BrightSphere Investment Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Bright Sphere Investment Group earnings conference call and webcast for the fourth quarter 2021. 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 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, February 3rd, 2022, 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.

Good morning, and welcome to BrightStress Conference Call to discuss our results for the fourth quarter ended December 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 to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8K filed today containing the earnings release, our 2020 Form 10K, and our Form 10Q for each of the first, second, and third 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. 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?

Thanks, Ali.

Good morning, everyone, and thank you for joining us today. Well, I'll start off with slide five of the presentation deck as usual. Over the last few quarters, we completed the divestitures of six of our seven affiliates. So the fourth quarter of 21 was the first quarter of the company operating as a pure play quant business rather than a multi-boutique business. And we're pleased that we had a solid start in this new phase with strong financial results for the quarter. We reported ENI per share of 53 cents for 4Q21 compared to 28 cents for 4Q20. And also 28 cents, incidentally, for 3Q21. The increase was primarily driven by strong performance. In the fourth quarter of 21, we also deployed a large chunk of our excess capital. We repurchased $1.1 billion of our shares, reducing our share count by 45%, and also paid down $125 million of retail notes, which will collectively generate significant earnings accretion and reduce leverage. Pro forma for the redemption of the retail notes, which happened in January after the quarter ends, our cash balance is $125 million, and we will continue deploying capital towards share repurchases and to support organic growth. Now, turning to the operating highlights for Acadian on slide seven. Acadian generated $87.6 million of adjusted EBITDA in 4Q21 compared to 40.4 million in 4Q20 and 49.1 million in 3Q21. The increase in EBITDA was mainly driven by strong performance peaks. Acadian reported net outflows of 0.8 billion in 4Q21 compared to net outflows of 1.3 billion in 4Q20. On a revenue basis, the flows were breakeven in 4Q21. compared to an annualized revenue impact of minus $6.1 million for 4Q of 2020. Acadian's investment performance continued to be excellent and got even stronger in 4Q21, with 82%, 86%, and 90% of strategies by revenue now beating their respective benchmarks over the prior 3, 5, and 10-year period. Now, last quarter, we spent some time diving into Acadian's platform a bit more, as laid out on slides 8 through 12 in this deck. This time, let me take the opportunity to touch on the long-term outlook for Acadian's business and the drivers of growth. So, on slide 13, we look at the key secular trends impacting our business. Firstly, There continues to be an explosive growth in alternative data available to investors. It includes company-related information, sector trends, macro data, ESG data, you name it. Processing it all efficiently and extracting useful takeaways from it is getting harder and harder for human analysts. At the same time, the techniques and technology for making meaning of the data keep getting better and better. including machine learning and artificial intelligence approaches. And also the scale of investment in technology, data, and talent is becoming more and more important to truly make the most use of the signals available in the data. Acadian is a pioneer in quant investing and has been investing heavily in its capabilities for 35 years, building a unique combination of data, technology, and talent. We're seeing a growing demand for uncorrelated strategies and for customized solutions to client objectives such as ESG or diversification. And these type of strategies are particularly suited for big data-driven approaches. We believe that these long-term trends position us really well to produce superior alpha for our clients and meet this growing demand for data-driven strategies. We are on the cutting edge of quant, and we can apply our edge in adjacent asset classes, such as alternatives and new markets, such as China. On slide 14, we'll review some specific initiatives that we have underway on these themes. First, investors around the globe are looking for yield, but with downside protection and robust diversification across market environments. And of course, this trend continues to power the growth of private alternatives. We have developed two very good solutions to satisfy this demand, which we are very excited about. One, systematic macro, which is applying our multi-factor model across asset classes, including equity, fixed income, currency, and commodities to generate absolute returns with very high diversification. We've been getting very good traction from clients for this strategy. And two, equity alternative strategy, which is using alternative signals, alternative data, and differentiated portfolio construction techniques to produce uncorrelated returns. We are very happy with the investment results we're getting here. And then we are seeing continually increasing demand for ESG-focused strategies, which have already exceeded a trillion dollars in AUM. With Acadian's focus on quantum technology, our advantage in ESG space is that we can quantify the ESG signals and more precisely customize client portfolios for their ESG values. We can implement dynamic programs related to client ESG goals, such as quantifying their carbon exposures and decarbonizing their portfolios and measuring the impact and risk and return of their portfolios. These sophisticated techniques are way superior than crude methods such as excluding or divesting some names or just incorporating ESG considerations qualitatively without explicit measurement of ESG exposures. Doing the latter doesn't really achieve the ESG goals, and clients may be unwittingly sacrificing return or taking on additional risk. We're seeing increasing demand and engagement compliance on the ESG theme and expect this to continue for a long time. And then as an example of applying our quant edge in new markets, we seeded a strategy for China market, which is performing pretty well. China market is large and liquid, but rich in opportunity and inefficiencies since it's retail driven. So to summarize our growth strategy, we will continue investing in our quant capability to remain on the cutting edge, and we will leverage our quant edge to tap into several secular growth areas, such as ESG, absolute return, alternatives, and new markets, such as China. Now let me turn the call back to the operator, and we're happy to answer questions at this point.

