Victory Capital Holdings, Inc. (NASDAQ:VCTR) Q2 2022 Earnings Conference Call August 5, 2022 8:00 AM ET
Matthew Dennis – Chief-Staff and Director-Investor Relations
David Brown – Chairman and Chief Executive Officer
Michael Policarpo – President, Chief Financial Officer and Chief Administrative Officer
Conference Call Participants
Craig Siegenthaler – Bank of America
Ken Worthington – JPMorgan
Kenneth Lee – RBC Capital
Michael Brown – KBW
Michael Cyprys – Morgan Stanley
Brennan Hawken – UBS
Good morning, and welcome to the Victory Capital Second Quarter 2022 Earnings Conference Call. All callers are in a listen-only mode. Following the company’s prepared remarks, there will be a question-and-answer session.
I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis.
Thank you. Before I turn the call over to David Brown, I would like to remind you that during today’s conference call, we may make a number of forward-looking statements. Please note that Victory Capital’s actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today’s call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements.
Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the Investor Relations portion of our website at ir.vcm.com.
It’s now my pleasure to turn the call over to David Brown, Chairman and CEO. David?
Thanks, Matt. Good morning, and welcome to Victory Capital’s second quarter 2022 earnings conference call. I’m joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer, as well as Matt Dennis, our Chief Staff and Director of Investor Relations.
I’ll start today by providing an overview of the quarter and first half of the year. Then I will cover our investment performance, which continues to be strong. After that, I will turn the call over to Mike to review the financial results in greater detail. Following our prepared remarks, Mike, Matt and I will be available to take your questions.
The quarterly business overview begins on Slide 5. The first half of 2022 was the worst first half period for public markets in more than half a century. Despite this challenging backdrop, our business performed exceptionally well in part due to our operating model and the stellar employees we have leading it. We exceeded our long-term adjusted EBITDA margin guidance of 49% for the eighth consecutive quarter and achieved an adjusted EBITDA margin of 49.5% during the first half of the year.
We continue to invest in our growth initiatives despite lower AUM and revenue this quarter. As a reminder, a majority of our expenses are variable, which affords us the ability to continue investing as many of our expenses flex with revenue and asset levels. By consistently investing in growth initiatives through market downturns, we can increase market share and emerge from this type of environment an even stronger, more competitive organization. Therefore, we are not making any material changes to our long-term growth strategy for the investments we are making in data, technology, marketing, distribution and people.
We generated $9.2 billion of gross long-term flows in the quarter, which resulted in record high gross long-term flows of $20.2 billion for the first six months of the year. This was up 21% from the first half of last year, which is a testament to the appeal of our broad product set as well as the confidence our clients have in our investment franchises. The record gross flows in this year’s first half reflects positive contributions across each of our distribution channels and was well diversified across a wide mix of investment strategies and products.
The diversification strategy we have embarked on over the last few years through organic and inorganic activities has positioned us well with a wide range of products we can offer our clients that are suitable for managing through the current volatile environment. Our ETF flows have been positive for seven consecutive quarters and for the past 20 straight months. One good example of the unique ETF is our Victory shares U.S. Equity Income Enhanced Volatility Weighted ETFs, ticker symbol CDC, which automatically increases its allocation to cash during periods of high volatility, a feature that is attractive to many of our investors.
Our Market Neutral Income Fund, ticker symbol CBHIX also continues to generate positive net asset flows. It continues to be added to a number of new industry-leading distribution platforms, which provides clients with broader ways to access it. Net long-term flows were a positive $2.4 billion in the first half of the year. Second quarter net long-term flows were slightly negative at approximately negative $600 million. Although as a firm, we were negative for the quarter, we had significant pockets of strength in various channels, products and strategies. The strength has continued into the third quarter, and as of today, we are still positive net long-term flows year-to-date and have a strong net one but not yet funded book along with a robust pipeline of potential new business. We attribute this strength to the excellent investment performance we have as a firm, coupled with a diverse set of products being distributed through multiple channels that we’ve invested in over the last few years.
