BrightSphere Investment Group Inc.

ladies and gentlemen thank you for standing by welcome to bright sphere investment group earnings conference call and webcast for the fourth 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 the number one on your telephone keypad if you have If you need to reach out to an operator, please press star followed by zero. Note this call is being recorded today, Thursday, February 2nd, 2023 at 11 a.m. Eastern Time. I would now like to turn the call over to Eli Sugarman, Head of Strategy and Corporate Development.

Please go ahead.

Good morning and welcome to BrightSphere's conference call to discuss our results for the fourth quarter ended December 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 filed today containing the earnings release, our 2021 Form 10-K and our Form 10-Q for each of the first, second, and third 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 reflected, 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. Thank you for joining us today. As usual, I'll start off with the financial highlights on slide five of the deck. For Q4 22, we reported our highest ever quarterly E&I per share of 67 cents, 26.4% higher than 53 cents that we reported for Q4 of 2021. Our sizable share buybacks in Q4 of 21 and Q1 of 22 more than offset the drop in our earnings from the significant equity market decline in 2022 and the resulting impact on our AUM. We are pleased that throughout this volatile market environment, our investment performance has continued to be strong. As of December 31, 22, 88%, 87%, 87%, and 90% of our strategies by revenue beat their benchmarks over the prior 1, 3, 5, and 10-year periods respectively. We also reported second straight quarter of positive net client cash flows with $1.3 billion of net inflows as we saw robust sales across a few different strategies. Our sales pipeline remains healthy with ongoing searches across a range of strategies. Turning to capital management, we had a cash balance of $108 million as of December 31-22, after funding $15 million of seed capital for Acadian's equity alternatives platform and fully paying off Acadian's seasonal credit facility. Acadian generally draws on this facility in the first quarter for 1Q seasonal needs, and they fully pay it off over the course of the year. 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 highlights for Acadian on slide seven. Acadian generated 50.9 million of adjusted EBITDA in the fourth quarter of 22 compared to 87.6 million in the fourth quarter of 21. The drop in EBITDA compared to 4Q of 21 was mainly driven by the approximately 20 percent decline in AUM over the last 12 months due to equity market decline globally and lower performance fees than last year. Turning to slide 11 for a minute as a reminder overview of what Acadian's capabilities are. The top two rows, equity and managed volatility, have historically been Acadian's core capabilities, and that's where most of our AUM resides currently. The bottom four rows represent the growth initiatives underway. These are all large and growing markets where Acadian's systematic approach is particularly suited to serve this demand. As a quick update on these initiatives, we continue to build out Acadian's efforts in systematic credit with the core investment team now mostly in place, and we continue to add to the investment model and data and technology infrastructure. We expect to start investing in this strategy in the second half of 23 with seed capital. We kick-started Acadian's equity alternative platform in Q4 with $15 million of seed capital and have now started to build a track record here. We continue to make further progress of systematic macro with ongoing traction with clients and additional buy ratings from consultants. And we continue to see more investment mandates focused on responsible investing. All these initiatives tap into secular growth markets. And over time, we expect them to help generate sustained organic growth for Acadians. To conclude with our long-term strategy on slide 15, we will continue to invest in our core 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 whenever opportunities are available. And we remain focused on maximizing shareholder value. Now, let me turn the call back to the operator Happy to answer questions at this point.

At this time, those with a question should lift their phone receiver, press star, followed by the number one on their telephone keypad. To cancel a question, press star one again.

Our first question comes from Glenn Shore with Evercore.

Hi, thanks very much.

I'm very curious on some of the new build-outs. You talked about the team mostly being paid in systematic credit. So one is, is that the case for equity alternatives as well? And then at the highest level, I'm curious of what you see the differences between systematic equity and systematic credit from process standpoint, and why would Arcadian just be getting around to it now? It does seem like a big opportunity. It's just It's not as big in the marketplace, so I'm curious if you could talk to those two things. Thanks.

