Brightsphere Investment Group PLC. (BSIG) Q1 2021 Earnings Call Transcript

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Brightsphere Investment Group PLC. (BSIG -1.52%)
Q1 2021 Earnings Call
Apr 29, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the BrightSphere Investment Group Earnings conference call and webcast for the first quarter 2021. [Operator Instructions] Please note that this call is being recorded today, Thursday, April 29, 2021, at 11:00 a.m. Eastern Time.

I would now like to turn the meeting over to Elie Sugarman, Head of Corporate Development and Investor Relations. Please go ahead, Elie.

Elie Sugarman -- MD of Strategic Development

Good morning, and welcome to BrightSphere's conference call to discuss our results for the first quarter ended March 31, 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 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 and our 2020 Form 10-K. 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 investment products. Suren Rana, our President and Chief Executive Officer, will lead the call.

And now I'm pleased to turn it over to Suren. Suren?

Suren Rana -- Chief Executive Officer

Thanks, Elie. Good morning, everyone, and thanks for joining us this morning. As usual, I'll focus my initial remarks on the key highlights in the quarter that we summarized here on Slide five of the deck. And then we can switch to Q&A. So let me start with refreshing the context and remind everyone that we announced the sale of our Affiliate landmark in March this year. And we're expecting the transaction to close near the end of the current quarter. The valuation we received for our stake was quite attractive at 16.4 times EV to adjusted EBITDA multiple. And with total proceeds from the sales loss of $724 million pre-tax and $630 million after tax. So this transaction unlocks and crystallizes significant value for our shareholders. Given the announced sales, effective 1Q 2021, Landmark has been moved into discontinued operations. So now we essentially have two primary Affiliates, our largest business, Acadian, which comprises our Quant & Solutions segment and TSW, which comprises our Liquid Alpha segment.

Both Acadian and TSW are very well positioned, differentiated businesses and we will continue to follow our approach of full affiliate autonomy in managing and growing our business, while continuing to be lean and maintaining expense discipline at our corporate center. So with Landmark now included in discontinued operations, we don't have the Alternatives segment any longer. Campbell Global, our affiliate focused on Forest Resources which used to be included in the Alternatives segment, along with Landmark, has now been moved to the other segment. Now moving to our financial results for the quarter. We reported ENI per share of $0.34 for the first quarter of this year compared with $0.30 for the first quarter of last year. Again, to be clear, ENI for both periods is excluding Landmark. If Landmark was included, it would have contributed $0.11 to our EPS for 1Q 2021 and $0.10 for 1Q 2020. So if you're trying to compare to our prior report, the EPS for 1Q 2021 would be $0.45 if you add Landmark.

The increase in reported EPS to $0.34 per share compared to the $0.30 a year ago, primarily was driven by the market recovery since then; the cost savings that we achieved from restructuring our corporate center; and finally, our share repurchase activity last year. These three factors helped us to more than offset the absence of earnings from Barrow Hanley, which was reflected in our 1Q 2020 results, but not in 1Q 2021 since we already closed the transaction in the fourth quarter of 2020. The EPS of $0.34 in the quarter is relatively flat compared to $0.35 for the fourth quarter of 2020. And this reflects the benefit of continued market appreciation, which was just about offset by the disposition of Barrow Hanley. Because in 4Q 2020, we had earnings from Barrow Hanley for about half the quarter until the closing of that sale in the middle of that quarter. But in 1Q 2021, we obviously had no earnings from Barrow Hanley. Our net client cash flows in the quarter were negative $2.4 billion, compared to negative $1.5 billion in 4Q 2020. Again, to be clear, both numbers exclude Landmark. In 1Q 2021 in the Liquid Alpha segment, we had positive net client cash flows of $1.2 billion, but we had net outflows of $3.6 billion in Quant & Solutions. And the outflows in Quant & Solutions were primarily driven by some reallocations from one or two strategies by select clients.

