Good morning. My name is Richard, and I'll be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the investor relations section of the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. An instruction will follow at that time. I will now turn the call over to your host, Sean P. Rourke. Please go ahead.
Thank you, Richard, and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the third quarter of 2021. Our speakers today are George Aylward, President, CEO of Virtus, and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we will have a Q&A period. Before we begin, I direct your attention to the important disclosures on page two of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our SEC filings.
These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures, the applicable GAAP measures, are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George?
Thank you, Sean. Good morning, everyone. I'll start today with an overview of the results we reported this morning before turning it over to Mike to provide more detail. We delivered very strong financial and operating results for the quarter, and although we did have modestly negative net flows attributable to equity mutual funds, we reported record levels of operating profitability and margin, with operating income more than double the prior year period. Our highest level of earnings per share as adjusted, continued strong investment performance, positive net flows in retail separate accounts, ETFs, and institutional, and meaningfully higher return on capital through increases in both share repurchases and our dividend. We also continued to take actions to enhance the company's strategic and financial positioning.
On October first, we closed on our acquisition of Westchester Capital Management, further diversifying our investment offerings with $5.1 billion of differentiated, non-correlated, event-driven strategies. We also remain on track with the approval process to complete our transaction with Stone Harbor Investment Partners near year-end. Stone Harbor's $15 billion in emerging markets debt, multi-asset credit, and other strategies are highly complementary to our existing fixed income products and well-respected among clients and consultants. In addition, we completed the refinancing of our credit arrangement, providing additional financial flexibility, an extended maturity profile, and more attractive borrowing costs. Now turning to a review of the results. Total assets under management were $177.3 billion, down 1% from June 30th due to market performance and modest net outflows.
Over the past year, AUM has increased by 52% from the addition of the AGI assets, market performance, and positive net flows. Sales of $7.6 billion declined sequentially from $9.6 billion, while redemptions were flat for the period. The sales decline were primarily due to weakness in equity funds, consistent with the shift in investor preferences during the period. On a year-to-date basis, sales have increased 13% on growth in retail separate accounts, open-end funds, and ETFs. Net outflows in the third quarter were $0.6 billion, as outflows in mutual funds, including a $0.7 billion model rebalance, offset organic growth in retail separate accounts, ETFs, and institutional. Open-end net flows, which included the model change, were negative due to international and domestic equity.
Retail separate accounts continued to deliver positive net flows with an 8% annualized organic growth rate and positive flows across investment strategies. Institutional net flows were positive for the fourth consecutive quarter, with continued traction at multiple affiliates. ETFs generated positive net flows for the fifth consecutive quarter. Organic growth for the trailing 12-month period exceeded 5%, with essentially all asset classes generating positive flows. In terms of the flows we are seeing so far in October, many of the third quarter trends have continued, including solid momentum in retail separate accounts and ETFs. In institutional, the pipeline is consistent with what we have seen over the past year. In open-end funds, areas of continued strength in fixed income, multi-asset, and alternatives are being offset by international and domestic equities.
Westchester Capital, which generated $0.1 billion of positive net flows in the third quarter prior to the close, continues to grow organically in October. Our profitability for the quarter again reached a new high. Operating income as adjusted increased by 7% sequentially and more than doubled over the prior year, and the related margin of 50.6% increased from 48.9% in the prior quarter and by 11 percentage points from the prior year. Earnings per share as adjusted were $9.71, up 7% sequentially due to higher revenues and stable expenses. Turning now to capital. During the quarter, we increased return of capital to shareholders, reflecting the meaningful growth of free cash flow over the past year. We repurchased approximately 65,000 shares for $20 million, up from $7.5 million in the prior quarter.
We increased our quarterly common dividend by 83%, representing the fourth consecutive annual increase. Our balance sheet remains strong, and we ended the quarter in a net cash position as we continue to generate significant cash flow, providing opportunity to continue to invest in the growth of the business and roll to the shareholders. With that, I'll turn the call over to Mike. Mike?
Thank you, George. Good morning, everyone. Starting with our results on slide seven, Assets Under Management. At September 30th, assets under management were $177.3 billion, down modestly from $178.6 billion at June 30th. The sequential decrease reflected $0.5 billion of market decline and $0.6 billion of net outflows. Our assets under management continued to generate strong relative performance across strategies. At September 30th, approximately 68% of rated fund assets had four or five stars, and 85% were in three, four, or five-star funds. We had 13 funds with AUM of $1 billion or more that were rated four or five stars, up from eight funds a year ago, representing a diverse set of strategies from five different managers.
