Q2 2020 Brightsphere Investment Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Brits Fear investment Group earnings Conference call and webcast for the second quarter 2020.
During the call all participants will be in listen only mode.
The presentation, we will conduct a question and answer session.
To be added to the Q. Please press star followed by one at anytime during the call.
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Please note. This call is being recorded today Thursday August six 2000, 20-F, 11 am eastern time.
I would now like to turn the meeting over to at least your friends managing director of strategic development. Please go ahead.
Good morning, welcome to breakthroughs conference call to discuss our results for the second quarter ended June Thirtyth 2020, before we get started please note that we may make forward looking statements about our business and financial performance.
Forward looking statement is subject to risks and uncertainties that could cause actual results could differ materially from those projected.
Additional information regarding these risks and uncertainties scares and or else you see filings, including our form 8-K filed today getting the earnings release in our 2019 form 10-K in an EUR 10-Q for the first quarter of 2020.
Any forward looking statements that we make on this call are based on assumptions as of today, we undertake no obligation to update them as a result of new information for future events.
They 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 here in Shelby deemed to be an offer solicitation to buy any investment products.
Sure in running for President and Chief Executive Officer will lead to call now please turn it over to serve Sharon.
It's like Bobby.
Good morning, everyone. Thank you for joining us today.
I hope, everyone and their loved ones are healthy and well.
Let me start with like five of the presentation deck as usual.
Provide some key updates on our business in the second quarter.
We reported economic for share a 41 cents well the second quarter up 2020.
Compared to 45 cents.
And the second quarter last year, and 40 cents in the first quarter that's here.
While our Robin you deploy more.
Parents of a year ago quarter due to the impact of the market decline on our Richard.
The impact on your nine was much lower.
That's what you do our continuing discipline on the Opex and dumped and variability.
Just comes from time to time on our other costs like variable compensation and employee share of the distributions.
Also the repurchase of like we did in tier one tier two.
Helped.
For the reduce the impact of the Robin you decline on you know on a per share basis.
We previously announced divestiture Barrow Hanley and copper rock.
These results in a more attractive pro forma business mix.
That has consistently generated positive not loads historically.
And the second quarter, two our total not flying Cosmos.
On a pro forma basis.
Got it loading Barrow Hanley copper rock.
Were positive across our three segments with a total log 0.4 billion.
Which is another encouraging data point for the pro forma doesn't.
We will use the 335 MW in public sector. After tax proceeds primarily to pay down debt and repurchase our shares which we would expect to produce double digit accretion <unk> per share in 2021.
The additional capital also allows us to seed new strategies to enhance organic growth.
Our affiliates.
And the quantum solution segment, our investment performance continued to be strong.
What 47%, 48% and 88% of strategies by revenue.
Beating their benchmarks over the prior three five and 10 year period.
And the alternative segment.
We continue to expect to reach our UN growth targets, but with a slower pace.
Causing a timing delay of about two quarters.
In the liquid Alpha segment, we now have haagen inflows on a pro forma basis in the second quarter that is excluding Barrow Hanley and copper on.
We're on track to deliver annualized cost savings of over 20 million by Q1 up 2021 from the previously announced repositioning of our corporate center.
Which would have an annual pre tax income impact of a similar amount that's 20 million.
And the second quarter.
Purchased 3% how about outstanding shares.
Which were executed in the early part of the quarter and previously announced on our last earnings call.
As we announced then we intend to focus on totally paying down our revolver first and then be able to presume repurchases.
Moving to leverage.
Abuse, the outstanding amounts on our revolver or 230 million.
Parity or to 20 million at the end of the first quarter.
That's reduced our net leverage ratio from two X. last quarter to 1.7 next.
For the second quarter.
On slide seven.
I'll briefly recap the long term strategy that we're executing on.
The centerpiece of our strategy is our attractive business mix.
In the top section, we highlight that 88% of our business.
Pro forma for the recently announced divestitures.
Comes from quantum solutions segment, which is primarily Acadia.
And alternative segment, which is primarily landmark.
Each of Acadian and landmark leading scam players in their respective fields.
And we are seeing secular growth tailwinds in both the there yes.
No attractive business mix generates strong free cash flow.
And we will focus on deploying our free cash flow creatively.
Two one reduce debt and maintaining a strong balance sheet.
To repurchase our stock given not stockstill trades at a meaningful discount to intrinsic lobby.
