Q4 2020 Brightsphere Investment Group Inc Earnings Call

<unk> locked Egypt for bright for.

Investment.

Thank you.

The spelling of your first and last name please.

David Brown from Iraq.

Thank you you may have your telephone number be human day area code.

Q1, 296 036 97.

Thank you your line will be placed on music hold on until the conference begins.

Mhm.

Okay.

And welcome to the Bright Spirit investment Group earnings Conference call and webcast for the fourth quarter 2020.

During the call all participants will be in a listen only mode.

After their 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.

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Please note that this call is being recorded today Thursday February 4th 2021 at 11, a M eastern time.

I would now like to turn the meeting over to Ali Sugarman, managing director and strategic development. Please go ahead aly.

Good morning, and welcome to price first conference call to discuss our results for the fourth quarter ended December 31 2020.

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 2019 form 10-K, and our form 10 Qs for the first second and third quarters of 2020 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 investor.

<unk> products Cerner on our President and Chief Executive Officer will lead the call and now I'm pleased to turn it over to Sarah Suren.

Thanks Tobey.

Good morning, everyone and thank you for joining us today.

I'll focus my initial remarks on the key highlights in the quarter laid out on slide five of the deck.

And then we can push for Q&A.

We reported Eni per share of <unk> 47 per quarter, compared with 50% that we reported for the fourth quarter of 2019.

The EPS decline compared with a year ago quarter, primarily reflect the impact of closing the failed on Barrow Hanley in the middle of the quarter on hand.

Smith on the earnings from the affiliate for the back half of the quarter.

And this was only partially offset by achieving our target for expense reduction and our corporate center and our share buyback activity in the year.

The Eni of <unk> 47 from the quarter is flat compared to the third quarter of this year, which results from <unk> 47.

And that again reflects the Barrow Hanley to provision in the quarter, which led to lower you know in our liquid Alpha segment.

But the decline in liquid Alpha segment relative to the third quarter was offset by higher Eni in our Quant <unk> solutions segment, driven by the continuing market recovery and higher Eni in our alternatives segment.

And by net inflows.

Our net client cash flow during the quarter on a pro forma basis.

That is excluding Barrow Hanley, Inc.

Slightly to minus <unk> 3 billion compared to minus <unk> 5 billion that we had in the third quarter.

The fourth quarter net outflows of <unk> 3 billion comprised net inflows of <unk> 6 billion in alternatives.

Reflecting continued fundraising and other flows.

And net inflows of <unk> 4 billion in pro forma on liquid alpha.

So a combined $1 billion of net inflows from these two segments.

Which was offset by net outflows of $1 3 billion and quantum solutions, resulting in the 0.3 billion of net outflows.

Our investment performance remains generally stable.

And it's similar to the third quarter.

As I mentioned earlier in the fourth quarter, we reached our target.

Head of schedule of reducing our annualized corporate center costs by $20 million.

Turning to capital management.

Completed the sale of barrel Henry in the middle of the quarter and we used a part of the proceeds to fully pay off the remaining $80 million of borrowings on our corporate revolving facility.

We expect to use the rest of the proceeds.

Selected in our outsized cash position on our balance sheet low return more capital to the shareholders and potentially deleverage further.

As you will note our cash balance at the end of the fourth quarter was 403 million compared to $130 million at the end of the third quarter.

Now, let me turn the call back to the operator and I'm 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 your question. Please press the numbers on.

Please hold for a brief moment, while we compile the Q&A roster.

Our first question is from Craig Siegenthaler from Credit Suisse. Your line is open.

Good morning, Sir on helpful as well.

Hi, Greg how are you.

I'm good so.

Given the improving capital position, but also the higher stock price can you just remind us how we should think about the method in which you will return capital to shareholders. This year.

Yeah. Thanks, Craig.

We haven't made a specific decision yet we continue to.

Evaluate.

So what's the best use of capital is but returning capital to shareholders.

Remains.

Our job priority and the top skus.

And then as I mentioned earlier.

We're also looking into using some of the proceeds to.

Potentially towards.

A little bit more deleveraging.

So a couple of ways, we could do with that <unk>.

Repurchases were monitoring the market.

There was a lot of volatility.

So we will see.

You know what the right timing, maybe we do have low <unk>.

<unk> toward.

Using up the capital sooner rather than later.

It could also consider one time special dividend.

For example, we're thinking through that so.

So more to come.

And the next.

Call it month or a couple of months on that and whatnot, but essentially return of capital to shareholders being the primary rooms, and maybe a little bit more on deleveraging.

Got it very helpful.

Just as my follow up.

I wanted to get your perspective on the potential timing.

