look like for alternative asset manager acquisitions? It seems like such a hot area that pricing could possibly be a challenge to growing that business. Is that possibly the case? And can you use deal structure to mitigate high prices?

David C. Brown -- Chairman & Chief Executive Officer

Hi, Ken. So to answer the first part of your question as far as filling out the different buckets and alternatives, we really start with the client portfolio and think about areas where clients will allocate and we can compete. So we don't really look at it where we must have this kind of capability or that kind of capability. Some areas that we're interested in is definitely private credit, direct lending, we've thought about real estate.

And so those are areas that are interesting to us, but I wouldn't say any of them are must haves. We really do start from the client side and really where we think we can add value and compete. From a deal cost or pricing perspective, I would say when we speak to alternative managers, the managers that want to partner with us are really thinking about growth going forward. They're thinking about how do we get access to a much larger client base given our distribution reach.

And I think that when you have those kinds of conversation, upfront pricing is important and you have to be competitive. And yes, it's more expensive. Structuring definitely can get you there. But I think it's more of a holistic discussion of what does the future look like and what is the future opportunity to create value and earnings. And so the firms that are looking to, if you will, cash out or monetize are probably not the kinds of firms that we're a good partner with. I think it's the firms that are really looking at how do we get access to a larger client base, how do I get to the next levels in organization.

But we don't see pricing today something that we can overcome with structuring with the ability to pay fair prices and really with showing our platform and what we have to offer.

Kenneth Worthington -- JPMorgan -- Analyst

Thank you. And then in terms of structure, following up on Alex's question, you implied or talked about bringing some of these alternative products to nonaccredited investors and you're working on sort of product structure, how small investments do you think your wrappers could handle? Like, how far down market do you anticipate being able to go with the alternative platform? Is this something where you get down to $50,000 sort of investments? Could it be $20,000? Could it be $10,000? Could it be $5,000? Like, how small can you support in terms of structure for these alternative products that you envision?

David C. Brown -- Chairman & Chief Executive Officer

I think that is a complicated answer. And what I would say is it really depends on the specific facts and circumstances of the product, how you package the product. But I think the longer-term opportunity set for us is to go down to the smallest investor all the way to the largest investor.

And I think that, that is a great opportunity. It's why you're seeing some of the transactions you've seen announced in the last few weeks. And I think we are well positioned to take advantage of that. But a lot of it is facts and circumstances dependent. But I don't see, if you will, a bottom cap that would prohibit you from taking a certain type of product in a certain situation down to a very small investor, which will be very additive to that investor in a properly allocated portfolio.

Kenneth Worthington -- JPMorgan -- Analyst

Thank you very much.

Operator

Your final question comes from Robert Lee with KBW.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Thank you. Thanks for taking my follow up and I apologize if you may have covered some of this, but I had to jump off the call a little bit. But just going back to WestEnd and some of the inputs into the guidance on accretion, so there's 30 basis points. But can you maybe just refresh on kind of what kind of baked in growth you have in that? And it would seem, just given the moving pieces that it's maybe a higher than -- even though it's 30 basis points, it's maybe a higher than average EBITDA margin or that goodwill tax -- the core goodwill benefit will be pretty significant?

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Thanks, Rob. It's Mike. Yes, as we mentioned, the fee rates on WestEnd are 30 basis points. What I would say is it will be accretive to our overall margins. WestEnd is a highly scaled business today. And as we think about integrating them into the Victory operating and distribution platform, we will really be able to utilize efficiently our platform, and would expect that there'll be minimal incremental investments that we'll need to make to support the growth that we foresee.

And Dave had mentioned before that we really see a lot of complementary opportunities with our distribution, with the relationships that we have, that we look at supporting the levels of growth that WestEnd has accomplished on their own, there's tremendous upside to that as well as we move forward.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Okay. Thank you for taking my follow-ups and have a good weekend.

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Thanks.

Operator

That concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. David Brown for closing remarks.

David C. Brown -- Chairman & Chief Executive Officer

Thank you, and thank you for joining us this morning. We look forward to keeping you updated on the execution of our strategy, and hope to see you next week when we'll be meeting with investors at the Bank of America's Banking and Financials Conference, or next month we'll be attending the Goldman Sachs US Financial Services Conference. Have a wonderful day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Matthew Dennis -- Chief of Staff, Director, Investor Relations

David C. Brown -- Chairman & Chief Executive Officer

Michael D. Policarpo -- President, Chief Financial Officer & Chief Administrative Officer

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Alexander Blostein -- Goldman Sachs -- Analyst

Cullen Johnson -- B Riley FBR -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Kwun Lau -- Oppenheimer -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Kenneth Worthington -- JPMorgan -- Analyst

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