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 second 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 that this call is being recorded today, Thursday, July 28, 2022, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Ellie Sugarman, Head of Strategy and Corporate Development. Please go ahead, Ellie.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30, 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 filed today containing the earnings release, our 2021 Form 10-K, and our Form 10-Q for the first quarter of 2022. 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 product. 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. As usual, I'll start off with the financial highlights on slide five of the deck. We reported ENI per share of 41 cents for the second quarter, 3% higher compared to 40 cents that we reported for the second quarter of 21. The EPS for second quarter of 21 included about $0.07 of contribution from a couple of auxiliar, ICM and Campbell Global, both of which have since been divested. Excluding the $0.07, EPS for 2Q21 would have been $0.33. And so on an apples-to-apples basis, the EPS of $0.41 for 2Q22 is 24% higher than 2Q21. The adjusted EBITDA for our sole operating business, Acadian, decreased by 26.9% to 38.8 million in the second quarter of 22, compared to 53.1 million in the second quarter of 21, primarily because Acadian's AUM declined 23% due to the depreciation in equity markets globally. in 22, and also a stronger U.S. dollar, given a substantial portion of our AUM is invested outside the U.S. However, our sizable share buybacks over the last several quarters more than offset this decline in EBITDA and earnings to drive EPS higher year over year. And I'll get into this in more detail later, but let me also quickly touch on two important initiatives that we're investing in to support our long-term organic growth. First, Acadian announced launch of an effort to expand into the large credit market where systematic credit strategies are currently nascent, but poised to grow well as industry dynamics become more and more conducive. Second, in Q4 of this year, we will be seeding Acadian's multi-strategy equity alternatives platform, which will house several equity alternative strategies that are uncorrelated to the broader markets. Our investment performance continues to be strong through volatile markets. As of June 30, 82%, 87%, 86%, and 90% of strategies by revenue beat their benchmarks over the prior 1, 3, 5, and 10-year periods, respectively. Our next-line cash flows in 2Q22 were negative $2.8 billion, primarily driven by portfolio reallocations from a couple of clients. Looking at the most recent data, we're encouraged that the net flows for June and month-to-date July are positive. Also, our sales pipeline remains robust across a cross-section of our strategies. And from a longer-term perspective, we have several irons in the fire. including credit and equity alternatives that I just touched on, that should benefit from secular tailwinds and that we would expect to drive more consistent organic growth for us. Turning to capital management, we had $50 million outstanding on Acadian's revolving credit facility compared to $88 million at the end of 1Q22. As a reminder, this is a facility that supports Acadian seasonal needs in the first quarter and is typically paid down in subsequent quarters. So we expect the outstanding amount to be fully paid down by the end of the year, similar to what we did in 2021. Our cash balance was $92 million as of June 30, 2022. To reiterate our capital management priorities, As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back shares. Now, turning to some operating highlights for Acadian on slide seven. Acadian generated $38.8 million of adjusted EBITDA in 2Q22 compared to $53.1 million in 2Q21. The drop in EBITDA compared to 2Q21 was mainly driven by approximately 23% decline in AUM over the last 12 months due to market depreciation and a stronger US dollar. The EBITDA in the prior sequential quarter, 1Q22, was $48.1 million. And the drop in EBITDA for the second quarter compared to the first quarter of 2022 was also mainly driven by market declines And secondly, performance fee in the second quarter was lower at $2 million versus $10 million in the first quarter. As a reminder, majority of our performance fee generally comes through in the fourth quarter. In second quarter and third quarter, performance fee is generally lower than first quarter.

Turning to slide eight for a minute.