In addition to continuing to make investments that support our organic growth initiatives, we are also continuing to execute on our inorganic growth strategy. The M&A environment remains constructive, and we are continuing to conduct diligence on multiple prospective deals. We have ample financial capacity to execute on a wide range of deals that vary in size, structure and product set.
Our focus here remains the same as it has for the last decade. Every potential acquisition we look at must have a strategic aspect that will make us a better company. We start with a view on where investors are or potentially will be allocating assets and where we can earn a fair fee for the work that we do. To be clear, I do not believe the current environment will impede us on executing a transaction should the right one presents itself, given what we know today.
The direct investor business continues to make good progress. Our 529 education savings plan experienced positive net flows again in the second quarter and the year-to-date period. During the current market conditions, we saw an uptick in the number of investor engagements through our communication channels. These types of conversations give us the opportunity to learn about each investor’s objectives and risk tolerance as well as offer a portfolio review. We are also able to educate investors about the potential benefits of dollar cost averaging and encourage the establishment of automatic investment plans.
Turning to Slide 7. You can see our strong investment performance continued throughout the second quarter of the year. During periods of significant market volatility, mispricing can occur, providing attractive opportunities for active managers to generate alpha. Over the years, our franchises have excelled during these times, and this period is proving to be no different. At the end of June, we had 50 mutual funds and ETFs with a four or five-star overall rating from Morningstar. This is up from 44 funds at the end of March and represents 68% of our mutual fund and ETF AUM, up from 65% at the end of the first quarter.
Turning to Slide 8. As I mentioned earlier, we are not making any changes in our plans to invest in our business organically and inorganically or in our capital allocation strategy. We continue to generate strong cash flow and pay down debt in the second quarter. Since the beginning of this year, we allocated the majority of our excess cash flow to reducing debt, repaying $115 [ph] million of debt through the end of June. Post June, we reduced our debt another $26 million. And as disclosed in yesterday’s press release, we returned more capital to shareholders this quarter than during any other quarter in our history via share repurchases and dividends.
We returned a total of $34 million through share repurchases and dividends, which is 26% higher than the $27 million returned in the first quarter of this year. This increased our year-to-date return of capital to shareholders to $61 million, which approximates the amount of capital returned to shareholders in all of 2021.
One point I would like to highlight is we will be opportunistic between the paydown of debt and share repurchases, given the dynamic market environment we’re in and the flexibility we have through our different programs. This flexibility should bode well for our shareholders
With that, I will turn it over to Mike for more details on the quarter’s financials. Mike?
Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 10. Total AUM decreased by $23.2 billion or 13% in the quarter to $154.9 billion at the end of June. This decrease brought the year-to-date decline in AUM to $28.7 billion or 16% lower than at the beginning of the year. This was primarily driven by approximately $30 billion of negative market action and was partially offset by $2.3 billion of positive inflows during the first half of 2022. AUM at quarter end was 4% lower than at the same time last year.
Revenue of $216 million in the second quarter was 6% lower than in the first quarter due to the lower AUM and down 3% from the same quarter last year. During the second quarter, GAAP operating income was favorably impacted by lower acquisition-related costs. We had a $26.6 million noncash benefit to our GAAP results related to a reduction in the fair value of the contingent earn-out liability on our balance sheet.
As you may recall, any quarter-over-quarter change in this liability runs through our income statement. This resulted in GAAP operating income of $119 million and an operating margin of greater than 55%.
Adjusted EBITDA was $106.2 million in the second quarter. We are once again pleased with the performance of our operating model, resulting in adjusted EBITDA margin of 49.2%. We believe this clearly highlights the benefit of our variable cost structure. As a reminder, approximately two-thirds of our expenses are variable.
