The Brooklyn, Ohio firm doubles its assets to $144 billion, adding USAA's $69 billion to Munder, RS Investments, Harvest and other assets --Brooklyn where?

November 7, 2018 — 9:27 PM by Brooke Southall

Brooke's Note: Here's a roll-up play operating under the radar. But no more. A group of shrewd executives in a Cleveland 'burb has a plan, a pile of debt and now a marquee deal. If this deal works out, the sky is the limit. But if you listen to the 47-minute analyst call, you'll be struck by which questions didn't get answered as much as the ones that did.

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Loaded to the gills with debt, Victory Capital is paying $1 billion -- $850 million guaranteed -- for USAA's mutual fund business with a bet based on a belief that USAA has a great brand but did a lousy job of marketing its funds on the investment side.

Stuart Parker, CEO USAA
Stuart Parker believes Victory Capital is well positioned to provide a broader selection of leading-edge investment solutions

The Brooklyn, Ohio roll-up firm, founded in 2013, is borrowing $1.4 billion to buy $69.2 billion in assets under management in 53 investment funds from the San Antonio, Texas insurer.  Less than half the assets in USAA Asset Management Company are active equity funds. Excluded from the deal are $11 billion of "managed assets," which may be USAA's wealth manager.

The play hinges on Victory's ability to digest the USAA deal. If it can pull that off, it can begin to run the table with the dozens of nervous mutual-fund firms with good brands and investing, but declining businesses.

"I think we're as well-positioned as anyone to be a consolidator in the business," says Victory CEO David Brown. "This shows the kind of quality (brand) we can attract to this platform."

Victory Capital's $1.4 billion in loans also covers its pending purchase of Harvest Volatility Management, which had $12 billion in assets under management as of July 31. It manages derivatives from New York City.

Victory has already bought 11 other brands, including RS Investments and Munder Capital.

Peppered with questions

Multiple Wall Street analysts on a call today (Nov. 7) with Victory executives peppered them with questions about how fast they could pay down all that debt. Victory execs bristled at the questions, declining to answer other than to say: "We've operated at these levels [of debt being three times equity] before."

Dan Seivert: I think it is a very smart move for USAA the seller to get out…especially while times are good

Victory's financial engineering includes an IPO completed in February, giving it a market capitalization of $664 million. Described  at the time as a multi-boutique asset management firm with $62 billion in AUM, Victory raised $152 million by offering 11.7 million shares at $13, well below the estimated range of $17 to $19. 

Shares of Victory [VCTR] jumped 20% Wednesday (Nov. 7) after the USAA deal got reported, but the stock,  weighted by its debt profile, remains in single digits at $9.78, up $1.63 from $8.15.

USAA also had a lackluster prior 12 months with neutral flows -- a trend expected to change because the USAA funds were mainly offered to USAA members. Only 1.5 million insurance customers use the funds, with 11 million abstaining.  See: At mostly morose Morningstar conference, mutual fund wholesalers play cards face-up on perma-dislocation -- and the glimmers of hope that innovation provides

"A number of the products have been under-marketed [dependent on] only the direct market channel," says Brown, who joined the company as part of its purchase of KeyCorp. "Again, they've been under-marketed," he reiterated to analysts.

Under-marketing may be only one issue, and USAA is wise to beat it to the exit, says Dan Seivert, CEO of ECHELON Partners of Newport Beach, Calif.

Smart to get out

"I think it is a very smart move for USAA, the seller, to get out…especially while times are good," he says. "With traditional long-only investment management business, I see this not squaring with their open architecture philosophy," he explains.

"Why USAA mutual funds when there are so many others and, likely, so many others that are better?  Again, tough to stand out and tough to leverage a process and get the right people and right margins," he says. See: Schwab studies zero-fee mutual funds in wake of Fidelity's zero-fee mutual fund launch, but Schwab CEO Walt Bettinger still wonders 'what's the point?'

"With the ETFs business – they look around and see Vanguard, State Street, BlackRock and realize: 'We should just be their vendor partners not their competitors.  What the heck are we doing in this business? It is hard to hire the people, they aren’t the easiest to keep or match with our culture. There is no real process to leverage It is not client-facing, but a B-to-B offering into our wealth management channel,'" Seivert adds.

