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spk00: Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and webcast for the second quarter 2021. During the call, our 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 star followed by the number 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, July 29th, 2021 at 11 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.
spk01: Good morning and welcome to Brightstrips conference call to discuss our results for the second quarter ended June 30th, 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 to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-K file today containing the earnings release, our 2020 Form 10-K, and our Form 10-Q for the first quarter of 2021. 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 measure 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. 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 lead the call. And now I'm pleased to turn the call over to Surin. Surin?
spk02: Thank you, Ali. Good morning, everyone, and thanks for joining us today. I'll start with slide five of the presentation deck as usual. And let me begin with a summary of a few recent developments. that collectively mark an important shift in our business model. We closed on the divestiture transaction of Landmark Partners in May. And as we announced in the press release last week, earlier this month, we also closed on the divestiture transactions of two other affiliates, TSW and ICM. And we still expect the closing of the announced transaction for sale of another affiliate, Campbell Global, in the third quarter of this year. After that sale is completed, our sole business will be Acadian, a market-leading quant manager with a great track record of outperformance. So at that point, we will have completed a full transition from what's referred to as a multi-boutique or multi-manager business model to a single, focused investment manager model, providing our investors pure play exposure to Acadian's highly differentiated business. Now, moving to our financial results for the quarter, we reported ENI per share of 40 cents for the second quarter of this year, compared to 24 cents for the second quarter of last year. ENI for both these periods excludes Landmark and TSW, since they have been moved into discontinued operations. But these numbers still do include ICM and Campbell, just given how the accounting guidelines work. It seems several analysts may have included TSW in their earnings estimates since the TSW sale closed in July after the end of the second quarter. So to make it easier to compare, I want to point out that if TSW was included in our results, it would have added another six cents to the EPS for 2Q21, which would make the second quarter EPS 46 cents. As I mentioned, ICM and Campbell are still included in these results, but since ICM's sale is now closed and Campbell's sale is expected to close in the third quarter, we're now really focused on our sole go-forward business, Acadian. So let's now turn to slide eight to zero in on Acadian. As you can see in the first column relating to 2Q21, with an AUM of $118 billion, Acadian has significant scale, particularly for a very focused, differentiated business. The business generated 53 million of EBITDA in the second quarter of 21 compared to 33 million in the second quarter of 2020 and 46 million in the first quarter of 2021. The biggest driver for the increase in EBITDA relative to both the year-ago quarter and the prior sequential quarter was higher revenues. driven in turn by the increase in our AUM from market appreciation. Acadian's net flows in the quarter were negative $1.3 billion, primarily driven by reallocations from select strategies, such as low volatility strategies, given the generally rising markets we have had. Looking at investment performance, you can see on the chart on the lower left-hand side that Acadian's investment performance strengthened further in this quarter with 82%, 85%, and 88% of strategies by revenue beating their respective benchmarks over the prior three, five, and 10-year periods. We're optimistic that this strong long-term track record will help generate robust net flows and organic growth over time. Turning to our balance sheet and capital management on slide 14, our cash balance as of June 30, 21, was $1,175 million. We expect this balance to grow to more than $1.3 billion over the next few months when we include the after-tax proceeds from TSW, ICM, Campbell sales, and pay the taxes on gain on sale of Landmark, which hadn't been paid since they weren't due just yet. We expect to deploy this cash balance to pay down debt and return capital to our shareholders. As of June 30, 2021, we had outstanding notes of $400 million. So our cash balance net of this debt would be $900 million. So basically you can think of the company currently as two distinct parts. Our operating business generating 53 million of quarterly EBITDA and our cash balance net of debt of more than $900 million. Now, let me turn the call back to the operator, happy to answer questions at this point.
spk00: At this time, those with questions should lift their phone receiver and press star followed by the number one on your telephone keypad. To cancel a question, please press the number sign. Please hold for a brief moment while we compile the Q&A roster. Your first question comes from the line of Robert Lee with KBW. Please go ahead, sir. Your line is open.
spk06: Great. Excuse me. Good morning. Thanks for taking my questions. Maybe, sir, we could start off with understanding the goal here is to return capital and pay down debt, but I guess maybe you would have thought concurrent with earnings, it would have been a little bit more specific on that. Could you maybe talk to You know, maybe why we haven't had the specific set, particularly with the retail notes already callable, I believe, at par. And then as a follow-up question, the adjusted EBITDA for Acadian, how much of that is related to maybe the performance fees in the quarter, and what can we think of as kind of a core EBITDA for Acadian? Thank you.
