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spk05: Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group earnings conference call and webcast for the third quarter 2021. During the call, all participants will be in a listen-only mode. After the presentation, we'll 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, October 28, 2021, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Ellie Sugarman, Head of Corporate Development and Investment Relations. Please go ahead, Ellie.
spk01: Good morning, and welcome to BrightSphere's conference call to discuss our results for the third quarter ended September 30, 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 our 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 2020 Form 10-K, in our Form 10-Q for each of the first and second quarters 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 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 the call over to CERN. CERN?
spk07: Thank you, Ali.
spk06: Good morning, everyone, and thanks for joining us today. I'll kick off with slide five of the presentation deck as usual. Well, in the third quarter of this year, we officially crossed the key milestone. We closed on the previously announced divestitures of three affiliates, PSW, ICM, and Campbell Global. And now, going forward, our sole operating business will be Acadian, which is a market-leading quant manager with an impressive track record of outperformance. But now, we have completed a full transition from a multi-boutique business to a single, focused, integrated business, which will now provide our investors pure play exposure to Acadian's highly differentiated business. We also expect to fully deploy our excess capital in this fourth quarter, which will likely involve paying down $125 million of our retail notes and repurchasing more than $1 billion of our shares, which will collectively generate significant earnings accretion while reducing leverage. The completion of divestitures of six of our seven affiliates at attractive valuations, and now the deployment of excess capital generated from these transactions, significantly simplifies our business and our balance sheet. But going forward, BrightSphere is essentially just the Acadian business publicly listed. Now, moving to our financial results for the quarter, we reported ENI per share of 28 cents for the third quarter of this year, compared to 30 cents in the third quarter of last year. There is some noise in these ENI comparisons coming from other affiliates which have now been sold. Also, the EPS base will change after the share buybacks I mentioned. So it would be topical to look at the financials for Acadian, our sole operating business going forward. Turning to slide seven to zero in on Acadian, the business generated 49.1 million of adjusted EBITDA in the third quarter of 21 compared to 37.4 million in the third quarter of 2020 and 53.1 million in the second quarter of 2021. The adjusted EBITDA in 3Q21 is lower compared to 2Q21, primarily due to performance fee seasonality, because we generally have fewer performance fee measurements in the third quarter. We have a lot of our measurements in the fourth quarter, so we would expect performance fee, and hence EBITDA, to be higher in Q421. Turning to flows, our net client cash flows are getting better as outflows from low evolved strategies continue to reduce. We reported net outflows of $0.7 billion in 3Q21 compared to net outflows of $2.4 billion in 3Q20 and net outflows of $1.3 billion in 2Q21. Looking at investment performance, you can see on the revenue-weighted chart on the lower left-hand side, that Acadian's investment performance continues to be very strong, with 81%, 85%, and 88% of strategies by revenue beating their respective benchmarks over the prior three, five, and 10-year period. We're optimistic that this strong long-term track record will help generate robust net flows and organic growth over time. I would also like to take this opportunity to delve into Acadian a little bit more. On slide eight, we provide a high-level overview on the Acadian platform. Acadian is a differentiated and scaled business with $114 billion of AUM and a long track record of performing for its clients for 35 years. At the heart of the business is an exceptional combination of one specific talent comprising people with PhDs and other advanced degrees in finance and technology. Two, our unique data, comprising 200 million observations daily across 43,000 traded assets around the globe. And three, our advanced technology platform that allows us to leverage our academic research and data across asset classes and geographies. We have deep capability across long-only, long-short, multi-asset class, managed volatility, ESG, and other areas with our AUM spread across more than 70 different strategies. And I will also note that approximately 80% of our AUM is invested outside the U.S. On slide nine, revisiting investment performance again in a bit more detail, you can see that Acadian platform has outperformed across long and short periods with 81 to 89% of strategies by revenue outperforming their benchmarks. I would also like to spend a minute on slide 13, summarizing our growth strategy. Our growth strategy going forward is primarily organic. There's a growing demand for majority of our strategies and solutions. and our offerings have capacity and are scalable. We will continue to leverage our quant platform to provide solutions sought by our clients as their needs evolve. Our multi-asset class offering is an example of that. Our clients express the need for a factor-based solution covering multiple asset classes beyond just equity. The growing demand for ESG solutions is another example of a market opportunity that is particularly suited to our capability, since we can really methodically quantify the various ESG factors for any given security, as well as the impact on returns with a lot more precision than others could. So we will continue to see new products and invest in innovation. We will continue to invest in our technology to remain on the cutting edge, and we will continue to add to our distribution as our needs evolve. And we will always continue to look for all the various ways to realize additional value for our shareholders. On that note now, let me turn the call back to the operator, and we're happy to answer questions at this point.
spk05: At this time, those with questions should lift their phone receiver and press the star followed by the number one on their telephone keypad. To cancel a question, please press star one once again. We'll have a brief hold for a moment while we'll compile the Q&A roster.
spk07: We'll take our first question from Kenneth Lee with RBC Capital Markets.