USAA's AUM has been stuck in neutral for years as shown in a Victory Capital slide.

Phone calls and emails sent to the deal parties went unreturned,. A key question: What, if any, restrictions has USAA placed on Victory's use of its brand? (Stay tuned.)

Brown said his firm has more experience marketing to RIAs and a better ability to serve existing investors.  "We felt we could really evolve how they serve their members," he adds.

That said, the firm says it'll likely keep 300 USAA Asset Management Company employees, have them stay in San Antonio and appoint a leader there.

USAA apparently sees the future similarly.

Maintain high standards

“We believe Victory Capital is well positioned to provide a broader selection of leading-edge investment solutions to our members over the long-term, while maintaining the high standards of service that our members expect," said USAA CEO Stuart Parker, in a release.

Both parties have an incentive to keep the business healthy.

USAA gets its final $150 million over four years. Asked about the conditions attached to paying the $150 million, Brown declined to say, except that it could be categorized as "revenue retention." Presumably that is different from "revenue growth."

USAA has had retention rates of 82% over the last five years and its average investor sticks in the products 11 years, according to Victory execs on the call.

Editor's Note: An earlier version of this article served to break the news. The new version is a total rewrite based largely upon the Victory Capital third-quarter earnings call recording, with a big assist from Dan Seivert.

 

 

 

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J Terreau said:

January 29, 2019 — 8:32 PM

USAA member for 64 years and voted with my feet to leave USAA brokerage. The whole deal stinks! Why Victory Capital? Are the sale proceeds going to be distributed to USAA members of the mutual association, after all we elect the BOD. USAA has lost the original reason for its existence, getting bigger but not getting better. Still a good company but not as good as it once was.
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Michael W Williams said:

February 26, 2019 — 9:37 PM

USAA has lost its way during my 40+years of membership. Growth in many areas but has not stuck to its original purpose of insurance - low cost and reliable. USAA investments have been lackluster or worse. I will pull my funds out of the brokerage/management business.
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Manuel C. Alejandro said:

February 28, 2019 — 7:31 PM

Voted against VC with my proxy.
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D Reich said:

March 5, 2019 — 3:19 PM

Agree with Michael, USAA has lost it’s way and we need to really look at who on the Board of Directors is betraying the trust of members who have invested their entire life’s savings. Vote no. USAA member 35 years.
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BlueLithium said:

March 7, 2019 — 2:48 AM

Nearly the entire deal is being financed and that will be paid for by USAA customers who are currently seeing middle of the road performance. No employee guarantees for current employees and zero info on how Victory can use the USAA name nor mention if they will be able to market USAA labeled products to non members. I don't don't see this ending well for anyone. Even USAA will ultimately get dragged down for this.
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Lima Delta said:

March 7, 2019 — 10:44 PM

The board is betraying the USAA members. I can see no advantage to this deal. The members are bailing out little known company, and getting no return on investment.
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Eric J Felt said:

March 12, 2019 — 1:21 AM

The USAA Board must indeed have lost their way. I don't see any way this deal will benefit USAA members or USAA fund investors. I've read through the entire packet of proxy materials and saw no discussion of benefit to current fund shareholders other than that economies of scale could maybe someday decrease management fees. Unlikely. The USAA 500 Index fund currently pays 0.10% to the fund manager. Victory's 500 Index fund pays 0.20%. Victory will be motivated to maximize revenue to pay off the $1B of debt they assumed to buy the USAA funds; how likely will they be to cut their management fees by more than 50%? I'm a USAA member for 30 years and I voted no.
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Glenn said:

March 23, 2019 — 3:47 PM

I left USAA investment back in 2017 and glad I did. Was with them for 35+yrs and wasn't impressed by any of their products or fees. This might be good for Victory Capital and Stuart Parker but not for USAA members. I too voted with my feet and left for Vanguard and Schwab.
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Edward said:

April 8, 2019 — 2:30 PM

Also voted "no". All the wasted money on advertising and continuing decline in customer/ members service.
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Chris said:

April 12, 2019 — 4:36 PM

I voted "against" Victory and "withhold" on the shyster David C. Brown. If you have already voted, you can go back to proxyvote (the link in the USAA emails) and change your vote until 17 April. Please do so. Let USAA know they aren't taking care of their members anymore.
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Laura said:

April 18, 2019 — 12:01 PM

After years of watching my mutual funds being stagnate invested in companies that I now realize do not have the same morals and values that I have, I have opted for a change. I hope to see tremendous growth and new aspiring jobs for other young professionals. The biography of the Victory leaders are outstanding each holding accredited degrees from remarkable universities. Go for it! Putting my risk here.
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JoeFriday6 said:

June 27, 2019 — 4:46 PM

Few have any information about what is to occur July 1, 2019.
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Marti said:

July 1, 2019 — 8:04 PM

I just learned about this when I called to check on balances of multiple accounts; the research I've done (while on hold for over 30 minutes with Victory Capital) I will be transferring my $$$ from these mutual funds to my USAA Managed Portfolio!
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GJP said:

July 10, 2019 — 5:05 PM

I also voted no. The USAA Board of Directors have an obligation to make decisions in the best interest of their members/investors, but it seems they have chosen to ignore us while pushing out carefully worded rhetoric as to why this sell off was a good decision. I'm in the process of transferring assets out of USAA to other institutions. The reasons I joined USAA are no longer. USAA member 30 years.
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JoeFriday6 said:

July 10, 2019 — 7:05 PM

I too voted No on the buy by Victory Capital. I am sick that the deal went through. Couldn't USAA have simply got rid of Parker and hired another? I am holding temporarily on my USAA/VC mutual funds, the dividend of which I transfer to my bank account every months. If VC tries to stop that or I see dividends going down to pay VC indebtedness then I'm gone. I talked to a lot of military friends prior to the transfer date and almost all of them were against VC taking over the MFs. It is a really scary time. Good luck to all of you. Out--
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Don said:

July 13, 2019 — 10:11 PM

Finally got a person on phone with VC. I just wanted to know the address to send my transfer paperwork to move my IRA to another firm. I got a full court press on why I should leave the money with VC. We had a long discussion. I had no idea this transaction was in the works. We moved this money to USAA in march and no one ever mentioned this sale was happening. We feel betrayed. They have lost their way. Not the same company I joined 35 years ago. Don
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Don said:

July 16, 2019 — 12:55 AM

News broke today that USAA is in talks with Schwab to sell their brokerage and wealth management business. That is it, I am done with USAA with my Roth and Regular IRA. Taking it to TD Ameritrade. Been there several years with a regular brokerage acct. no complaints. Don
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Gerald said:

July 16, 2019 — 11:13 AM

USAA short on details of online transactions prior to sale. Just found out that I won't be able to pay Visa charges w/ USAA mm fund online. Never advised prior. After 47 yrs with USAA, a real letdown. Like others, will move funds if fees increase. BOD should have shared with billion w/ mutual members.
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D Reich said:

July 16, 2019 — 5:21 PM

Does anyone have the final shareholder vote approving the transaction? USAA didn't reveal the vote totals to members.
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JoeFriday6 said:

July 20, 2019 — 4:19 PM

Only those of you who use Quicken to track investments will know what I am talking about. I use Quicken to track my USAA investments. A few days ago I found a minus 10000.00 with the caption "Cash" as the last item in my Brokerrage Account. And these Cash minus amounts as the last entry on my brokerage accounts show on every Quicken profile since I started USAA today. I called Quicken to ask what they were. Quicken said they made by Victory Capital who now has access to my Quicken Account for postings. I was told Victory capital was not to have access to the USAA Brokerage Accounts. I have contacted USAA and sent them documents. They have made a Work Project of it and will get back to me in a few days. I have seen no deletion of cash, but the Quicken Brokerage Account on USAA is reducted by USAA records by these negative postings by Victory Capital. Has anyone else seen this kind of activity?
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Gerald said:

July 23, 2019 — 11:11 AM

Not the same experience as Joe, but website would NOT allow me to transfer funds to USAA Savings/Performance. Had to contact by phone, but was helped immediately. USAA turned off credit card payments by investment funds according to Victory. Did anyone get advised upfront that these features were to be closed ???
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John said:

