BrightSphere Investment Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference call and webcast for the third quarter 2023. 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 start followed by 1 at any time during the call. If you need to reach an operator, please press the start followed by 0. Please note that this call is being recorded today, Thursday, November 2nd, 2023, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Melody Huang, Senior Vice President, Director of Finance and Investor Relations. Please go ahead, Melody.

Good morning and welcome to Bryce Sears' conference call to discuss our results for the third quarter ended September 30th. Before we get started, please note that we may take forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risk and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding this risk and uncertainties appears in our SEC filing including the form 8K filed today containing the earnings released, our 2022 form 10K, and our form 10Q for the first and second quarters of 2023. 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 the 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. 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.

Thanks, Mallory. Good morning, everyone, and thank you for joining us today. As usual, I'll start off with the main highlights on slide five of the deck, and then I can answer questions. So for the third quarter of 2023, we reported E&I per share of 45 cents compared to 30 cents in the third quarter of 2022, and 28 cents in the second quarter of 2023. This 50% increase in E&I per share compared to the year-ago quarter was primarily driven by a 24% increase in revenue due to higher AUM from market appreciation and higher performance fees. Acadian's investment performance remained strong and got even stronger in the third quarter. As of September 30, 2023, 83%, 88%, and 91% of strategies by revenue beat their benchmarks over the prior three, five, and 10-year periods, respectively. We reported half a billion of net outflows this quarter as we had some lumpy reallocations from select clients out of our managed volatility strategy. However, we continue to have a robust sales pipeline. The implementation of our growth initiative continues to be on track. Acadian's equity alternatives platform is off to a good start and is showing nice investment outperformance so far. Acadian's systematic credit initiative will be seated this month, starting with a high-yield strategy, and then that effort will also start to build its investment stock record. Turning to capital management, we had a cash balance of $143 million as of September 30, 2023. Acadian has continued to play down its revolving credit facility and ended the quarter with an outstanding balance of $13 million. compared to 38 million at the end of Q2 and 87 million at the end of the first quarter of the year. As in prior years, we expect the facility to be fully paid down by year end. Our long-term strategy remains the same. We'll continue to invest in and leverage our unique quant capabilities to grow and expand into new areas. We'll continue using our free cash flow to support organic growth and to buy back stock whenever opportunities are available, and will remain focused on maximizing shareholder value. Now, let me turn the call back to the operator, and I'm happy to answer any questions at this point.

At this time, those with questions should lift their phone receiver and press Start, followed by the number 1 on their telephone keypad. To cancel a question, please press Start and then 2. Please hold for a brief moment while we compile the Q&A roster. Our first question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead, Kenneth. Your line is open.

Hi. Good morning. Thanks for taking my question. Just one on the performance fees. I wonder if you could just provide a little bit more details behind that. Were there any specific strategies that drove the performance fees? I was a bit surprised in terms of the timing. Any other factors that we should be aware of, either in terms of performance or high watermarks? Thanks again.

Good morning, Ken. Yeah, you're right. Typically, most of our performance fee comes in Q4, a little bit in Q1, and Q2 and Q3 are generally light. Now, having said that, we do have some performance-eligible strategies that have measuring periods at the end of Q2 and at the end of Q3. And sometimes those are the strategies that would be performance-free, but you'd write that it's not typical, certainly the magnitudes, and that just goes to the performance. The investment performance has been great, and we had a great quarter. So for the strategies with the measuring period, ending this quarter, that worked out really well. But for the rest of the fee in Q4, there are two more months to go, so we'll see how it ends. But we are encouraged with the performance so far.

Gotcha. Very helpful there. And then in terms of the net flows in the quarter, you mentioned some reallocation within the managed vol strategies. Just as you look ahead, would you expect any continued weakness in the net flows in the new trend, just given the market environment, or is the reallocation at this point predominantly done? Thanks.

Yeah, the flows, you know, it's the managed volatility strategies generally have low beta, low risk, and oftentimes it's been a beta rewarding market. So it's been challenging to beat the markets which have higher beta. They have their own, but in some cases clients want to take on either more risk or they want to move on to fixed income. So we'll see how that goes. We hope for our clients to be long-term focused, but sometimes clients make reallocation decisions. And so we'll see. But other than that, in other strategies, we don't see that kind of pressure. And our sales pipeline, as I said earlier, is robust. So we'll see. Next was ultimately the combination of the sales and what we made I see on the outflows, there can be surprises sometimes. So we're cautiously optimistic that we can stay flat to a boat.

Gotcha. And just one more final follow-up question, if I could just squeeze it in. I just want to clarify, and it sounds like it, just want to clarify that the share repurchase window is still closed. Thanks.

And yes, the status remains the same on that now. We still haven't had an open window. So we'll see.

Got you. Very helpful there. Thanks again.

Thank you, Ken.

Our next question comes from the line of Michael Sipris with Morgan Stanley. Michael, please go ahead. Your line is open.

Great. Thank you. Good morning. Maybe just continuing on the buybacks question. So it sounds like you did not have an open window in the quarter. Just want to confirm. And I guess, when do you expect you might have an open window as you look out? Is that something that might happen next year? Any help on sort of framing the timing around that? And if and when you do have an open window, how should we think about the pace and magnitude of potential buybacks at that point, just in terms of tender offer, which would enable you to put more cash to work in terms of buybacks more quickly.

