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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 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 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, November 3rd, 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.
spk04: Good morning, and welcome to Bryce's conference calls to discuss our results for the third quarter ended September 30th, 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 8K filed today containing the earnings release, our 2021 form 10K, and our form 10Qs for the first and second quarters 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 products. Sharan Rana, our President and Chief Executive Officer, will lead the call. And now, I'm pleased to turn the call over to Sharan. Sharan?
spk00: Thanks, Ali. Good morning, everyone, and thank you for joining us today. As usual, let me start off with a financial highlight on slide five of the deck. We reported E&I per share of 30 cents for the third quarter of this year, 7% higher compared to 28 cents that we reported for the third quarter of 2021 as our sizable share buybacks in Q4 of 21 and Q1 of this year more than offset the decline in our earnings caused by the impact on our AUM from the significant equity market declines this year and a stronger US dollar. We're pleased, however, that through this volatile market environment, our investment performance continues to be strong. As of September 30, 96%, 87%, 86%, and 90% of strategies by revenue beat their benchmarks over the prior 1, 3, 5, and 10-year periods respectively. Next, our net client cash flows turned positive in the quarter with 0.6 billion of net inflows as we saw flat and modestly positive flows pretty much across all of our major strategies. And we are encouraged that our sales pipeline remains healthy. From a longer-term perspective, we continue to build out our effort in systematic credit and equity alternatives that we announced on our last earnings call. During the quarter, we added more people to these teams and are adding to the data and technology infrastructure. We will be kickstarting the equity alternative platform with 15 million of seed capital this month. We also continue to make progress on our ongoing growth efforts like systematic macro. Together, these initiatives will tap into the secular growing demand for uncorrelated returns, and we expect them to help generate long-term organic growth for our business. Turning to capital management. We had a cash balance of 101 million as of September 30, 22. 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 whenever opportunities come up. Turning to some operating highlights for Acadian on slide seven. Acadian generated 30.5 million of adjusted EBITDA in the third quarter of this year compared to 49.1 million in the third quarter of 2021. The drop in EBITDA compared to 3Q of 21 was mainly driven by the approximately 27% decline in AUM over the last 12 months due to equity market decline globally and a stronger U.S. dollar. given a substantial portion of our AUM is invested outside the U.S. The EBITDA in the prior sequential quarter, second quarter of this year, was 38.8 million. The drop in EBITDA for the third quarter compared to the second quarter of 22 was also mainly driven by continued market decline, and also performance fee in the third quarter was even lower at 1 million versus 2 million in the second quarter. As a reminder, majority of our performance fee generally comes through in the fourth quarter. Now, let me turn to slide 11 for a minute, as it provides a good snapshot of the expansive capabilities of Acadian franchise and the future potential of the platform. Most of our AUM today resides in the top two rows. Equity, where we seek to consistently produce alpha for our clients, across various equity strategies, and managed volatility, where we seek to produce alpha in equity strategies with reduced volatility. However, we are positive that our platform will prove to be equally good in generating alpha outside equity. We discussed on the last call how credit is a very large market. We have started our systematic quant effort in credit with building the team. and we will start with high-yield and investment-grade areas. We previously launched our systematic macro strategy, like multi-asset class absolute return, which continue to move along and now have $2 billion of AUM. I touched on seeding our equity alternative platform with $15 billion of seed capital this month to provide investors uncorrelated returns, and our ESG capabilities date back to more than 20 plus years and are integrated in our investment process throughout our strategies. We continue to see demand from investors for alpha from ESG factors to mitigate ESG risk and to customize portfolios for their ESG values. So, in summary, each of these pockets of demand are very large and continue to grow, and our unique quant capabilities will allow us to effectively serve this demand. To conclude on slide 15, our long-term strategy remains the same. We will continue to invest in our core capabilities and leverage our unique quant platform to expand into new areas. We'll continue using our free cash flow to support organic growth and for share repurchases whenever opportunities are available. 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.