The next vintages of fund raising at landmark.

And maybe you could just compare it in.

In terms of.

Sizing when we think about the last fundraising cycle day experience two to three years ago.

Yeah.

We're still essentially as we we've said that we're targeting and then I guess I'm glad you've referenced the last one raising because as we've always said, we're targeting essentially more or less the same.

Amount as our last vintages.

So in 2020, you would have noticed that you know we got it.

Started amid COVID-19 and so we definitely have had an impact on the.

On the normal cadence of fund raising.

From Covid, both logistical issues as well as just on.

Being a little bit.

Somewhat.

Laying things if you will.

But in 2020, having gotten a startup you would you would have noticed.

But you know we have about $1 billion.

That we raised in 2020, just getting warmed up if you will.

And that wasn't one of our strategies, which is infrastructure.

And we have an ethics.

Secondly strategies.

And then we would expect to get to our target essentially.

Over the next.

Couple of years this year range in 'twenty two essentially.

And we'd probably expect.

North of 10 billion remaining to be raised.

And that sort of compares to what we did in the in the last vintage.

Thank you Sir.

Thanks, Greg.

Our next question is from Michael Cyprus with Morgan Stanley. Your line is open.

Oh, Hey, thanks for taking the question, maybe you could just dig a little bit more on on the capital management I was just hoping you could just give us a little bit more color around you know.

How you might approach evaluating whether you'd shift a little bit more toward a special dividend versus buybacks. What factors are you going to be considering in that sort of analysis and then similarly as you think about sizing the the debt pay down again, how are you thinking about sizing that and what are the factors you're going to be looking to take into consideration there.

Yeah, Thanks, Mike Yeah, no essentially.

Just value accretion remains our.

Primary lens, if you will in terms of just used up capital and it was the reason that we have.

<unk> focused on acquisitions for example, as we've been consistent.

But we think the.

But they would be EPS accretive but the per.

But the value of those incremental earnings.

We don't consider them.

When considering the high enough too low.

More on the capital use.

So in terms of.

Looking at it from here.

Essentially yes.

Returning the capital to shareholders. There is some definitive enough to that in terms of what that value is whereas.

You know in terms of.

Delevering or repurchasing our there.

There is.

You know we have to take into account the.

The market conditions the timing.

And the size and how much you can actually get done. So so those are the things where we're looking at but I.

I would say that those are all good options its on its a good problem to have an always on.

Trying to figure out, which are which one's the most optimal it could be a combination.

Great and just maybe as a follow up question I'm, hoping you could give a little bit of color on on maybe the institutional pipeline here you know how that stands today versus maybe last quarter and a year ago and any color you can share on the quantum related outflows in the quarter in particular, how some of the managed vol.

<unk> are performing and holding up that are indicating that maybe you can remind us of where they stand from an AUM standpoint, and how they contributed from a flow standpoint in the quarter.

Yes, certainly I.

I think on the institutional pipeline.

Things are starting to come back to more normal.

Normally in the sense of the remote environment normal.

In defense, our clients and consultants are all engaged in have got used to working remotely and doing diligence remotely and rewarding mandates remotely that's becoming more normal zone.

It's not work from office for a while.

Things are picking up in full swing and pipelines on building up to pre COVID-19.

In an environment. So so that's encouraging going into 2021.

But on the flip side as well I guess.

There are times when clients are looking to do things.

Moving into products that we don't have and so.

That's.

But the flip side of it, but we expect to be winning more often than than losing.

When when new things come up.

And in terms of performance, yes, no Acadian has.

On a pretty diverse set of strategies and managed vol group of strategies.

It is one of the larger ones they are pretty diversified within that that is true.

International other regions, but but as a group.

Malaria to get there is that they generally have.

Essentially low low beta.

Securities as opposed to high beta.

The theme being that the when picked well using all of the multiple factors low beta strategies delivered just as much as it turned on its high beta.

Over longer periods, if not more but during the day specifics that up.

Circumstances during 2020 during Covid.

A situation that low beta sold off as much as high beta.

And on the on the recovery.

Have.

High beta stocks is from not be Textbox day at Homestar, they've actually done twice twice as better.

So you'd have to.

I would like that.

Which is not.

Two question the long term academic statistical.

Oh.

The power of the strategy, which is borne over time, but yes, you will have periods like that money flow.

<unk> strategies underperformed.

And then yes, certainly that could be fine.

That are focused on near term, but.

But the vast majority of our clients are focused on longer time periods, but yeah, we do see some.

So some pressures there on that on.

And that's about our strategies.

But generally the effect on so it's a very diversified group of strategies. We have managed vol. We have a variety of international or non U S strategies across different cap range is.