And three seed new strategies at our affiliates that can drive future organic growth.
Given the divestiture or two affiliates.
It's also worthwhile to recap what our key businesses are on a pro forma basis, which we had layout on slide eight.
So on slide eight on the left is our quantum solution segment, which is primarily or Caribbean.
And comprises 68% of our EBITDA on a pro forma basis.
Acadian into highly specialized and differentiated business.
Broad base Kwan capability and ongoing investment in cutting edge research data and technology.
Which allows us to generate alpha in the specific exposures and strategies that declines desire as markets continue to evolve.
In the Middle is our alternative segment, which is primarily landmark as I said.
And comprises 20% of our EBITDA on a pro forma basis.
As we've discussed before we expect this business to continue growing very well as we raised our next vintage funds.
This business is also very well positioned for the long term.
Because the demand for private market strategy continues to grow.
And secondary strategy is going to patiently to meet growing demand.
Importantly.
Landmark to the pioneer and one of the top you names in the secondary business.
On the right is our liquid outside segment, which is now primarily Keith W.
And comprised 12% of our EBITDA on a pro forma basis.
This business Diversifies and complements our overall business as well.
In this business, we provide a mix of fundamental long only strategy.
<unk> equities and fixed income across cap ranges and regions.
And we believe the segment as well positioned to benefit when value returns to favor.
Slide nine and 10 highlight how our pro forma business mix is more attractive by various metrics.
For example, if you're looking at the bottom half of like nine.
I see about 88%, however, EBITDA on a pro forma basis.
Comes from Plonking solutions and alternative solutions.
Next few slides show our segment results in greater detail, but you can review.
I will point out a couple of things on slide 13 regarding our leak what outside segment.
Our management fee rate in the segment was 31 that's for Q2.
As disclosed in footnote one.
Format for the divestitures management fee rate for Q2 would be higher that's 40 bips.
Similarly, <unk> operating margin was 39.3 person for Q2.
As disclosed in footnote to.
So for most of the divestitures, Ian <unk> operating margin for Q2 would be higher I, 45.5%.
Finally.
Turning to our flows on slide 14.
Looking at the chart on the box.
As I mentioned earlier.
Pro forma for Barrow Hanley copper rock divestitures, we saw positive flows across our three segments.
Looking ahead, we are pleased by these trends and are hopeful that the fundraising and be alternative segment.
Pickup paid next year further improving our overall slows.
Now I'd like to turn the call back to the operator.
Happy to answer questions at this point thank you.
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 the number side.
Please hold for brief moment, while we compiled acuity roster.
Our first question comes from a Craig Siegenthaler with credit Suisse. Your line is open.
Yeah.
Good morning store and hope all is well.
After a successful disposition Barrow Hanley in copper rock I just wanted your perspective on the potential for similar accepts with your two other attritional manager affiliates, which could actually improve your business mix and more importantly organic growth rate further.
Oh, Hi, correct thing.
Yeah, because we'd mentioned wouldn't be announced those divestitures.
Pro forma for the two divestitures, we have a very strong business mix now.
The strong record of producing positive flows.
And the liquid Alpha segment to had positive flows Oh this quarter may not happen every quarter.
But we do like.
The diversification had we have.
Our older All states are having said that as you pointed out.
It is our duty to consider any compelling opportunities.
That may come up from time to time too.
Unlock shareholder value or things like maybe compellingly attractive oh to shareholder value.
So we will consider those things as they come up.
Thank you start and end up just as my follow up on landmark I think many of US we're already running with a two quarter delay on the landmark fundraising cycle. After the May I want to earnings call does this two quarter delay equate to one Q 21, when we should start seeing the first close is or.
It's actually incremental to what you were saying my last earnings call.
Hi, Thanks for asking that I guess did extend their with confusion or we definitely want to clarify that we were just reiterating the prior discussions that we've had last earnings call a that it's the theme to quarter delayed initially we had been saying.
The second half up 2020 is when we would expect fund raising to pick up pace.
Oh and what this means is that.
Most of the fundraising moves to a 2021 in first half up 22, which was earlier second half hour 20, and and all of 2021.
Very clear thank you sorry.
Thank you.
Our next question comes from my carrier with Bank of America Merrill Lynch. Your line is open.
Hi, good morning, and Theyre getting questions.
First one just on a like that the accretion you know we did divestures. There you know the debt buybacks I don't know few knowing that you guys. When you announced a transaction you, making like sorted and net income they Pat.
