Prepared remarks
Good morning. My name is Jacinda, and I will 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 being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. There will be a question-and-answer period; instructions will follow at that time. I will now turn the conference to your host, Sean Rourke.
Thanks, Jacinda, and good morning, everyone. Welcome to Virtus Investment Partners' discussion of our second quarter 2026 financial and operating results. Joining me today are George Aylward, our President and CEO, and Mike Angerthal, our Chief Financial Officer. After their prepared remarks, we will open the call for questions. Before we begin, I will refer you to the disclosures on slide 2. Today's comments may include forward-looking statements, which involve risks and uncertainties described in our news release and SEC filings. Actual results may differ materially. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in today's news release financial supplement on our website. Now I would like to turn the call over to George. George?
Thank you, Sean, and good morning, everyone. We will start with an overview of the results we reported this morning, and then Mike will provide more detail. While our results continue to reflect the challenging environment for quality-oriented equity strategies, there were several positive underlying trends during the quarter, which included a meaningful improvement in total net flows, over $1 billion of positive net flows excluding the quality equity strategies, our strongest quarter of institutional sales and net flows in nearly three years, positive net flows in alternatives, fixed income, and multi-asset strategies, higher sales across multiple products including institutional, wealth management and ETFs, and continued return of capital to shareholders while reducing debt. We also continue to broaden our products in areas where we see attractive growth opportunities. During the quarter, we introduced new actively managed ETFs from Duff & Phelps and Silvant, further expanding our ETF platform and providing clients with differentiated investments. ETFs have continued to generate positive net flows. For perspective, our ETF business has grown significantly from about $1 billion five years ago and has generated $2 billion of net flows in the past year alone. We remain focused on expanding our capabilities and product offerings in ETFs and other areas where we see growing client demand and attractive opportunities for long-term growth. Turning to investment performance: outside of quality equity, our performance remains strong across most periods. Fixed income and alternative strategies have had consistently strong performance, with 80% and 67%, respectively, beating benchmarks for the three-year period. Over the longer ten-year period, 73% of our fixed income and 67% of alternative strategies beat their benchmarks. Our equity investment performance reflects our overweight to quality-oriented equity strategies. These strategies have the opportunity to demonstrate strong performance in more constructive markets, which have been absent for the past two years. However, we have seen indications of the impact of such opportunities, for example in the most recent period since late June. While it is still early in the quarter and in a very short time frame, nearly every quality strategy has been outperforming its benchmark quarter-to-date and some meaningfully so. The improvement has coincided with a broadening market environment that is more supportive of fundamentally driven active security selection and is consistent with the type of market in which these strategies have historically performed well. Again, with such a short period, it is difficult to draw a conclusion on the cycle, but it does demonstrate the opportunity when it does change. Looking at our second quarter results, assets under management were $152 billion at June 30, up from $149 billion primarily due to performance. Total sales increased 5% to $6.1 billion, with higher sales of institutional, wealth management and ETFs. For institutional and wealth management, it was our highest level of sales in several years. Total net outflows improved to $5.6 billion from $8.4 billion due to both higher sales and lower redemptions. By product, net flows improved sequentially for institutional, intermediary-sold retail separate accounts, ETFs, and wealth management. Looking at flows across asset classes and consistent with prior quarters, the net outflows reflected the continued style headwind for quality-oriented strategies. Outside of those strategies, positive net flows were broad-based across managers spanning fixed income, alternatives, multi-asset, and equity strategies that do not have a quality orientation. In terms of what we have seen in July, U.S. retail fund sales and net flows are tracking more favorably than in each month of the second quarter, and ETF net flows continue at a similar pace. On the institutional side, while known redemptions do exceed known wins, the sales pipeline is stronger than it has been in a year and is diversified across five managers and six strategies. In addition, we anticipate issuing a new CLO later this year. Turning now to our financial results: earnings per share and operating margin each increased sequentially due to the impact of prior-quarter seasonal expenses, offset partially by a discrete non-cash expense item related to previously issued investment professional stock awards. The operating margin was 26.1%, up from 24%; excluding the discrete item, it was 28.2%. Earnings per share as adjusted of $5.54 increased from $5.38 and were $5.97 excluding the discrete item. In terms of our balance sheet and capital, we ended the quarter with cash and equivalents of $176 million, CLO and other investments of $273 million, and $220 million of undrawn capacity on our revolving credit facility. During the quarter, we repurchased approximately 70,000 shares for $10 million and paid our quarterly dividend. We continue to have financial flexibility to balance our capital priorities of investing in the business, returning capital to shareholders, and maintaining appropriate leverage. With that, I will turn the call over to Mike to provide more detail on the results. Mike?