So there was a lot of lumpiness in the flows, which we don't see as recurring. For example, in the second quarter so far, we're seeing positive flows in the segment. The investment performance of both of our key affiliates, Acadian and TSW continues to be strong. Acadian's long-term performance strengthened further in the quarter, with 57%, 84% and 91% of strategies by revenue, now beating their benchmarks over the prior 3, five and 10 year periods, compared to 43%, 50% and 90% in Q4 2020. Turning to capital management. In 1Q 2021, we fully terminated our corporate revolving facility at the parent company level. And assigned it to Acadian with a reduced maximum size of $125 million. So this facility is now available only to Acadian for their general needs and not to basic parent. As we've discussed a few times previously, Acadian has seasonal means in the first quarter given the timing of the annual bonuses.

So Acadian grew $81 million on this facility in 1Q 2021 for the seasonal need and we expect to fully pay it down within the year. Our total consolidated debt at the end of the quarter, including the seasonal Acadian draw on the revolver, skewed at $475 million. Compared to this, the cash on our balance sheet at the end of the quarter was $450 million. Closing the Landmark sale later in the second quarter would provide us another $630 million after tax. So that provides us ample capacity to deleverage substantially as well as return capital to our shareholders.

Now let me turn the call back to the operator, and I'm happy to answer questions at this point.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Analyst

Good morning Suren and operator as well.

Suren Rana -- Chief Executive Officer

Hi Craig.

Craig Siegenthaler -- Credit Suisse -- Analyst

So Suren, how should we think about your capital return priorities this year between share repurchases, dividends and maybe even a special dividend?

Suren Rana -- Chief Executive Officer

Yes, Craig, we're still thinking through it. As I said earlier, we're expecting another $630 million near the end of the quarter. So once that capital is fully in the bag, it will be easier to have a holistic view and execution at that point rather than tranching it and doing a little bit now without having the second part fully executed. But in terms of priorities, those are the uses essentially deleveraging and returning capital to shareholders and then the mechanisms by which we do it, we're still working through it. The main -- essentially the second shoot or drop is closing on the Landmark sale, which we have near certainty on, but it's always good to have it fully in the bag.

Operator

Your next question comes from the line of Glenn Schorr with Evercore ISI.

Glenn Schorr -- Evercore ISI -- Analyst

Hi Suren, I appreciate the color on the quarter and not recurring flows on the Quant side. But I'm still curious to hear a little bit more. About the asset reallocations that happened during the quarter, what kind of conversations do you have to know that it's just a reallocation. And is it out of equity markets did well? You mentioned the rising market environment and that threw me a little bit. I'm just curious for a little more color. Thanks.

Suren Rana -- Chief Executive Officer

Yes. Thank you, Glenn. Yes. Sometimes, what happens is when markets are doing well and our strategies are doing well, some clients would do some profit taking, if you will, and move it to other areas that maybe haven't done so well. So we saw that factor at play a little bit. There were also some idiosyncratic things that happened given the institutional business, and that's what I alluded to, with the lumpiness. For example, a larger outflow was related to a client reallocating because of a regulatory concern around not having too much exposure to one manager. So these kind of idiosyncratic things do happen. Of course, some regular way outflows and inflows are related to people just looking at what strategies we do invest. So for example, we have touched on that in a rising environment managed low volatility type of strategy isn't necessarily on everyone's mind right now. So there are things that happen in select strategies like that. But if you diversify business, and so there are other strategies, regional strategies, strategies of different objectives, that's the inflows. So it's a combination of all of those, but definitely some idiosyncratic and lumpiness.

Glenn Schorr -- Evercore ISI -- Analyst

I appreciate that. Maybe that just I could follow-up on that because my other question was on -- you commented about continuing on the product innovation side. I wonder if you could just expand that out a little bit for both on the Quant and Liquid Alpha side, that would be great. Thanks.

Suren Rana -- Chief Executive Officer

Yes. So we continue to support our Affiliates with capital, particularly in terms of seeding new strategies. And that's where we can help invest but the efforts themselves are really driven by the Affiliate teams based on the feedback from clients in terms of what clients are looking for them to do and to provide. But we continue to provide -- and we encourage our targets to continue and develop products that we can see. So it's essentially a recurring R&D effort, if you will.

