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 third quarter 2024. 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, October 31st, 2024, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Melody Wong, SVP, 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 know that we may make 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 filings. including the Form 8-K filed today containing the earnings release, our 2023 Form 10-K, and our Form 10-Q for the first and second quarter of 2024. 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 of 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. Surin Renna, a President and Chief Executive Officer, will lead the call. And now, I'm pleased to turn the call over to Surin.

Thank you, Melody. Good morning, everyone, and thanks for joining us today. I'll cover the highlights on slide five of the deck in my initial remarks, and then we can move to Q&A. So, for the third quarter of 2024, we reported ENI per share of 59 cents. compared to 45 cents in the third quarter of 2023, and also 45 cents in the second quarter of 2024. The E&I in the third quarter of 2024 increased by 15%, 2 million dollars, compared to 19.3 million a year ago in the third quarter of 2023. The increase was primarily driven by the growth in management fee revenue. due to higher AUM from the market appreciation that we've seen over the last 12 months. And additionally, we continued our expense discipline during this period. The E&I per share increased by 31% in the third quarter of 2024 compared to the year-ago quarter, which is higher than the 15% increase in E&I over that same period. And that's because the E&I per share was additionally driven by the $100 million of share repurchases that we started in December 23 and continued in the first half of the year before. Acadian investment performance remained very strong in the quarter. As of September 30, 2024, 85%, 93%, and 94% of Acadian strategies by revenue outperformed their respective benchmarks across three, five, and 10-year periods. Turning to flows, we reported positive net client cash flows of half a billion this quarter compared to the break-even NCCF we had in the second quarter of 2024 and negative half a billion of NCCF that we had in the third quarter of 2023. Our organic growth initiatives continue to progress well. and in line with our expectations. On our systematic credit initiative, all three credit strategies stated so far are building nice track records. As a reminder, these three strategies comprise U.S. high-yield strategy, which we seeded in November 2023, global high-yield strategy, seeded in April 2024, and U.S. investment-grade strategy, seeded in Q3 of 2024. On our equity alternatives initiative, our multi-strategy fund, seeded about two years ago in Q4 of 22, continues to build a strong track record of our performance. And in September 24, we also seeded a new global equity extension strategy, which is a variant of our global equity strategy with some ability to go short. Turning to capital management. At the end of the third quarter, we had a cash balance of approximately $53.6 million, and Acadian had fully paid down its revolving facility compared to the outstanding balance of $36 million at the end of the second quarter. As discussed previously, this revolving facility supports Acadian's first quarter seasonal needs and is generally paid down fully by year end from the cash generated from Acadian's operations. Now, as we announced earlier this month, this will be my last earnings call as BrightFear CEO. Effective 1Q25, we will rebrand BrightFear as Acadian Asset Management, since Acadian is our only remaining business. Our current ticker, BSIG, will change to AAMI. And Kelly Young, who is currently the CEO of Acadian, our sole operating business, will assume the role of the public company's CEO, too. These steps basically complete our transition from a multi-boutique conglomerate to a streamlined and singularly focused asset manager. We successfully sold six of the company's seven affiliates to strategic acquirers and retain Acadian, our largest and the most differentiated business. Thanks to the divestitures, we returned $1.3 billion of capital to the shareholders via shared buybacks, and we also paid down $125 million of debt. We expanded Acadian's business into new areas, including credit and equity alternatives that I touched on earlier, and we expect these new asset classes to generate sustained organic growth for the company over time. And we also reduced our corporate overhead by approximately 70% over the last few years. Collectively, these efforts have produced very strong returns for our shareholders. Now, Acadian is one of the top performing systematic investment managers in the world. And the completion of the transition to a singularly focused asset management company presents an exciting opportunity to focus exclusively on this exceptional business. I'd like to close my initial remarks by reiterating, as I've done for about 24 quarters now, that the company will remain focused on maximizing shareholder value and will continue using its free cash flow to support organic growth and to buy back its shares. I'll now turn the call back to the operator, and I'm 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. And the first question comes from the line of Kenneth Lee of RBC Capital Markets. Please go ahead.

Hey, good morning, and thanks for taking my question. And CERN, it's been great working with you for the past several years. In terms of the transition, and I think you also mentioned the streamlining of the company structure. And once again, I appreciate that BrightSphere had undergone some major cost reductions in the past. Do you think there's any potential opportunities for any further expense reductions going forward as the structure gets streamlined? Thanks.