July 26, 2019 — 4:34 AM

Can somebody explain the relationship between Schwab, Victory, USAA and my mutual funds? Am I dealing with victory now or Schwab?
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brooke said:

July 26, 2019 — 4:40 AM

The short answer is Victory, John. But if you own them through a USAA broker then soon (2020) Schwab will become your broker. You'll then be doing business with Schwab and Victory.
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bill said:

July 26, 2019 — 7:51 PM

Joined USAA 50 years ago. Used them for house, car and investment for all that time. Was a corporate litigation attorney for 35 years in DC. Think I know what I am talking about. This Victory deal is an attempt to increase USAA earnings and bonuses for senior execs with little concern for USAA members. Victory charges more for management of funds than USAA. It hopes members will stay with it. Its index funds have done worse than the indexes they track. Victory is incredibly debt loaded. I dumped my investments today. Not sure what Charles Schwab hopes to gain for its 1Billion. Maybe we will all get lots of marketing stuff from them soon. What has happened to this Association?
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Joe W said:

July 27, 2019 — 9:46 PM

Have been a USAA member since 1953. Have ended up with 100% of my property and casualty insurance placed with USAA; Currently have one IRA account (in USAA Funds)and a brokerage account (not USAA funds) with nominal 5 figure amounts remaining in each. Am receiving USAA annuity payouts I definitely need (wife in long term care). My take on current situation, the comments here and USAA's customer service these days tell me: I probably pay too much for the insurance but continue to hope the Subscriber account refunds will make up for the premium I pay for the coverage, the IRA account should probably be transferred elsewhere, thank the lord the brokerage account is NOT in any USAA funds and the annuities are safe - or better be but my "comfort zone " with USAA has dropped a ton over these last 66 years.
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Joe W said:

July 30, 2019 — 6:44 PM

Correction for Joe W: I wrote-"my comfort zone " with USAA has dropped a ton over these last 66 years." That should say - "over these last FEW years"
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Laura Hastings said:

August 1, 2019 — 10:14 AM

It’s been 1 month, and this deal is already rife with problems. Some I suspect are in violation of SEC rules. It’s a shame that USAA has squandered its once reputable reputation. Victory doesn’t have the resources or infrastructure to support even USAA’s relatively small mutual fund base. USAA insurance is no longer a good value (despite the fact that it is exclusive to members who qualify), and their banking practices are degrading. Time to move on.
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Gerald said:

August 1, 2019 — 10:36 AM

Don't know if I agree. Sure the USAA Investments were handled poorly ; no disagreement here. But to indict the insurance and banking arms goes a bit too far. We just had an issue with a totaled vehicle while way out of town, and it was processed quickly & professionally. After 47 yrs w/ USAA, have learned not to indict the whole organization over the actions of a very few -
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Glenn said:

August 1, 2019 — 2:02 PM

Gerald, you're one of the fortunate ones when it comes to insurance claims. Just look at the number of complaints on USAA's Community website and a couple of consumer complaints pages.
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Chris said:

August 2, 2019 — 3:49 AM

@Glenn > Just look at the number of complaints on USAA's Community website You mean the community website polluted with barely literate rants of half truths, opinions presented as fact, and otherwise unhinged behavior? I'll take a hard pass using that tire fire of a forum as a barometer for USAA as a whole. I've had multiple auto (getting hit by Californian drivers who brought their bad habits with them to Colorado) and property claims (wind and hail damage) over 20 years with USAA and everything has been handled 1st class. The Victory deal is rotten for sure (see my post from April above) but you're painting with a VERY broad brush.
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GJP said:

August 2, 2019 — 5:56 AM

I haven't reviewed USAA's community website comments, but our home flooded during Hurricane Harvey a few years back as did both our vehicles. Despite the pain of dealing with a flooded house and vehicles, along with myriad associated problems, USAA inflicted more pain by low-balling us on our vehicles - this at a time when rental vehicles, including U-haul trucks, were scarce. After being bounced between perhaps a dozen or so different USAA reps/managers, USAA finally agreed to pay fair market value for the vehicles, but only after I invested much of my time to research the vehicles' values and show USAA proof. As professional insurers, USAA has fair market value info available to them if they wish to use it, but instead they decided to make our terrible situation much worse for us by using what seemed to be gamesmanship to cut their losses. In another dealings with USAA INS about 5 years prior to the flood, USAA faulted my wife when a driver swerved into her lane and side-swiped her. They continued to fault her until we reached a more seasoned investigator/underwriter with whom we could plead our case. I'm happy that some of you have had good outcomes when working with USAA auto, because that's the way it should be with USAA. My experiences, however, have been negative. The Hartford handled our flood insurance thru the NFIP, and they were surprisingly good considering the widespread devastation during Harvey. We're researching other companies for home and auto insurance, but haven't yet made the leap. If you're looking for ck/savings interest rates comparisons, Navy Federal Credit Union seems to beat USAA across the board - checking, savings, MMSA, Jumbos. I've been extremely happy with NFCU. As I noted early, I'm on board with y'all re the Victory (and Charlie Schwab) selloff, although USAA is claiming some of the Schwab selloff proceeds will be kicked back to members. Most USAA board members used to hold the same mutual funds as do I, so I may check their holdings soon to see if they've jumped ship or downsized after the two big sales :-). I always thought it wise to check board mbr's personal holdings (as well as prospectus) before investing, not that an investment company would ever focus more efforts on their BMs' investments than the investments of us regular folks, lol.
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Laura said:

August 2, 2019 — 1:24 PM

Sorry about that GJP. I haven’t ever checked the complaint site either. My experiences were minor, but, like you, they bounced me around. First incident someone hit my car in a parking lot & after the deductible they would have owed me less than $100. They asked me if I really wanted the money. I was in shock. Last month my storage room flooded and destroyed about 2000 photos and 200 books. USAA refused to pay unless I took a photo of every single item an listed the value. I don’t even have the means to complete that request (especially when they would have lowballed me). There were irreplaceable items from my childhood home. They would not return my calls, but directed me to some rinky dink site. Had the nerve to ask me exactly what it was I felt they were not handling well. I gave up and threw about $1200 worth of possessions away. I feel sorry for the folks who lose a home or a vehicle. SMH Once I called about an issue with my bank account and the rep said “Thank you for being a customer for over 35 years.” I was like “uh-huh”.
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John said:

August 2, 2019 — 3:34 PM

USAA member for 20 years and honestly they have lost touch with reality and like many companies focus on becoming bigger/making more money instead of focusing on the customer. How times have changed. time to pull the money out of my IRA...pulled insurance and checking/savings years ago. Sad.
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JoeFriday6 said:

August 2, 2019 — 3:42 PM

I blame the CEO who stopped training USAA staff and stopped doing Due Diligence on the company itself.
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Blue Orange said:

December 20, 2019 — 4:37 AM

Victory Capital has been a nightmare to deal with after taking over the USAA accounts. After sending in countless, redundant documentations, POA and death certificates for 3 months, only one of mom’s accounts has been transferred into her name after my father’s death. They can’t email and we have never received a welcome letter or listings of transferred USAA accounts with account numbers. We feel like the money is in limbo. As soon as the accounts are in her name, the money will be moved out of Victory Capital. Their record keeping and communication are horrific. Terrible company to deal with.
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Don said:

December 20, 2019 — 12:50 PM

Blue Orange: Sorry to hear about your issues with VC. I left USAA just as soon as we heard about this issue. Am a 35 year member. The only tie I have with Usaa now is a credit card with the bank. Hope you get things straightened out. Most likely VC will be taken over by Schwab or Fidelity eventually. That is the way the industry is headed.
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Gerald said:

December 20, 2019 — 1:05 PM

It seems that Stuart Parker should have been more attentive to potential treatment by VC of USAA members after the $Billion transfer. This was poor planning on their part . Think the BOD benefited more than any others.
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Gerald said:

December 20, 2019 — 1:06 PM

It seems that Stuart Parker should have been more attentive to potential treatment by VC of USAA members after the $Billion transfer. This was poor planning on their part . Think the BOD benefited more than any others.

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