spk02: Hi, good morning. Thanks for taking my question. Just one in terms of the mechanics of the share repurchases in the fourth quarter. It is a significant amount of shares. Wondering if you're thinking about either a tender offer or an accelerated share repurchase. Thanks.
spk06: I cannot think. Yeah, as you alluded, given just the size, particularly relative to our market cap, Tender offer is probably the only option, as most other options take a long amount of time.
spk07: Gotcha. Very helpful.
spk02: And then just one within the Acadian franchise, really appreciate the further breakdown and the overview of the business. Sounds like you have a very broad set of strategies there. Are there any particular strategies that you're particularly excited about and which ones potentially have the best growth prospects in the current environment? Thanks.
spk06: Thanks, Ken. Yeah, I guess, you know, the advantage of having a good number of solid strategies is essentially that diversification, right, that there's always – There are always some strategies that are in high demand in any environment, and there are some strategies maybe that are not as much in demand. So diversification provides that benefit that you always have something to sell. In the current environment, we are seeing a lot of demand for some of our scaled strategies, emerging markets, for example, international equity. And we're also seeing demand for some of the new products that we have developed more recently. As we mentioned, multi-acid class, for example, that continues to get good traction because it provides exposure across acid classes in a very factor-driven, quantitative way, which is a little bit of a unique capability. And we continue to develop other products on ESG theme, for example, that we are very excited about, as I touched earlier. During my introductory remarks, we have equity alternatives and derivatives of that in terms of multi-strategy. So we said there are a lot of earlier stage strategies that are smaller right now, but we are very excited about them from the perspective of future growth. And then we have scaled strategies, some of whom, I guess, It's a tag that any given quarter or any given period, some are always in demand.
spk07: Great. Very helpful. Thanks again. Thank you, Ken.
spk05: Next, we'll go to David Eller with Wells Fargo.
spk03: Hey, good morning. Thank you for taking the question. I'm kind of new to the story. um you know you've done a lot of work over the last year to reposition the business you've done a pretty good job you know getting fairly attractive valuations for the businesses you've sold so i wondered if you could talk a little bit about you know why the large share repurchase makes the most sense versus you know maybe taking a look at other asset management platforms or seating kind of new and emerging managers and then kind of related question. Was Acadian shopped as well? Do you think it would make sense in the hands of another owner? Would that be a better way to create value for shareholders? Thank you.
spk06: Hi, David. Yeah, there's a lot to unpack there. But maybe let me start with the first one. Yes, we've definitely taken a lot of steps over the last year and a half to simplify our business and unlock value. The first of which was just really, we used to be a UK company, and some folks who covered us from before may remember. We re-dominantized. We used to be heavy on corporate overhead. We reduced that. And then we had a lot of these businesses that were highly valued in the private market, but we weren't getting enough credit for those businesses in the public market. And there were good homes for those teams And those clients were well served with their organizations. So we moved ahead on that. Now we have fast forward six of our seven affiliates are with other homes, which are win-win situations. And yes, we got attractive valuations for most of those businesses, including some businesses that at the time were seeing a lot of outflows. In most cases, we got more than eight to nine. know more than eight times if it does in some cases double digits yeah ev to give it up and then we ended up with a lot of cash on our balance sheet so as we look at using this cash on the balance sheet we have been in the m&a game of course having been a multi-boutique in the past and we continue to look at various targets most of the time the valuation was really high, even for half-decent platforms. It was nine or ten times EBITDA. And for the ones that had growth, it was in double digits, EBITDA. So as we look at where to use the capital, we are trading our own business at an EBITDA with a fixed handle. And our business is very well positioned, as I touched on earlier, in terms of being a unique differentiated business and having all the growth opportunities ahead of it. So rather than paying, you know, nine or ten times a good dollar for a business and take on execution risk, we would rather just, you know, buying our own stock. It's just a much smarter and low risk investment for us as a part of the proceeds that still deliver and just manage an optimal leverage. So that's how we went about our decision. That's just a bit of a no-brainer in terms of what our own business is, where it's trading, compared to the M&A opportunities. I'm not sure if I answered all of your questions, but please repeat it. I missed some things.
spk03: yeah i know you covered most of it um you know obviously you're much smaller scale now you mentioned you know kind of the overhead costs and trying to get those down but you know do you when you look at the business today and and the overhead costs uh required to you know kind of manage acadian do you think it would be you know more efficient for a you know a different owner um you know that could you know realize pretty good valuation for your own shareholders but also you know kind of benefit from
spk07: you know, the synergies of a larger owner.
spk06: Yeah, I know we've always been very shareholder value focused as those of those of those of the people on the phone who know us for some time now. So we will always be receptive to, you know, anything that provides greater value to our shareholders. And we are fortunate that we have very unique and differentiated capabilities. So that might happen, we'll be receptive to it. And now having simplified our business, we have a scale business at the operating level, and then we have some, so we still have some overheads. We reduced a lot of what we used to call center overhead. Now it's about $20 million We think now that with just one business, simplified business, we can probably maybe bring down the 20 to 10 pretty quickly. And then maybe because the business is pretty scaled, the remaining 10 can also over time, we can whittle that down. Now, in the context of another scale player who needs these capabilities, taking on the business, then of course the entire 20 is not needed because most of it is in support of public company reporting. So there is, yeah, there is that little bit of overhead which we view as an opportunity. So we really view the operating EBITDA, which I touched on, you know, 50-ish, 50 to 53 million per quarter, we really view that as a core EBITDA.