Glenn Schorr -- Evercore ISI -- Analyst

Thanks Suren appreciate it.

Suren Rana -- Chief Executive Officer

Thanks Glenn.

Operator

Your next question comes from the line of Mike Carrier with Bank of America.

Mike Carrier -- Bank of America -- Analyst

The question, Suren just on the M&A front, given active conversations that you've had with buyers, which led to successful sales of Barrow Hanley and Landmark. How have conversation been for the overall franchise during those conversations? And any restrictions or headwinds in the way for further demand?

Suren Rana -- Chief Executive Officer

Yes. The M&A environment is, over the last 1.5 years, has been very constructive and definitely industry participants looking for capabilities or looking for scale, there are a variety of factors at play. And as we've said to the market and our shareholders that we -- our primary focus is fiduciary duty to maximize shareholder value. And we have a good plan and our Affiliates, our strong businesses and that generate really good cash flow. So we don't necessarily have to do anything, but we do, as a result of our public stance that we are open-minded and have a fiduciary duty to maximize value. We do get inquiries from time to time, and we review them along with the teams. And if there's anything, let anything of interest, we discuss further. So that's generally how we've been approaching things.

Mike Carrier -- Bank of America -- Analyst

Great. Okay. And then just on capital return. It sounds like post Landmark, then you'll have an update on kind of the strategy. So before that, so in the second quarter, should we not assume much in terms of buybacks?

Suren Rana -- Chief Executive Officer

Yes, yes, yes. It's really hard to peg. Like I said, we prefer to not transit. So essentially, we would like to really have a holistic plan for the entire amount. So yes, so if there's anything, it would be pretty close to once we reach the closing. But we wouldn't do much in advance of getting to the closing.

Mike Carrier -- Bank of America -- Analyst

Got it. Thanks a lot.

Operator

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Behind the motivations of signing the corporate revolving facility to Acadian. Just wondering if there's anything else that you want to share with that? Thanks.

Suren Rana -- Chief Executive Officer

Ken, I think we missed the first part of your question. Sorry if I don't answer it, I can ask again, but I got it. In terms of what's the motivation to assign the revolver to Acadian. And that's really has to do with deleveraging that we had a large facility, which was $450 million originally which we reduced because we had cash building up. So we didn't really have a need for that much credit. So we reduced it first and then as I mentioned, we do have a seasonal need every year at Acadian, which is not a long-term leverage need because there is a first quarter need to pay bonuses. And then the revenues and earnings in subsequent quarters more than pay off for that. So it's a classic credit line need. So -- and it's more needed at Acadian. So we basically moved it there because at the parent level, we don't really have any need for credit given the excess capital we have. And it's also from a leverage perspective, it's very low leverage relative to Acadian's EBITDA in the sense this $80 million draw is a fraction of their EBITDA. So it's a pretty robust facility that meets their needs.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. That's helpful. And that answered my question. Just one follow-up, if I may. Wonder if you could just highlight any products or strategies that you've been seeing some good demand within the quarter? Thanks.

Suren Rana -- Chief Executive Officer

Yes. Ken, that kind of varies quarter-to-quarter, it's pretty diversified overall. So most strategies at Acadian are seeing demand at TSW. We saw some good wins, as you saw in Liquid Alpha flows on international equity side. And Acadian, I guess, maybe one -- I touched on this earlier, one strategy as we didn't see a lot of demand in this kind of environment was low volatility, volatility strategies. But generally, otherwise, we see pretty good demand across the board. And we've touched on this that some of these new strategies we're seeing while not big numbers yet, they continue to get traction, for example, the multi-asset class strategy, which goes beyond high equities, but leverages the same multifactor approach and data and philosophy, we're seeing, we continue to see good traction there.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great that is very helpful thanks again.

Suren Rana -- Chief Executive Officer

Thank you Ken.