Thank you, George. Good to be with you all this morning. Starting with our results on slide 7, assets under management: our total assets under management at June 30 were $152.2 billion, up 2% primarily due to market performance. Average assets were $153.3 billion, down 3% sequentially. Our AUM is well diversified across products and asset classes. By product, institutional accounts were 33% of AUM, U.S. retail funds represented 27%, and retail separate accounts including wealth management represented 24%. The remaining 16% consisted of closed-end and tender offer funds, ETFs, and global funds. Within open-end funds, ETF AUM increased to $5.8 billion, up $400 million sequentially reflecting continued positive net flows and up 58% year over year. By asset class, fixed income represented nearly 27% of AUM, with offerings diversified across duration, credit quality, and geography. Alternatives and multi-asset together represented over 28% of AUM, up from 21% a year ago, and included positive net flows in alternatives and the addition of Keystone in the first quarter. We also have broad representation across domestic and international equities, including mid, small, and large cap strategies. Turning to slide 8, asset flows. Total sales increased 5% to $6.1 billion, up from $5.8 billion in the first quarter, with higher sales in institutional, wealth management and ETFs. Reviewing by product: institutional sales increased to $2.2 billion from $1.2 billion with higher sales in alternatives, equities, and fixed income, and included a large global listed real estate inflow. This was the highest level of institutional sales in three years. Retail separate account sales of $1.2 billion declined from $1.4 billion in the first quarter as higher wealth management sales were more than offset by lower intermediary-sold sales. Wealth management sales were at their highest level since the fourth quarter of 2023. Open-end fund sales declined 14% to $2.6 billion as higher ETF sales were more than offset by lower U.S. retail and global fund sales. Total net outflows improved to $5.6 billion from $8.4 billion last quarter. By product, institutional net outflows of $700 million improved meaningfully from $3.2 billion last quarter driven by both higher sales and lower redemptions, and represented our best quarter of institutional flows in nearly three years. The majority of the redemptions continued to be concentrated in quality-oriented equity strategies. Retail separate account net outflows of $3.1 billion improved from $3.9 billion last quarter with the outflows driven by intermediary-sold quality-oriented equities. Wealth management net flows were positive. Open-end net outflows of $1.8 billion compared with $1.3 billion last quarter and included positive net flows in fixed income. Within open-end funds, ETFs continued to grow, generating $300 million of positive net flows and sustaining a strong double-digit organic growth rate. For closed-end funds and tender offer funds, we reported essentially breakeven net flows. Turning to slide 9, investment management fees as adjusted were $164.8 million, up 1% as a higher average fee rate was partially offset by lower average assets. The average fee rate of 43.1 basis points, up from 41.9 basis points last quarter, included approximately 1.2 basis points of incentive fees. For modeling purposes, the second quarter fee rate is reasonable, and as always, the fee rate will vary with market levels and asset mix. Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted of $102.1 million declined 4% sequentially reflecting the impact of prior-quarter seasonal items, partially offset by a full quarter of expenses of a new manager and a $3.8 million discrete expense item. This nonrecurring item consisted of a noncash expense related to multiple annual investment professional stock-based awards that were fully expensed primarily due to required acceleration upon achievement of employee retirement eligibility in the quarter. These multi-year performance-based awards will fluctuate over the measurement periods and are currently marked at the maximum level of the awards' performance range. As a percentage of revenue, employment expenses were 55.6% or 53.5% excluding the discrete item, essentially in line with our outlook. For modeling purposes, 54% is a reasonable level for the third quarter. As always, results will vary with flows and market performance. Turning to slide 11, other operating expenses as adjusted were $31.9 million and included the annual equity grant to the board of directors of $700,000. Excluding the grant, the modest increase in other operating expenses reflected the full-quarter impact of a new manager. I would note that even with that addition, other operating expenses declined modestly compared with the prior year period. For modeling purposes, a quarterly range of $30 million to $32 million is a reasonable range going forward. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $47.9 million increased from $43.8 million due to prior-quarter seasonality and higher investment management fees, partially offset by the discrete item. The operating margin as adjusted was 26.1% or 28.2% excluding the discrete item. With respect to nonoperating items, interest expense increased by $400,000 due to higher average gross debt. With the repayment of a portion of the credit facility during the quarter, we would anticipate a modest decline in interest expense in the third quarter. Turning to income taxes, our effective tax rate for the second quarter was 13.3%, essentially unchanged from the prior quarter level. As a reminder, our effective tax rate includes the economic benefit of our intangible tax assets. Looking ahead, an effective tax rate in the range of 13% to 14% would be reasonable to expect. Net income as adjusted of $5.54 per diluted share included the $0.43 discrete expense item. The increase from $5.38 in the prior quarter reflected first-quarter seasonality and higher revenues. Slide 13 shows the trend of our capital, liquidity, and select balance sheet items. Cash and equivalents at June 30 were $176 million, up from the prior quarter due to cash earnings in excess of return of capital and repayment of debt. In addition, we had $273 million of other investments including seed capital to support future growth opportunities. Return of capital to shareholders in the second quarter included the repurchase of 70.1 thousand shares of common stock for $10 million. We also repaid $20 million of the outstanding amount on our revolving credit facility and anticipate repaying the remaining $30 million in the short term. Gross debt at the end of the quarter was $427 million, down from $448 million at March 31. Net debt was $251 million or 0.9x EBITDA. And with that, let me turn the call back over to George. George?
Thank you, Mike. We will now take your questions. Jacinda, would you open up the lines, please?
Questions and answers
Thank you. At this time, we will conduct a question-and-answer session. Please wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from Bill Katz at TD Cowen.
Hi. It's Bradley Hayes on for Bill Katz. George, maybe one for you to start. While quality equity is broadly lagging, you've gotten strong performance in fixed income and also continue to trend favorably. What is driving some of the strength in those two buckets and maybe some color on upturn potential within equities?
Sure. So, as you know, the overweight we have to quality equities really overshadowed quite a bit because, as you referenced, we have had positive flows in fixed income, alternatives, multi-asset, etc. In our fixed income business, we have several capabilities from multi-sector to emerging market debt, leveraged loans, and investment grade. Generally, all of them have performed well, and we have seen assets increase in several product structures. On the alternative side, we do include listed securities like REITs and global REIT, and as we called out in the quarter, we were very pleased to have a large inflow into a global listed REIT capability. And then in our other equity strategies that are not quality-oriented, we have seen growth for several quarters; just given their relative size, it has not yet been as noticeable. We are optimistic that can change going forward. I think all of those areas on their own are in very competitive opportunity spaces, and we would ultimately expect them to hopefully continue to grow. Again, the overshadowing effect of quality strategies is obviously there. We were pleased to see a reduction in the level of outflows given that the outflows have come down a bit and sales have also gone up. And while it is only a short period of time, it was very nice to see a full month so far of significant outperformance in some select quality-oriented strategies. That demonstrates that when those types of strategies are in favor, they can have significant performance, and some of those strategies were meaningfully strong. Again, it's a short period and too early to know whether the tide is turning, but from our perspective it shows why investors should be diversified into different types of strategies so that you can balance out the cycles of different equity strategies.
So then maybe a bit more of a narrow question. On the lumpy comp expense, anything to be aware of in the coming quarters or in 2027? And related to that, how much of the third-quarter comp guide is driven by future discrete items?
I think the going-forward guide at 54% just takes into account the current state of the business. The discrete item was stock-based and an acceleration of multi-year performance-based investment professional awards. The good news is there were strong investment performances across strategies, and given retirement eligibility, those awards were recognized in one quarter. Going forward, I would expect 54% to be the right level for modeling. Depending on revenue, because revenue actually in some ways impacts that margin more in some quarters than employment expense.
Makes sense. And then you mentioned expecting to issue a CLO later this year. Any color on size, timing, or perhaps capital to be invested on your end?
Historically, the last few that we've done have been sized in the $300 million to $400 million range. Generally, we've invested in the mid-twenties to low-thirties million-dollar range of capital. It's too early to give specifics on timing, but that's the general range we've targeted and is reasonable going forward. Thank you.