spk07: Got it. That's super helpful. Thanks for all the color. Thank you.
spk05: Next, we'll go to Michael Cypress with Morgan Stanley.
spk04: Hey, good morning. Thanks for taking the questions. I just wanted to circle back to your comment around the buybacks and that more likely being a tender. It sounded like I was hoping you could maybe unpack how a tender process would work. what are the sort of different steps and time frame around how that process might unfold?
spk06: Yes, and as we've mentioned, we expect this to be a Q4 event, and we're working through the details, so we should be coming out with the details soon, but it's Essentially, given the size we've mentioned, that's sort of more of a known. And the rest of it is pretty, I think, standard, pretty typical for how normal tenders go. So we will be coming out with a full package in the near term.
spk04: And would your expectation be that the existing large shareholder that you have would participate or any sense there on how that would work out? Because if they don't participate, then that large shareholder can end up owning like half the company. Is that their intention? Just any thoughts there?
spk06: Yeah, we don't know, you know, if they would or would not participate. But we do understand that their intention is not to increase their stake beyond the current close to 25% stake that they have. So it is the expectation that their stake will not be increasing.
spk04: Got it. And if I could just sneak one more in here, just as you think about buybacks here that you kind of came out with, just curious what led you to buybacks over a special dividend? What factors led you to consider that? what would you have led you the other way toward a special dividend?
spk06: Yeah, I guess in part, as I mentioned in response to David's question earlier, that we always look at, for every dollar of capital, we always look at all the possible uses and what could be more accretive than something else. So acquisitions were clearly not holding up well versus buying our own stock. uh then of course a part of the proceeds are being used to reduce leverage which we think is also prudent and then in regards to the return of capital you know dividend versus buying back the stock of course where we are trading is is a key factor uh that given in our own experience uh the businesses that we have divested uh we got what we believe to be reasonable valuations But, of course, compared to where we trade for a business that was sort of our, you know, crown jewel, we believe that, you know, we are undervalued. So it's a good investment from that perspective. Also dividends for a good number of shareholders. We had to see feedback that wasn't tax efficient for a lot of our investors.
spk07: Great, thanks, Seren. I'll get back in queue.
spk05: And this concludes our question and answer session. I'd like to turn the conference back over to Seren Rana for any additional or closing remarks.
spk07: Thank you. I thought Mike Cypress mentioned he was getting back in the queue. Okay, we'll take Mike Cypress.
spk04: Oh, great. Thanks for squeezing me back in here. Thank you. Just coming back to your comments around the expense efficiencies at the center, I think you had mentioned the $20 million of center costs going down to $10. I was hoping you might be able to elaborate a little bit more on just what are the biggest items that are sort of impacting that. It sounds like it's coming out pretty quickly. So just any help as we think about the guidance on the expense side into 2022, into next year, should we be thinking about the similar sort of operating expense efficiency range into next year or no because of the expense saves coming through? Just any help there on the different guidance items that we've given already for this year? How does that sort of progress into next year?
spk06: Yeah, I guess, you know, as you would expect that, you know, when we had more than one affiliate, then there was, you know, there were some overlapping functions that were needed. But now it's just really one one business and it's really an integrated business at this point and continuing to be more integrated. So there is some overlap, you know, particularly on the whole co-executive side, which is probably where more of it is. And then some overlap in other functions. But of course, much less overlap in public company reporting related areas like, you know, finance and legal, because those are the things that the operating business did not have. So that would represent the remaining 10. But the business at Acadian is a very scaled business, as I mentioned, with fully built back office and investor reporting. So over time, that can probably absorb the public company reporting responsibility. uh as well so so that that's where we think that you know the remaining time probably will not be coming out in one year it might maybe take maybe a bit longer than that but the first 10 is relatively easier and then any help on the expense related ratios as we kind of roll forward into next year just from you know looking at the run rate that we put up so far
spk04: here in the third quarter as we go into the fourth quarter and next year. Just any help on how those might progress?
spk06: Yeah, I guess, you know, what we have for the full year 2021 is a little bit of there was some noise in there in terms of fillets that have been sold and now won't be impacting that anymore. But we'll provide guidance on that in due course.
spk07: I don't have it offhand. Okay. Great. Thanks so much for taking my questions.
spk05: And that does conclude today's Q&A session. I'll turn the call back over to Surin Rana for any additional or closing remarks.
spk06: Thank you. Thank you, everyone, for joining us today. We are excited about... being a really simple business now, cleaning up our balance sheet, and really focusing on organic growth going forward. I look forward to engaging with you as we execute. Thank you.
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