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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 first quarter 2022. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. To be added to the queue, please press the star followed by one at any time during the call. If you need to reach an operator, please press the star followed by zero. Please note this call is being recorded today. Thursday, May 5th, 2022, at 11 a.m. Eastern Time. I now would like to turn the meeting over to Ellie Sugarman, Head of Strategy and Corporate Development. Please go ahead, Ellie.
spk03: Good morning and welcome to Brett's conference call to discuss our results for the first quarter ended March 31st, 2022. 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 and our 2021 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 measure reference, including a reconciliation of those measures to GAAP measures, can be found on our website, along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Surin Rana, our President and Chief Executive Officer, will leave the call. And now I'm pleased to turn the call over to Surin.
spk06: Surin? Thanks, Ali. Good morning, everyone.
spk05: Thank you for joining us today. I'll start off with the financial highlights on slide five of the presentation deck as usual. We reported ENI per share of 52 cents for 1Q22 compared to 27 cents for 1Q21. The increase in EPS compared to 1Q21 was primarily driven by share repurchases including the large tender offer we did in the fourth quarter of 2021. And also performance fee was stronger in 1Q22 compared to 1Q21. Turning to our investment performance, we're pleased that our multi-factor quant investment process continues to produce outperformance for our clients across most of our strategies through what was a very challenging macro and geopolitical environment. As of March 31-22, 96%, 86%, 88%, and 90% of our strategies by revenue beat their benchmarks over the prior 1, 3, 5, and 10-year periods respectively. Our net fine cash flows in 1Q22 were negative $2.2 billion, but the annualized revenue impact of the flow was negative $1.1 million. which is about 0.3% of Acadian's management fee revenue for 2021. Looking past one or two quarters, we are very well positioned on our flow trajectory. Our investment performance is impressive and has continued to strengthen, and we believe flows should follow. We generally do see a few quarters of lag between performance strengthening and flows. We also have a very healthy pipeline across a few different strategies. And from a longer-term perspective, we are very excited about our newer strategies, such as ESG, equity alternatives, and China, since these strategies have secular tailwinds that we expect to drive long-term growth for us. Turning to capital management, in 1Q22, we bought back about 9% of our outstanding shares for $100 million. We also completed the previously announced redemption of $125 million of senior notes, which now leaves $275 million of institutional senior notes maturing 2026 as our only long-term debt. As of March 31, 2022, we did have $88 million outstanding on our Acadian's revolving credit facility, which is a facility that's been in place to support our regular first quarter fees and we expect the outstanding amount to be fully paid down by the end of the year, like what we did in 2021. We had a cash balance of $89 million as of March 31, 2022, and as our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and buy back our shares. Now turning to some operating highlights for Acadian from slide seven. Acadian generated 48.1 million of adjusted EBITDA in 1Q22 compared to 45.5 million in 1Q21. The increase in EBITDA compared to 1Q21 was mainly driven by stronger performance speed of 10 million in 1Q22 versus 4.6 million in 1Q21. The EBITDA in the prior sequential quarter, 4Q21, was $87.6 million, which was driven by seasonality, as we typically earn majority of our performance fee in the fourth quarter, and that quarter included $56 million of performance fee. Given our continuing strong investment performance and the stronger performance fee we are seeing in 1Q22 compared to 1Q21, We're optimistic about our performance fee for the full year 2022, a majority of which is expected to accrue in the fourth quarter. Turning to slide nine briefly, I would just like to highlight that our investment performance is very strong across short and long-term horizons, and we believe this performance will generate positive flows in due course. I want to end my prepared remarks with slide 14. to summarize some of our ongoing initiatives that we expect to drive growth over the medium to long term, and then we can move to Q&A. First, as we discussed last quarter, institutional investors around the globe are looking for yields, but with downside protection and low correlation to broader markets. We are very well positioned to meet this secular demand, and we had seen some strategies a few years ago which are now getting ready to be marketed more broadly. One example of that are our systematic macro strategies, such as multi-asset absolute return and commodities absolute return strategies. With these strategies, we basically apply our multi-factor models, including macroeconomic factors, across asset classes like equity, fixed income, currency, commodities, and others to generate uncalculated absolute returns. We've been getting very good reception from clients and consultants for this strategy, and the pipeline is building as well. Another example is our group of equity alternative strategies, which includes a few different strategies that use new signals, alternative data, and unique portfolio construction techniques to produce uncorrelated returns. We're pleased with the investment results and the momentum we're building here. Secondly, we continue to see growing demand for ESG-focused mandates, and we expect this to be a secular trend for a long time. We're very well positioned to be a big beneficiary of this trend. ESG factors are anyway a key part of our core investment process because ESG factors such as sustainability are often not given due consideration by the market and are mispriced, allowing our models to generate excess returns. Additionally, and importantly, we are seeing an increasing demand from clients to customize their portfolios to match their ESG values. For example, on the environment factor, in some cases, they want to make their portfolios carbon-free, or in other cases, it's a three-year, a five-year, or a 10-year life path to getting to zero carbon. Our big advantage in helping clients customize their portfolios to match their ESG values is that we can leverage our data and technology to explicitly measure the carbon exposures today and then decarbonize our portfolios by the desired target with precision. And we can also measure the associated impact on risk and return of the portfolio. We're increasingly deploying this capability for clients across our strategy and expect this to help retain existing assets and win new assets. especially with regards to ESG-focused mandates. Lastly, I will touch on China market, in which we see the strategy three years ago for China A-shared market, which is coming along well. China market is, of course, large and liquid, but quite rich in opportunities, since it's retail-driven and is often inefficient. We expect the strategy to scale in due course. These ongoing initiatives underscore our ability to leverage our unique quant platform into new areas. Over time, we expect to similarly apply our quant edge in other parts of the market that we haven't yet touched on, such as credit, and we expect to distribute our products in newer channels, such as retail, where we're not present today. In summary, we are very excited about our longer-term growth prospects. Now, let me turn the call back to the operator.