spk02: Thanks, Rob. Yeah, on the first question, you're right. We still have not finalized our action plan decisively around the capital. It's a rather large amount of capital, so we continue to tinker. However, as we've said, high level, it is for debt pay down and returning capital to shareholders. And in terms of sequencing, yes, we plan to at least pay the retail notes of $125 million first before returning capital to shareholders. But, yeah, there is – at least that part is straightforward. Yes, I agree. We just want to execute the entire plan more holistically. And the second part regarding EBITDA – For Acadian, yeah, so it's this quarter we've had performance fee similar to 1Q. As you know, our performance fee largely is 4Q is generally the quarter where we have the largest amount of performance fee. So when you sort of normalize all that, we would say maybe on performance fee at least, it's probably middle of the fairway this quarter. because 4Q is larger, and there may be certainly years when we don't have performance fee in earlier quarters. But this quarter is probably, call it an average, if you were to average out a full year. Does that answer your question?
spk06: Well, maybe as a follow-up. So was the $20 million in performance fees, is that driven mainly by Acadia? Maybe that Maybe that was also Campbell Global. And I guess of the Acadian, $53 million of adjusted EBITDA, which had a nice increase, you know, sequentially. And obviously some of that's going to be just, you know, market-driven and asset levels. But I guess I'm just trying to get a sense of how much of that EBITDA increase we can kind of carry forward versus maybe being kind of more one-time related to some performance fees in the quarter.
spk02: I see what you mean. Yeah, so the performance fee of the $20 million that you see, it was really only $5 million in Acadian, and about $15 million was from Campbell Global, which I guess we provide that breakup in our segment information, but you're right, if it's performance fee, it doesn't get broken out. So that's the breakup. And, of course, we've announced sale of Campbell Global. And so what's included in the quantum solution segment is only the $5 million performance fee, which, as I mentioned earlier, is more sort of, you know, you can think of it as an average run rate because 4Q would typically be higher. And there may be times when earlier quarters don't have performance fee.
spk06: Okay, great. That was helpful. Thank you.
spk00: Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead. Your line is open.
spk05: Hi. Thanks for taking my question. Just one on Acadian. You talked about seeing some client reallocation activities in the quarter. Wondering what your expectations are for the near term. What are you seeing in terms of positioning? and which products and strategy do you think could garner some potential growth in this environment?
spk02: Thanks. Yeah, I know we are very pleased with the performance of the firm overall because we look at the performance right now. On a one-year basis, it's 87%. Three years, it's 82%. Five and ten is like more than 85%. So vast majority of our strategies are beating their benchmarks. So it's really some, I guess, the category of low volatility strategies that in this kind of rising market environment, while they are delivering low volatility, you would expect and clients would expect, I guess, or should expect in this environment that they don't necessarily beat the core benchmarks. But because of that, we do have some clients that take directional macro positions, choosing market over low volatility targets, for example. So that's where essentially we're seeing the negative flows. But most other strategies, the track record is good. And so these things change by the market, but essentially given that more than 80% across all time periods, in some cases more than 85% of strategies are beating their benchmarks, we are optimistic about the outlook going forward.
spk05: Gotcha.
spk02: That's very helpful.
spk05: And one follow-up, if I may, with the pending divestitures such as the Campbell Global and Within a few quarters, you'll just essentially be Acadian. I wonder if you could just share with us any thoughts around longer-term strategic plans, any changes you could expect as you're operating in a slimmed-down fashion. Thanks.
spk02: Thanks, Ken. Essentially, we really have essentially would have completed our transition to a single manager model. So we won't be a multi-boutique anymore. And with the affiliate sales, and as we've said, our focus had always been value maximization for the shareholders. And when we got prices for our assets that were more than where the market was valuing them, we took that to accrete value to shareholders. But also another interesting dichotomy in the market is that we've always had what was a multi-boutique discount. So now that we are a single manager, it's much easier. It's a pure play exposure that investors can expect. It's a very differentiated and scaled business. so investors know what they are getting. And just strategically, as we have discussed in the past, which was the reason for these divestitures, we had found that very limited synergies of having multiple different businesses under one roof. In fact, there were some dis-synergies from the coordination work, central initiatives, that maybe not necessarily weren't in tune with the customized needs of each business. So this simplified business and also providing a much simpler story for our investors to understand. We think it has operational benefits and we also think it has marketplace benefits for us. Great, very helpful, thanks again.