In addition to strong fund performance, as of September 30th, 92% of institutional assets and 92% of retail separate account assets were beating their benchmarks on a three-year basis. 66% of institutional assets and 81% of retail separate account assets were outperforming their benchmarks over five years. Also, 87% of institutional assets were exceeding the median performance of their peer groups on the same five-year basis. Turning to slide eight, Asset Flows. After five consecutive quarters of organic growth, net outflows turned modestly negative for the quarter at $0.6 billion, which included a $0.7 billion model rebalance. Net outflows were specific to open-end funds as retail separate accounts, ETFs, and institutional all generated positive net flows in the quarter. Reviewing by product.
For open-end funds, net outflows were $1.5 billion due to equity strategies, with fixed income, multi-asset, and alternatives each delivering positive flows in the quarter. Within equities, both domestic and international generated net outflows, including the rebalance in international equity. In retail separate accounts, net flows were $0.8 billion and continued to be positive across nearly all investment categories, with an annualized organic growth rate of more than 8%. ETFs had $0.1 billion of positive net flows, the fifth consecutive quarter of organic growth. Institutional net flows of $0.1 billion were positive for the fourth consecutive quarter, again benefiting from new mandates at multiple affiliates. By asset class for all products, net outflows were primarily due to international equity, which turned negative in the third quarter, most notably in July and August.
Domestic equity, global equity, and multi-asset each continued to generate positive net flows. Total sales were $7.6 billion, down sequentially from $9.6 billion. By product, fund sales of $3.6 billion compared with $4.7 billion in the second quarter, largely due to lower equity sales, consistent with industry trends. Retail separate account sales were down modestly to $2 billion, and institutional sales of $1.8 billion decreased sequentially from $2.3 billion, which included the funding of several large new mandates. Turning to slide nine, investment management fees as adjusted of $190 million increased $6.8 million or 4% sequentially, reflecting 4% growth in average assets. Performance fees in the quarter of $0.6 million compared with $0.8 million in the prior quarter.
The average fee rate was 42 basis points, down 0.5 basis points sequentially. Excluding performance fees, the average fee rate was 41.9 basis points and compared with 42.3 in the second quarter. The lower fee rate reflected a higher proportion of retail separate account and institutional assets. Looking ahead, it would be reasonable to assume a fee rate in the range of 41-43 basis points. For the fourth quarter, we would expect to be at the higher end of that range and then move to the middle of the range for 2022 after closing on Stone Harbor. Slide 10 shows the five-quarter trend in employment expenses.
Total employment expenses as adjusted of $86.5 million were flat sequentially as higher profit-based incentive was offset by lower sales-based compensation. As a percentage of revenues, employment expenses were 39.7%, a decline from 41.1% due to market-driven revenue growth. We believe that a reasonable range for modeling going forward is 41%-43%, subject to variability based on markets and sales. For the fourth quarter, we expect to be at the lower end of that range, moving to the middle of the range for 2022 upon closing the Stone Harbor transaction. Turning to slide 11, other operating expenses as adjusted were $20.2 million, up on a sequential basis from $19.9 million, which included $0.8 million of annual grants to the board of directors.
The sequential increase of $1.1 million normalized for the grants reflected growth in the business, as well as a continued modest increase in travel and related expenses. As a percentage of revenues, other operating expenses were 9.3%, down both sequentially and from the prior year period, reflecting the leverageability of the business. Looking forward, we expect other operating expenses in a range of $22 million-$27 million, with the fourth quarter at the low end of that range. Slide 12 illustrates the trend in earnings. Operating income, as adjusted, of $110.1 million, increased $7.2 million or 7% sequentially due to higher revenues and essentially flat operating expenses. Notably, operating income, as adjusted, more than doubled from the same period last year due to growth in the business, including the addition of the Allianz GI assets.
The operating margin as adjusted of 50.6% increased by 170 basis points from 48.9% in the second quarter, and was up 11.3 percentage points from 39.3% in the prior year quarter. Net income, as adjusted, of $9.71 per diluted share increased by $0.64 or 7% sequentially due to higher revenues from the increase in average assets under management. Regarding GAAP results, net income per share of $7.36 decreased 6% from $7.86 per share in the second quarter and included the following items, a $1.36 reduction, reflecting the increase in the fair value of the minority interest liability, $0.27 of realized and unrealized losses on investments, and $0.21 of acquisition and integration costs.