GAAP net income was $79.2 million or $1.09 per diluted share and ANI with tax benefit was $1.11 per diluted share. We paid down $45 million of debt and returned $34 million of capital to shareholders in the quarter, which Dave just highlighted. We repurchased 640,000 shares in the quarter, which was up from 293,000 shares in the first quarter. The cash dividend was maintained at $0.25 per share for the current quarter.
On Slide 11, you can see total AUM was $154.9 billion at the end of June and remains well diversified from a distribution channel and client perspective. This diversification has served us well in the current volatile market environment. Long-term AUM totaled $152 billion at quarter end. This was down from $181 billion at the beginning of the year and was 4% lower than the $159 billion of long-term AUM at the end of last year’s second quarter.
Turning to Slide 12. Gross long-term flows totaled $9.2 billion in the quarter, and we had $600 million of net long-term outflows. This resulted in record first half gross flows of $20.2 billion and positive year-to-date net long-term inflows of $2.4 billion. Given the state of the industry, we are very happy to be net flow positive for the first six months of the year, and we are off to a solid start for the third quarter. Several of our investment franchises are generating positive net flows and our VictoryShares ETF platform continues to grow nicely as well.
Slide 13 illustrates our revenue, which declined 6% from the first quarter, consistent with the quarter-over-quarter 6% decline in average AUM. Our fee rate came in at 52.3 basis points, which was down slightly from the first quarter.
On Slide 14, we detail our expenses, which declined $28 million to $111 million in the second quarter due primarily to lower operating expenses. In addition to lower GAAP compensation expenses, which declined 11% and the calibration of our distribution and other asset-based expenses, the greatest quarter-over-quarter variance was the noncash benefit that I discussed earlier related to potential contingent earn-out payments for prior acquisitions. The single item resulted in $23 million of the sequential reduction in operating expenses versus the first quarter.
On a cash basis, compensation was reduced in the second quarter by 9% to $53.6 million or 24.8% of revenue, down from $58.7 million or 25.5% of revenue in the first quarter. About $2 million of this decline can be traced to seasonally higher payroll taxes and benefits in the first quarter of the calendar year and the majority of the remaining decline relates to the adjustment of our variable incentive compensation pool, which is linked to revenue and earnings.
Moving to our non-GAAP results on Slide 15. Adjusted net income was $71.4 million in the quarter, and the tax benefit was unchanged at $9.3 million, resulting in ANI with tax benefit of $80.7 million or $1.11 per diluted share.
Our adjusted EBITDA margin was 49.2% in Q2. For the first half of the year, adjusted EBITDA margin was 49.5%, which exceeds our long-term guidance of 49%, which we are maintaining. We continue to make strategic investments in technology, distribution, data, marketing and people. Given the strength and resilience of our operating model, we have the wherewithal to maintain these investments and have no intention to alter our plans to invest for growth.
Finally, turning to Slide 16. On the capital management front, we repaid an additional $45 million of debt during the quarter. Our net leverage ratio at quarter end increased to 2.3 times. At the end of June, our debt-to-equity ratio improved to 1:1. Our blended interest rate on debt during the quarter increased to 3.2%, which was up from 2.9% in the prior quarter. This was partially offset by the lower level of debt and resulted in our cost of debt increasing by $700,000 in the quarter to $9.9 million.
We are very comfortable with our current debt, particularly considering the floating to fixed swap that laps in the rate of 3.22% on $450 million of the debt. The balance of our term loans flow at LIBOR plus 225 basis points. Also, our $100 million revolver remains undrawn. After the quarter, we repaid and/or repurchased and retired another $26 million of debt.
That concludes our prepared remarks. I will now turn it back over to the operator for questions.
Thank you. [Operator Instructions.] Your first question is from the line of Craig Siegenthaler with Bank of America.
Hey, good morning, David, Michel. Hope you both doing well.
So, my first one is on M&A after the WestEnd integration. Can you update us on your appetite from M&A and also your focus on more highly accretive consolidation type transactions versus more revenue and gross synergistic, strategic acquisitions? And then also, have you seen valuations dip for potential deals in 2022?
