Q3 2021 Brightsphere Investment Group Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Bright fear investment Group earnings Conference call and webcast for the third quarter 2021 during the call all participants will be in a listen only mode. After the presentation, we will conduct.

A question and answer session.

The attitude of the queue. Please press the star followed by one at any time during the call. If you need to reach an operator, Please press star followed by zero.

Please note that this call is being recorded today Thursday October 28th 2021 at 11, a M eastern time.

And I'd like to turn the meeting over to Ali Sugarman head of corporate development and Investor Relations. Please go ahead early.

Good morning, welcome to <unk> conference call to discuss our results for the third quarter ended September 30th 2021.

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 our 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 2020 Form 10-K, and our Form 10-Q for each of the first and second quarters of 2021.

These 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 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 turned.

Turning to honor, our President and Chief Executive Officer will lead the call and now I'm pleased to turn the call over to serve certain.

Thank you Ali.

Good morning, everyone and thanks for joining us today.

I'll kick off on slide five of the presentation deck as usual.

Well in the third quarter of this year, we are especially across the key milestone.

We closed on the previously announced divestitures of three affiliate.

GSW ICM and Campbell global.

And now going forward, our operating business will be Acadian.

Which is a market leading quant manager with an impressive track record of outperformance.

But now we have completed a full transition from a multi boutique business.

Ill focus.

Integrated business, which will now provide our investors pure play exposure to Acadian highly differentiate it.

We also expect to fully deploy our excess capital and that's fourth quarter.

Which would likely involve paying down $125 million of our retail notes.

And repurchasing more than 1 billion of our.

Shares, which will collectively generate significant earnings accretion, while reducing leverage.

The completion of divestitures of six of our seven affiliate.

At attractive valuations.

And now the deployment of excess capital generated from these transactions.

<unk> simplifies our business and our balance sheet going forward bright here is essentially just the Acadian business public data.

Now moving to our financial results for the quarter.

We reported Eni per share of 28 for the third quarter of this year compared to 30 in the third quarter of last year.

There is some noise in the Eni comparisons.

Coming from other affiliates, which have now been sold.

Also the EPS base will change.

The share buybacks I mentioned.

So it won't be topical to look at the financials for Acadian, our selling operating business going forward.

Turning to slide seven zero in on Acadian.

The business generated $49 1 million of adjusted EBITDA in the third quarter up 21.

Compared to $37 4 million in the <unk>.

Third quarter of 2020.

And $53 1 million in the second quarter of 2021.

The adjusted EBITDA increased to 21.

He is lower compared to Q21.

Primarily due to performance fee seasonality.

It has been generally half yogurt performance measurements in the third quarter.

We have a lot of our measurements in the fourth quarter.

We would expect performance fee and hence EBITDA to be higher in Q4 21.

Turning to flows.

Our net client cash flows are getting better as outflows from lower bond strategy continuing to reduce.

We reported net outflows of <unk> 7 billion and $3 21.

Compared to net outflows of $2 4 billion in <unk> 'twenty.

And net outflows of $1 3 billion in <unk> 'twenty one.

Looking at investment performance.

You can see on the revenue chart on the lower left hand side.

At Acadian investment performance continues to be very strong with.

With 81%, 85% and 88% of strategies by revenue.

Beating their respective benchmarks over the prior three five and 10 year periods.

We're optimistic that the strong long term track record.

<unk> generated robust net flows and organic growth over time.

I would also like to take this opportunity with delve into Acadian a little bit more.

On slide eight we provide a high level overview on the Acadian platform.

Acadian is a differentiated and scaled business with.

114 billion.

And a long track record of perf.

Forming for its clients for 35 years.

At the heart of the business is an exceptional combination of one.

Perfect.

Comprising people with Phd and other advanced degrees in finance and technology.

Two our unique data comprising $200 million observation daily.

Cross 43000 traded assets around the globe.

And three our advanced technology platform that allows us to leverage our academic research and data across asset classes and geography.