Slide 13 shows the trend of our capital liquidity and select balance sheet items. On September 28th, we completed the refinancing of our credit agreement with a new $275 million term loan maturing in 2028 and $175 million of revolving credit capacity through 2026. In addition to increasing the company's financial flexibility and extending the maturity profile, the refinanced credit agreement reduces borrowing costs by approximately 65 basis points at current rates. Working capital was $345 million at September 30th, up 51% sequentially due to the net proceeds from the debt refinancing, as well as cash generated by the business in excess of return of capital to shareholders.
At September 30th, gross debt to EBITDA was 0.7x, which compared with 0.6x at June 30th, and was down from 1x at September 30th, 2020, due to significant growth in operating income over that period. We generated $177 million of EBITDA in the third quarter, up 5% sequentially and 92% above the prior year level as AUM growth from the addition of the AGI assets, market appreciation, and positive net flows has meaningfully increased quarterly cash flow. We ended the quarter in a net cash position with cash exceeding gross debt by $162 million. After the quarter, we made a closing payment of $135 million for the acquisition of Westchester Capital.
Additional upcoming obligations include a revenue retention payment for Westchester Capital that will be paid near year-end, the closing payment for Stone Harbor, and the first Allianz GI revenue participation payment. During the third quarter, we repurchased 64,494 shares of common stock for $20 million above the prior quarter level of $7.5 million. We also raised our quarterly common dividend by 83% to $1.50 per share, representing the fourth consecutive annual increase. We continue to take a balanced approach to capital management, and we're pleased to return meaningfully more capital to shareholders in the third quarter, reflecting the significant growth in free cash flow over the past year. With that, let me turn the call back over to George. George?
Thanks, Mike. We will now take your questions. Richard, would you open up the lines, please?
Sure. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. If you wish to withdraw your question, just press the pound key. Again, to ask a question, that is star one. We now have our first question from the line of Michael Cyprys from Morgan Stanley. Please ask your question.
Great, thanks. Good morning. Thanks for taking the question. I just wanted to circle back to the model rebalancing, the $700 million figure that you had referenced, I think, in international equities. Just, you know, curious if there's any additional color you can share with us around that rebalancing. Any thoughts on any potential risk as we kinda go forward from here? Maybe you could just remind us on how much of your AUM sits in the models today, and maybe you could also talk a little bit about your broader strategy and initiatives around model portfolios.
Sure. When we use the term model portfolios, we're generally referring to those things that are sort of home office established and decided as opposed to just pure wholesale product. As we sort of indicated in our comments, the outflows included a model rebalance was $0.7 billion. Again, it was in the equity area. We don't have a lot of assets in that strategy still left in models. Periodically what you see over periods of time, you'll see people home offices either making decisions to increase allocations to things or decrease allocations to things or making different decisions about what types of strategies they wanna use.
Generally, you will get some lumpiness as it relates to some of the model flows as opposed to the pure wholesale flows. We did sort of experience that in the third quarter. Again, I think as you've sort of seen in some public commentary about, you know, international and domestic in the third quarter. I mean, I sort of look at it that way, is that the assets that were in that model for a very long period of time was not unreasonable for it to be rebalanced. We don't have a lot left in those strategies in models. Then the other thing, you know, as we sort of indicated in our comments, you know, the outflows in total were really in open-end mutual funds.
They were in equity, primarily international equity, and was mostly really in the month of July and August. Of the $1.5-ish billion of outflows in open-end funds, only $0.1 billion of it was in the month of September. It was really kind of very focused in on that. None of us know what the markets are gonna look like in the rest of the fourth quarter. Really, you know, that July and August improved significantly in September, and we're kinda seeing the same kind of run rate so far in the month of October.
Great. Thanks. Then just a follow question maybe just on the Westchester deal that had closed. Just an update on how the integration is progressing, and how are you thinking about the opportunity to accelerate growth at that property, whether it's around new product introductions and also some distribution synergies going on both sides in terms of distribution relationships at Westchester that could help accelerate growth of your existing products at Virtus and vice versa to help them grow faster at Westchester as well.