So really, nothing has changed in our strategy around M&A, as I said in our prepared remarks. We’ve been doing M&A over the last decade. And I think everything has started with does this make our company better. Does the transaction make our company better? And that’s the approach, we have done all types of transactions, small, large consolidation growth focused. The playing field for us, if you will, is going to be the same. We’re not leaning towards one or the other. We really are looking at does it make our company better. If you looked at a WestEnd, clearly, that was a growth transaction. If you look at — go back and look at the USAA transaction, that was growth along with expense synergies — so we’re not really leaning towards anything — any specific type of transaction. The environment is extremely constructive. And what I mean by that is there are a lot of opportunities with the market dislocation.
As far as valuations, I think valuations are all over the place. You do have opportunities where things are at a significant discount and probably rightfully so. And then there are other opportunities where price is held. A lot of the pricing can be dealt with restructuring. A lot of the pricing could be dealt with in our platform, the way we integrate and the way we purchase, I think is unique, and I think a lot of the pricing could be dealt with that way. So, I would say that to sum it up, our strategy hasn’t changed, and we’re pretty excited about the environment. And we’ve been doing this for a long time in a lot of different market conditions. And so, we feel really good about the opportunity.
Thank you, David. And then my second question really is on capacity to do deals. What is your current excess capital or cash today? And then how much incremental debt capacity do you have to go above that? And when you combine these with free cash flow generation, how do you think about total deal capacity over the next year?
So, we won’t go into detail on what we think our total deal capacity is. I don’t think we are going to be constrained. There are a lot of different ways to approach a deal. Clearly, we’ve used debt in the past. We have the debt capacity today. So, we have that as a tool. We’ve used deferred payouts in the past, and we still will have that. We’ve used revenue sharing, future revenue sharing as a tool. And then we’ve used structuring as a toll and earn-out structuring. So, I think the way we’re looking at it is we don’t feel like we’re constrained. And then I would also add that the free cash flow we have between announce and close and then ongoing, I think should give us all of the fuel, if you will, to do really any deal that has approached us. So, we don’t feel constrained at all.
Great. Thank you, David.
Your next question is from the line of Ken Worthington with JPMorgan.
Thanks for taking the question. First, the market is bouncing back here sort of July and August, where do you think client interest and demand might rebound most quickly? And where are you focusing or plan to focus your global marketing efforts if the market conditions continue to recover?
Hi, Ken. It’s Dave. I think people are rethinking their portfolios. If you go back and look during the last decade, we had an environment with low rates. We had an environment where there was a lot of stimulus, if you will, put into the economy through buyback of central banks buying back bonds. And so, I think what people are starting to sort through is, is that going to be the investing environment going forward? And I think many of our clients are thinking about we’re into a different investing environment. And so, a lot of the discussions we’re having are really around what kind of investments are going to succeed or what types of investments will succeed going forward. And a lot of those are around active management.
In the past, if you were invested in beta, you did very well. I think a lot of the discussions today are around active management and being in certain asset classes. And that’s – so we’re focusing on that. I mean, clearly, we’re an active manager, and we think that going forward that active management is going to play an even bigger role in portfolios. As far as where we’re focusing our marketing efforts, we’ve invested over the last few years very heavily in distribution. We’ve added people. We’ve entered into different channels. We’ve invested pretty heavily in data and technology and really around digital marketing. And I think you can see in our results through some of the year-over-year numbers that’s coming – that’s paying dividends for us. We’re going to continue doing that.
And I would also say from a product development perspective, we’ve launched a good number of products on the ETF side. ETFs, I think, will continue to be an important part of a well-diversified portfolio, especially in the retail side. We also believe private markets through our New Energy acquisition are going to be just as important going forward as they are today. And so, we’re going to continue to invest in market there as well.