spk06: happily 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 their telephone keypad. To cancel a question, please press star one again. Please hold for a brief moment while we compile the Q&A roster. Your first question today comes from the line of Kenneth Lee with RBC. Your line is now open.
spk01: Hi, good morning, and thanks for taking my question. I was wondering if you could just share with us, in terms of the net flow that you saw in the quarter, were there any particular contributions from certain strategies, either positively or negatively? And more specifically, what have you been seeing across your managed volatility strategies in terms of net flows recently? Thanks.
spk06: Yeah, good morning, Ken. Thanks.
spk05: Yeah, we're not seeing any particular patterns yet in terms of first quarter. It was just idiosyncratic is probably the best way to describe it. There are, of course, a couple of larger outflows that determine that number. And I guess specifically on your question about the managed valves, we did have some outflows from managed valves. But that, again, is sort of, as we've touched on last quarter, that's been reducing. So there were some lagged numbers from Managed Wall. We believe Managed Wall has mostly played out and done. And now, actually, when we turn to performance, as you see, that more than 85% of our strategies are beating the benchmarks on a longer-term basis. But if you look at the one year, it's 96%. So, of course, that includes performance. managed wall and performance in the managed wall has at least a near-term performance has been great leading core benchmarks because this environment produced a rather good environment for managed wall. So we would expect given the performance that at some point it should actually be enclosed. So we'll see. But as I mentioned earlier that essentially If you look past one or two quarters, then the base is loaded well in the sense the performance is good, pipeline is healthy. So we would expect the flow situation to be better. And then we have these looking out even further. We have these growth drivers that we expect to kick in. But specifically this quarter, nothing specific to really point to that it would just a few idiosyncratic things that sort of determine the outcome.
spk01: Gotcha. Very helpful. And just one follow-up, if I may. If you could just give us a little bit more updates around ongoing cost reduction efforts. Thanks.
spk06: Yeah, certainly.
spk05: Yeah, so we think going forward, our focus is a lot more on growth, and we're actually looking and have been investing in these new initiatives. It's reflected in our OPEX P&L. We would also be seeding these newer strategies. But one area where we are looking to continue to be and expenses and reduce, as we have touched on, is the center, and that we continue to evaluate and are looking probably more towards the end of the year or beginning of next year when we would sort of see that fully baked in.
spk06: Gotcha. Thank you very much. Thank you, Ken.
spk00: Your next question comes from the line of Michael Cypress with Morgan Stanley. Your line is now open.
spk04: Great, thanks. Hey, good morning, sir, and thanks for taking the questions here. Maybe just going back to your last point just around organic growth, talking about investing in the business there around organic growth, seed strategies that you're deploying into. Can you just maybe help quantify how much of the overall cash flow of the business you see putting into the seed book, which I think is maybe around $53 million today? How do you expect that to sort of grow and trend from here versus how much cash flow would you envision being available on a go-forward basis for buybacks?
spk05: Yeah, thanks, Mike. Yeah, definitely. We don't sort of allocate any specific budgets. Those two are definitely the primary uses, the leading new strategies and repurchasing our shares. And so we ended the quarter with about $89 million total cash. And as we sort of continue to go forward and cash will build up more, we would love to spending on organic growth and repurchases. It's hard to say sort of a specific allocation at this point. The timing could vary and will also generally be opportunistic both with regards to repurchases and also with regards to opportunity to deploy capital towards growth in the sense that if a great team becomes available for a new asset class where we could leverage our quant capability. That could be interesting. So we'll hold a little bit of Orchest to support organic growth and see new strategies, but we'll also look to repurchase shares opportunistically.
spk04: And just as we think about the cash flow generation and the ability to buy back stock and use that for organic purposes, I guess how should we think about The cashflow generation here, it looks like about 48 million of adjusted EBITDA from the Acadian business. Maybe you could just help flush out sort of what costs we should be thinking about. Would it be sort of counting against that and sort of getting down to a run rate cashflow generation that would be available for use for buybacks and for organic initiatives?