spk00: Your next question comes from the line of Michael Cypress with Morgan Stanley. Please go ahead. Your line is open.
spk03: Hey, good morning. Thanks for taking the question. Just on capital management front, I know in the past you've mentioned that when you're in conversations around selling certain businesses, you might be restricted or you are restricted from buying back stock. Just curious if that restriction also extends to redeeming debt and how, if and to what extent are there any sort of restrictions there on the debt side, how that differs from the equity side?
spk02: Yeah, I guess we've discussed that from time to time. We don't think that restriction would apply to redeeming debt. And, you know, and I guess, as I mentioned, the retail notes are more straightforward, we can probably do that in advance. Having said that, we just would like a line of sight on the entire capital plan because the retail notes are relatively easy to redeem. There isn't much execution risk to it. But on the repurchases, yes, from time to time if there are non-public things going on, we would be restricting.
spk03: And just any color on the timeframe for the retail notes? You mentioned that it's pretty straightforward. Is that something we can expect here in the third quarter, or is that maybe more later in the year, next year?
spk02: Yeah, when it happens, it'll be quick. I hesitate to give a timeframe because You know, we just aren't necessarily very sure, but it's relatively straightforward. I guess it's just really when we have a holistic plan, we will start with the retail notes first.
spk03: Okay. And just to follow up a question on the quant solution segment, just wanted to clarify. So that's now all entirely Acadian, as you've reported in your segment results, one affiliate there in the – 53 million or so of EBITDA in the quarter. That's kind of the right run rate to be thinking about on a go-forward basis. If I hear you right, just in terms of thinking about the movement of performance fees, kind of ebb and flow, but this is a good run rate. But then maybe you could also elaborate a bit on the other segment, which I think had the impact of ICM and Campbell in the quarter, just how to think about what the right run rate is. for that other segment should be, which historically had been more of the center cost, and just how to think about some of the moving pieces there.
spk02: Yeah, so we're really focused on the quantum solution segment, which is Acadian, and yeah, that's the 53 million is the right run rate in the ballpark. Of course, quarter to quarter, there are some things that happen, a million or two seasonal items, but that's about the right run rate for quantum solutions. The other segment, I would say, is temporary because in there, you know, we used to have liquid alpha segment. And since, you know, ICM, which already closed but is included in the results for Q2, that's in the other now. It's moved from liquid alpha to the other. Campbell Global, again, used to be in the alternative segment. and is expected to close, but that's in the other now and in center. So with the closing of ICM and Campbell, you know, ICM already closed. Campbell will be closing in this quarter. Then that other segment would basically just become center again like it used to be. And we think of center really more as not as holdco anymore or center as we used to call it, but it's really now, it's a department, it's a team of people that's focused on handling public company responsibilities, given that it's just one business now. So over time, we would expect more efficiency in handling public company costs, so that the full Acadian EBITDA of 53 million, and going from there, goes to the shareholders. We have of course proven over the last year and a half that we can continue to get more and more efficient So we will always look to minimize the overheads. Also, if there were ever to be an acquisition, in that scenario, a buyer would not need the public company costs. So for those reasons, we don't really view these costs in the other as core and are really, from a management perspective, much more focused on the EBITDA that's produced by our operating business.
spk03: Great, thanks. Maybe just a quick follow-up there just on the other segment. I guess what can we expect near term into 3Q and 4Q for that sort of corporate overhead? And then what sort of time frame would it take for that to get, I guess in your view, eliminated where you basically kind of get really closer to that 53? What sort of actions have to be taken and how realistic is that as a public company to really achieve that?
spk02: Yeah, so in 3Q, we would have a month of ICM, and we would have probably one quarter of Campbell. But 4Q is when you would really just see the headquarter costs, which was in a 20 million ballpark, and we'll continue to whittle it down over time. It's not a quarter or two. It's probably longer than that. But as Acadian continues to scale, there would be more that we can do on the other side. But yeah, over time, we would expect that it continues to get smaller and smaller.
