BrightSphere Investment Group plc (BSIG) Q2 2021 Earnings Call Transcript

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BrightSphere Investment Group plc (BSIG -1.45%)
Q2 2021 Earnings Call
Jul 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. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second 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. [Operator Instructions] Please note that this call is being recorded today, Thursday, July 29, 2021 at 11:00 AM Eastern Time.

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

Elie Sugarman -- Head of Corporate Development and Investor Relations

Good morning and welcome to BrightSphere's conference call to discuss the results for the second quarter ended June 30, 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, our 2020 Form 10-K and our Form 10-Q for the first quarter of 2021. 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 measure 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 the call over to Suren. Suren? Thank you, Ali. Good morning everyone and thanks for joining us today. I will start with slide 5 of the presentation deck as usual and let me begin with a summary of a few recent developments, the collectively mark an important shift in our business model. We closed on the divestiture transaction of landmark Partners in May and as we announced in the press release last week, earlier this month, we also closed on the divestiture transactions of two other affiliates, TSW and ICM and we still expect the closing of the announced transaction for sale of another affiliate, Campbell Global in the third quarter of this year. After that sale is completed, our sole business will be Acadian, a market-leading quant manager with a great stock record of outperformance. So, at that point, we will have completed a full transition from what's referred to as a multi-boutique or a multi-manager business model to a single focused investment manager model, providing our investors pure play exposure through Acadian's highly differentiated business. Now moving to our financial results for the quarter. We reported ENI per share of $0.40 for the second quarter of this year compared to $0.24 for the second quarter of last year. ENI for both these periods excludes Landmark and TSW since they have been moved into discontinued operations. But these numbers still do include ICM and Campbell, just given how the accounting guidelines work. It seems several analysts may have included TSW in their earnings estimates since the TSW sale closed in July after the end of the second quarter. So, to make it easier to compare, I want to point out that if TSW was included in our results, it would have added another $0.06 to the EPS for 2Q '21, which would make the second quarter EPS $0.46. As I mentioned, ICM and Campbell are still included in these results, but since ICM sale is now closed and Campbell sale is expected to close in the third quarter, we're now really focused on our sole go-forward business Acadian. So, let's now turn to Slide 8 to zero in on Acadian. As you can see in the first column relating to 2Q '21 with an AUM of $118 billion, Acadian has significant scale, particularly for a very focused differentiated business. The business generated $53 million of EBITDA in the second quarter of '21 compared to $33 million in the second quarter of 2020 and $46 million in the first quarter of 2021. The biggest driver for the increase in EBITDA relative to both the year-ago quarter and the prior sequential quarter was higher revenue driven in turn by the increase in our AUM from market appreciation. Acadian's net flows in the quarter were negative $1.3 billion, primarily driven by reallocations from select strategies such as low volatility strategies given the generally rising markets we have had. Looking at investment performance, you can see on the chart, on the lower left hand side that Acadian's investment performance strengthened further in this quarter with 82%, 85% and 88% of strategies by revenue, beating their respective benchmarks over the prior three, five, and 10-year periods. We're optimistic that this strong long-term track record will help generate robust net flows and organic growth over time. Turning to our balance sheet and capital management on Slide 14. Our cash balance as of June 30, 2021, was $1,175 million. We expect this balance to grow to more than $1.3 billion over the next few months when we include the after-tax proceeds from TSW, ICM, Campbell sales and pay the taxes on gain on sale of Landmark, which hadn't been paid since they weren't due just yet. We expect to deploy this cash balance to pay down debt and return capital to our shareholders. As of June 30, 2021, we had outstanding notes of $400 million. So, our cash balance, net of this debt would be $900 million. So, basically you can think of the company currently as two distinct parts, our operating business generating $53 million of quarterly EBITDA and our cash balance net of debt of more than $900 million. Now let me turn the call back to the operator, happy to answer questions at this point.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Robert Lee with KBW. Please go ahead, sir. Your line is open.