Non U S small cap.

Global equity.

So there are lots of puts and takes on and that's the main benefit of having a diversified business.

Great. Thank you.

Our next question is from Kenneth Lee with RBC capital. Your line is open.

Hi, Thanks for taking my question, just one follow up around capital management.

I'm wondering whether you could share with us any preliminary thoughts about key considerations.

For a future potential target leverage.

Thanks.

Yeah, Hi, Ken on leverage where you are.

We're glad to have fully paid off on a bottler. So now we have the essentially the bonds outstanding which are longer dated.

We do generate a lot of cash flow scale right now and we have that now.

<unk> on our balance sheet sitting on.

So first priority of the fed was returning capital to shareholders than than we'd see about.

Opportunities to deleverage further, but just given the the.

The growth in the indeed, and the earnings and cash flow generation, we would expect even if we were to.

Is keep our current level of gross debt.

They probably expect to end up with less than two ex.

Gross debt gross debt to EBITDA.

Most times.

We would have because we have generally as I've mentioned in earlier calls.

Particularly around <unk>, we have some seasonal Lee.

But that that taper off.

In the course of the following quarters, so we'd probably expect as we get to second and third quarter and fourth quarter, we would expect gross debt to EBITDA.

Generally be less into ex.

Got you that's very helpful and just one quick follow up if I may.

Wondering if you could just share with us any thoughts around any potential need for reinvestments within the business over the near term either on technology platforms or other areas. Thanks.

So thanks, again, and we have been investing.

And all of our businesses during normal course, so at Acadian for example, we've been investing in the technology from <unk>.

Multiple years on trying to stay ahead of the curve in terms of.

On data, but also having the latest.

Investor reporting.

Tools as well as having the latest trading.

Trading capability.

Both expand capacity and gum and to help with Alpha generation similar.

Similarly at landmark we have been investing in.

Based on nearly all fronts in terms of fund raising and deploying capital.

<unk> reporting so that's just not already reflected in our.

If you will the run rate on P&L.

The recurring investment that we do.

But we also use a part of the capital to seed new strategies. So that we continue to do across all three of our segments.

And the management teams will encourage the management teams too.

To come up with.

<unk>, where they can produce alpha and where the market is.

So we'll continue to do that and we have.

Enough in our seed capital pool.

No that that's adequate as opposed to needing more.

To to support that.

New strategy development.

Great. That's very helpful. Thank you very much.

Thanks, Ken.

Our next question is from Gayatri Ram Krishnan with Bank of America. Your line is open.

Hi, Peter.

I was wondering about your expenses your guidance was definitely better compared to last quarter and I was just curious in terms of what has changed and how to generally think about the long term margin.

Hi, guys.

Oh, Yeah Theres.

Theres been lots of ins and outs.

On the expense, particularly with the disposition if you will.

Barrow Hanley and copper rock earlier, and then there is the.

The center expenses that we had guided to.

Would achieve $20 million.

A reduction and so by 121, the book, we weren't able to get there by by this quarter.

So that's the that's essentially the on the expenses.

We also this year or if there is a margin on benefit we had in the on the TNT.

Front that.

That will normalize over time.

But that was the the expenses so going into 'twenty one.

Well, we'll stay disciplined on on expenses will continue to invest in growth.

Particularly at Acadian and landmark and then some TNT was normalized so the result of all that would be probably.

Stay more or less at the same place with moderate.

Growth.

We would expect just given the market recovery that has happened.

No.

And the fund raising we're doing day in yards. So so the revenue growth, we expect to outpace the expense growth.

The result, we would expect some modest improvement.

On our on our margins.

Got it thank you.

Our next question is from Chris Harris with Wells Fargo. Your line is open.

Great. Thanks.

So what are you hearing these days from your institutional customers with all the corporate level changes going on.

I know, that's not necessarily a new development, but its been happening for per bit of time.

And is this are those changes do you think having an impact on the flows in any way.

Yes.

Yeah, that's from the perspective of the institutional client gross yeah, no non changes as best from their perspective.

Definitely on a given.

But if there were to be changes I think the multi boutique model the benefit of that model is that at our affiliates.

On the actual investment managers R. R.

Fairly insulated from any changes in the sense that somebody else have always had.

Full investment autonomy and operational autonomy and with the changes that we announced.

And in the in the second quarter last year.

No. We went further ahead you know on that autonomy and so.

So much so that now clearly it's basically operate their businesses autonomous fleets.

So that that helps because from a practical perspective, there is nothing that.

Really impacts the the underlying.

Investment managers now and hence their clients.