We have deep capability across long only offshore multi asset class managed volatility ESG and other areas with our AUM spread across more than 70 different strategy.

And I would also note that approximately 80% of our AUM is invested outside the U S.

On slide nine.

Visiting investment performance again in a bit more detail.

You can see that Acadian platform has outperformed across long and short periods.

81% to 89% up strategies by revenue outperforming their benchmarks.

I would also like to spend a minute on slide 13, summarizing our growth strategy.

Our growth strategy going forward is primarily organic.

There is a growing demand for a majority of our strategies and solutions.

And our offerings have capacity and are scalable.

We will continue to leverage our quant platform to provide solution.

By our clients as their needs evolve.

Our multi asset class offering is an example of that our clients expressed the need for a factor based solution covering multiple asset classes beyond just equity.

The growing demand for ESG solution is another example of a market opportunity that is particularly as they relate to our capability.

Hence, we can really methodically quantify the various ESG factors.

Any given security as well as the impact on returns with a lot more precision than others.

So we will continue to see new products and invest in innovation.

We will continue to invest in our technology to remain on the cutting edge and we will continue to add to our distribution as our needs it wrong.

And we will as always continue to look for all of the various ways to realize additional value for our shareholders.

On that note now let me turn the call back to the operator.

And we are happy to answer questions at this point.

At this time those with questions should lift their phone receiver and press the star followed by the number one on their telephone keypad to cancel a question. Please press star one once again.

We will have a brief hold for a moment, while we compile the Q&A roster.

Okay. We will take our first question from Kenneth Lee with RBC capital markets.

Hi, good morning, Thanks for taking my question.

Just one on in terms of the mechanics of the share repurchases in the fourth quarter.

It is a significant amount of shares wondering if youre thinking about either a tender offer or an accelerated share repurchase.

Hi, Ken.

Yes.

Loaded.

Given just the Si.

Relative to our market cap.

Probably tender offer is probably the.

The only option.

As most other options take a long amount of time.

Got you very helpful.

And then just one on within the Acadian franchise.

Really appreciate the further breakdown in the.

Overview.

Yes.

Sounds like you're very broad set of strategies, there, which are there any particular strategies that you're particularly excited about.

<unk> potential we have the best growth prospects.

Environment. Thanks.

Thanks, Ken Yes, the advantage of having.

A good number of solid strategy.

That diversification right that Theres always.

So there are always some strategies that are in high demand.

Environment and there are some strategies maybe that.

Not as much in demand so diversification provides that benefit but you always have something to sell.

In the current environment, we are seeing.

A lot of demand for some of our scaled strategy emerging market for example international equity.

And we're also seeing demand for some of the new products that we have developed more recently.

We mentioned multi asset class for example.

That continues to get good traction.

Because it provides.

Closure across.

Asset classes, and a very factor dividend quantitative way.

Does not.

<unk> unique capability.

And we will continue to develop other products on ESG.

<unk> for example that we are very excited about that.

Touched earlier.

During my introductory remarks.

We have equity alternatives.

No derivatives of that in terms of multi strategy.

We said there are a lot of earlier stage strategies that are.

Smaller right now, but we are very excited about them from the perspective of future growth.

And then we haven't scaled strategies.

Some of them.

Okay.

It's a tad.

And in any given quarter or any given period. Some some are always in demand.

Great very helpful. Thanks again.

Thank you Ken.

Next we'll go to David Eller with Wells Fargo.

Hey, good morning. Thank you for taking the question I'm kind of new to the story.

You've done a lot of work over the last year to reposition the business you've done a pretty good job getting fairly attractive valuations for the businesses you've sold so I'm wondering if you could talk a little bit about why the large share repurchase makes most sense versus maybe taking a look at other.

Our asset management platforms are seating kind of new and emerging managers and then kind of related question was Acadian shopped as well do you think it would make sense.

In the hands of another owner would that be a better way to create value for shareholders. Thank you.

Hi, David Yes.

Lot to unpack there.

