BrightSphere Investment Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings conference call and webcast for the fourth quarter 2020. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. To be added to the queue, please press the star followed by one at any time during the call. If you need to reach an operator, please press star followed by zero. Please note that this call is being recorded today, Thursday, February 4th, 2021, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Ellie Sugarman, Managing Director and Strategic Development. Please go ahead, Ellie.

Good morning and welcome to Brightspace conference call to discuss our results for the fourth quarter and the December 31st, 2020. Before we get started, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-K filed today containing the earnings release, our 2019 Form 10-K, and our Form 10-Qs for the first, second, and third quarters of 2020. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures. Information about any non-GAAP measures referenced, including a reconciliation of those measures to GAAP measures, can be found on our website, along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Surin Rana, our President and Chief Executive Officer, will leave the call. And now I'm pleased to turn it over to Surin. Surin?

Thanks, Avi. Good morning, everyone, and thank you for joining us today. I'll focus my initial remarks on the key highlights in the quarter laid out on slide five of the deck, and then we can switch to Q&A. We reported E&I for a share of 47 cents for the quarter, compared to 50 cents as we reported for the fourth quarter of 2019. The EPS decline compared to the year-ago quarter primarily reflects the impact of closing the sale of Barrow-Henry in the middle of the quarter, and hence missing the earnings from that affiliate for the back half of the quarter. And this was only partially offset by us achieving our target for expense reduction in our corporate center and our shared buyback activity in the year. The E&I of 47 cents in the quarter is flat compared to the third quarter of this year, which was also 47 cents. And this, again, reflects the bearer-handler disposition in the quarter, which led to lower E&I in our liquid alpha segment. But the decline in liquid alpha segments relative to third quarter was offset by higher ENI in our quantum solutions segment, driven by the continuing market recovery, and higher ENI in our alternative segment, driven by net inflows. Our net client cash flows in the quarter on a pro forma basis, that is excluding Barrow-Hanley, improved slightly to minus 0.3 billion compared to minus 0.5 billion that we had in the third quarter. The fourth quarter net outflows of $0.3 billion comprised net inflows of $0.6 billion in alternatives, reflecting continued fundraising and other flows, and net inflows of $0.4 billion in pro forma liquid alpha. So a combined $1 billion of net inflows from these two segments, which was offset by net outflows of $1.3 billion in quantum solutions. resulting in the $0.3 billion of net outflows. Our investment performance remains generally stable and is similar to the third quarter. As I mentioned earlier, in the fourth quarter, we reached our target, a bit ahead of schedule, of reducing our annualized corporate center costs by $20 million. Turning to capital management, we completed the sale of Barrow-Hanley in the middle of the quarter and we used a part of the proceeds to fully pay off the remaining $80 million of borrowings on our corporate revolving facility. We expect to use the rest of the proceeds reflected in our outsized cash position on the balance sheet to return more capital to the shareholders and potentially deal out this further. As you will note, our cash balance at the end of the fourth quarter was $403 million, compared to 130 million at the end of the third quarter. Now let me turn the call back to the operator, and I'm happy to answer questions at this point. Thank you.

At this time, those with questions should lift their phone receiver and press star, followed by the number 1 on their telephone keypad. To cancel a question, please press the number sign. Please hold for a brief moment while we compile the Q&A roster. Our first question is from Craig Siegenthaler from Credit Suisse. Your line is open.

Craig Siegenthaler Good morning, sir, and hope all is well.

Craig Siegenthaler Hi, Craig.

How are you? Craig Siegenthaler I'm good. So, given the improving capital position but also the higher stock price, can you just remind us how we should think about the method in which you will return capital to shareholders this year?

Thanks, Craig. We haven't made a specific decision yet. We continue to evaluate as to what the best use of capital is. But returning capital to shareholders remains our priority and the top use. And then, as I mentioned earlier, we're also looking into using some of the proceeds potentially towards a little bit more deleveraging. So a couple of ways we could do that is repurchases. We're monitoring the market. There is a lot of volatility. So we'll see what the right timing may be. We do have a bias toward using up the capital sooner rather than later. You could also consider one-time special dividends, for example. We're thinking through that. So more to come. in the next call it month or couple months on that, but essentially return of capital to shareholders being a primary use and maybe a little bit more in the leverage.