Well, we're very excited to have closed on that transaction. It's a great firm, great strategy, great legacy, good culture, and they've done an incredible job. As a smaller boutique, they've raised assets really just through the strength and the quality of their investment process. While they certainly have, you know, great support in terms of their own marketing and distribution, I think we really are gonna bring another element to the table for them to allow a product that I would describe as speaking for itself, to have a lot more voices telling that story. I think we look forward to not only sort of amplifying their availability throughout the retail channel. I think there's a lot of other opportunities to leverage their strategy possibly in other product structures.
We closed on October first. I think the integration went in so far has gone incredibly well. A lot of thought and planning was put into that. We're really now focused on the next step, which is, you know, how do we maximize their opportunity set, and how do we grow them? As I noted in the comments, they were positive even pre-close, and we continue to see organic growth since the close, even though it's only been a couple weeks.
Great. If I could just maybe sneak another one in here. Just a question.
Yeah.
On SMAs, where you've had a lot of strength and traction on flows. Just hoping you maybe could give us a sense of just, you know, what that underlying product looks like that you're selling into the SMAs from, like, a strategy standpoint. You know, what are some of the bigger ones? What would be the opportunity to bring other products into the SMA wrapper as you kinda look out over the next year or two, products, maybe including strategies from Stone Harbor, Westchester, AGI, et cetera? How are you thinking about broadening out the product set within the SMA wrapper?
Well, yeah. We really do believe that the retail separate account structure is a great structure for investors. We have been in retail separate accounts actually since our initial creation back in the mid-nineties, where we've always been in the retail separate business. A lot of the growth that we have seen over the last few years has been in more of the equity product, either in the quality equity, growth equity, small cap equity, small mid cap, mid cap. But we absolutely do have other of our managers and capabilities on the value side, even on the fixed income side available in retail separate accounts. A lot of the growth and the
Continued strength in that has been driven more on the equity side, but we have a large number of other strategies, and we continue to see that as an area of growth for us in an area where we have a lot of experience in selling that product.
Great. Thank you.
Okay. Thank you.
Richard, can we take the next question, please?
Sure. Our next question is from the line of Sumeet Mody from Piper Sandler. Please ask your question.
Hey, thanks. Good morning, guys. Just sticking with the SMA business. Just noticed the fee rates kinda crept down over the last couple of years. Just wondering if you could talk about the drivers of that trend and how we should think about that kinda moving forward from here.
Sure. I mean, I think, like a lot of active investment strategies, there's always a little bit of pressure on fees. Most of the strategies that I sort of recited in answer to the previous question are more capacity constrained, so they're generally higher fees. If you sort of look at that business, there's really kinda two components. There's kinda like manager traded or model provided to the intermediary, so we do both. But if you actually sorta look through the industry trends, you've seen much more of a growth in the, quote, unquote, what they call model only as opposed to the manager traded. We have seen some more of the model onlys coming on as well.
I think that fee rate, you know, is gonna be moving more by asset levels and market. Yeah, I think that's right. I mean, it's been in that 44 or 45 basis point range over the last four or five quarters, and I think that level will be dependent on, you know, market dynamics. I think the current level is an appropriate one as we think about looking forward.
Okay. Great. Thanks. On the institutional pipeline, can you just update the kinda won but not yet funded mandate, pipeline and kinda what you're seeing today where that demand has been concentrated? Just a little bit of color around that.
Sure. I mean, I think in our comments we sort of said the pipeline is generally looking consistent with what we've seen. Generally, we've spoken about multiple affiliates and multiple strategies. Mike, any color?
Yeah, I think that's right, and we talked about it looking at it over the last year where we've been positive flows in that period of time. Any given quarter can be a bit lumpy, but I think as we look out, we see you know, known wins not yet funded, sort of exceeding what we know on redemptions. But you know, that could be impacted in any given quarter. The strength that we talk about comes from multiple of our affiliates. You know, the traction that we're seeing is from you know, multiple affiliates.
We continue to win mandates and be considered for more mandates across affiliates and across strategies. That gives us the optimism that some of the traction we've seen over the last year and a half can continue. Again, it is a lumpy business, and any given quarter can shift a bit. Generally speaking, we're pleased with that pipeline dynamic right now. Yeah. The other element, and it showed itself last quarter, is some of the non-U.S. growth, right? That we've been focused on trying to grow our client base outside the U.S. We've been very fortunate to be able to be bringing in some of the non-U.S. mandates. We continue to see that as an area of growth.
I think last quarter when we commented about one of the many things we find attractive about Stone Harbor is that will also, we think, be additive to us in terms of our ability to make our offerings available to non-U.S. clients, where I think we have a much bigger opportunity set because we haven't traditionally had all of our managers being represented in the offshore, in those markets. Very excited about that and see that potentially as a good growth area.