Thank you.

Thank you. At this time, those with questions should lift their phone receiver and press star followed by the number one 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 Kenneth Lee with RBC Capital Markets. Your line is open.

Hi. Thanks for taking my question. I'm wondering if you could just talk a little bit more about How do you think about capital allocation as it pertains to what's needed for organic growth and feed capital?

Thanks. I can think.

Yeah, as we've said, our business throws out a lot of cash, and that's, of course, a good problem to have. At the same time, we think our stock is undervalued, and our long-term prospects are really great. So we will probably be using a lot of our cash generation toward repurchases. In terms of organic growth, as I said, you know, our business, we've been investing in our capability for decades. And a lot of that investment is already baked into the P&L in terms of the talent that we have, the data that we pay for and have, the technology that we've built and and continue to invest it. A lot of that is expensed into the P&L. So the incremental need is really mostly seeding new strategies for which we have an active program. So as seed opportunities come, we will continue to seed new strategies, such as the types I described, which we seeded from time to time. But a bulk of the cash generation really is available for repurchases. So currently our cash balance is about $125 million after having paid the retail notes. So we have about that much capacity now for repurchases. And then we'll see how the year progresses in terms of additional cash flow generation.

Great. That's very helpful.

And just one follow-up question, if I may. I wonder if you could comment on whether you've had any, you know, had any discussions around potential value-enhancing transactions in the quarter, and perhaps one of you could also frame the likelihood of seeing any kind of potential transaction over the near term.

Thanks.

Yeah, sure. You know, as we've always said, our objective and our duty remains to maximize shareholder value. Now having completed our divestiture, we are very well positioned with our unique business and we really believe in our long-term growth prospects and we are very optimistic about our future growth and we generate a lot of cash flow and we can add value through buybacks. So we're very happy continuing on At the same time, if we have a serious proposal that is attractive for our shareholders and recognizes the value, we're very open to it. You know, it's hard to really peg the timing of anything. But, you know, if something happens that's great for shareholders, we, of course, have a fiduciary duty, you know, to make that happen.

Great. Thank you very much.

Our next question is from Robert Lee with KVW. Your line is open.

Great. Thanks. Good morning, sir. Hope all is well. Just real quickly, could you maybe update us on where you are with kind of corporate overhead, holding company expenses? I know you have talked about kind of driving some room to drive those down some more. Maybe as part of that, is there an avenue here where kind of the public company kind of gets collapsed into Acadian. I'm not sure. I mean, who knows if Acadian management wants to run a public company, but you know, you've seen some of those in the distant past in the industry, but is that something we should be thinking that ultimately if there is no transaction, the public, you know, the public holding company essentially gets absorbed into the operating business?

Yeah, that is anyway our plan. We're not necessarily counting on a transaction, but we're always open to it. And given our capabilities are so unique and our business is so well positioned, that could very well happen. We're a scarce business. At the same time, of course, we are continuing on the path of continuing to simplify our business, make things easier. So we are, you know, we are in the process to more closely integrate our public company functions with the operating business. So, in effect, it is what you're describing sort of collapsing. It's already underway. You know, and, of course, we're doing it thoughtfully in terms of making sure that all the work streams are streamlined. And it will take a few quarters. And, of course, as that – As that continues on, there are efficiencies that we mentioned that will be realized from the simplification.

Okay. And I assume that's embedded in whatever savings will be there embedded in your guidance on expenses. You know, with the performance fees, I guess just the magnitude of them took me by surprise. I would expect, you know, based on estimates out there, you know, People weren't expecting anything of that magnitude. So you give us a little color. Is there like one or two products that drove that? Or was that just really because this is just a one-off that was this big? Because I know there was some performance fees from Acadian, but I just didn't think there was the potential for that kind of magnitude.