Maybe let me start with the first one is that.

No we don't.

<unk> taken a lot of steps over the last year and a half.

Simplify our business and unlock value.

First of which was just really we used to be a UK company at some folks who covered us from before May remember, we re domiciled.

We used to be.

Heavy on corporate overhead to reduce debt and then we have a lot of these businesses that were highly valued.

And the private market, but we werent getting.

Enough credit for those businesses.

In the public market.

And there was there were good homes for those teams and those clients were well served with.

With bigger organizations.

Moved ahead.

And that now we have not slower six of our 7% affiliate with.

With other homes, which are win win situations and yes, we got attractive valuations for for most of those businesses.

Floating some businesses that at the time, we're seeing a lot of outflows.

In most cases, we've got more than eight.

More than eight times EBITDA in some cases double digit yes.

EBIT to EBITDA.

And then we ended up with a lot of cash on our balance sheet.

So as we look at using the cash on the balance sheet, we have been in the M&A game of course, having been a multi boutique in the past and we continue to look at various targets.

Most of the time.

The valuation was really high even for our App decent platforms.

It was nine or 10 times, EBITDA or EBITDA and for the ones that had growth and double digit EBIT to EBITDA.

So as we look at.

Where to use the capital we are trading.

Our own business at an EBIT to EBITDA with a six handle.

And our business is very well positioned as I touched on earlier.

In terms of being a unique differentiated business and having all of the growth opportunities ahead of it.

So rather than paying.

Nine or 10 times EBITDA for our business and take an execution risk.

We would rather just.

Buying our own stock is.

Just a much smaller and low risk inverse.

Investment.

For us.

And then a part of the proceeds.

Delevering.

Just.

Manage an optimal leverage.

That's how we went about our decision that just.

A bit of a no brainer in terms of what are the owned businesses, whether it's trading.

Paired with the M&A opportunities.

Not sure if I answered all of your questions, but please.

Please.

Repeat it.

Miss something.

Yes, no you covered most of it.

Obviously, you're a much smaller scale now and you mentioned kind of the overhead costs and I'm trying to get those down but.

When you look at the business today and in the overhead costs required to kind.

Manage Acadian do you think it would be more efficient.

Different owner.

Realized pretty good valuation for your own shareholders, but also kind of benefit from the.

Synergies of a larger owner.

Yes, no we have always been very shareholder value focus.

As those of those of those.

On the phone who knows.

For some time now.

So we will always be receptive to.

Anything that.

That provides greater value to our shareholders.

And we are fortunate that we have very unique.

And differentiated capability.

So that might that might happen.

Receptive to it.

And now having simplified our business.

We have a scaled business.

The operating level and then we have them. So we still have some overheads.

We reduced a lot of what we used to call center overhead.

Now, it's about $20 million.

We think now that with just one business simplified business, we can probably.

Maybe bringing down the 20 to turn pretty quickly.

And then maybe.

Because the business is pretty scale.

The remaining 10 can also over time.

We can.

What does that down now in the context.

Another scale players.

Capability.

Taking on the business then of course, the entire 2000.

It's not needed because most of it in support of public company reporting.

So there is yes, there is debt.

A little bit of overhead, which we view as document opportunity.

Any view of the operating EBITDA.

Jeff touched on as you know.

<unk>.

50 ish $50 million to $53 million per quarter.

We really view that as a core EBITDA.

Got it that's super helpful. Thanks for all the color.

Thank you.

Next we'll go to Michael Cyprus with Morgan Stanley.

Hey, good morning, Thanks for taking the questions I just wanted to circle back to your comment around the buybacks and that more likely being a tender it sounded like I was hoping you could maybe unpack how.

Tender process would work what are the sort of different steps and timeframe around how that process might unfold.

Yes, and as we've mentioned bike that we.

We expect this to be a Q4 event.

And we're working through the details.

So we should be coming out with the details soon but it's.

Essentially given the size we had mentioned it.

That's sort of more of a known and then rest of it is pretty standard.