So the question does come up from time to time as clients do their diligence.

Diligence, but most of the time, our managers are able to provide them enough information, but from a practical perspective.

The corporate changes of basic don't impact what they do for their clients day to day.

It really doesn't impact the declines.

But it is something that not climb.

Clients could read the headlines from time to time, but want to check with their managers, whether it's something that impacts them.

Yep Okay.

And just to verify you know on the capital management and thanks for all your comments on that.

Yeah, a big increase in the cash balance this quarter from the sale of Barrow Hanley.

Laid out the options and it sounds like Youre going to make a decision about a month or two on.

On your on the board on on what to do with that for that excess cash on our balance sheet is that is that a fair summary.

Yeah, that's a good summary, and you said it better in line.

And the big four way than I did.

[laughter], Okay, alright, thank you.

Our next question is from Glenn Schorr with Evercore ISI. Your line is open.

Yes.

Excellent.

No.

So on.

What 15 question on patent Ashwin, sorry, what's that.

It's really missing from all of those options.

Yes.

Acquisitions to add to the strategy.

The man Quant <unk> solutions and alternative strategies.

So it's fair enough to assume that the organic growth will come from investments within our cash.

Mark.

And then the follow up on that is that self funded by them.

It does.

Parent company.

Fund.

You've actually seen investments or how does it how does that how does that work between self funding and per.

Hi, Glenn.

Yes, so as I touched on earlier essentially that are recurring P&L. It's due do have.

A good yeah.

Healthy amount that we've needed all of our technology investments for example at Acadian as well as.

At landmark, where we're investing in proprietary technology.

It is helpful to their oh.

On our clients.

So we can do that and a fair bet and and as well as the growth in.

And head count to support Investor Relations fund raising that's already.

And there and runs through the P&L and then we provide seed capital.

At all of our businesses too to support new strategy.

Well as to support our fund raising and.

And we have a.

Steve capital pool to support that.

So so essentially that is definitely one of the he was just from a capital management perspective that we laid out in our new strategy.

In April.

2020.

Essentially the the main uses our return on capital to shareholders.

One deleveraging too and third supporting there are plenty of businesses.

We happened to have enough on the on the third item.

We already have it on a carve out if you will end up in the P&L and in the seed capital pools that we have.

And we remain supportive of.

The bolt on inorganic acquisitions should our affiliate find complementary strategies.

<unk> our platforms.

And in that case me what.

We would.

So then would that would that capital.

So, but that's very much with our new approach.

Switch to more of an affiliate led.

Approach on on those on those issues because they are really there their ground level knowledge and intelligence.

Is it would be much better to underwrite a decision like that as opposed to corporate making that decision.

Fair enough, if I could ask a related.

A follow up on.

For Acadian and Quant land I'm just curious on.

This is bang on in their business is just I want to see it.

They fared Inc.

On the retirement.

Volatility and ex and if they see changes coming down the pipe at low.

Walter how they had they navigate those markets with them.

Hi, Glenn you broke up there a little bit would you mind restating a rephrasing the question.

Sure no problem.

That's me.

Yeah.

I guess I'm curious on how are paying good during the January big retail volatility.

That was going on this day impulse.

We're able to account for all that on some of the MSA safety either changes in the marketplace counting on it.

Tweaks, we need to make to adapt or is it really just business as usual.

Yeah.

Yes, it's more of the latter it is business as usual in the sense that you know.

I mentioned on our businesses long only business even in strategies like managed volatility it's basically.

Just having low beta.

Securities as opposed to having a good options our short positions. So we don't really have a long short business I'm just very tiny.

So the volatility that you saw in specific securities in January.

Did not affect us from that perspective.

But one way day.

These things can affect us.

To be can it would be if there were you know a larger.

Securities that just just rise and that would then have essentially the an increase in the benchmark right because the way in the benchmark return right. So that that why it would be then underperforming.

The benchmark.

But the volatility in January you had some impact on the benchmark, but given those birds.

Smaller portions.

Of the security are smaller portions of the benchmark it did not impact us.

That much it was it was manageable.

But of course, our Acadian as well as our other affiliates.

They've stayed true to their discipline right, whether it's we're doing the multifactor approach at Acadian arts or value approach.

And that's that will that will prove out on.

And generally has proven out over time right as opposed to.

Dabbling in.

Near term momentum because we have a firm belief.

That.

It's an investment process that we that we stick to that we adhere to.

And we Havent veered from that right. So if there is.

Some investors retail investors are enjoying.

A hot air balloon right. If you will right now we know that's not going to take them to the moon right. It's a from in the air.

Finishes then it could be a hard landing.