Thank you. Our next question comes from Crispin Love at Piper Sandler.
Hi, good morning. Thanks so much for taking my questions. I'm looking just for an update on Keystone, particularly First Brands exposures. Keystone funds have exposures to a good size of loans that Keystone has self-identified as being in default or tied to a bankruptcy based on its portfolio investment reports, but they are marked at par or around par. So wondering if you could give an update there — why does it make sense for those to be marked that way and can they carry at par or near par?
Yeah. We previously commented that the Keystone fund had exposure to First Brands, and there is exposure out there. Given the way that it is structured, it has not had implications at the level you may be thinking about. Currently, there is no update in terms of any kind of impact, and the expectation is that there should not be any further impacts. I missed part of your question earlier; I did not get the specific filing reference you were asking about. Could you repeat that?
Of course. Yes. So just wondering if for the loans that Keystone has self-identified as being in default or tied to a bankruptcy, they are marked at par or around par. I'm just wondering what the rationale is for that marking and whether it makes sense to carry at par or near par.
I apologize — I'm not sure of the specific loans you're referring to. Keystone does financing and there are exposures, and they use standard methodologies to mark those positions. At this point, I don't have an update on any material impact. The way it's structured, it has not resulted in the level of implications you might be assuming.
Okay. That, to be honest, gives me the color I was looking for. I appreciate it. I can move on. I just had another question on flows — more specifically on how they remain concentrated in your quality-oriented equity strategies. Do you see this primarily as a style or performance cycle issue that would reverse with a rotation back to quality, or is it more of a structural or distribution-related redemption pattern that could persist regardless of performance?
Our view is that this is really a cyclical matter. When our quality-oriented strategies have been in favor and generated strong performance, they have been our biggest asset gatherers. In the painful period over the last two years, the factors included in quality significantly underperformed momentum, and that dynamic drove those outflows. We do not think the strategies are doing anything other than sticking to their process; their stock selection is based on factors the market has not rewarded as much as more momentum-driven names. We are hopeful that as the cycle changes — and again we have seen only a very short period of improvement — it demonstrates how quickly performance can move from the bottom percentile to the top percentile depending on market cycles. We view this as more of a market cycle in and out of favor rather than a structural problem.
Great. Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward.
I want to thank everyone for joining us today. I certainly encourage you to reach out if you have any other further questions. Thank you.
That concludes today's call. Thank you for participating. You may now disconnect. Good morning. My name is Jacinda, and I will 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 being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. There will be a question-and-answer period, and instructions will follow at that time. I will now turn the conference to your host, Sean Rourke.
Thanks, Jacinda, and good morning, everyone. Welcome to Virtus Investment Partners' discussion of our second quarter 2026 financial and operating results. Joining me today are George Aylward, our President and CEO, and Mike Angerthal, our Chief Financial Officer. After their prepared remarks, we will open the call for questions. Before we begin, I will refer you to the disclosures on slide 2. Today's comments may include forward-looking statements, which involve risks and uncertainties described in our news release and SEC filings. Actual results may differ materially. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in today's news release financial supplement on our website. Now I would like to turn the call over to George. George?