Last quarter, we spent some time to discuss the unique capabilities of Cadian's platform. which include a powerful combination of a team with deep quant experience, wealth of data on traded assets around the globe, and our technology platform, all of which have been built up over decades. Together, these capabilities allow us to uncover sources of alpha unavailable to most other managers. And if you look at the secular trends on slide 11, They highlight that Acadian's capabilities are becoming only more valuable. There continues to be an explosive growth in alternative data, and Acadian's advanced techniques to extract useful signals from the data are continually improving, which would increase their ability to produce alpha for the client. At the same time, the scale of investment needed to bring all these resources together is getting bigger and bigger, which provides us strong protection from barriers to entry, given our decades of lead. The demand from institutional clients for uncorrelated returns and customized solutions continues to grow, and our strong quant capabilities allow us to meet this demand across a range of asset classes. On slide 12, we cover some of the ongoing initiatives that we have seeded in recent years in this regard. We already discussed systematic macro strategies, including multi-asset class, our ESG capability, and China A onshore strategy on our last call. Today, let me discuss our newest initiative of systematic credit and equity alternatives platform a bit more. On slide 13, we summarize some key highlights for our systematic credit efforts. The business will be led by Scott Richardson, who is an industry pioneer with long experience in quant and credit from BlackRock, AQR, and Academia. We've started building a team and the data in trading infrastructure. We're looking to build a team of around 15 people over the next two or three years. The plan is to initially focus on corporate credit markets, which is a $14 trillion market. And since the data and resources between corporate credit and equity have meaningful overlap and we have a unique advantage in this segment. Systematic strategies are nascent right now in the corporate credit market with less than 1% penetration, but poised to grow for several reasons. Trading is becoming increasingly electronic with 30% of volume already electronic. There's more and more fixed income data becoming available and the returns from systematic strategies are generally uncorrelated with fundamental credit managers. On slide 14, we summarize some key highlights for Acadian's equity alternatives platform. There is a growing demand for strategies with truly low correlations with the broader markets, but this demand is severely underserved because often correlations turn out to be much higher than investors expected. In the fourth quarter, we will be seeding Acadian's overall equity alternative platform, which will combine Acadian's unique capabilities in multi-asset macro, equity long-short, alpha signal research, alternative data, and portfolio construction techniques. We have a core team of seven people already in place, and this will grow over time. To conclude on slide 16, Our long-term strategy remains the same. We will continue to invest in our capabilities and leverage our unique quant platform to expand into new areas. We will continue using our free cash flow to support organic growth and for share repurchases. And we remain focused on maximizing shareholder value. Now, let me turn the call back to the operator, and we're happy to answer questions at this point.

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. Our first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead, your line is open.

Hey, good morning. Thanks for taking my question. I'm wondering if you could just provide any update around potential discussions around value-enhancing transactions. And I wonder if you could also just talk about whether the pause in share repurchases would be due to the state of discussions.

Thanks. Hi, Ken.

Yeah, as we've said, we've been consistent that we're focused on maximizing shareholder value and remain open to all possible ways in which that can be accomplished. And our capital deployment is an example of that in terms of using it in the places where it's best used, either repurchases or feeding our organic growth strategies, because that will ultimately help generate a better Multiple, whether it's public markets multiple or an acquisition multiple. And we remain open to strategic discussions as and when they would happen. And the repurchases, you know, we definitely find them to be accretive. But we may not necessarily do them every quarter. It's not that large an amount compared to what we used to have where we were almost needed to do the tender and there was no other way to deploy that much capital. But now with the amount of capital we have, we could always catch up in any quarter. And yes, there are times when we are in blackout windows, whether related to earnings calls or conversations, et cetera, when we cannot be in the market.

Gotcha. Very helpful there.

Just one follow-up, if I may. You talked about a priority for free cash flow to support organic growth, and you mentioned the systematic credit and the equity alternatives platform. I wonder if you could just quantify how much capital would be needed to help build out those capabilities.

Thanks.

Certainly.

For those two combined, We would probably expect, you know, about 15 to 25 million, you know, per year for the next, call it three years. So about 15 to 20 this year, another 20 to 25 next year, and then in 23, and then maybe another 20 or so in 24.

Gotcha. Very helpful there. Thanks again.

Thank you, Ken.

This concludes our question and answer session.

I'd like to turn the conference call back over to Sir and Rana.

Thank you, operator. If there are no more questions, we thank everyone for joining us today. We understand it's a busy day for earnings calls, so thank you, everyone.