Got it. Very helpful. Just as my follow-up, I wanted to get your perspective on the potential timing of the next vintages of fundraising at Landmark And maybe you could just compare it in terms of sizing when we think about the last fundraising cycle they experienced two to three years ago.

Yeah, I guess, no, we're still essentially, as we've said, that we're targeting, and I guess I'm glad you referenced the last fundraising because we've always said we're targeting essentially more or less the same amount as our last rentages. So in 2020, you would have noticed that we got it started amidst COVID, and so we definitely have had an impact on the normal cadence of fundraising from COVID, both logistical issues as well as just crimes being a little bit somewhat delaying things, if you will. But in 2020, having gotten it started, you would have noticed in our filings that we have about a billion that we raised in 2020, just getting warmed up, if you will. And that was in one of our strategies, which is infrastructure and real assets secondary strategies. And then we would expect to get to our targets essentially in over the next couple years, this year and 22, essentially. And we probably expect north of $10 billion remaining to be raised. And that sort of compares to what we did in the last vintage.

Thank you, Soren.

Thanks, Greg. Our next question is from Michael Cypress with Morgan Stanley. Your line is open. Hey, thanks for taking the question. Maybe you could just dig in a little bit more on the capital management. I was just hoping you could just give us a little bit more color around how you might approach evaluating whether you'd shift a little bit more toward a special dividend versus a buyback. What factors are you going to be considering in that sort of analysis? And then similarly, as you think about sizing the debt pay down, again, how are you thinking about sizing that and what are the factors you're going to be looking to take into consideration there?

Yeah, thanks, Mike. Yeah, I guess, you know, essentially just value accretion remains our primary, you know, lens, if you will, in terms of just use of capital. And it was that reason that we are not focused on acquisitions. For example, as we've been consistent that we think that they would be EPS accretive, but the value of those incremental learnings. we wouldn't consider it high enough to warrant that capital use. So in terms of looking at it from here, essentially just returning the capital to shareholders, there is some definitiveness to that in terms of what that value is. Whereas in terms of delivering or repurchasing, there is Uh, you know, we have to take into account the, you know, the market conditions, the timing, uh, you know, and the size and how much we can actually get done. So, so those are the things we're, we're looking at, but, uh, I would say those are all good options. It's, uh, it's a good problem to have in a way of trying to figure out which, uh, which one's the most optimal. It could be a combination.

Great. And just maybe as a follow-up question, I was hoping you could give a little bit of color on maybe the institutional pipeline here, you know, how that stands today versus maybe last quarter and a year ago, and any color you can share on the quant-related outflows in the quarter in particular, how some of the manageable strategies are performing and holding up at educating, and maybe you can remind us of where they stand from an AUM standpoint and how they contributed from a flow standpoint in the quarter.

Yeah, certainly. I think on the institutional pipeline, things are starting to come back to more normal. Normal in the sense of the remote environment normal, in the sense that clients and consultants are all engaged and have got used to working remotely and doing diligence remotely and awarding mandates remotely. That's becoming more normal. So even if uh it's not work from office for a while uh things are picking up and full swing and pipelines are building up to pre-covered and environments so so that's uh encouraging going into 2021 uh yeah but uh on the flip side as well i guess you know there are times when clients are looking to do things uh moving into products that we don't have and so you know That's the flip side of it, but we expect to be winning more often than losing when new things come up. And in terms of performance, you have to note Acadian has a pretty diverse set of strategies and managed a large group of strategies. is one of the larger ones. They are pretty diversified within that. There is U.S., international, other regions. But as a group, the similarity there is that they generally have essentially low beta securities as opposed to high beta, the theme being that when picked well using all the multiple factors, low-beta strategies deliver just as much return as high-beta over longer periods, if not more. But during the specific set of circumstances during 2020, during COVID, you had a situation that low-beta sold off as much as high-beta, and on the recovery, you have high-beta stocks, which turned out to be tech stocks, stay-at-home stocks, that have actually gone twice as better. So you'd have periods like that, which is not to question the long-term academic statistical power of the strategy, which is born over time. But yeah, you would have periods like that when low-volume strategies underperformed. And then, yes, certainly there could be fines that are focused on nearer term, but the vast majority of our clients are focused on longer-term periods. But, yeah, we do see some pressures there on that set of strategies. But generally, as I said, it's a very diversified group of strategies. We have Spanish Falls. We have a variety of international and non-U.S. strategies across different cap ranges, non-U.S. small caps, global equity. So there are lots of puts and takes, and that's the main benefit of having a diversified business. Great. Thank you.