Great. Thanks. And then noticed you guys decided not to pay down any debt in the quarter. You know, focused capital more towards repurchases and kinda presumably the Westchester closing. So, you know, given the float and lower debt levels, can you give us an update on how you're thinking about capital priorities going forward? I know you guys wanted to remain balanced, but you know, and then kind of along those lines, on the M&A front, now that you have two of the three deals closed this year, you know, what's the pipeline look like today? You know, how are conversations going with potential maybe future targets in the market, and how are you guys thinking about inorganic growth from here?
Okay. Sumeet, this is Mike. I'll start and address some of the capital components of your question, then turn it over to George to touch on the M&A conversations. From a capital standpoint, you know, we were pleased this quarter, at the end of the quarter on September 28th, to be in a position to refinance our term loan and extend the maturities, bring the borrowing costs down, given current LIBOR rates. You know, increase the flexibility position as well for the closing payment for Westchester and the upcoming obligations. I guess in that period that we are refinancing, we wouldn't anticipate paying down debt.
You know, we'll continue our balanced approach, which we were pleased to tick up the share repurchases this quarter up to $20 million from $7.5 million, and increase the dividend. really address returning meaningful levels of capital to shareholders. We are pleased to also have that balance sheet and financial flexibility to invest in the business and continue to grow the business. I don't think I'd read into any longer-term shift in our balanced approach to capital management, more of a timing in terms of this is the period we refinance, extended the maturity where the revolver was coming due in less than 12 months. we reset that to be maturing in 2026. The term loan was coming due in less than three years, so we reset that for 2028.
None of that impacts the balanced approach that we would expect to continue to implement, just more in terms of timing with executing that refinancing. George, I'll.
Yeah. On the M&A question, you know, as we always say, you know, we think it's really important that our long-term growth strategy and value creation strategy is not dependent on M&A. We focus on that organic growth and that increase of distribution of existing products and creation of new product. That being said, as you noted, we literally have just done three transactions in a 12-month period. We are structurally very focused on that activity. We continue to be very active in that area. We see lots of things. Again, I think as we've commented before, you know, for us, it would have to be very strategic and fit in either in terms of the product diversification or other strategic elements.
Again, I continue to think the activity out in the M&A market continues to be quite robust, and that's just not for our sector, I think it's for a lot of sectors. Again, we'll only do things that make a lot of sense for us in terms of moving us forward on our growth plans.
All right, great. Thanks. Just last one here on the CLO front. Is there any kind of open warehouses or anything to kind of look at over the next, you know, few quarters, that you guys are kind of keeping your eye on in that way?
Yes, Sumeet, I obviously we've been active at our leveraged finance teams in the CLO market both in existing transactions to be in a position to refinance or reset those given the current outlook in the market. We were able to recently extend one of our CLOs through a refinancing. Our team do stay close to the market. It's a product structure and a capability that we think is compelling. You know, we'll stay close to it. I think at this time, there's nothing specific to report, but we believe the market characteristics are compelling, and we'll stay close to it. If we think it's a good use of shareholder capital, we would consider it.
All right, great. Thanks for taking my questions.
Thank you.
We have a follow-up question from Michael Cyprys of Morgan Stanley. Please ask your question.
Thanks for taking the follow-up. Just wanted to dig in on a few other points, maybe just starting with the CLOs. We've seen a number of firms across the industry raise new CLOs and do some restructurings. It sounds like you guys are doing some on the restructuring side at Virtus. Just curious what's holding Virtus back from participating in new CLOs, where we're seeing others across the industry raise a significant amount of capital.
Yeah. I think there are two elements to it. We've got approximately 11 structured products and about $4 billion of assets under management in that product category. We look at both sides of it. One is resetting or refinancing the existing book, and we completed one of those actually post the quarter in earlier October, which extends the maturity and the reinvestment period at Seix. The team there does stay close to the market. I think our last new issuance was a little over a year ago, and the cadence has been anywhere from 12-18 months. I'd expect we'd stay close to that.
Again, it's an area that we have the capabilities, and we are certainly willing and demonstrated in the past to support our teams if we think the capital is appropriate and the opportunity is meaningful.