So we will stay.

True to our discipline.

Essentially but yeah, but acknowledging that we.

We don't have any short positions and he put options.

But if the benchmarks you got impacted.

Then yeah, then we would miss out on.

On.

On the return that we would just be scratching our heads.

You know how something like that can happen.

Does that answer your question. Thanks, a lot Sir.

Yeah, absolutely. Thank you.

Our next question is from Toby I guess small pack with Clearbridge. Your line is open.

Oh Hazer in Ohio.

Oh hi.

All my questions have been Austin on so thank you.

Oh, great. Thanks.

Our next question is from Michael Cyprus with Morgan Stanley. Your line is open.

Hey, Sir and thanks for taking the follow up I just wanted to circle back on landmark with the upcoming fund raising I was just hoping you might be able to help quantify the impact of any step down on the fees from predecessor funds as you raise the new funds and turn on fees for those and then if you can provide any sort of color on how the existing.

Set of landmark funds are performing in the marketplace, maybe where they stand in terms of distributions back to Lps, and then and just lastly, any sort of color around the GP commitment that's needed from from bright sphere versus a landmark itself versus the affiliate just in terms of you know how that's going to be split up to be.

To be paid for it for the G P commit.

Right. So that's the.

So it goes maybe get if I'm, if I Miss anything Mike feel free to ask again.

But in terms of the track record of net spend one of the best and the longest track record of landmark was the pioneer.

In the in the secondary business.

So it's been a it's been a consistent track record.

Of of returns, including a very strong track record during the global financial crisis.

So that's why landmark continues to be.

Well regarded and a strong track record in the most recent vintages.

So in terms of the the last winter just that we have raised and and yet you're asking a good question, but essentially our fees are charged on committed capital.

And there was a period of time.

During reservoir with Covid.

Remains uncommitted capital and then it flips to invested capital.

And then.

Unless there are a lot of distributions are.

A lot of change generally when it flips to invested capital it should be more or less the same.

But that would that would be coming up starting in 'twenty. Two there would be some changes from committed capital too.

On to the net asset value.

And that impact as we get closer to two that Dave will provide.

More guidance on what that impact will be but no but of course.

Unfortunately, we're raising funds much ahead of that so.

But so some of that essentially.

It would be way more than offset on all of <unk>.

Force just given the.

The last set of fund raises of.

Similar size, but the step down it is much smaller in terms of the change from committed capital to know because these are very long dated funds so not that much.

It gets distributed out that would create that non-GAAP between committed capital and now.

And I guess there was a third part of the question, Mike If you could refresh.

If I missed it.

Just on the G. P commitment I mean, how are you thinking about funding that and kind of splitting it between.

Between the parent versus landmark itself and the employees.

Yeah.

So essentially yes.

It's a split that we are that we discuss with the team and on the last set of funds essentially that Blake was 60 40, we generally provide one per cent of GP commitment.

And and 60% was funded by Visa, Inc, and 40% by the team.

And and there was a split of carry on the last set of vintages we.

Basic we wanted the team to have them on.

You're already at that carries on a team of about 85%.

Leasing has about 15% on a net debt of vintages that are that that will still well, we'll be discussing that in terms of what the right split should be.

But essentially we provide them.

And we get some carry.

Great and just sorry to clarify you mentioned the step down taking place more in 'twenty 'twenty. Two does that suggest that the funds would be raised or starting to be raised from 'twenty, one, but you wouldn't necessarily be charging fees on that until 2022.

Oh, no the way our funds work on the secondary strategies is that no.

But essentially the fees as fees are charged on committed capital, whether it's deployed or not it of course gets deployed.

You know relatively sooner compared to primary funds.

That's one of the advantages of secondaries, but there're fees. It starts getting crude from the time. It's committed so when we have fun closes the fee is accrued and you may recall that we also have this element.

Element of catch up fees.

For subsequent closings or clients that come in later, they pay fees going back to the first logos.

Does that clarify.

If that's the case how come the the funds are not theory on earlier ones are not stepping down in 'twenty one.

Just curious on that sort of day economy there.

Yeah that it gets basically they will have different strategies and so the step downs are different for different strategy.

But essentially we will see them.

Some step downs.

And in 'twenty two.

That's what I don't understand the specific why why you would expect some funds to be stepping down in 'twenty one.

Got it okay, well, we could take off line that's okay.

All the color here. Thanks, so much.

Thank you.

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

Great. Thank you everyone for joining us today and.

For.

For asking US the question hope that was helpful wishing everyone.

And those maybe are they pushing everyone's successful 'twenty 'twenty, one and a healthy one thank you.

[music].

Net.