Our next question is from Kenneth Lee with RBC Capital. Your line is open.

Hi. Thanks for taking my question. Just one follow-up around capital management. Wondering whether you could share with us any preliminary thoughts about

key considerations uh for uh future potential target leverage thanks yeah hi ken uh on leverage you know we uh we're glad to uh have uh fully paid off our revolvers so now we have essentially uh the bonds outstanding which are longer dated uh we do generate a lot of cash flow still uh right and we have that uh the proceeds on our balance sheet sitting. So first priority, as I said, was returning capital to shareholders. Then we see about opportunities to be leveraged further. But just given the growth in the earnings and cash flow generation, we would expect, even if we were to keep our current level of gross debt, we would probably expect to end up with less than 2X gross debt, you know, gross debt to be bid down most times. We'd have, I guess we have generally, as I mentioned in earlier calls, particularly around 1Q, we have some seasonal means, but that taper off, you know, in the course of the following quarters. So we'd probably expect as we get to second and third quarter and fourth quarter, we'd expect gross debt to generally be less than 2x.

Gotcha. That's very helpful. And just one quick follow-up, if I may. I wonder if you could just share with us any thoughts around any potential need for reinvestments within the business over the near term, either in technology platforms or other areas. Thanks.

Thanks, Kenny. We have been investing in our businesses during normal course. So at Acadian, for example, we've been investing in the technology for multiple years, trying to stay ahead of the curve in terms of data, but also having the latest investor reporting tools, as well as having the latest trading capabilities. to both expand capacity and to help with alpha generation. Similarly, at Landmark, we've been investing in basically nearly all fronts in terms of fundraising, deploying capital, investor reporting. So that's just already reflected in our, if you will, the run rate P&L, the recurring investments that we do. But we also use a part of the capital to seed new strategies so that we continue to do across all three of our segments. And the management teams, we encourage the management teams to come up with new strategies where they can produce alpha and where the market is big. So we'll continue to do that. And we have enough in our seed capital pool that that's adequate as opposed to needing more to support that new strategy development.

Great. That's very helpful. Thank you very much.

Thanks, Ken. Our next question is from Gayathri Ramakrishna with Bank of America. Your line is open.

Hi there. I was wondering about the expenses. Your guidance was definitely better compared to last quarter. And I was just curious in terms of what has changed and how to generally think about long-term margins.

I agree. Yeah, there's been lots of ins and outs on the expense, particularly with the disposition, if you will, you know, Barrow-Hanley and Copper Rock earlier. And then there is the central expenses that we had guided to that we would achieve $20 million of reduction. And so by 1-21, we were able to get there by this quarter. So that's essentially on the expenses. We also, this year, there's a margin on benefit we had on the T&E front. That will normalize over time. But that was the expenses. So going into 21, we'll stay disciplined on expenses. We'll continue to invest in growth, particularly at Acadian and Landmark. And then some T&E will normalize. So the result of all that, we'll probably stay more or less at the same pace with some moderate, growth that we expect, just given the market recovery that has happened and the fundraising we're doing. So the revenue growth we expect to outpace the expense growth. As a result, we expect a modest improvement on our margins.

Got it. Thank you.

Our next question is from Chris Harris with Wells Fargo. Your line is open. Great, thanks. So what are you hearing these days from your institutional customers with all the corporate-level changes going on? I know that's not necessarily a new development, but it's been happening for a bit of time. And are those changes, do you think, having an impact on the flows in any way?