spk05: Yeah, generally our ENI is a pretty good proxy for, you know, the cash generation. because, of course, we do have to pay interest and taxes, you know, so that ENI is a fair proxy. And that, of course, for this one queue, it was about 23.4, you know, and the fourth quarter is generally, you know, higher because of the performance fee, the 4Q event. So, you know, so those are probably couple of data points to keep in mind.
spk04: Got it. And if I could just maybe sneak in another one here, just on the buyback, maybe you could just a little elaborate a bit on, you know, what sort of buyback program you have in place. Is that a 12B15 program? And when might you be able to be in the market next?
spk05: Yeah, so the repurchases we did in 1Q were open market repurchases, you know, because there was, there was, enough time in the entirety of the quarter to put that capital to work. So we felt we didn't need anything else. And we think that's clearly a good option. Open market repurchases to take advantage of whenever levels are very attractive. And the tender offer we did in the fourth quarter, it was just that there was simply no other way to put that large an amount to work. Right, open market's not the right method. So we think we could do open market or if there's capital building up and levels are attractive, when we're going into an earnings window, there's 10B51 Safe Harbor available as well. So between those two, we think we have good tools.
spk06: Great, thanks. I'll get back to you. Thank you, Mike.
spk00: Your next question comes from the line of Gerard Sweeney with KBW. Your line is now open.
spk02: Hi, good morning. Calling in from . Just wanted to ask about that kind of share purchase, any restrictions you see for the rest of the year in terms of debt levels or excess capacity?
spk06: What could restrict any repurchase plans?
spk05: Yeah, I guess, you know, of course, there are, you know, closed windows during the earnings period. So, for example, you know, April was a closed window after we, you know, closed a quarter and before we released earnings. That could also be times if we are having any partnership type conversations with potential partners when we get restricted. That's a possibility. That has happened, you know, in the past over the last few years as we've been selling affiliates. But other than that, no, there are other restrictions that could prevent us from repurchasing our shares. Those are the primary ones.
spk02: Great. Thank you. And then just a quick follow-up to that. Could you share your ending share count for the quarter?
spk05: Yeah, certainly. I guess it will be in the 10Q, which should be upcoming shortly. But we have about 41.4 million basic shares, and the loaded count would be about 42.
spk06: Perfect. Thank you very much.
spk00: Your next question, again, comes from the line of Michael Cypress with Morgan Stanley. Your line is now open.
spk04: Hey, thanks for taking the follow-up. Just on broadly thinking about strategic actions, you mentioned the possibility of maybe adding a team. Just curious how your views on M&A and strategic actions, whether strategic alternatives, but similarly on potential additions to the platform, how that thinking is evolving.
spk05: Yeah, certainly. Thanks, Mike. It's a good question. You know, we're basically focused on really leveraging our unique platform, right, to other asset classes to really fully, you know, monetize what we have. And we have lots of opportunities in front of us right now. I mean, we touched on a few, which we've invested in, you know, for a long time. Our ESG capability, for example, is a new, it sort of, it goes really, right along with the quant capability. We've been investing in it for a while. Similarly, our uncorrelated returns, we've seeded these strategies and built the teams and the capabilities, as well as China. But there are others where we haven't invested as much historically, but these are great opportunities and that align well with what we are able to do and what our capabilities are. Credit is one example of that, for example. Then similarly, in terms of distribution, we can, you know, increase our distribution on the institutional side, but, you know, retail or RIA, things like that are new. So we would essentially, we are investing organically both to our P&L and seeding strategies to access these areas, but if there was an opportunity to if there was a team available to accelerate these things, we would look at it. What we are not looking at is, you know, the legacy multi-boutique kind of M&A, right, where you added unrelated, you know, affiliate, you know, to the business. We are essentially looking at, you know, basically purely from a monoline, staying focused on our customers quant platform and adding capabilities where we have a fit well in our culture and where we can get synergies. And by definition, there would be generally smaller things like a team is a good example of that.
spk04: Great. And maybe just on the retail point, I was hoping you might be able to elaborate a bit how you think about accessing the retail channel. Would that require an acquisition or partnership such as maybe some advisory? I guess, how do you think about accessing that channel and what sort of actions would you need to take there?
spk05: Yeah, I guess a bit of it is opportunistic when something right becomes available. But yeah, it could take many forms. It could be a JV or a revenue share relationship with somebody who has that. Or, you know, if it's a merger-type partnership, of course, that's one of the things that can be very synergistic. So we're looking at it from multiple angles, and it will just depend on what sort of comes through. It's a little bit of, you know, there's an opportunistic element to it.
spk06: Great. Thanks so much.
spk00: This concludes our question and answer session. I'd like to turn the conference call back over to Suran Rana.
spk05: Great. Thank you, everyone. Thanks for joining us today, and we'll look forward to seeing everyone next quarter.
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