Operator

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey good morning thanks for taking the question maybe just another on capital management. So it sounds like you're waiting until the Landmark sale closes before, I guess, deciding on how much and how to sort of pursue that. If I hear you correctly, that means it would be the third quarter -- or sorry, second quarter conference call in July is when you would expect to hear an update? Is that right? Or what's the scenario where we could hear or see something any sooner than that? And maybe if you could just elaborate a little bit on why wait so long, I think last quarter or the quarter or two before, you were suggesting we would be able to hear an update in the next couple of months, which some are suggesting, thinking would be this quarter's conference call.

Suren Rana -- Chief Executive Officer

Yes. So on the first part, Mike, yes, that's accurate that we would probably have an update on our next earnings call. If -- or right around then, it would definitely be around or after the closing of Landmark. So that we know so they fully have the capital that we are looking to deploy. That's part one. And the second part, yes, on the last earnings call, we were probably expecting within a few months from then but then we have, of course, had a sizable development in terms of sale of Landmark, which essentially obviously changes the magnitude of the capital we're looking to deploy. And hence, a reworking, if you will, of our approach.

Michael Cyprys -- Morgan Stanley -- Analyst

Is it also fair that given you were in discussions to sell Landmark, you were prohibited from buying back stock earlier in the year because of those discussions? And if that's correct? And if you were theoretically in discussions today around selling something else, would that also theoretically limit your ability to buy back stock over the next couple of months? If theoretically, if you were in such discussions?

Suren Rana -- Chief Executive Officer

Yes, we do have those type of constraints from time to time in terms of buybacks, in particular or anything material if we are in a blackout window before earnings or if we are on conversations, real conversations on a material part of the business. Yes. So that would restrict us from time to time.

Michael Cyprys -- Morgan Stanley -- Analyst

Sorry. Just one last one. If you were to sort of sell off maybe Acadian here, but then there's a lot of cash left in the public entity and a small business with Campbell and TSW. I guess how do you think about small public company, a large cash position, but significantly smaller business. What sort of scenario could such a thing play out?

Suren Rana -- Chief Executive Officer

Yes, we would generally do not consider that specific kind of scenario. As I said, our -- we very much are pleased with our businesses, right? As you saw with Liquid Alpha, we have flows. And Acadian, it's a very strong business that's highly regarded and reputed around the world. So -- but if -- if some inquiries came in from the perspective of issued duty, we do consider them. But of course, you see even with Landmark, which is a business we bought not so many years ago, there is some tax leakage. And the larger the value, the more the tax leakage. So we would -- that would also be a factor in considering something. So the scenario played out that we sell our largest business and pay a big tax build and have a smaller business, it's probably low likelihood. It would only be something that's so compelling that in spite of that, we go ahead.

Michael Cyprys -- Morgan Stanley -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from the line of Robert Lee with KBW.

Robert Lee -- KBW -- Analyst

Good morning Suren thank you for taking my question, just a real quick -- two questions. First, just actual modeling question. In the Liquid Alpha segment, is there anything -- since, I guess, largely TS&W or only TSW right now. Is there anything if we look at the $9 million of adjusted EBITDA that that's a good run rate? Is there anything kind of seasonal? Maybe in that around comp or something as you're trying to think of the first clean quarter without Barrow. I'm just trying to get a handle if that's a good run rate? That's the first question.

Suren Rana -- Chief Executive Officer

Yes Rob, yes, it is mostly basically TSW. Now we announced the sale of ICM in our 10-K, and that's to be closed. So ICM results and flows are in there as well. So that will essentially -- so it's basically clean, but there is slight noise. Now ICM is not -- it's another income, so it doesn't flow into the full P&L. But I would say next quarter would be a clean quarter, essentially, the -- but you can consider it mostly TSW.

Robert Lee -- KBW -- Analyst

Okay. And I mean, just another quick question on the, the revolver that you need Acadian and to just cross every T and dial every I, that's moved down there upstairs, but there's no -- it's complete nonrecourse in the whole company. Sounds correct?