Thank you, Sean, and good morning, everyone. We will start with an overview of the results we reported this morning, and then Mike will provide more detail. While our results continue to reflect the challenging environment for quality-oriented equity strategies, there are several positive underlying trends during the quarter, which included a meaningful improvement in total net flows, over $1 billion of positive net flows excluding the quality equity strategies, our strongest quarter of institutional sales and net flows in nearly three years, positive net flows in alternatives, fixed income, and multi-asset strategies, higher sales across multiple products including institutional, wealth management and ETFs, and continued return of capital to shareholders while reducing debt. We also continue to broaden our products in areas where we see attractive growth opportunities. During the quarter, we introduced new actively managed ETFs from Duff & Phelps and Silvant, further expanding our ETF platform and providing clients with differentiated investments. ETFs have continued to generate positive net flows. For perspective, our ETF business has grown significantly from about $1 billion five years ago and has generated $2 billion of net flows in the past year alone. We remain focused on expanding our capabilities and product offerings in ETFs and other areas where we see growing client demand and attractive opportunities for long-term growth. Turning to investment performance: outside of quality equity, our performance remains strong across most periods. Fixed income and alternative strategies have had consistently strong performance, with 80% and 67%, respectively, beating benchmarks for the three-year period. Over the longer ten-year period, 73% of our fixed income and 67% of alternative strategies beat their benchmarks. Our equity investment performance reflects our overweight to quality-oriented equity strategies. These strategies have the opportunity to demonstrate strong performance in more constructive markets, which have been absent for the past two years. However, we have seen indications of the impact of such opportunities, for example in the most recent period since late June. While it is still early in the quarter and in a very short time frame, nearly every quality strategy has been outperforming its benchmark quarter-to-date and some meaningfully so. The improvement has coincided with a broadening market environment that is more supportive of fundamentally driven active security selection and is consistent with the type of market in which these strategies have historically performed well. Again, with such a short period, it is difficult to draw a conclusion on the cycle, but it does demonstrate the opportunity when it does change. Looking at our second quarter results, assets under management were $152 billion at June 30, up from $149 billion primarily due to performance. Total sales increased 5% to $6.1 billion, with higher sales of institutional, wealth management and ETFs. For institutional and wealth management, it was our highest level of sales in several years. Total net outflows improved to $5.6 billion from $8.4 billion due to both higher sales and lower redemptions. By product, net flows improved sequentially for institutional, intermediary-sold retail separate accounts, ETFs, and wealth management. Looking at flows across asset classes and consistent with prior quarters, the net outflows reflected the continued style headwind for quality-oriented strategies. Outside of those strategies, positive net flows were broad-based across managers spanning fixed income, alternatives, multi-asset, and equity strategies that do not have a quality orientation. In terms of what we have seen in July, U.S. retail fund sales and net flows are tracking more favorably than in each month of the second quarter, and ETF net flows continue at a similar pace. On the institutional side, while known redemptions do exceed known wins, the sales pipeline is stronger than it has been in a year and is diversified across five managers and six strategies. In addition, we anticipate issuing a new CLO later this year. Turning now to our financial results, earnings per share and operating margin each increased sequentially due to the impact of prior-quarter seasonal expenses, offset partially by a discrete non-cash expense item related to previously issued investment professional stock awards. The operating margin was 26.1%, up from 24%; excluding the discrete item, it was 28.2%. Earnings per share as adjusted of $5.54 increased from $5.38 and were $5.97 excluding the discrete item. In terms of our balance sheet and capital, we ended the quarter with cash and equivalents of $176 million, CLO and other investments of $273 million, and $220 million of undrawn capacity on our revolving credit facility. During the quarter, we repurchased approximately 70,000 shares for $10 million and paid our quarterly dividend. We continue to have financial flexibility to balance our capital priorities of investing in the business, returning capital to shareholders, and maintaining appropriate leverage. With that, I will turn the call over to Mike to provide more detail on the results. Mike?
Thank you, George. Good to be with you all this morning. Starting with our results on slide 7, assets under management: our total assets under management at June 30 were $152.2 billion, up 2% primarily due to market performance. Average assets were $153.3 billion, down 3% sequentially. Our AUM is well diversified across products and asset classes. By product, institutional accounts were 33% of AUM, U.S. retail funds represented 27%, and retail separate accounts including wealth management represented 24%. The remaining 16% consisted of closed-end and tender offer funds, ETFs, and global funds. Within open-end funds, ETF AUM increased to $5.8 billion, up $400 million sequentially reflecting continued positive net flows and up 58% year over year. By asset class, fixed income represented nearly 27% of AUM, with offerings diversified across duration, credit quality, and geography. Alternatives and multi-asset together represented over 28% of AUM, up from 21% a year ago, and included positive net flows in alternatives and the addition of Keystone in the first quarter. We also have broad