BrightSphere Investment Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the BrightSphere Investment Group earnings conference call and webcast for the first quarter 2021. During the call, all participants will be in listen-only mode. After the presentation, we will conduct the question and answer session. To be added to the queue, please press 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, April 29th, 2021 at 11 o'clock a.m. Eastern time. I would now like to turn the meeting over to Ellie Sugarman, Head of Corporate Development and Investor Relations. Please go ahead, Ellie.

Good morning and welcome to Bright's first conference call to discuss our results for the first quarter ended March 31st, 2021. 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 different 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 in our 2020 Form 10-K. 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. CERN Rana, our President and Chief Executive Officer, will lead the call. And now I'm pleased to turn it over to CERN. CERN?

CERN Rana Rana Thanks, Ali. Good morning, everyone, and thanks for joining us this morning. As usual, I'll focus my initial remarks on the key highlights in the quarter that we summarize here on slide five of the deck, and then we can switch to Q&A. So let me start with refreshing the context and remind everyone that we announced the sale of our affiliate landmark in March this year, and we're expecting that transaction to close near the end of the current quarter. The valuation we received for our stake was quite attractive at 16.4 EV to adjusted EBITDA multiple. and with total proceeds from the sale to us of $724 million pre-tax and $630 million after-tax. So this transaction unlocks and crystallizes significant value for our shareholders. Given the announced sales, effective 1-2-21, Landmark has been moved into discontinued operations. So now we essentially have two primary affiliates, our largest business, Akabian, which comprises our quantum solution segment, and TSW, which comprises our liquid alpha segment. Both Acadian and TSW are very well positioned, differentiated businesses, and we will continue to follow our approach of full affiliate autonomy in managing and growing our business, while continuing to be lean and maintaining expense discipline at our corporate centers. So with Landmark now included in this continued operation, we don't have the alternative segment any longer. Campbell Global, our affiliate focused on forest resources, which used to be included in the alternative segment along with Landmark, has now been moved to the other segment. Now, moving to our financial results for the quarter, we reported ENI per share of $0.34 for the first quarter of this year, compared to $0.30 for the first quarter of last year. Again, to be clear, ENI for both periods is excluding landmarks. If landmark was included, it would have contributed $0.11 to our EPS for 1Q21 and $0.10 for 1Q20. So if you're trying to compare to our prior reporting, the EPS for 1Q21 would be $0.45 if you add landmarks. The increase in reported EPS to $0.34 per share compared to the $0.30 a year ago primarily was driven by the market recovery since then, the cost savings that we achieved from restructuring our corporate center, and finally our share repurchase activity last year. These three factors helped us to more than offset the absence of earnings from barrel handling, which was reflected in our 1-20 results, but not in 1Q21, since we already closed that transaction in the fourth quarter of 2020. The EPS of $0.34 in the quarter is relatively flat compared to $0.35 for the fourth quarter of 2020. And this reflects the benefit of continued market appreciation, which was just about offset by the disposition of Darrell Hanley, because in 4Q20, we had earnings from Barrow Hanley for about half the quarter until the closing of that sale in the middle of that quarter. But in 1Q21, we obviously had no earnings from Barrow Hanley. Our net flying cash flows in the quarter were negative 2.4 billion compared to negative 1.5 billion in 4Q20. Again, to be clear, both numbers exclude landmarks. In 1Q21, In the liquid alpha segment, we had positive net client cash flows of 1.2 billion, but we had net outflows of 3.6 billion in quantum solutions. And the outflows in quantum solutions were primarily driven by some reallocations from one or two strategies by select clients. So there was a lot of lumpiness in the flows, which we don't see as recurring. For example, in the second quarter so far, we're seeing positive flows in the segment. The investment performance of both of our key affiliates, Acadian and TSW, continues to be strong. Acadian's long-term performance strengthened further in the quarter, with 57%, 84%, and 91% of strategies by revenue now beating their benchmarks over the prior three, five, and 10-year periods, compared to 43%, 50% and 90% in Q4 2020. Turning to capital management, in 1Q21, we fully terminated our cultured revolving facility at the parent company level and assigned it to Acadian with a reduced maximum size of 125 million. So this facility is now available only to Acadian for their general needs and not to basic parents. As we've discussed A few times previously, Acadian has seasonal needs in the first quarter, given the timing of the annual bonuses. So Acadian drew $81 million on this facility in 1-21 for the seasonal need, and they expect to fully pay it down within the year. Our total consolidated debt at the end of the quarter, including the seasonal Acadian draw on their revolver, stood at $475 million. Compared to this, the cash on our balance sheet at the end of the quarter was $450 million. Closing the landmark sale later in the second quarter would provide us another $630 million after tax. So that provides us ample capacity to be leveraged substantially, as well as return capital to our shareholders. Now, let me turn the call back to the operator, and I'm happy to answer questions at this point.