And I just wanted to make sure that like poorly yes, you. The economic net income I'm, just kind of want to know.
Earnings that you're going to be you are losing and then obviously back into the buyback debt paydown.
I think maybe slightly tough you had tougher to get you to you need to certain levels of appreciate getting on with that Oh, you that earnings losses.
Yeah, Hi, Hi, Mike.
If I understood the question correctly.
Yes, they eat the guidance that we gave last week was that he asked me would news the EBITDA and the earnings from the affiliates that we are divesting.
But no by deploying those proceeds and paying down debt and repurchasing shares we expect.
Double digit accretion.
To the <unk> per share.
You were referring to you know I thought in terms of unite our share in terms of the accretion. So essentially if you do the math me, we had announced about job 40 million annualized EBITDA.
I'd be would lose from those divestitures and you can tax effect that.
And but by using the proceeds and paying down the debt and repurchasing our shares and be excuse the variety.
Are we purchase price scenarios and debt pay down scenarios that in most scenarios, we're comfortable that we pay down debt as well as get about a double digit.
Yes accretion.
And I P S I mean.
Because it seems like it might.
Yeah, Yeah that makes sense and then she's done the yes. Some of the pro forma like century, If you guide that you gave.
Just given the timing you know these transactions is that you guys had pretty good D. Yeah for I'd be thinking for for 2021.
Yes so.
Ah, yes, the guidance to be given on the and the ratios in the in the Investor deck Oh, that's that's pretty good so my 2021.
Perspective.
Some of their ratios are particularly the opex ratio.
That does obviously vary depending on.
The revenue and what the market does but no I would that qualify or whatever they're generally code based on what we know so far.
Okay. Thanks, a lot.
Our next question is from Michael Cyprys with Morgan Stanley. Your line is open.
Hey, good morning, Thanks for taking the question I just want to come back to the quantum solutions business I'm, just hoping you can open the curtain, they're a bit more on the corn solutions business educating and maybe just give us some color around the diversity and that makes a strategies that that they have and maybe just more specifically if you were able to help us a frame and quantify say the top three.
Strategies, how much anyway.
Would they have in each of those top three strategies and then if you could maybe help us understand the top three flowing strategies. What those are indicating in you know recently and how much is coming in across those different toppling strategies.
Hey, Mike Yeah. Good instead, so one of the largest business as we have especially on the pro forma basis is more than half or.
Of our revenue and EBITDA, that's a very diversified business Oh, what does that though variety of strategies.
<unk> continued to seed new strategies.
So some of the larger strategies. So for example, as a regional strategy now emerging markets strategies, one of the larger strategies. There we have a variety of non U.S. regional strategies.
What's different flavors in terms of Ah cap ranges and markets like Japan.
We have bought managed volatility strategies, which again are low ball or managed vol. But also our you know further detected by by regions.
And we have a number of new strategies that are getting.
Good traction from clients all like the multi asset class that you've touched on or there are no specific factors strategies, where clients are looking for exposure.
To a specific factor on the combination of two or three factors or or more.
And does smaller much smaller part of our businesses wherever we are always experimenting with a with its new things.
So, it's a very diversified business and.
Depending on different.
Market in environments different strategies to come in slowing or are flowing but on balance its a.
Lot of things do tend to offset each other.
So were pleased with.
Without the capability the core capabilities ultimately the.
The outside model and the in the and the.
Investment, we're doing in the data and research and the academic research and the team.
But diversifies unlocked by.
By region by.
By the specific objectives and declines have.
Okay, and just in the quarter it looks like about 300 million inflows are so into the Quants solutions imagine all that's at Acadia and but there was a negative revenue impact associated with those inflows on page 14, it looks like 6.8 million negative revenue a annualized impact there I guess, that's just the redemptions.
Coming out the door at a higher fee rate than the gross sales. So just hoping you can elaborate around that maybe just help us a little bit more color, there and maybe give a sense, some which strategies were in flowing indicating in the quarter and what strategies you saw outflows from.
Oh, Yeah, certainly, Mike and that and then I would say that's about what you see on the revenue side, it's a little bit of happenstance a few wells.
That there, we're not seeing any kind of fee compression or any particular strategies that are out flowing.
Oh, and a recovering way.
Just a function of.
Whether we have the combination of inflows and outflows, whether we have higher fee.
Outflows in particular quarter.
Compared to inflows.