Right, yeah. We got a strong performance fee this year, and we're very happy with that. And it came on the back of impressive investment performance, right, as we've been reporting recently. you know, our investment performance has been great. In 4Q, it improved even more, you know, with at least more than 80% of strategies beating across all time horizons, and some are 90% of strategies on some time horizons. So performance fee will largely depend on how the investment performance stacks up, you know, at the end of 22. As we've said, you know, performance fee is generally a a 4Q event for us. We have smaller amounts in earlier quarters, but it really gets fully determined in 4Q. So for 22, probably be lower than 21. But we're hoping for another good performance year. The environment is good. So we'll see where it comes out. It's hard to peg. But it came from a wide variety of clients and strategies. Again, but it just really depends on performance.

Is there any way of kind of sizing, you know, of the $117 billion, there's $20 billion of assets that are performance fee eligible or $10 or $50, just trying to get some sense of the potential, you know, asset-based supporting it?

I see. Yeah, that's about right. We try to keep it, you know, less than a quarter, so about 20%, 25% one could say.

Okay, great. And one last really just kind of a modeling question. What, you know, post the tender and everything, what is the, you know, year-end kind of actual share count? At that point, I just want to make sure I'm level setting it correctly for, you know, going forward.

Yeah, I guess it will be in the 10K, but, you know, but it's around, you know, you'll get the exact number in the 10K. but around 46 million basic share count at the end of the year, just as a starting point. And of course, as we do repurchases, if we put the 120 million to work, maybe we can reduce that by four or five million.

Right. Okay. Great. Great. Thanks for taking my questions. Thank you. Our next question is from Michael Cypress with Morgan Stanley. Your line is open.

Oh, hey, thanks for taking the question. Just hoping you could maybe share a little color on how the quant strategies are holding up from a performance standpoint so far in 2022, just given the volatility in the marketplace. What are you seeing there? And then related to that, what are you seeing from clients just in terms of demand for these sort of strategies and what is likely here a choppier tape.

Yeah, hi, Mike. Yeah, I guess, you know, it's only a month into it. So, of course, it's too soon to tell. You know, but thematically, we like this environment. Of course, it is a better environment for performance because it gives me some more normal environment in the sense that the market's more discerning. about rewarding different investment factors rather than what we had for a few years, right, buying growth factor at any price. So in that sense, we would hope that it's a constructive market to reward, you know, good investment process. And in terms of, yeah, client demand, you know, we will see how the market develops and what kind of strategies come invoked, we do have a variety of strategies. You know, and as we've said, our low vol strategies, for example, this is kind of the environment where they are performing again. And we are always, our low vol strategies were always outperforming its beta, and they were always ahead of the low vol indices. But in this environment, we are also outperforming the core indices like S&P and MSCI. So that's good to see. But again, it's just a little too soon to tell. We'll see how the market plays out.

Great. And maybe just circling back to the performance fees, you know, hearing your earlier commentary suggesting 22 likely to be lower on performance fees than 21. But would you have any historical periods you might be able to share with us and just what the performance fees were? in 2020, 2019, either for the fourth quarter or full year, understandably, with all the other affiliates, you had some moving pieces and some clawbacks, I think, with Barrow. So just any help there? And what change would you say in 21 relative to the performance fee that you guys have put up in prior years, just in terms of the business? Was there just outsized performance over a 12-month period? Or was it looking back over a multi-year time frame with these new strategies? Is anything that's different? Because the magnitude of performance here that we've seen is not something we've seen at all in BrightSphere or OMAM's history that we can tell.

Yeah, it certainly bounces around, you know, depending on performance. And, you know, I'm sure enough, you know, some of that is linked to one-year performance and some of that is linked to other periods, you know, two or three or five-year periods. And so, you know, on the longer-dated periods, I guess when you get that kind of a period, you know, then it's high. But it certainly has bounced around in the history. There have been times when The number was, the dollar number was similar, you know, on a smaller AUM base when sort of, you know, just a combination of things come together and a lot of strategies are performing. And there are times when only a few strategies are performing. So it's really, you know, the simple thing is that, you know, we had really across the board great investment performance. So when that happens, then you get a strong performance feed.

And I guess just given that strong performance backdrop that you're articulating, do you think this is enough at this point to reverse the outflow trajectory that we're seeing and to drive inflows? Or what do you think needs to happen to really drive and inflect towards a more sustainable flow trajectory?

