Victory Capital Holdings Inc. (VCTR)

A. Company Overview

Victory Capital Holdings Inc. is a diversified global asset management firm with a total assets under management (AUM) of $166.6 billion as of December 31, 2023. The firm is distinguished by its unique business model, which merges the boutique characteristics of traditional and alternative investment managers with an integrated, centralized operating and distribution platform. Victory Capital caters to a diverse clientele, providing specialized investment strategies accessible to institutions, intermediaries, retirement platforms, and individual investors.

With a portfolio that encompasses various investment products, Victory Capital employs 11 autonomous Investment Franchises alongside a Solutions Platform. The investment strategies offered include actively and passively managed mutual funds, rules-based and active exchange traded funds (ETFs), institutional separate accounts, variable insurance products (VIPs), alternative investments, private closed-end funds, and a 529 Education Savings Plan. As of the specified date, 118 investment strategies were managed across these franchises and platforms.

B. Business History and Organization

Victory Capital was established in 2013, primarily to facilitate the acquisition of Victory Capital Management (VCM) and Victory Capital Services, Inc. (VCS) from KeyCorp. VCM is a registered investment adviser that manages assets through various channels, including open-end mutual funds, institutional separate accounts, Collective Investment Trusts (CITs), and ETFs. VCS operates as an introducing broker-dealer, distributing specific Victory Funds and municipal fund securities linked to the USAA 529 Education Savings Plan.

The company experienced a significant enhancement in its offering with the acquisition of WestEnd Advisors in 2021, followed by the expansion of its Direct Investor Business to include brokerage capabilities in April 2023. This expansion underscored its commitment to providing a broader range of investment solutions directly to investors. Victory Capital owns several subsidiaries, including RS Investment Management in Singapore and the UK.

C. Growth Strategy

Victory Capital adopts a dual growth strategy consisting of organic and inorganic growth.

Organic Growth

Organic growth is pursued by enhancing existing investment franchises through value-added strategies that offer strong, risk-adjusted performance. The firm provides its investment professionals access to robust operational support, enabling them to concentrate on investment excellence and client relationships. This includes support in product development and marketing initiatives. A critical focus on technological investments and operational improvements drives efficiencies which support organic growth.

Inorganic Growth

Inorganic growth occurs through strategic acquisitions of investment management firms to enhance the company's overall growth profile, diversification by asset class and investment strategy, and distribution capabilities. The firm's successful acquisition strategy, evidenced by the completion of seven acquisitions since its inception, has resulted in a remarkable increase in AUM, surpassing 830% growth from $17.9 billion to $166.6 billion by the end of 2023. This strategy is complemented by the integration of acquired firms’ operations to minimize disruptions to their investment processes and client experiences.

D. Diversification Strategy

Victory Capital's investment offerings include a broad array of equities, fixed income assets, alternative investments, and solutions strategies across various market capitalizations and sectors. The company emphasizes diversification by asset class, investment vehicle, and investment franchise.

The firm recognizes the importance of maintaining diverse strategies within specific asset classes to mitigate risk and enhance the overall performance.

As of December 31, 2023, the asset class mix comprised significant contributions from equities, fixed income, and alternative investments, with representation across different investment philosophies and processes.

E. Investment Franchises

Victory Capital comprises 11 Investment Franchises, each characterized by its distinct investment approach and philosophy. These franchises operate independently, retaining their branding and investment processes. Each franchise is supervised by a Chief Investment Officer (CIO) or dedicated management team tailored to optimize performance.

Franchise Descriptions:

• Integrity Asset Management: Focuses on mid- and small-cap U.S. companies with a value-oriented approach.
• Munder Capital Management: Utilizes a Growth-at-a-Reasonable-Price (GARP) strategy primarily in U.S. equities.
• New Energy Capital (NEC): Manages private closed-end funds with an emphasis on clean energy infrastructure investments.
• NewBridge Asset Management: Employs a growth-oriented strategy targeting large-cap firms with superior growth potential.
• RS Investments: This franchise operates under three teams focusing on value, growth, and global equity strategies, employing a proprietary fundamental approach.
• Sophus Capital: Engages in a disciplined quantitative process to select investments in emerging markets.
• Sycamore Capital: Focuses on value-oriented investment strategies in mid- and small-cap U.S. companies.
• THB Asset Management: Manages equity assets with a historical focus on ESG considerations.
• Trivalent Investments: Utilizes a proprietary quantitative approach for both international and emerging market investments.
• Victory Income Investors: Examines fundamentals through rigorous credit and yield-focused methodologies for bond products.
• WestEnd Advisors: Specializes in core model allocation strategies within the ETF model spectrum.

F. Solutions Platform

The Solutions Platform provides a range of multi-asset and multi-manager investment strategies designed to deliver targeted return characteristics. This platform incorporates values-based investments along with traditional strategies, presenting various vehicles, including separate accounts, mutual funds, and ETFs. As of December 31, 2023, this platform managed $58.9 billion in AUM, supported by a dedicated team combining extensive investment and operational expertise.

G. Products and Investment Performance

Victory Capital offers a comprehensive suite of 118 investment strategies across multiple asset classes. A significant majority of its AUM is attributed to common asset classes such as fixed income and equities, while maintaining a strong performance record relative to benchmarks. Considerable portions of mutual funds and ETFs have received high ratings from independent evaluation agencies, indicating that a large proportion of strategies perform well against their respective benchmarks over various time horizons.

H. Competitive Strengths

Victory Capital’s competitive advantages stem from its integrated operational model that provides centralized support functions while allowing its Investment Franchises ample investment autonomy. This structure fosters operational efficiency, allowing specialized managers to focus on investment performance. The firm’s proven acquisition capabilities and diversified investment strategy portfolio bolster its competitive standing in the asset management industry.

I. Economic and Structural Alignment of Interests

Victory Capital promotes an ownership culture among its employees through equity compensation and revenue-sharing models. This approach not only aligns employees’ interests with those of clients but also fosters a long-term commitment to the firm’s success. The high percentage of employee ownership enhances the accountability and motivation of investment professionals within the organization, promoting high levels of client service and investment performance.

J. Governance and Compliance

The governance structure of Victory Capital places significant emphasis on regulatory compliance, thus enhancing its operational integrity. As a registered investment adviser, the firm adheres to federal laws and regulations, enhanced through a comprehensive internal compliance framework. This robust compliance mechanism mitigates the risks associated with various regulatory environments and helps maintain high operational standards.