If you would like to ask an audio question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question. Your first question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler Good morning, Soren. Hope all is well. Craig Siegenthaler Hi, Craig.

Craig Siegenthaler So, Soren, how should we think about your capital return priorities this year between share repurchases dividends, and maybe even a special dividend?

Yeah, Craig. We're still thinking through it. As I said earlier, we're expecting another $630 million near the end of the quarter. So once that capital is fully in the bag, it'll be easier to have a holistic view and execution at that point rather than trenching it and doing a little bit now without having the second part fully executed. But in terms of priority, those are the uses, essentially, deleveraging and returning capital to shareholders. And then the mechanisms by which we do it, we're still working through it. Essentially, the second shooter drop is closing on that landmark sale, which we have near certainty on, but it's always good to have it fully in the bag.

Thank you, Soren. That was it for me.

Your next question comes from the line of Glenn Shore with Evercore ISI.

Hi, Soren. I appreciate the color on the quarter and not recurring flows on the quant side, but I'm still curious to hear a little bit more. about the asset reallocations that happened during the quarter. What kind of conversation do you have to know that it's just a reallocation? And is it out of equities? Because equity markets did well. You mentioned the rising market environment. That threw me a little bit. I'm just curious for a little more color. Thanks.

Thank you, Brent. Yeah, sometimes what happens is when markets are doing well and our strategies are doing well, some clients would do some profit-taking, if you will, and move it to other areas that maybe haven't done so well. So we saw that factor at play a little bit. There are also some idiosyncratic things that have been given the institutional business, and that's what I alluded to, the lumpiness. For example, a larger outflow was related to a client reallocating because of a regulatory concern around not having too much exposure to one manager. So these kind of idiosyncratic things do happen. Of course, some regular way outflows and inflows are related to people just looking at what strategies will do best. So, for example, we've touched on that in a rising environment, managed low volatility type of strategy isn't necessarily on everyone's mind right now. So, you know, there are things that happen in select strategies like that, but it's a very diversified business. And so there are other strategies, regional strategies, and strategies of different objectives that see inflows. So it's a combination of all of those, but definitely some idiosyncrasy and lumpiness.

I appreciate that. Maybe I just could follow up on that because my other question was on, you commented about continuing on the product innovation side. I wonder if you could just expand that thought a little bit for both on the quanta and liquid alpha side. That would be great. Thanks.

Yeah, so we continue to support our affiliates with capital, particularly in terms of seeing new strategies. And that's where we can help best. But the efforts themselves are really driven by the affiliate team based on the feedback from clients in terms of what the clients are looking for them to do and to provide. But we continue to provide and we encourage our affiliates to continue to develop products that we can feed. So it's essentially a recurring R&D effort, if you will.

Thanks, Sam. Appreciate it. Thanks, Glenn.

Your next question comes from the line of Mike Carrier with Bank of America.

Good question. Sharon, just on the M&A front, given active conversations that you've had with buyers, you know, which led to successful sales of Barrel Hanley and Landmark, how have conversations been, you know, for the overall franchise, you know, during those conversations? And any restrictions, you know, or headwinds in the way for further demand?

Yeah, the M&A environment over the last year and a half has been very constructive, and definitely industry participants are looking for capabilities or looking for scale. There are a variety of factors at play. And as we said to the market and our shareholders, that our primary focus is fiduciary duty to maximize shareholder value. And we have a good plan in our affiliates are strong businesses, and that generates really good cash flow. So we don't necessarily have to do anything, but we do, as a result of our public stance, that we are open-minded and have a fiduciary duty to maximize value. We do get inquiries from time to time, and we review them, along with

with the teams and uh if there's anything that you can get anything of interest we uh we discuss further so that's generally uh how we've been approaching things great okay and then just on capital return um it sounds like you know post landmark you know then you'll have an update on you know kind of the strategy so um before that so in the second quarter should we not assume you know much in terms of buybacks

Yeah, it's really hard to peg. Like I said, we prefer to not transit. So essentially, we would like to have a holistic plan for the entire amount. So if there's anything, it would be pretty close to once we reach the closing. But we wouldn't do much in advance of getting to the closing.