Suren Rana -- Chief Executive Officer

Yes, that is right. And of course, as I touched on, it was essentially -- deleveraging was a driver. So by moving it to Acadian and having very low leverage ratios at Acadian, it's nonrecoursed to basic. So that -- while it's consolidated in our debt, it is not apples-to-apples because it's non-recourse to be said.

Robert Lee -- KBW -- Analyst

That's right. Okay. And I guess you kind of addressed this in your prior comments about tax leakage. But curious, is there any noticeable or meaningful deferred tax asset post the Landmark deal that will remain at the wholesale? Or is it pretty much used up?

Suren Rana -- Chief Executive Officer

Yes, we pretty much used up our deferred tax assets last year from the earnings that we had as well as the sales that we had with Barrow and others. So with Landmark, actually, we didn't have much left to use.

Robert Lee -- KBW -- Analyst

Right. That is my question thank you so much.

Suren Rana -- Chief Executive Officer

Thanks Rob.

Operator

Your next question comes from the line of Justin Ziegler with Eaton Vance.

Justin Ziegler -- Eaton Vance -- Analyst

Follow-up on the transfer of the revolver to Acadian. You just mentioned it's nonrecourse. But in doing that, are you guys still beholden to the covenants? Are there shifts in how those apply to debt and leverage at the holding company? And what does this do in terms of cash flow up to the center -- corporate center as well? And how does that kind of affect how bondholders might be, at least on the unsecured basis at the holding company still have that kind of EBITDA available to them?

Suren Rana -- Chief Executive Officer

Yes. Thank you, Justin, for asking the question. It seems like it wasn't clear in the material, so I appreciate that. Yes. So essentially, that is the benefit that as now at the parent level, we don't have any debt-to-EBITDA covenants because our bonds did not have such covenants. So -- but we did have a debt-to-EBITDA covenant on our revolver. So by having -- by moving it out of the corporate structure, we don't have that covenant at the parent level. There is a debt-to-EBITDA covenant at Acadian level on the facility, but their EBITDA, if you look at the most recent quarter, it's close to 2 times multiple of how much they drew.

So there is ample notion at Acadian level given is this a small portion of their EBITDA. There are any restrictions in terms of the distributions that come to us, of course, except in scenarios where, if you had an extreme scenario where debt servicing was a problem and all our business went away. Which, of course, is next to -- we wouldn't really think that's a scenario. It's a conceivable scenario. So it's a prudent approach, essentially, that's a very low leverage at Acadian levels. No restrictions on our distributions and no covenants at the parent level.

Justin Ziegler -- Eaton Vance -- Analyst

Okay. Thanks for that clarification. And as you think about the year coming forward by the end of 2021, you stated intention to delever. I mean you've got the call coming up in June. But given you have like kind of two Affiliates with maybe less overall EBITDA, how do you think about leverage at the holding company going forward? And what's your target area for that?

Suren Rana -- Chief Executive Officer

Yes. I mean, generally, we would say basically one to stay below 2 times in terms of total leverage. And we do, of course, we have compared, for example, the -- excluding the seasonal need, we have shy of $400 million on our bonds. And our cash already is $450 million, and then we would have another $630 million coming from sale of Landmark. So we have essentially pretty low leverage on a net basis, but even in terms of EBIT to EBITDA multiple, we would generally want to stay below 2 times, if not lower.

Justin Ziegler -- Eaton Vance -- Analyst

Okay thanks very much.

Suren Rana -- Chief Executive Officer

Thank you.

Operator

There are no questions at this time.

Suren Rana -- Chief Executive Officer

Great. Thank you, everyone, for joining us this morning. And we look forward to talking to everyone next quarter.

Duration: 31 minutes

Call participants:

Elie Sugarman -- MD of Strategic Development

Suren Rana -- Chief Executive Officer

Craig Siegenthaler -- Credit Suisse -- Analyst

Glenn Schorr -- Evercore ISI -- Analyst

Mike Carrier -- Bank of America -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Robert Lee -- KBW -- Analyst

Justin Ziegler -- Eaton Vance -- Analyst

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