Okay. Great. Thank you. And then just maybe an easier one on comp. In the prepared remarks, you spoke about the payroll and some adjustments this quarter due to profitability. Were the adjustments this quarter, the backing out of the reversal of accruals that were made in 1Q and therefore, are we not quite at the right run rate? Or is the 2Q number sort of the right run rate that we should think about as we bounce off going forward?
Good morning, Ken. It’s Mike. Yes, in the prepared remarks, what was highlighted really is in the first quarter, in the first part of each calendar year, we see a reset on payroll taxes and benefits. And so, there was a natural decline from Q1 to Q2 of about $2 million related to just as those reset from a timing perspective. As you think about the comp expense going forward from a cash compensation perspective for 24.8% this quarter, we ebb and flow and flow based on that timing of payroll, but 24% to 25% really is what we look at long-term. And so, what you see in Q2 is about the right level. A lot of our incentive compensation pools flex with the revenue and the earnings of the business from a compensation perspective to our investment franchises as well as the overall business. And so, you saw that flex as well in Q2 as the earnings and the revenue came down.
Okay. So, what I’m taking from you is there was no reversal of accruals? And this is – okay, perfect. Thanks. That was it.
Your next question is from the line of Kenneth Lee with RBC Capital.
Good morning and thanks for taking my question. Just want to dig in a little bit more into the strong net flows within the alternatives assets under management. Wondering how much of a contribution there you saw within – I think there’s the market-neutral income fund there. Thanks.
Hi Ken, market neutral was a big part of that. That is a product that we’re just really beginning to get wide distribution on we talked about in our prepared remarks about how the distribution channels and the platforms are growing. So that was a big part of it. We have other products in our pipeline that we’re thinking about adding as well. And market neutral specifically fits really well into the investing environment today and is an important part of a portfolio as you look going forward with kind of the new investing environment we’re going to get into.
Got you. Very helpful there. One follow-up, if I may. I know that you have a couple of ongoing efforts in terms of expanding distribution for several of the new strategies and franchises. I wonder if you could just give us a quick update on that. I think in the past, you talked about expanding distribution of fixed income products, obviously, WestEnd as well. Just wanted more of an update there. Thanks.
So maybe I’ll start with WestEnd. WestEnd has been a grower for us since we acquired the business. So that has grown nicely, even against the backdrop where that specific part of the industry is actually contracted for the first half of the year. So, they have bucked that trend. We are working with their distribution team to really bring their products to more advisers and then bring their products to more platforms.
And so, we’re investing there. We’ve also invested in different channels, the registered investment adviser channel is an area where the last few years, we’ve added people and added spend on data, and I think that’s worked out very nicely. And in that channel, we sold a number of different products. And then just generally speaking, we have invested pretty heavily into data and arming our sales force to be better educated, walking into potential clients and existing clients’ offices. So those are areas – there’s? Just a few examples.
On the private side, with New Energy, we continue to work with them on increasing the size of their business as we go through the year. We’re right on plan on that. So, from a distribution side, you can see the increase kind of this year versus last. You can see that those investments have come together and really have produced. And I think that we’re just in the beginning of some momentum from a distribution side. And we have begun, I think, to separate ourselves from some others around some of the investments we’ve made with our own team with some of the products we’ve brought and some of the acquisitions we’ve done.
Great. Very helpful there. Thanks again.
Your next question is from the line of Michael Brown with KBW.
Hi, good morning.
Good morning, Michael.
Hi, great. Thanks for taking my questions. Yes, I just wanted to start by parsing out your comments on the capital allocation here and the balance between deleveraging and share buybacks now. So, when you think about you’re paying back the debt here, what is the leverage ratio you have in mind as you’re thinking about where you plan to bring that? And then, just given that the pipeline of deals does sound pretty good here.
Does it make sense for you to actually run with a bit higher debt than you normally would just to finance future deals given the rising rate environment here and maybe the more attractive rates that you have on your current borrowings versus what current rates have risen to?