spk03: Great. Thank you.
spk00: Your next question comes from the line of Glenn Shore with Evercore. Please go ahead. Your line is open.
spk04: Thank you. Hi, Saren. Question. With the benefit of hindsight, you've now sold off six or seven of the boutiques to get down to this single manager model. And I think you've gotten some good fair value for shareholders on the prices. Was there any specific staging or order, or was that more a function of how how the deals just came in and where investor or partner interest shook out. I have a follow up on that.
spk02: Yeah, hi Glenn. Yeah, we've been, as we've said, we've been open-minded about unlocking value for shareholders. And that's been known to the marketplace. So as legitimate inquiries have come in, we have had those conversations where things worked out for us, for our teams, and for the buyer, we moved forward. So I would say no particular staging except that Acadian being our largest and most differentiated business, it would make sense that that's the business we have now saved the best for last, as they say. uh and uh and also because it's largest if you were to sell uh this business as an asset the tax bill would be uh would be hefty so that that's the only one i would say probably by design okay and and then just to follow up i had is is was our was arcadian on the list of of uh
spk04: things you take calls on, meaning is it just you haven't found the right partner, the right price yet, or is it that tax potential liability that is just delaying the conversation? In other words, is this just a matter of time?
spk02: We're very happy with the business. It's a scale business in a very differentiated area, and it's a great team. you know, great track record to serve their clients very well. So we think it's a very good business for the public markets, you know, and we're happy to keep going. At the same time, we've always, you know, maintained that it is our fiduciary duty, right, to our shareholders that to the extent there was a party that was really able to award our shareholders, we would consider it.
spk04: Okay, cool.
spk00: Thanks. Thanks, John. Your next question is a follow-up question from the line of Michael Cypress with Morgan Stanley. Please go ahead. Your line is open.
spk03: Thanks for taking the follow-up. Just on the Acadian business, I was just hoping you might be able to remind us of the top three or five strategies at Acadian, how much they contribute in AUM, and And if you could also maybe help us, maybe some of the flow trends that you're seeing in each of those strategies, which ones would you say are seeing more positive flow trends versus ones that are seeing more challenges in the flows, and if you're able to also help quantify that as well across the top three or five strategies at Acadia. Thank you.
spk02: Yeah, thanks, Mike. You know, that's actually something that we will discuss We are, you know, working on it in terms of what, you know, how we slice and dice on a consistent quarterly basis and provide to you all. So we will do that probably next quarter onwards in terms of the level that's the right level for people to have enough granularity. But as we've said, we have the managed vol, low vol group of strategies that's about less than maybe about 18 or 20 percent of our AUM. That's a little bit of a slightly different objective. Then we have – we cover emerging markets. That's about There's a variety of geographical regional strategies, you know, Europe, non-U.S., et cetera. Then there are some – there's global as well, which is U.S. and developed markets. So it's – and then there's some newer strategies like multi-asset class that are doing well and getting great traction. It's quite diversified, and that's why when you have some strategies that are less in demand and rising market environment, you have other strategies that are getting demand. So we will sort of figure out the right slicing and dicing, and we'll probably report back next quarter with that.
spk03: Got it. Okay, that'll be helpful. If I could just maybe just one more just around the quantitative strategies. I guess what portion of the AUM would you say are in quantitative strategies versus more fundamental, and how do you think about that spectrum of more quant-informed strategies in there? Imagine the managed vol, that's more quant, but what about some of the EM and global equity strategies? Are those also quant, or is that just part of the investment process but more fundamental? Just any help there would be appreciated.
spk02: Yeah, our entire business is multi-factor quant. So all the strategies that we have are informed by the same core data, core technology, and core investment philosophy, which is informed by decades of data that we have and the technology that we've continued to invest in and the team of researchers and academics that continue to improve the process. So that's applied across all strategies and including our newer strategies like multi-asset class where we're applying the same philosophy and approach and technology beyond equities.
spk03: Great. Thank you.
spk00: This concludes our question and answer session. I would now like to turn the conference back over to Sir and Rana.
spk02: Thank you, Operator. Thank you, everyone, for joining us. As I said, we are excited about this transition to a single, focused, differentiated business, and we look forward to reporting on our progress next quarter.
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