Because we do have a range of strategy and that also vary.
By feed because some are easier to implement so maybe lower fleet not necessarily lower margin because there are easier to implement and some are higher see.
So just didn't depends on the combination.
It is a very a institutional business and.
Oh can be lumpy and choppy.
But I wouldn't see necessarily see a particular patterns in terms of.
You know higher fee, inflowing or lower feed and flowing and vice versa.
And just any color on which strategies are inflowing versus element in the quarter.
It could changes from from quarter to quarter, Oh, you know so so the as you would expect for example, the.
Low vol strategies.
In one Q, we had a more demand.
For them.
Then what we saw in the second quarter.
So so that strategy in second quarter, a lot wasn't in flowing.
But it does change.
Quite a bit from quarter to quarter.
Okay. Thanks.
Our next question comes from Robert Lee with KBW. Your line is open.
Great. Thank you thanks for taking my question.
Maybe you should see two landmark.
Oh, maybe it maybe similar to Arcadia King.
Since the cadence or hastened fund raising their and specifically what I mean by that as you know our I'm assuming landmark is raising multiple products not actually all the same size. So.
If you think of that no fund raising story I'm starting to close.
First quarter save 2021, no will be some of the larger strategies that you expect to start digging their clones earlier, just trying to you know for or maybe some larger stride use later in the cycle just trying to get some sense.
No over the course net yields have been raising kind of what you should think it was as a pattern like larger funds later.
Smaller funds first and then.
Second part of that would be close and getting flavor of.
The mix of strategy that obviously ease and for our independence is one of them on strategy some sense.
Our this specific strategies, the rating or and maybe how they differ.
Yeah. Thanks, Rob.
Yeah, good somewhat similar to Kadien.
Landmark is also very diversified business.
You know the on the core strength is obviously the secondary.
Aspect.
Which which they are one of the pioneers and that business.
But also because there are one of the pioneers in the business.
Its diversified.
So the three D primary strategies, we have.
Private equity real estate and real assets. So for example infrastructure.
As you would expect private equities or larger strategy being one of them more established.
In one of the earlier.
Secondary asset classes.
Spoke so its diversified and no we would.
I'll just be target to grow all three and ideally continuing to.
Andy secondary.
Asset class into beyond between.
Overtime.
But in terms of Uh huh.
2021 and onwards.
[music].
We wouldn't expect any sort of backend from from that perspective, I guess, it a simplified assumption would be that.
2021 onwards, so when budgets.
Spread it evenly over a 567 quarters.
And maybe the follow up with the pending transaction.
Fourth quarter was there any.
Later color on kind of went in the fourth quarter or me.
You know who's in October 1st versus.
The first.
Something patient about.
Buybacks heading into the or at least.
Fourth quarter, so any sense.
No.
Quickly fourth quarter terms is more kind of.
Yeah, I would assume a almost toward the yearend could happen sooner, but I would I would assume December.
Hey, Thank you very much it's taking my question.
Thank you Rob.
Our next question is from Chris Harris with Wells Fargo. Your line is open.
Yes. It first question on expenses.
Yeah, the operating expense ratio was.
43.4% and the second quarter.
Your guidance is 45% to 48% for the year.
So I know, you're giving us a ratio here and not actual numbers, but but that seems to imply.
Higher expenses in the second half.
Relative to the second quarter.
Is at a reasonable assumption I mean, do we have that right or and if so you know what can be driving expenses up in the second half.
Yeah, certainly no. Thanks, Chris that the ratio is a it's again, it's a range it falls.
Assumptions regarding no the revenue.
But not in the second quarter.
You'll see that compare to the first quarter. The dollar amount of expenses was lower.
And some of that was driven by Teeny, a third party vendors.
You know some slowdown in recruitment.
Oh that we had for example at landmark.
So we wouldn't expect some a bit saw to pick up.
You know in third quarter in fourth quarter, Oh, so as far as party that that yes, we wouldn't expect the.
Some of the operating expenses.
To increase.
And and then and then it's really in terms of ratio, it's really the expectation around.
Oh, you know, what what would happen and the market side to it so it's a range for that reason.
Okay.
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Is there any light you can shed on on possible performance fees and the second half I know traditionally Q4 tends to be.
Pretty strong quarter for you guys as it relates to that.
I think we should we should still be modeling for.
And then kind of an unrelated follow up.
What are your thoughts on on the pro forma tax rate of this company that is that really much different than where where it stands today.