Yes. It’s Dave. I think what we’re doing is we are really looking at the facts and circumstances a lot closer. I think if you went back a few years, it was – we were in a low interest rate environment, and our playbook was to automatically pay down debt with our free cash flow and buy shares back. I think in today’s environment, we are looking at it on a much closer and I’d say, more daily, weekly basis. I think the share buyback program that we have becomes interesting, especially with our stock at levels that it’s at today. As you can see, this quarter, we bought back more shares than we ever have.
And as far as our debt, we do have a portion, as Mike said, that is locked in. That would be a natural level where we would think about keeping that the part that floats, we do think about that level, and we think about should we not pay that down and maybe think about accumulating cash for a potential transaction. So, we evaluate that. We don’t have set boundaries around that. We’re mindful of it. But I would also say that each transaction is going to look very different. Some will require a significant amount of cash up front. Some will require less. I’d also remind you that we also have the revolver that’s undrawn which is $100 million. So, we are looking at it a lot closer. Our overall strategy has not changed, though. Our overall strategy is to make sure we are in a position to do accretive transactions no matter what the environment is. And I can say that where we are today, we’re in that position.
Okay. Great. I appreciate the color there. And then I was just curious about the direct channel here. Obviously, that’s a unique channel that you have. Can you just expand on how that has performed during the sharp market sell-off in the first half of the year? And then any early reads on how that’s performed quarter-to-date? And just curious to hear about some of the trends, that you’ve seen from that specific channel.
So just to take a little bit of a step back, we are building a broader, wider digital marketplace there planning on expanding the product set and the products we have to offer our clients. Our customer service scores are excellent and continue to be excellent as we took more engagements, more calls, more interactions. So that has not dipped at all. It gave us a great opportunity to have discussions and interact with clients and talk about some of the benefits of thinking long term while investing. So that’s been a big positive. Our 529 education savings plan continues to grow this year, this quarter, it’s net flow positive.
We’re working pretty hard behind the scenes on building new products that we will roll out as we go into this year and to next year. It’s been a really solid, consistent, steady part of our business, very loyal client base, a client base that has not been quick to move assets based on short-term thinking. So, we’ve been very pleased during this market disruption. And we think we have the core of something pretty interesting going forward as we continue to think about expanding the product set there and offering more products and becoming more important in those clients’ financial lives.
Okay, great. Thank you for taking my questions.
Your next question is from the line of Michael Cyprys with Morgan Stanley.
Great. Thanks. Good morning. I was hoping you could update us on your retail separately managed account initiatives, retail SMAs, how much – maybe you can remind us how much you have an AUM today? What sort of flow trends you’re seeing? And how are you thinking about expanding your offerings in the retail SMA space, just in terms of number of underlying strategies and such.
Hi, Mike. It’s Mike. How are you? Yes. I think from a retail SMA perspective, we have offered a number of our products and continue to expand the product offering. So, THB which came on last year, we now have several offerings in the retail wrap space that we’ve expanded through a number of intermediaries and wires. It’s early days there, but we see opportunity based on the performance that they have and the product set that they have. Additionally, WestEnd is big in that space. And that was really one of the reasons why we wanted to acquire WestEnd was the presence that they had in the retail SMA and model business space.
And Dave highlighted that we continued to see very strong success with WestEnd through the first half of the year, both on the existing platforms that they had as they were acquired by us at the end of last year. And then also platform expansion based on the relationships that Victory has and has brought to that relationship as well. So, from an AUM perspective, WestEnd makes up the predominant amount of our retail wrap. But we do have a handful of other offerings that have been in place. Our convertible strategy, our large cap growth strategy. And then as I mentioned, some of the THB strategies as well. It is an opportunity set for us, and we think we’ve got the product set and the distribution debt to continue to capitalize on that as that continues to grow within our business.
Yes. And I would add one – just a follow-up on, Mike. I mean we’re probably approaching close to $20 billion of AUM that you would categorize as SMA or model-driven business?