Yeah, that's from the perspective of institutional clients. No changes is best from their perspective. That's definitely a given. But if there were to be changes, I think the multi-boutique model, the benefit of that model is that our affiliates, the actual investment managers are fairly insulated from any changes. in the sense that our affiliates have always had full investment autonomy and operational autonomy. And with the changes that we announced in the second quarter last year, we went further ahead on that autonomy and so much so that now affiliates basically operate their businesses autonomously. So that helps because from a practical perspective, there is nothing that really impacts the underlying investment managers and hence their clients. So the question does come up from time to time as clients do their diligence. But most of the time, our managers are able to provide them enough information that from a practical perspective, the corporate changes of VSIC don't impact what they do for the clients day to day. and certainly doesn't impact the clients. But it is something that clients that read the headlines from time to time would want to check with their managers whether it's something that impacts them.

Yep, okay. And just to verify, you know, on the capital management, and thanks for all your comments on that, a big increase in the cash balance this quarter from the sale of Darrell Hanley, You've laid out the options, and it sounds like you want to make a decision in a month or two on you and the board on what to do with that excess cash in the balance sheet. Is that a fair summary?

Yeah, that's a good summary. And you said it better in a big, fair way than I did.

Okay. All right. Thank you. Our next question is from Glenn Shore with Epicor ISI. Your line is open.

So, 15th question on talent. I'm sorry, but what's obviously missing from all those options is acquisitions to add to the strategy of high demand quant solutions and alternative strategies. So, fair enough to assume that the organic growth will come from investments within Arcadia and live market TSW. And then to follow up on that, is that self-funded by them, or does the parent company fund the – you mentioned seed investments earlier. How does that work between self-funding and parent company?

Hi, Glenn. Yeah, so as I touched on earlier, essentially, that our recurring T&Ls do have – a good, healthy amount that we've needed of technology investments, for example, at Acadian, as well as at Landmark, where we're investing in proprietary technology that's helpful to their clients. So we do that a fair bit, and as well as the growth in and headcount to support investor relations, fundraising that's already in there and runs through the T&L. And then we provide seed capital at all of our businesses to support new strategies as well as to support fundraising. And we have a seed capital pool to support that. So essentially, that is definitely one of the uses from a capital management perspective that we laid out in our new strategy in April of 2020, that essentially the main uses are return of capital to shareholders, one, leveraging, two, and third, supporting our affiliate businesses. But we happen to have enough on the third item. We already have it carved out, if you will, in the P&Ls. and in the seed capital pool that we have. And we remain supportive of the bolt-on inorganic acquisition should our affiliates find complementary strategies, teams, or platforms. And in that case, we would support them with that capital. But that's very much with our new approach. we've switched to more of an affiliate-led approach on those issues because they're really their ground level knowledge and diligence. It would be much better to underwrite a decision like that as opposed to corporate making the decision.

Fair enough. If I could ask a related follow-up. For Octavia and Quantland, I'm just curious on how, this is by knowing their business, it's just I want to see how will they fare in January during the week volatility, and if they see changes coming down the pipe, that will alter how they navigate those markets with their models.

You broke up there a little bit. Would you mind restating or rephrasing the question?

Sure, no problem. Sorry about that. That's me. I guess I'm curious on how Arcadia did during the January big retail volatility that was going on, if their models were able to account for all that volatility, and if they see key to changes in the marketplace, how many more tweaks they need to make to adapt, or is it really just business as usual?

Yeah, it's more of the latter business as usual, in the sense that, you know, as I mentioned, our business is long only business, even in strategies like managed volatility. It's basically, you know, just having low beta securities, as opposed to having good options or short positions. So we don't really have a long short business. It's very tiny. So the volatility that you saw in specific securities in January did not affect us from that perspective. But one way these things can affect us, to be candid, would be if there were, you know, larger securities that just, you know, just rise, and that would then have essentially an increase in the benchmarks. because the way in the benchmark return, so that would be then underperforming the benchmark. But the volatility in January had some impact on the benchmark, but given those were smaller portions of the security, smaller portions of the benchmark, it did not impact us that much. It was manageable. But, of course, our Acadian, as well as our other they've stayed true to their discipline, right? Whether we're doing the multi-factor approach or value approach. And that will prove out and generally has proven out over time, right? As opposed to dabbling in near-term momentum. Because we have a firm belief that, you know, it's an investment process that we stick to, that we adhere to, and we haven't veered from that, right? So there is, if some investors, retail investors are enjoying, you know, a hot air balloon ride, if you will, right now, we know that's not going to take them to the moon, right? When the air finishes, then it could be a hard landing. So we will stay true to our disciplines. essentially, but acknowledging that we don't have any short positions, any put options, but if the benchmarks get impacted, then we'll miss out on the return that we would just be scratching our heads, you know, how something like that can happen. Does that answer your question? Thanks a lot, sir.