Standard pretty typical for how normal tenders go so will it be.

Coming out with a full blown package.

In the near term.

And would your expectation be that that.

The existing large shareholder that you have would participate or any sense. There on how that would work out because if they don't participate then that large shareholder can end up owning like half the company and is that their intention just any thoughts there.

Yes, we don't know.

Clearly, if they would or would not participate.

But we do understand that their intention is not to.

Increased their stake beyond the current.

Glenn close to 25% stake that they have.

So it is the expectation that there will not be increasing.

Got it and if I could just sneak one more in here just as you think about buybacks here that you kind of came out with just curious what led you to buybacks over a special dividend what factors led you to consider that and what would you have led you to the other way toward the special dividend.

Yes.

Yes, I guess in part as I mentioned.

In response to David's question earlier, right that we always look at where every dollar of capital. We always look at all the possible uses in what could be more accretive than than something else.

So acquisitions were clearly.

I am not holding up well versus buying our own stock.

Then of course, a part of the proceeds are being used to reduce leverage which we think is also prudent.

And then with regards to the return of capital dividend versus buying back the stock of course, where we're trading as a key factor.

Debt given in our own experience.

The businesses that we have divested.

We got what we believe.

It can be a reasonable valuation, but of course compared to where we trade for and a business that was sort of our crown jewel.

We believe that.

We are undervalued. So so it's a good investment.

From that perspective also dividends.

Four.

A good number of shareholders, we have received feedback that.

It wasn't tax efficient for.

But a lot of our investors.

Great. Thanks, Sara I'll get back in queue.

And this concludes our question and answer session I'd like to turn the conference back over to Suren Rana for any additional or closing remarks.

Thank you.

Mike Cyprus mentioned, he was getting back in the queue.

Okay, we'll take Mike Cyprus.

Oh, great. Thanks for squeezing me back in here.

Thank you.

Just coming back to your comments around the expense efficiencies at the center I think you had mentioned that $20 million of center costs going down to 10, I was hoping you might be able to elaborate a little bit more on just what are the biggest item et cetera sort of impacting that it sounds like it's coming out pretty quickly. So just any help as we think about the guidance on the expense.

<unk> into 2022 into next year should we be thinking about the similar sort of operating expense efficiency range into next year or no because of the expense saves coming through just any help there on that the different guidance items that you've given us already for this year, how does that sort of progress into next year.

Yes, I guess as you would.

Would expect that when we when we had more than one affiliate.

Then there was.

There were some overlapping.

Functions that were needed, but now it's just really one.

One business.

Early integrated business at this point and continuing to be more integrated.

So there is some overlap.

Particularly on the.

On the Holdco executive.

Hi.

It just probably where more of it is.

And then and then some some overlap in other functions.

But of course.

Much less overlap overlapping public company reporting related.

Mike.

No findings.

In legal because those are the things that the operating business did not have that.

Representing the remaining 10, but the business.

At Acadian is very scaled business as I mentioned, but fully built back office and investor reporting.

So that over time.

That can drop probably absorbed a public company reporting responsibility.

As well so that's why we think that now.

The remaining 10, probably will not be coming out in one year it might take.

Longer than that.

But the first tenants relative.

Relatively gains here.

And then any help on the expense related ratios as we kind of roll forward into next year just from looking at the run rate that we put up so far here in the third quarter as we go into the fourth quarter and next year, just any help on how those might progress.

Yes, and I would be would we have four.

For the full year.

2021.

The little bit of.

There was some noise in there in terms of affiliates that have been sold.

Now won't be impacting that any anymore.

But we will provide guidance on that.

In due course.

I don't have enough that often.

Okay.

Great. Thanks, so much for taking my questions.

And that does conclude today's Q&A session I'll turn the call back over to <unk> for any additional or closing remarks.

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

We are excited about it.

Being a really simple business now.

Cleaning up our balance sheet.

And really focusing on organic growth.

Going forward, we look forward to engaging with you in.

As we execute thank you.

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