representation across domestic and international equities, including mid, small, and large cap strategies. Turning to slide 8, asset flows. Total sales increased 5% to $6.1 billion, up from $5.8 billion in the first quarter, with higher sales in institutional, wealth management and ETFs. Reviewing by product: institutional sales increased to $2.2 billion from $1.2 billion with higher sales in alternatives, equities, and fixed income, and included a large global listed real estate inflow. This was the highest level of institutional sales in three years. Retail separate account sales of $1.2 billion declined from $1.4 billion in the first quarter as higher wealth management sales were more than offset by lower intermediary-sold sales. Wealth management sales were at their highest level since the fourth quarter of 2023. Open-end fund sales declined 14% to $2.6 billion as higher ETF sales were more than offset by lower U.S. retail and global fund sales. Total net outflows improved to $5.6 billion from $8.4 billion last quarter. By product, institutional net outflows of $700 million improved meaningfully from $3.2 billion last quarter driven by both higher sales and lower redemptions, and represented our best quarter of institutional flows in nearly three years. The majority of the redemptions continued to be concentrated in quality-oriented equity strategies. Retail separate account net outflows of $3.1 billion improved from $3.9 billion last quarter with the outflows driven by intermediary-sold quality-oriented equities. Wealth management net flows were positive. Open-end net outflows of $1.8 billion compared with $1.3 billion last quarter and included positive net flows in fixed income. Within open-end funds, ETFs continued to grow, generating $300 million of positive net flows and sustaining a strong double-digit organic growth rate. For closed-end funds and tender offer funds, we reported essentially breakeven net flows. Turning to slide 9, investment management fees as adjusted were $164.8 million, up 1% as a higher average fee rate was partially offset by lower average assets. The average fee rate of 43.1 basis points, up from 41.9 basis points last quarter, included approximately 1.2 basis points of incentive fees. For modeling purposes, the second quarter fee rate is reasonable, and as always, the fee rate will vary with market levels and asset mix. Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted of $102.1 million declined 4% sequentially reflecting the impact of prior-quarter seasonal items, partially offset by a full-quarter of expenses from a new manager and a $3.8 million discrete expense item. This nonrecurring item consisted of a noncash expense related to multiple annual investment professional stock-based awards that were fully expensed primarily due to required acceleration upon achievement of employee retirement eligibility in the quarter. These multi-year performance-based awards will fluctuate over the measurement periods and are currently marked at the maximum level of the awards' performance range. As a percentage of revenue, employment expenses were 55.6% or 53.5% excluding the discrete item, essentially in line with our outlook. For modeling purposes, 54% is a reasonable level for the third quarter. As always, results will vary with flows and market performance. Turning to slide 11, other operating expenses as adjusted were $31.9 million and included the annual equity grant to the board of directors of $700,000. Excluding the grant, the modest increase in other operating expenses reflected the full-quarter impact of a new manager. I would note that even with that addition, other operating expenses declined modestly compared with the prior year period. For modeling purposes, a quarterly range of $30 million to $32 million is a reasonable range going forward. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $47.9 million increased from $43.8 million due to prior-quarter seasonality and higher investment management fees, partially offset by the discrete item. The operating margin as adjusted was 26.1% or 28.2% excluding the discrete item. With respect to nonoperating items, interest expense increased by $400,000 due to higher average gross debt. With the repayment of a portion of the credit facility during the quarter, we would anticipate a modest decline in interest expense in the third quarter. Turning to income taxes, our effective tax rate for the second quarter was 13.3%, essentially unchanged from the prior quarter level. As a reminder, our effective tax rate includes the economic benefit of our intangible tax assets. Looking ahead, an effective tax rate in the range of 13% to 14% would be reasonable to expect. Net income as adjusted of $5.54 per diluted share included the $0.43 discrete expense item. The increase from $5.38 in the prior quarter reflected first-quarter seasonality and higher revenues. Slide 13 shows the trend of our capital, liquidity, and select balance sheet items. Cash and equivalents at June 30 were $176 million, up from the prior quarter due to cash earnings in excess of return of capital and repayment of debt. In addition, we had $273 million of other investments including seed capital to support future growth opportunities. Return of capital to shareholders in the second quarter included the repurchase of 70.1 thousand shares of common stock for $10 million. We also repaid $20 million of the outstanding amount on our revolving credit facility and anticipate repaying the remaining $30 million in the short term. Gross debt at the end of the quarter was $427 million, down from $448 million at March 31. Net debt was $251 million or 0.9x EBITDA. And with that, let me turn the call back over to George. George?
Thank you, Mike. We will now take your questions. Jacinda, would you open up the lines, please?
Thank you. At this time, we will conduct a question-and-answer session. Please wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from Bill Katz at TD Cowen.
Hi. It's Bradley Hayes on for Bill Katz. George, maybe one for you to start. While quality equity is broadly lagging, you've gotten strong performance in fixed income and also continue to trend favorably. What is driving some of the strength in those two buckets and maybe some color on upturn potential within equities?