spk05: Thank you. At this time, those with questions should lift their phone receiver and press star followed by 1 on their telephone keypad. To cancel a question, please press star 1 again. Our first question is from Kenneth Lee with RBC Capital Markets. Your line is open.
spk06: Hi, good morning, and thanks for taking my question. I'm wondering if you could comment on any recent discussions you may have had around potential value enhancing transactions. Thanks.
spk00: Hi, Ken. As we've said, we remain focused on maximizing shareholder value. and as such are always open to any shareholder value enhancing partnerships or transactions. I can't specifically comment on anything in particular, but suffice to say we remain open and whenever any such opportunities come up, we do engage to see whether something shareholder value maximizing were possible.
spk06: Gotcha. And one follow-up, if I may, just in terms of excess capital allocation, you mentioned that you could support organic growth or repurchase stock as opportunities allow. Just wanted to clarify, further expand what that means in terms of opportunities allowing that. Thanks.
spk00: Yeah, thanks, Ken. Yeah, as we've said, you know, for our excess cash flow, the business, of course, produces good cash flow, even, for example, in these markets when the AUM is typically low. And the use of that cash flow is essentially twofold. As we've been clear, feeding new strategies and repurchases. And with regards to feeding, the opportunities that did come up, it was systematic credit and equity alternatives, which we think are very compelling opportunities. So, and as we outlined, we probably use about 75 to 80 million over the next three years in those two opportunities. Let's call it 20 to 25 million a year, you know, in that. And with repurchases, again, whenever opportunities come up, we do that, but from time to time, we are, you know, some kind of restriction, whether it's an earnings-related blackout window or if we're having, you know, a legitimately strategic kind of conversation.
spk06: Gotcha. And to clarify, was there any repurchases in the most recent quarter, and do you expect to resume share repurchases, you know, given where share prices are currently? Okay.
spk00: There were not any repurchases in the most recent quarter, but we always, you know, remain open whenever we have the right opportunity in an open window. That's clearly one of the key uses. Gotcha. That's all I had.
spk02: Very helpful. Thanks again.
spk05: The next question is from Michael Cypress with Morgan Stanley. Your line is open.
spk03: Hey, good morning. Thanks for taking the question. Maybe just continue with the buybacks theme. So I hear you that there weren't any repurchases in the quarter, but I was hoping you might be able to elaborate on why that was and did that have anything to do with any sort of restrictions that I think you were alluding to potentially in the prior answer that could happen from time to time and we've seen that in the past.
spk02: Hi, Mike.
spk00: Yeah, that's right. For repurchases, of course, we monitor the market and when it's the most attractive to buy back, but also the other factor is whether we have an open window. So it's a combination of those things. But I'll reiterate that whenever the markets are attractive and we have an open window, Repurchase is clearly, you know, the desire of use. I already touched on in terms of seeding, we have our two key opportunities identified is about 20 to 25 million a year. The rest of the capital is for repurchases whenever we can.
spk02: Did you have an open window in the third quarter? I can't comment specifically on that, but no, we did not do any repurchases in the third quarter.
spk03: Okay, fair enough. Maybe just changing topics over to organic growth and flows. I was hoping you might be able to elaborate a bit on which strategies contributed to the flow strength in the quarter, and then which, if any, strategies had outflows or maybe a bit softer.
spk00: Generally, we got, you know, flat to modestly positive flows across all the strategies, which, of course, is very encouraging considering the market backdrop we were in. So there aren't any particular areas of pressure in terms of at-risk assets, and we do see a good, healthy sales pipeline across strategies. And including the newer strategies like the multi-asset class, we are seeing good traction there from consultants and buy ratings coming in. So that's all encouraging. You know, so it's not – I wouldn't say there are any particular strategies that, you know, were contributed to most of it. We, of course, did get some impact from the, you know, UK pension funds LDIs. So it's encouraging that in spite of that, we ended up at a good place. You know, without that, the numbers would have been even better. So I would say good, you know, good expansive support level across strategies.