Great. And just maybe coming back to some of the commentary on M&A. You guys mentioned that you’re diligencing a number of prospective deals. I was hoping you might be able to just give us a little bit of a feel for the types of properties, asset classes that are embedded within that prospective deal pipeline? Thank you.
I think that they are – it’s a wide range of opportunities from an asset class and size perspective, it really does go to the smaller and larger side. Again, as I said earlier, we start off with, does it make our business better. We’ve done small transactions that have been very impactful. If you go back a number of years, we acquired a very small ETF platform, which has turned out wonderful for us with the growth and the size. And then we’ve done large transactions, as you know, and our diligence and our – what we’re looking at today really ranges in that size as well. So, there’s not one specific area or one specific size that we’re working on.
Okay, great. Thank you.
[Operator Instructions.] Your next question is from the line of Brennan Hawken with UBS.
Hi, good morning. Thanks for taking my questions. You guys flagged inorganic opportunities and spoke about pricing. It sounded like it’s sort of all over the map. We’ve definitely heard from others saying that M&A is swelling and the bid-ask spreads are wide. So, beyond pricing being in a wide range, maybe could you speak to whether or not that bid-ask spread is narrowing and whether or not the sellers’ expectations have appropriately reset or was a sustained wide spread in between buyer and seller expectations embedded within the comment around pricing. Just would love to try to flesh that out a bit.
Yes. I think the spread has definitely come in. I think some of the way to deal with the difference between buyer and seller expectation is restructuring and timing of payments and partnering on the future of growth. And I think that ultimately is at the core of the challenge of the spread. So, what we’ve seen in the discussions we’ve had is really around partnering in the future and the deals that we like to do. We like to share in risk going forward. And I think sellers have been a lot more open to that concept.
That all being said, we’re still in an environment, in my opinion, that is going to see a number of transactions. There are definitely executable opportunities. And I think people are realistic. And I think as the industry continues to mature, at the core of it, a lot of businesses need to partner, and they need to partner with platforms that have certain capabilities they don’t have and no matter what the market is doing, no matter what the pricing is, those capabilities that are needed are not going anywhere.
And so, we think we’re in an environment where there will be transactions with our experience and our platform, I think that there will be tremendous opportunities for us going forward. And I think there’s a pretty long runway of those opportunities.
Okay. Thanks refreshing that out. My follow-up would be your – from your perspective, attractive environment as you just flagged, but countering that would be higher borrowing costs. So how do you strike a balance there? And does that – is that really embedded within the more creative structure comment? Or does it require something further than that in order to compensate for those higher borrowing costs when you’re pegged in LIBOR and LIBOR is at multi-decade highs here? Thanks.
I think that there’s a few aspects to that. One is, I think we have a unique platform where we have, in the past, been able to utilize our platform to, if you will, buy down some of the multiples through integration. I think the other unique thing about our business is we – and the transactions we’ve done is we have partnered and structured through earnouts and through revenue sharing, which I think puts us at an advantage. And then I think the other side is we have a pretty sizable free cash flow profile, which I think we can utilize. And that all being said, I do think borrowing costs have increased. We’ll see where the costs are going forward. There’s an assumption in what you said that rates will continue to rise and stay high. I’m not sure that we 100% agree with that. So, I think there’s a number of inputs, but you go back to our history and you go back to the way we’ve done transactions that we’ve been extremely accretive [ph] and we have a number of different levers. And I don’t think increased borrowing costs will prevent us from executing on our strategy.
Okay, thanks for that color.
Thank you. I will now hand today’s call back over to our presenters for any closing remarks.
Thank you for joining us this morning. Next week, we will be meeting with investors at the BofA Securities Best SMID CAP Ideas Conference, and we hope to see you there. As the second half of the year unfolds, we look forward to keeping you all updated on our progress. Thank you for today.
This concludes today’s call. Thank you for joining. You may now disconnect.