I can. Yeah, as we've always said, you know, we maintain expense discipline and we continue to find opportunities and we continue to be really laser focused on being as efficient as we can be. So going forward, you know, we'll continue the same approach. But it's hard to say at this point whether there are any obvious opportunities. As we've talked about last two years, we've actually been investing in the infrastructure. We've upgraded our investor reporting capabilities. We've invested in our trading capabilities. And so what that will do is that it makes our platform much more scalable. And we also face the inflation pressures that we've touched on. So what I would say is that at this point, we've built up a lot over the last couple of years. So we may not see expense growth necessarily as our revenue grows. So we would see the benefit of operating leverage going forward. But it's hard to say whether there would be reduction sort of in absolute dollar terms of the expense levels.

Gotcha. Very helpful there. And just one follow-up, if I may. I just want to see if you could just give us an updated outlook in terms of potential cash usage for the remainder of this year, and as well related to that, what's sort of like the outlook for share repurchases over the near term there? Thanks.

Yeah, thank you. At a high level, as I just said earlier, The two primary uses for our cash haven't changed. And as I understand, even after the end of my tenure, they won't change. They remain investment in our organic growth, seeding new strategies, and then share repurchases. Between the two, it was sort of really would have to be opportunistic and see what opportunities present themselves, whether in terms of opportunity to seed something if the client is looking for a new product from us and also being vigilant about market conditions and with regard to share repurchases. So it's hard to put sort of a relative prioritization of the two, but those two remain the primary and almost exclusive uses for the cash.

Gotcha. Very helpful there. Thanks again.

Your next question comes from John Dunn of Evercore ISI. Please go ahead.

Hi. Could you maybe give us a little update on the institutional pipeline, like time to position, magnitude, time to funding, maybe geography?

Hi, John. Yeah, I guess we are... pleased with the pipeline. Of course, as we saw in the numbers in the third quarter, the pipeline has been good, and we are working through it. And as it sort of progresses, some of it has been converting into sales. And it's pretty healthy. It's pretty robust, and it goes across It goes across geographies, it goes across strategies, so it's not concentrated in any particular areas. And we're also seeing good response from some of the newer areas, like we have an enhanced strategy that has a low, essentially that offers a low tracking error to indices, but also with low risk. So I think we're happy with that, with how things are going. in the pipeline. Also, we saw some outflows from managed volatility in this quarter as well. So we have pockets of risk as well. So I would say on balance, we're satisfied with where things are that we expect to essentially ideally be positive flows or maybe break even as we look forward to next few quarters.

Got it. And then, you know, you've done some new product launches, but maybe thinking about the next phase, is there kind of like another crop of areas where you would consider maybe, you know, going into as like the next phase of growth?

Yeah, we'll always remain opportunistic and see if there are opportunities to seed any new asset classes. But I would say we do have our hands full at the moment. We're definitely – the areas that we're looking to expand into, credit and equity alternatives, and we've got some other product variants in the mix. These are large markets, and we are really keeping our eye on the ball and actually getting quarter to quarter in terms of building out the necessary capabilities and starting to talk to clients. So I would say we will definitely focus on what we have already in the hopper. Opportunistically, something great comes along, we'll look at it, but we want to stay disciplined on execution too.

Makes sense. Thank you, and all the best, CERN.

Thank you, John.

Your next question comes from Michael Cypress from Morgan Stanley. Please go ahead.

Hi, good morning, Surin, and congratulations on your tenure with BrightSphere and the strong execution on unlocking value for shareholders over the past number of years. It's been great working with you. Wish you all the best in your new endeavors. Just a couple of questions here. Just curious in your dialogue with the board, among others, maybe you could just elaborate a bit on the new strategy, what prompted it, and what is the scope for strategic alternatives from here? In the past, you guys have looked to pursue maybe potential buyers. Just curious what the reception feedback has been. It seems like the change in strategy is moving on from the strategic alternatives chapter to the organic growth chapter next.