Hi, Mike. Yes, that's right. We still haven't had an open window. We don't know for sure when we might have one. It's certainly possible in the next year that we may have one. We can say that for sure. But in terms of magnitude, we're approaching close to $100 million in terms of what we might have available for buybacks. We've got $143 million of cash. We'll use some of that for seed and maybe call it $25 million or so for cash balance. So we're getting close to $100 million, which we would have flexibility to be a tender or It could be open market, but I have to see the best execution at the time when we are approaching that decision.

Okay, thanks. And then just to follow up the question, with investment performance quite strong and improving, as you mentioned earlier, maybe you could help us size up the opportunity for potential performance season in the fourth quarter, which is typically seasonally strong for you, and What's the scope for fourth quarter performance fees this year to be even better than what we saw in a year ago, fourth quarter?

Yeah, there's still a couple of months to go. So it's always hard to say with the performance fee because there are a variety of different strategies and different clients. And so the measuring period that is coming up, a number of those are for the full year of 2023. So it's hard to say. Now, we've had a couple of strong years of performance. 2021 was definitely high. We had 67 million for the full year. 22, we had 49 million for the full year. So it's hard to say, but I would say if we're in the 40s number, we'd be happy. But it's hard to peg anything at this point.

Okay. And then just given the, if I could squeeze another one in here, given the commentary on the healthy pipeline, maybe you could just help unpack, you know, any way of sort of sizing it. You know, is it any bigger today than last quarter? And, you know, maybe you can provide a little bit more color on kind of what's in there and any scope to kind of get back to positive inflows as you look out over the next quarter or so.

Yeah, the pipeline's been healthy. It's at the same level as we've had for some quarters, which has been historically healthy. It has been moving a bit slower than we hoped for. You know, so hopefully that changes at some point, but it's robust. Not as much speed, though, as we wanted, but that site's pretty good. And the flip side, as I said, managed volatility is one strategy where we're hoping to stay flat, but there could always be reallocation decisions that could happen there. So it depends on essentially the balance of the two. We would hope to generally be flat or positive.

Great. Thank you.

Thanks, Mike.

Our next question comes from John Dunn with Evercore ISI. Please go ahead, John. Your line is open.

Thank you. You know, maybe you could talk about how you think about the flow ramp for the equity alt strategy in 24, and then maybe any other strategies you think are set up well and want to highlight for next year.

Yes, we've got our core strategies that are generally positioned well. Most of them have had good investment performance. That's why you see the long-term results are really good across the board. And then the new strategy, there are basically two equity alternatives and then systematic credit will actually be seeded this month to start to build a track record. Equity already has start to build a track record with the seed capital and some client fees as well. So we're starting to talk to clients about that and the reception has been good. So we would hope to get assets in the coming year in that strategy, in the equity all strategy. On the systematic credit strategy, we'll probably spend the next few quarters to build that track record, and sometimes some clients come in early. If they have enough conversion, sometimes it could take some time, but hopefully we could, in the back half of 24, we can at least start to get some early client wins.

Gotcha. Did that answer your question? Maybe just any... Yeah, it did. You know, any fourth quarter seasonality we should be thinking about, you know, either on flows or expenses or anything else?

Yeah, there is some seasonality in fourth quarter. Of course, our performance fee is one which we're all well aware of. There are some seasonal adjustments on the APEX as well on the fourth quarter. that you may see, but it's consistent with prior years. Thank you. Thanks, John.

Our next question is a follow-up from Michael Cypress with Morgan Stanley. Michael, please go ahead.

Thanks for taking the follow-up. Just wanted to ask on the expense side, over the past couple of years, you've made some investments launching some of the new products that you spoke about earlier here. And now that these strategies have been developed, you've launched them, how are you thinking about the pace of expense growth from here? Are we past the major investment spend, or do you anticipate launching some meaningful new strategies that will require some investment spend from here?

Yeah, on these two, we're mostly built out. And, you know, there may be some, you know, some selective additions here or there, but we're mostly built out. So, let's say there is no material additions to expenses for these initiatives. Similarly, on infrastructure, we're well built out. We've spent a fair bit over the last few years on adding to our infrastructure to make it more scalable. So, I think we're good there. And nothing, we're not taking on anything new that would be big, at least not that we have any visibility on. We're always open to figuring out new areas that we can leverage our capabilities in, but nothing imminent.

Okay, and just a final question for me, just from the balance sheet standpoint, you have some maturities coming up in 26, debt maturities and things like that. Burt Lazarin- 274 million of senior notes will always often 26 but just curious at this point how you're thinking about that, just in terms of would you look to pay that down entirely and building cash to facilitate there, or would you look to refinance that and how much you know in advance. Burt Lazarin- It just curious how you're thinking about them.

Manoj Mistry- yeah that that that one has a prepayment penalty so we'll just we're trying to just be alone for for some time and. and we're approaching closer to maybe a year from it, we may refinance it. We think we can, that much leverage is about right, is about prudent. So we may just refinance at that same level. The revolver, as you know, is more of a temporary seasonal need, which we draw on in the first quarter and then just pay it down. So we see that as separate. So with both the facilities combined, that gives us adequate, you know, cushion for our needs. But we could probably bring it down a little bit in terms of size. And we have that flexibility. But I think it's safe to assume that we would just keep those two.

Great. Thank you, Saran. Thanks, Mike.

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

Thank you, Alfredo. Thanks, everyone, for joining us today.