Sure. So, as you know, the overweight we have to quality equities really overshadowed quite a bit because, as you referenced, we have had positive flows in fixed income, alternatives, multi-asset, etc. In our fixed income business, we have several capabilities from multi-sector to emerging market debt, leveraged loans, and investment grade. Generally, all of them have performed well, and we have seen assets increase in several product structures. On the alternative side, we do include listed securities like REITs and global REIT, and as we called out in the quarter, we were very pleased to have a large inflow into a global listed REIT capability. And then in our other equity strategies that are not quality-oriented, we have seen growth for several quarters; just given their relative size, it has not yet been as noticeable. We are optimistic that can change going forward. I think all of those areas on their own are in very competitive opportunity spaces, and we would ultimately expect them to hopefully continue to grow. Again, the overshadowing effect of quality strategies is obviously there. We were pleased to see a reduction in the level of outflows given that the outflows have come down a bit and sales have also gone up. And while it is only a short period of time, it was very nice to see a full month so far of significant outperformance in some select quality-oriented strategies. That demonstrates that when those types of strategies are in favor, they can have significant performance, and some of those strategies were meaningfully strong. Again, it's a short period and too early to know whether the tide is turning, but from our perspective it shows why investors should be diversified into different types of strategies so that you can balance out the cycles of different equity strategies.
So then maybe a bit more of a narrow question. On the lumpy comp expense, anything to be aware of in the coming quarters or in 2027? And related to that, how much of the third-quarter comp guide is driven by future discrete items?
I think the going-forward guide at 54% just takes into account the current state of the business. The discrete item was stock-based and an acceleration of multi-year performance-based investment professional awards. The good news is there were strong investment performances across strategies, and given retirement eligibility, those awards were recognized in one quarter. Going forward, I would expect 54% to be the right level for modeling. Depending on revenue, because revenue actually in some ways impacts that margin more in some quarters than employment expense.
Makes sense. And then you mentioned expecting to issue a CLO later this year. Any color on size, timing, or perhaps capital to be invested on your end?
Historically, the last few that we've done have been sized in the $300 million to $400 million range. Generally, we've invested in the mid-twenties to low-thirties million-dollar range of capital. It's too early to give specifics on timing, but that's the general range we've targeted and is reasonable going forward. Thank you.
Thank you. Our next question comes from Crispin Love at Piper Sandler.
Hi, good morning. Thanks so much for taking my questions. I'm looking just for an update on Keystone, particularly First Brands exposures. Keystone funds have exposures to a good size of loans that Keystone has self-identified as being in default or tied to a bankruptcy based on its portfolio investment reports, but they are marked at par or around par. So wondering if you could give an update there — why does it make sense for those to be marked that way and can they carry at par or near par?
We previously commented that the Keystone fund had exposure to First Brands, and there is exposure out there. Given the way that it is structured, it has not had implications at the level you may be thinking about. Currently, there is no update in terms of any kind of impact, and the expectation is that there should not be any further impacts. I apologize if I missed part of your filing reference earlier; I did not get the specific nature of that question.
Okay. That, to be honest, gives me the color I was looking for there. I appreciate it. I can move on. I just had another question as well on flows — more specifically on how they remain concentrated in your quality-oriented equity strategies. Do you see this primarily as a style or performance cycle issue that would reverse with perhaps a rotation back to quality, or is it more of a structural or distribution-related redemption pattern that could persist regardless of performance?
Our view is that this really is a cyclical matter. When our quality-oriented strategies have been in favor and have generated strong performance, they have been our biggest asset gatherers. In the painful period over the last two years, the factors that are included in quality have significantly underperformed momentum, and that dynamic has driven those outflows. We do not think the strategies themselves are doing anything other than sticking to their knitting; their stock selection is based upon factors the market has not rewarded as much as more momentum-driven names. We are hopeful that as the cycle changes — and again we have seen only a very short period of time — it demonstrates the impact of moving from being in the bottom percentile to the top percentile in a short period, depending on cycle changes. So we view this as more of a market cycle in and out of favor rather than a structural issue.
Great. Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward.
I want to thank everyone for joining us today. I certainly encourage you to reach out if you have any other further questions. Thank you.
That concludes today's call. Thank you for participating. You may now disconnect.