Yeah, absolutely. Thank you.

Our next question is from Toby Gish-Mobach with ClearBridge. Your line is open.

Toby Gish- Oh, hey, sir, and how are you? Oh, hi. Toby Gish- All my questions have been often answered. Thank you. Oh, great. Thanks.

Our next question is from Michael Cypress with Morgan Stanley. Your line is open. Hey, sir, and thanks for taking the follow-up. I just wanted to circle back on Landmark with the upcoming fundraising, just hoping you might be able to help quantify the impact of any step down on the fees for predecessor funds as you raise the new funds and turn on fees for those. And then if you can provide any sort of color on how the existing set of landmark funds are performing in the marketplace, maybe where they stand in terms of distributions back to LPs. And then just lastly, any sort of color

around the gp commitment uh that's needed from um from bright sphere versus uh the landmark itself versus the affiliate just in terms of you know how that's going to be split up to be out to be paid for for the gp commit uh right so that's uh i think it's maybe you know if i'm if i miss anything uh like uh feel free to ask again uh but in terms of the the track record has been one of the the best and and the longest track record the landmark was a pioneer in the secondary business. So it's been a consistent track record of returns, including a very strong track record during the global financial crisis. So that's why Landmark continues to be well-regarded and a strong track record in the most recent vintages. So in terms of the last vintages that we raised, and you asked a good question that essentially Our fees are charged uncommitted capital, and there's a period of time during which it remains uncommitted capital, and then it flips to invested capital. And unless there are a lot of distributions or a lot of change, generally when it flips to invested capital, it should be more or less the same. But that would be coming up starting 22. There would be some changes from committed capital to the net asset value. That impact, as we get closer to that date, will provide more guidance on what that impact will be. But, of course, unfortunately, we're raising funds much ahead of that. So some of that essentially... It would be way more than offset, of course, just given the last set of fundraisers were similar size, but the step down is much smaller in terms of the change from committed capital to NAV. Because these are very long-dated funds, so not that much gets distributed out that would create that gap between committed capital and NAV. And I guess that was the third part of the question, Mike, if you could

Just on the GP commitment, how are you thinking about funding that and kind of splitting it between the parent versus Landmark itself and the employees?

Yeah. So essentially, it's a split that we discussed with the team. And on the last set of funds, Essentially, that split was 60-40. We generally provide 1% of GP commitment, and 60% was funded by VSIG and 40% by the team. And there was a split of carry on the last set of vintages. VSIG, we wanted the team to have a majority of the carry, so the team had about 85%. VSIG has about 15%. On the next set of vintages, we'll be discussing that in terms of what that right split should be. But essentially, we provide some and we get some carry.

Great. And just sorry to clarify, you mentioned the step down taking place more in 2022. Does that suggest that the funds will be raised or starting to be raised in 21, but you wouldn't necessarily be charging fees on that until 2022?

No, the way our funds work in the secondary strategies is that essentially the fees is charged on committed capital, whether it's deployed or not. It, of course, gets deployed, you know, relatively sooner compared to primary funds. And that's one of the advantages of secondary. But the fees starts getting accrued from the time it's committed. So when we have fund closures, the fees is accrued. And you may recall that we also have this element of catch-up fees for subsequent closings for clients that come in later, they pay fees going back to the first closes. Does that clarify?

If that's the case, how come the funds are not, the earlier ones are not stepping down in 21? I was just curious on that sort of dichotomy there.

Yeah, because we have different strategies, and so the step-downs are different for different strategies. But essentially, we will see some step-downs in 2022. But I don't understand the specific why you would expect some funds to be stepping down in 2021. Got it. Okay, we can take all funds.

That's okay. I appreciate all the color here. Thanks so much. Thank you. This concludes our question and answer session. Now I'd like to turn the conference call back over to Sirin Rahman.

Thank you, everyone, for joining us today and for asking us good questions. I hope that was helpful. Wishing everyone, even though it may be late, wishing everyone a successful 2021 and a healthy one. Thank you.