Got it. All right. Thanks a lot.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Behind the motivations of assigning the corporate revolving facility to Acadian, just wondering if there's anything else that want to share with that. Thanks.

Again, I think we missed the first part of your question. So if I don't answer it, I can ask again. But I think I got it in terms of what's the motivation to assign the revolver to Acadian. And that really has to do with the leveraging. We had a large facility between $450 million originally, which we reduced because we had cash building up. So we didn't really have a need for that much credit. So we reduced it first. And then, as I mentioned, we do have a seasonal need every year at Acadian, which is not a long-term leverage need because there is a first quarter need to pay bonuses and then the revenues and earnings in subsequent quarters more than pay off for that. So it's a classic credit line need. And it's more needed at Acadian. So we basically moved it there because at the parent level, we don't really have any need for a credit given the excess capital we have. And it's also, from a leverage perspective, it's very low leverage relative to Acadian's EBITDA in the sense that 80 million draw is a fraction of their EBITDA. So it's a pretty robust facility that meets their needs.

Great. That's helpful, and that answered my question. Just one follow-up, if I may. I'm wondering if you could just highlight any products or strategies that you've been seeing some good demand within the quarter. Thanks.

Yeah. That kind of varies. you know, quarter to quarter. It's pretty diversified overall. So most strategies at Acadian are seeing demand. At TSW, we saw some good wins, as you saw in the good alpha flows on international equity side. And Acadian, I guess, you know, maybe one, I touched on this earlier, one strategy is we didn't see a lot of demand in this kind of, environment with low volatility, managed volatility strategies. But generally, otherwise, we did see pretty good demand across the board. And we touched on this, that some of these new strategies we're seeing While not big numbers yet, they continue to get traction. For example, the multi-asset class strategy, which goes beyond equities but leverages the same multi-factor approach and data and philosophy, we're seeing we continue to see good traction there.

Great. That's very helpful. Thanks again.

Thank you, Ken.

Your next question comes from the line of Michael Cypress with Morgan Stanley.

Hey, good morning. Thanks for taking the question. Maybe just another on capital management. So it sounds like you're waiting until the landmark sale closes before, I guess, deciding on, you know, how much and how to sort of pursue that. If I hear you correctly, that means it would be the third quarter or, sorry, second quarter conference call in July is when we would expect to hear an update. Is that right? Or what's the scenario? or we could hear or see something any sooner than that. And maybe if you could just elaborate a little bit on why wait so long. I think last quarter or the quarter or two before you were suggesting we would be able to hear an update in the next couple of months, which some were suggesting, thinking would be this quarter's conference call.

Yeah, so on the first part, Mike, yeah, that's accurate, that we would probably have an update on our next earnings call. uh you know if or right around then it would definitely be around or after the closing of a landmark so that we we know uh so they could fully have the capital that we are uh looking to deploy uh that's part one and the second part uh yes you know in the last running call we were probably expecting within a few months from then uh but then we of course had a sizable development in terms of sale of landmark, which essentially obviously changes the magnitude of the capital we're looking to deploy, and hence, you know, a reworking, if you will, of our approach.

Is it also fair that, given you were in discussions to sell landmark, you were prohibited from buying back stock earlier in the year because of those discussions? And if that's correct, and if you were theoretically in discussions today around selling something else, would that also theoretically limit your ability to buy back stock over the next couple of months, if theoretically, if you were in such discussions?

Yeah, we do have those type of constraints from time to time in terms of buyback in particular, or any material if we are in a blackout window before earnings, or if you're on conversations, real conversations on a material part of the business. Yeah, so...

that would that would restrict us from time to time sorry just one last one if you were to sort of sell off maybe uh acadian here but then there's a lot of cash left in the public entity and a small business with campbell and tsnw i guess how do you think about a small public company a large cash position uh but significantly smaller business you know what sort of scenario could such a thing uh play out

Yeah, we would generally not consider that specific kind of scenario. We very much are pleased with our businesses, right? As you saw with Liquid Alpha, we have flows. And with Acadian, it's a very strong business that's highly regarded and reputed around the world. But if some inquiries came in from the perspective of initial duty, we do consider them. But of course, we see even the landmark, which is a business we bought not so many years ago, there is some tax leakage. And the larger the value, the more the tax leakage. So that would also be a factor in considering something. So the scenario... laid out that we sell our largest business and pay a big tax bill and have a smaller business, it's probably no likelihood. It would only be something that's so compelling that in spite of that, we go ahead. Got it. Thank you very much.