Great. Then just coming back to the capital management theme, we saw that the large dividend increase back in August. Just hoping you could maybe clarify, elaborate a bit more on how you're thinking about what is the right dividend payout ratio for Virtus today. How do you think about that longer term? Clearly, you have the cash flows to support a higher dividend payout ratio. I guess what holds you back?
Yeah. I think you've seen a progression for us on that, right? You know, we've had four annual consecutive increases in our dividend. They have been reflective of underlying growth in the business. The substantive change year-over-year led obviously the one we recently announced being the most significant, really just reflective of, you know, an EBITDA and a cash flow generation that has significantly grown and in some instances, almost doubled, depending on what periods you look at. We do think that the dividend is important part of our return of capital strategy, and the dependability and the reliability of that and expectations of growth in that going forward. We also balance that with the stock repurchases.
As you saw in this quarter, when we saw an opportunity, look at how our stock is trading, we will use some of that free cash flow to buy in the market. We have done that frequently over years, and we will continue to use that as a tool combined with that. We sort of look at the payout ratio relative to peers. Again, we think we manage that with growing the business because, you know, you have asked a question about CLOs which takes investments of capital. No, you didn't ask. No one asked about closed-end funds. See, closed-end funds is another good thing. There's a lot of other areas of investing in growth in the business. We wanna balance all of those things because we think in combination of balancing them over a longer period of time is the best way to create value for shareholders.
Great, thanks. Since you've mentioned closed-end funds, I do need to ask just 'cause we are seeing others across the industry, taking on the P&L, the issuance costs for closed-end funds, reopening that marketplace. It's been successful at other shops. Is that something you guys are considering? How do you think about that making sense for Virtus? If you were to reenter that marketplace with new issuance, would you be putting through the issuance costs through the P&L as we've seen with some others?
Well, I'll speak to the opportunity set and then Mike address the accounting side of it. No, we're a big fan of closed-end funds. Currently have about $11 billion-ish of closed-end funds across multiple affiliates. We think it is a great structure for retail investors and non-retail investors, in fact. As you know, though, it's gotten very busy out there. A lot of the underwriters are very busy putting out closed-end funds. We have several managers with attractive strategies. We've actually developed and actually probably have a filing out there on a fund that we've offered. We're very excited about that product structure and are in active dialogues with underwriters. Unfortunately, they're also in active dialogue with a lot of other people. We continue to think that's a great opportunity, and several of our managers have very attractive strategies. Mike?
I think, Michael, you kinda hit on it the way the accounting works. Although in certain instances, the closed-end fund structures can be 7-10 years, or in certain cases they can be indefinite life, just the accounting requires the charge for the structuring costs to be absorbed in the period that they're issued. You know, we'll follow that accounting. The way we look at it's usually a very compelling use of the capital required to set up one of the vehicles. You know, we'll call it out to ensure that the investment community is well aware of what that expense and investment went to create, which we think is a very good use of shareholder capital.
Great, thanks. Just one last one if I could. Just coming back to M&A. You know, it sounds like the bar maybe is going higher for you guys at this point. Just what could make sense as you kinda look out, you know, over the next year or two, what sort of gaps or white space remain that could be filled in through M&A? It sounds like it needs to move forward on your growth plans, but maybe you could just elaborate on what that could be.
Yeah. I don't know whether I'd say it was just higher, but it may have moved to the right or the left into right? 'Cause we have evolved as a company, so what was of highest value to us five, seven, eight, two, three years ago, you know, may not be the same thing as it is today. I think but consistent with what we've always said is we continue to think that adding differentiated investment strategies and firms is of value to us. We have a very good coverage on the traditional active management side. I think there's great opportunities in more of the non-traditional and the less liquid, less correlated strategy. So Westchester will increase our exposure to non-correlated strategies. We continue to think that's an area for us.
Just, you know, other product structures, and I've commented earlier about we continue to think that diversifying our business outside of the U.S. in terms of a client base continues to be attractive to us. We look at all those things again. Could be something that's specific to a product capability that is not a daily liquid type of a strategy, as well as opportunities non-U.S. Or again, anything that's gonna help us move our business forward and continue to generate organic growth.
Great. Thanks so much for taking my questions.
Okay. Thank you.
Thank you.
This concludes our question- and- answer session. I would now like to turn the conference back over to Mr. Aylward. Please go ahead.
Great. I wanna thank everyone today for joining us, and obviously, I certainly encourage you to give us a call, send a note if you have any other further questions. Enjoy the rest of your day.
That concludes today's call. Thank you for participating. You may now disconnect.