Yeah, how are you going? Thanks. Yeah, you're right. The team, you know, the core team at least in both these areas is mostly in place. You know, there are about, you know, 8 to 10 people in both strategies. There will be more people added as we go in select areas. you know, in data, et cetera, but the core team is mostly in place. And what's happening now is we continue to add more infrastructure, more trading infrastructure, more data infrastructure, particularly in credit. The equity alternatives is a little bit ahead, as I mentioned earlier. We've already seeded it, and the seed capital is being invested, and we're building a track record here. Credit, you're right, you know, it is a big opportunity, you know, fees as large as equity is, and it is a market that is, it is quant driven, and so our unique quant capabilities would have an advantage here. What's come along over the past few years, clearly this market was a voice market, you know, over the phone market, not as much electronic trading. That's changed a lot. So there's more and more electronification of trading here, and that has also in turn led to more data being available. So that made this market, I would say, more for the taking now for Acadian. And secondly, it's also, as our data has built up, we can leverage a lot of that for credit, it is similar kind of analysis, as you know. So we can leverage a lot of that data. But there was also, we had been on the lookout for a good team for a while. And that's critical, you know, that's the right fit people who are, who have the same systematic quant mindset, but also have credit experience. So we were fortunate to really find, as we announced a few quarters ago, in Scott Richardson, really one of the pioneers in quant credit who brought on more people with deep experience in the area. So it's really just a lot of things coming together at the right time, which is a bit of a coup.

Great. Appreciate all that. Thanks.

Our next question comes from Kenneth Lee with RBC Capital Markets.

Hi, good morning. Thanks for taking my question. Doesn't sound like you repurchased any shares in the quarter. So wondering if you could just comment on any discussions you may have had around potential value enhancing transactions. Thanks.

Hi, Ken. Chad is correct that we haven't purchased any shares Any shares in the quarter? We, of course, don't specifically comment on any conversations. But yes, from time to time, we are, you know, in blackout windows, either, as we mentioned, during earnings blackout windows, but also if we have any, you know, any nonpublic material conversations.

Gotcha. And one follow-up, if I may. I wonder if you could talk a little bit more about the, you know, key drivers for the performance fees you saw in the quarter. I think in the past you mentioned that some products were above their high watermarks, and then it could have been a favorable setup. Just wondering if that was a factor as well from any other drivers there. Thanks.

Yeah, I can. Yeah, last year was... Definitely, as you alluded, it was a bit of a loaded base, and so that was unusual that things were set up correctly. And this year, also, the performance in many of the accounts was good, and we ended up, I think, at a decent place. What we got last year was clearly... very high in the record. Hopefully, we can get that again at some point, but it is up there. This year, we had good performance, and we got performance-free from some of the accounts that were eligible. But clearly, the setup last year was favorable than this year, and we're happy with what we got this year.

Gotcha. Very helpful there. Thanks. Our final question comes from Michael Tsipras with Morgan Stanley.

Great. Thanks. Good morning. I was hoping you might be able to elaborate a bit more on the sales pipeline. How's that look today versus a year ago? And if you could maybe comment on some of the strategies you're seeing strengths as well as the customer experience. channels as well where you're seeing more strength and maybe even from a geographic standpoint too.

Thank you.

Thanks, Michael. We are seeing generally a very healthy pipeline in terms of comparing historically. Compared to historical levels, it's at a healthy level. We're seeing searches across a range of strategies, including our flagship strategies like global equity, emerging markets, even managed volatility, which we talked about, you know, maybe a year ago, was out of favor. We're seeing searches there. And in our newer strategies, like the multi-asset class, you know, all countries, non-U.S. as well. So it's a pretty good, you know, broadly diversified pipeline. And we're seeing maybe about a fourth of the strategies have some kind of sustainability angle to them as well. So we're seeing more and more ESG type of searches as well. So that's all encouraging to see. Geographically, not much, of course, as you know, a lot of our EUN currently is is within the U.S. and non-U.S. clients represent growth area for us. And we are trying to do more of that, but it is in line with our, the current search pipeline is in line with historical levels. Does that cover your question, Mike?

Yes. Thank you. Thank you. Maybe just a follow-up, if I could, just on expenses. hoping you could maybe elaborate a bit around your expectations for expense growth next year. I saw you put out the guidance on the variable comp and the affiliate distributions and the operating expense guidance, but maybe you could just elaborate a bit on kind of what went into those ranges, how you thought about that, and what's sort of underpinning it around market performance expectations. Are you baking in a strong start to the year that's already been playing out in equity markets, or would that be sort of upside?

Yeah, you know, in our guidance, I guess, you know, we put this together relatively recently, so it does factor in all that that we know, you know, currently. And it reflects essentially, yeah, where the market is today, what we are going to invest more in these new initiatives that we touched on earlier. on people as well as data and infrastructure, on credit, equity alternatives, multi-asset class, ESG, all of these areas. So it reflects the investment in addition to P&L there. It reflects some inflation as well. So assuming, of course, the ratios can change depending on if the markets were to change significantly. But in the normal range, we should end up within our guidance.

Great. Thank you.

This concludes our question and answer session. I'd like to turn the conference call back over to Suran Rana.

Thank you, operator.

Thank you, everyone, for joining us this morning.