Your next question comes from the line of Robert Lee with KBW.

Good morning, Sarah. Thank you for taking my question. Just real quickly, two questions.

First, just an actual modeling question. In the liquid alpha segment, is there anything, since that's, I guess, largely TSMW, we're only TSMW right now, is there anything, if we were to be a $9 million of adjusted EBITDA, that's a good run rate? Is there anything kind of seasonal, maybe around comp or something, as you're trying to think of? the first clean quarter of that barrel, I guess. I'm just trying to get a handle on that. That's the first question. Yeah, it's mostly basically TSWs. Now, we announced the sale of ICM in our 10K, and that is to be closed. So ICM results and flows are in there as well. So that was essentially, so it's basically clean, but there is slight noise uh no icm it's not uh you know it's another income so it doesn't flow into the full uh p l sorry the next quarter would be a clean quarter um essentially uh there but you can consider it mostly k7 okay and i mean just another quick question on the uh the revolver that you've answered katie and just the across every T and down every I. We've moved down there and stairs, but it's complete non-recourse to the whole company. Correct? Yeah, that is right. For the touchdown, it was essentially deleveraging with the driver, so by moving it to Acadian and having very low leverage ratios at Acadian, it's non-recourse to BSAFE, so that's while it's consolidated in our debt, it is not apples to apples because it's non-recourse to be said. That's right. Okay. And I guess you kind of addressed this in your prior comments about tax leakage. I'm just curious, is there any noticeable or meaningful tax asset post the landmark deal that will remain at the hotel that you pretty much discussed? Yeah, we pretty much used up our deferred tax assets last year from the earnings that we had as well as the sales that we had with Barrow and others. So with Landmark, actually, we didn't have much left to use. Right. Great. Those are my only questions. Thanks so much. Thank you, Rob.

Your next question comes from the line of Justin Ziegler with Eaton Vance.

follow up on the transfer of the revolver to Acadia. You just mentioned it's non-recourse. But in doing that, are you guys still beholden to the covenants or their shifts in how those apply to debt and leverage at the holding company? And what does this do in terms of cash flow up to the corporate center as well? And how does that kind of affect how bondholders might be at least on the unsecured basis, that the holding company still had that kind of EBITDA available to them.

Yeah, thank you, Justin, for asking that question. It seems like it wasn't clear in the material, so I appreciate that. Yeah, so essentially that is the benefit that now at the parent level, we don't have any debt-to-EBITDA covenants because our bonds did not have such covenants. But we did have a debt to EBITDA covenant on our revolver. So by moving it out of the corporate structure, we don't have that covenant at the parent level. There is a debt to EBITDA covenant at Acadian level on the facility. But if you look at the most recent quarters, it's close to 2x multiple of how much they drew. So, there is ample caution at Acadian level given such a small portion of their EBITDA. There aren't any restrictions in terms of the distributions that come to us, of course, except in scenarios where if you have an extreme scenario where debt servicing was a problem and all our business went away, which of course is you know, next to, you know, if you think that's a scenario, a conceivable scenario. So it's a prudent approach, essentially, that's very low leverage at a Canadian level, no restrictions on our distributions, and no covenants at the parent level.

Okay. Thanks for that clarification. And as you think about the year coming forward by the end of 2021, your stated intention to delever, you've got the call coming up in June. But, you know, given you have like two affiliates with maybe less overall EBITDA, how do you think about leverage at the holding company going forward and what's your target area for that?

Yeah, generally we would basically want to stay below 2x, you know, in terms of total leverage. And we do, of course, we have compared, for example, excluding the seasonal need, we have shy of $400 million on our bonds, you know, and our cash already is $450 million, and then we would have another $630 million coming from sale of landmarks. So we have essentially pretty low leverage on a net basis. But even in terms of EBITDA down multiple, we would generally want to stay below two, if not lower. Okay.

Okay. Thank you very much. Thank you.

There are no questions at this time.

Great. Thank you everyone for joining us this morning. And we look forward to talking to everyone next quarter.