Yeah, thank you for the kind word, Mike. Appreciate it. And I would say there's really nothing new, I would say. There isn't necessarily a change of strategy. As we've said before, for a while, right, that we remain focused on maximizing shareholder value and looking at all possible ways that we can do that. So that strategy remains the same. The company remains open to strategic alternatives. So I wouldn't say that that's no longer an option or that's off the table. What we've done over the last few years has really sort of moved from the conglomerate approach, singular integrated asset management approach, right? And then this is the sort of the most unique and well-positioned business to do that with. And we accomplished this almost a year and a half ago. And then we've remained open to strategic alternatives. But, you know, of course, the partner has to be right. And at the same time, we continue to optimize our position as an independent public company and continue to be disciplined on expense. And we've had leadership succession at Acadian in the interim, you know, as we updated. And so we've been, you know, really continuing to be optimized on all fronts as an independent public company. as well as we remain open to strategic alternatives. So I would say nothing has changed, but this is just a continued execution of the strategy we've had for a while, and this is sort of, in a way, a culmination of that effort. Going forward, the company is very well positioned as an independent company, but also open to, if something synergistic came along, creates shareholder value, the company remains open to that.

And then could you just elaborate a bit on the traction that you're seeing with some of the new strategies that you've been seeing over the past couple of years, just where you are in terms of third-party client assets, traction, interest from clients, and how you're thinking about the scope for maybe bringing some newer strategies to the marketplace over the next year or so?

Yeah, certainly. So I would say the new strategies have been moving along completely on expected lines. And I appreciate that looking from outside in, you know, it's sort of really hard to tell what's been going on because with anything new, when you can't see necessarily a lot of flows, it's hard to tell. But with new strategies in our institutional long-only asset management business, it is, you know, the length of the track record is quite important. before we start to see meaningful sales numbers. But the execution has been going along well and kind of more or less on the lines we expected, that we built the teams, we built the models, we built the necessary technological changes we had to do. And we've been having great conversations with clients who have taken a lot of interest, but just for a variety of reasons, their internals, Thresholds that people have requirements to see a certain duration, a certain length of track record. So I would say that these, there is no, there's nothing to, there's nothing that we're concerned about on the new strategies. It's just moving along, things take awfully long in terms of coming up with new strategies that over time build scale. So that's what, I would say that we continue to stay focused on all these new strategies And we're happy with how the execution is going. So it's not that we would want to then start new strategies because we're unhappy with what we're doing right now. But we remain opportunistic, as I said, that if something compelling were to come from either from client feedback or market opportunities present themselves, the company remains open to seeding new strategies as well. But we do have enough, you know, in the pipeline right now. Great.

And just one follow-up question. Just on capital allocation, I know you mentioned that you look to be opportunistic on the buyback side, but also looking to seed. As we think about into 2025, just curious how we should think about the usage of cash generated across the business. To what extent do you look for cash balances to be built versus... You know, how much might we see of cash flow deployed into buybacks versus seeding new strategies or otherwise just cash building or other uses? Maybe you could help flesh that out.

Yeah, I mean, those two are the uses. And it's really, yeah, we haven't made any sort of predetermined allocation between the two. We do remain opportunistic. And it will be a function of the market conditions with regard to the buyback opportunity and just sort of how we see client feedback with regard to any new strategies and how big those markets are. As I said, we have enough to digest on the organic side right now. There may be one or two things that may come up, but it may not be very sizable, nothing that we know of that would be very large. And so I would say that you may probably see both of them, you know, with regard to the relative allocation between the two that it's hard to tell.

Great. Thanks, Mike. Thanks for working with you. Wish you all the best. Thank you, Mike.

Your next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Hey, thanks for taking my follow-up. Just wanted to get a better sense of what specific strategies drove net flows in the quarter there. Thanks.

Yeah, they really came from... I mean, it's a good cross-section of strategies that did that. But one of them, for example, just to touch on is, as I mentioned, we have some new variants as well. So one of them is enhanced, whereby we offer low tracking error with low risk. And that's resonating with clients that were otherwise going passive. So that was one area, for example. We've seen good interest in small cap equity investments. non-U.S. as well as U.S., and those are high fees as well. So that's a nice side benefit. And we also saw interest in emerging markets, small-cap opportunities. So it's been across a variety of strategies. Gotcha.

Thanks again for taking my follow-up. Thank you, Kent.

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

Thank you, operator. And thanks, everyone, for joining us. And thank you also for the kind words. It's a bittersweet moment for me. As I mentioned, on the one hand, it's really been a culmination of the strategy that we have been executing for the last few years. But also, at the same time, it is an exciting new phase as a more streamlined, independent public company. And I leave with the knowledge that the company is very well positioned without me. Thank you, everyone, for joining us.