Yeah underperform in speed, yes, you're right that we would expect generally performance fees due to come in in Q4.
And it's generally there is always something it's always hard to predict or of course, but Q4 would be though the right quota to model some performance fee.
And no what was the second question, Chris if you.
Pro forma tax rate is any different than <unk>, and where you are today.
Oh got enough that we not that'd be no.
We wouldn't run with it.
Okay, great. Thank you.
Our next question is from a Kenneth Lee with RBC capital markets. Your line is open.
Hi, Thanks for taking my question just one in terms of the seed capital.
Tons for seed capital investments Wonder if you could just share with us any updated thoughts on on any specific areas, which are looking to invest in thanks.
Hi, Ken.
On the seed capital as we've said it's.
To some other approaches to all their overall business that are that we are.
No well focusing our business on the growing parts.
I'll be industry.
So you would expect our seed portfolio also too.
To be reflective of that Oh, so it would be primarily at Acadia and and landmark.
In terms of seeding new strategies that we expect to have a client demand.
Our current portfolio.
Is invested for example, then he multi asset class strategy.
At Acadia and and a few others.
And similarly, we have Oh, you know participated in GP commitment.
In some of dogs landmark funds that were out there we're raising the in the last vintage. So we're generally that's how we're looking evolves.
With the with the growth of D.A. Davidson.
Got you very helpful and just one follow up our if I may wondering if you could just comment on.
Youre unfunded institutional off.
What's sort of products are are you seeing demand there. Thanks.
Can you didn't follow the question would you mind repeating.
Oh, just want to see if you could share with us any comments on on your unfunded dot institutional pipeline.
Well I think got it.
Yeah, we generally have not a shared any specifics on pipelines.
And offends me to be we always that you would expect have some.
One, but not fun day, then and and they eventually are funded but but the times.
A very.
So we were reasonably satisfied with our pipeline I would say, but it's a it's not very different from what do you normally have.
In the pipeline.
Gotcha. Thank you very much.
Our next question is from Patrick Thomas with Autonomous Research. Your line is open.
Patrick tell me with anonymous research your line is open.
Hey, good morning for all my questions have been answered thanks.
Our next question is from John Dunn with Evercore. Your line is open.
[laughter] just given the the strategic shift it can you talk about how big a piece of the puzzle do you think the non U.S. domiciled flows is going to be growth I'm basically how should be thinking about that Pete.
<unk>.
Hi, John.
Yeah, no non U.S. continues to be a an important markets.
Bodes for Oh for Acadian and landmark in particular.
Because those are three of.
Those products are in demand both in the U.S.
And overseas.
Oh, I would say that with regards to T. S. W. You're probably less so.
Because one of the larger strategies there is a international.
Which is more in demand into the U.S., but with our.
Two larger or Soviets Acadian and landmark.
Continues to be a important and both of those affiliates have.
I'm very a sizeable distribution efforts are directly idea sort of get level or in the U.S. as well as internationally.
<unk>.
Gotcha, and then I know I know, adding new clients, it's more complicated due to cope with it but can you give us any color on how did the existing clients, maybe looking at adding new strategies.
Yeah, that's been interesting dynamic or do you touched on John but no we're seeing those two.
Oh that no.
Adding new clients is logistically little bit more challenging than before when you worry about took obviously your clients in person.
But no by the same logic any claims that do need to.
Allocate more are generally going to their existing managers.
And we're seeing seeing that too so whether it's the client.
Looking for something different than before and if you have already have that.
And now are we in house and then we have.
Somewhat of an advantage.
And <unk>, so we do see that dynamic.
At boats for example, occasion and intense W which are more.
Now on the.
On the liquid side and on the in liquid side, but in line market. This obviously more about fund raising.
Phenomenon.
And there are the delayed at that we mentioned is more really related to the traveling and logistics.
Issues.
As clients settled into new process fees.
But no, but we do have.
A number of clients that are just repeat clients across.
Cross across all the prior vintages.
That we would expect but there are processes to go through.
Got it thank you.
Thanks, John.
This does conclude our question answer session kinda like to turn the conference back over to serving runner for any closing remarks.
[noise]. Thank you.
To summarize we're pleased about our pro forma business mix.
Oh and the net flows trajectory this new mix offers and we look forward to continuing to unlock and create shareholder value.
Thanks, everyone for taking the time stay safe and healthy.
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