Yeah, we don't have, like, no, it's not. when we talked about 21 and we were talking 1Q and 2Q that clients were moving out of low vol because just the high data just seemed to, you know, pay off really well for clients, right? And now the situation has changed. And anyway, we had outflows from low vol then. So we don't have any pressures, you know, like secular pressures like that on the flows per se. But then in 4Q, we had a client who decided to insource their business. So without that, the flow would have been positive for the fourth quarter. So there are idiosyncratic, lumpy things like that that can happen in institutional business. But away from that, there isn't any pressure as such. We are getting good sales. But to the question of in terms of getting consistently positive flows and growing flows, that would probably, you know, happen more from our, the new strategies that we're seated and that we're excited about. Because in our mature strategies, we get good sales. We can also get some, you know, clients to rebalance. And, you know, maybe it's like break even or modestly positive on average. But the real growth would probably come from, as I outlined earlier, in terms of our the new strategies that are tapping into secular trends. So our multi-asset fast strategy that's really getting good traction. We're really well positioned to provide ESG solutions to clients. So that we're very excited about. Our equity alternatives products where we have built up really good performance in markets like China. So those are the things that can generate flows on a consistent basis because those are secular growth themes. Most of our business is very strong, but probably modestly positive as opposed to consistent growth quarter after quarter. For that, we've got to tap into these new themes.

Great. Thanks so much.

Our next question is from John Dunn with Evercore. Your line is open.

Just looking at the newer strategies, is there any difference to the way those get distributed? And maybe can you talk about demand for them, the institutional channel versus maybe the wealth management channel?

Currently, all our distribution is institutional. And we certainly do see distribution as an avenue for growth. And whenever we find good resources, we want to have them, you know, in terms of opening new channels or opening new markets. But it's all institutional currently. You know, we haven't started a retail distribution, whether route or, you know, the warehouses. But the new products are essentially the same distribution. Essentially, it's more clients where we deeply understand what they need, and often in consultation with them, we can provide a customized approach, and then it becomes a larger strategy, and then we can sort of distribute it more broadly. But in terms of retail, we don't currently have plans to – you know, invest into retail. If it happens, it would probably be the context of a partnership with a retail organization that could bring a lot of synergies. So we don't plan to build retail, but now we plan to continue growing more and more into institutional.

Got it. And then maybe just, you mentioned the client redemption this quarter. Could you maybe size that for us? And then also, Do you guys see anything kind of chunky coming down the pike in the next couple of quarters?

No, we don't see anything, you know, chunky because, you know, by definition, these things are, you know, idiosyncratic. And, yeah, that was, you know, I guess a million and a half roughly. And so, you know, as I said, without that, no, the flows would have been, positive, but that could happen any quarter.

Got it. Thanks, sir. Thank you.

The next question is from Michael Cypress with Morgan Stanley. Your line is open.

Thanks for taking the follow-up. Just as we think about share buyback potential, can you just remind us how much cash you like to run with just to run the business and how much you think about investing back in into the business to drive growth organically? And maybe just kind of update us on some of those seeding initiatives. You certainly had mentioned some of the new products that you've invested in in prior years, but as you kind of look out over the next couple of years, how are you thinking about that on a go forward?

Yeah, I guess we typically, because the cash is always coming in, so we typically have uh you know more than 20 million uh on hand you know even times when we are using up a lot of cash uh and in terms of feeding as i said you know a lot of our uh investment in in the data and technology and talent that's already in the pnl so just cd um and and we have many seeds already um uh you know in the works so it's probably you know probably 10 20 million a year that we could put incrementally on seeding. And in the rest, we'll probably think about buybacks. So, you know, as I said, maybe $120, $125 million is what we would want to, you know, set aside for buybacks in the near term, and then we see how our cash balance progresses.

Great. Lastly, if I could, just coming back to the expense commentary, I hope you recall there were some plans to drive the corporate overhead costs from like a $20 million run rate to $10 million. Can you just remind us the timing of that, some of the actions you guys are taking? Is $10 million still the right end state? Is there potential for that to go even lower?

Yeah, I guess, you know, that's sort of, you know, a good high-level number. As I mentioned earlier, that process is underway in terms of just integrating our processes closely. So it's really just essentially one integrated business as opposed to a holdco and an opco. And, you know, we're being thoughtful about it in terms of making sure There's nothing slipped through the cracks.

So that will progress over the next few quarters. Great. Thanks for taking my questions.

This concludes our question and answer session. I'd like to turn the conference call back over to Sir and Rana for any closing remarks. Thank you.

Thank you, everyone, for joining us today. Appreciate that and we look forward to engaging with you in the coming quarters.