spk03: Great. And just a final question for me. Just on the expense guidance, it looks like you largely kept your prior guidance for this year, except I think the variable expense, variable comp guidance moved a little bit. So I was hoping you might be able to elaborate on what's driving that. And then maybe it's a little early for 23, but just as we think about your guidance for 22, is that a good sort of starting point for thinking about 23, or why might that look any sort of different into 23? Thank you.
spk00: Yeah, on the expense guidance, you know, on the OPAC, it's basically relatively at least a dollar amount is fixed. So as the management fee level goes down, the ratio, you know, goes up. So there isn't much change there except that we've started to invest in the new initiatives and started building the teams for structured credit and equity alternatives. We're growing those teams in both those initiatives and, you know, adding new sources of data and technology modules that we need. So that's one area where expense, you know, is starting to build up and will build up more next year, but also at the same time we'll bring expenses down on the center and corporate overhead side.
spk02: So that'll offset some of that.
spk03: Sorry, just on the variable expenses and the affiliate distribution guidance as well, the moving pieces there, and then he's on 23.
spk00: Yeah, the variable expenses, of course, they are variables. A large part of it is just a fixed ratio of the pre-variable comp So it moves up and down with that. But there is a portion of variable comp that's, you know, that sort of amortization from prior periods. That's what skews the ratio a little bit. And as we're building the new efforts, we're bringing on people with, you know, comp guidance and expectations that don't move. Of course, we don't have any revenues with these new initiatives yet. So that's also something that would skew the variable comp ratio a little bit. Otherwise, other than that, it generally should be moving up and down in line with pre-variable comp earnings. Okay.
spk02: Thank you. The next question is from John Dunn with Evercore ISI. Your line is open.
spk01: Hi, thanks. You talked about the sales pipeline. Could you maybe try and size it a little bit for us? And then as far as the mix, you talked about multi-asset, maybe just some more color on the mix. And then has the composition changed over the past several months, several year to date, let's say?
spk00: Hi, John. Hi, John. Yeah, we generally haven't provided sizing on our pipeline, but in terms of relative levels, it's a very good sales pipeline, as robust as we've had. So that's encouraging. In this environment, we have a good pipeline in various stages of searches, late stage, early, medium. That's good. And it's spread across various strategies, you know, strategies like global equity, emerging markets, you know, international or specific regions like Australia. That's pretty good. A lot of it is also, you know, with some ESG, you know, angles, you know, where clients have specific, you know, sustainable goals. So that's a pretty sort of diverse you know, healthy sales pipeline. And with the newer initiatives with multi-assets, you know, we are seeing good interest from the earlier doctor clients and good feedback from the consultant community, which are also always good leading indicators. So we're encouraged to see all that. Does that answer your question, John?
spk01: Yeah, it does. Yeah, thank you. And then follow up on the direction of the fee rate over time. You're just thinking about what's inflowing now and the newer stuff you guys are rolling out. Just how those different fee rates compare to one another and the direction over time.
spk02: Yeah.
spk00: You know, the fee rates do vary, you know, a fair bit for some of the You know, for some of the absolute return strategies, the fee rates are higher, including, for example, on the structured credit side, we'll initially focus on high yield. There, the fee rates are higher. So it depends on which items pick up first and how fast. But there are also some simpler, you know, strategies that we offer where the fee rates are lower than our current average fee. which would be, you know, simpler solutions where clients are looking for, you know, to increase their exposure to a value factor, for example, or the growth factor. And those are easier to do and hence low fee. So it's hard to have, we afford that, you know, it's good to have multiples, you know, multiple irons in the fire and we're encouraged about all of them. So So I would say, you know, it looks like there's a bias to the upside that our fee rate will increase over time. But we do have a number of offerings that are, you know, absolute return uncorrelated, which are higher fee. But we also are getting good traction on some simpler lower fee mandate. Makes sense. Thanks very much.
spk05: As a reminder, please press star 1 on your telephone keypad if you'd like to ask a question. It appears that we have no further questions, and this will conclude our question and answer session. I'd like to turn the conference call back over to Sir and Rana.
spk00: Okay. Thank you, Operator. Thanks, everyone, for joining us today.
spk05: Appreciate it.
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