Rob Lee -- Keefe, Bruyette & Woods -- Analyst

Great. Suren, good morning. Thanks for taking my questions. And may be Suren, start off with, I mean, understanding, it involves years to return capital and pay down debt, but I guess maybe you would have thought, concurrent with the earnings, it would have been a little bit more -- specifics on that. Could you maybe talk to what -- maybe why we haven't had specific set particularly with the retail notes already callable, I believe thus far? And then as a follow-up question, the adjusted EBITDA for Acadian, is that -- how much of that is related to maybe the performance fees in the quarter and what can we think of it as kind of a core EBITDA for Acadian? Thank you.

Suren Rana -- Chief Executive Officer

Thanks, Rob. Yes, on the first question. You're right, we still have not finalized our action plan decisively around the capital. It's a rather large amount of capital. So, we continue to tinker. However, as we said, high level it is for debt pay down and returning capital to shareholders and in terms of sequencing, yes, we plan to at least pay the retail notes of $125 million first before returning capital to shareholders. But, yes, there is -- it's -- at least that part straightforward. Yes, I agree, we just want to execute the entire plan more holistically.

And the second part regarding EBITDA for Acadian, yes, so it's -- this quarter we've had performance fee similar to 1Q. As you know, our performance fee largely is -- 4Q is generally the quarter where we have the largest amount of performance fee. So, when you sort of normalize all of that now, we would say median performance fee at least it's probably middle of the fairway this quarter because 4Q is larger and there may be certainly years when we don't have performance fee in earlier quarters, but this quarter is probably, call it in average, if you were to average out a full year. That answer your question?

Rob Lee -- Keefe, Bruyette & Woods -- Analyst

Yes. Well, may be the follow-up. So was the $20 million performance fees, was that driven mainly by Acadian, maybe that's Acadian, maybe that was also Campbell Global. And I guess of the Acadian's $53 million of adjusted EBITDA, which had a nice increase sequentially and obviously saying that's going to be just market driven asset levels. I guess, I'm trying to get a sense of how much of that EBITDA increase we can kind of carry forward versus maybe being kind of more one-time related to performance fees in the quarter.

Suren Rana -- Chief Executive Officer

I see what you mean. Yes. So, the performance fee that -- of the $20 million that you see, there was really only $5 million in Acadian and more -- about $15 million was from Campbell Global, which I guess we provide that breakup in our segment information, but you're right, that's performance, it doesn't get broken out. So, that's the breakup and of course, we have announced sale of Campbell Global and so what's included in the Quant and Solutions segment is only the $5 million performance fee, which as I mentioned earlier, is more sort of can think of it as an average run rate because 4Q would typically be higher. And there maybe times in earlier quarters, don't have performance fee.

Rob Lee -- Keefe, Bruyette & Woods -- Analyst

Okay, great. That is helpful. Thank you.

Operator

Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead. Your line is open.

Kenneth Lee -- RBC -- Analyst

Hi. Thanks for taking my question. Just one on Acadian, you talked about seeing some client reallocation activities in the quarter, wondering what your expectations are for the near term, what are you seeing in terms of positioning and which products and strategies you think garnered some potential growth in this environment? Thanks.

Suren Rana -- Chief Executive Officer

Yes, hi, Ken. Yes, I know we -- as we -- we are very pleased with the performance of the firm overall because we look at that -- the performance right now on a one-year basis, it's 87%, three-year is 82, five and 10 is like more than 85%. So, vast majority of our strategies are beating their benchmarks. So, it's really some, I guess, the category of low volatility strategies that in this kind of rising market environment, while they are delivering low volatility, you would expect and clients would expect, I guess, -- or should expect in this environment that they don't necessarily beat the core benchmarks. But because of that, we do have some clients that take their rationale macro positions -- that choosing market over low volatility targets, for example. So, that's where essentially we would -- we're seeing the negative flows. But most of their strategies, the track record is good. And so these things change by the market, but essentially, given that more than 80% across all time periods, in some cases more than 85% of strategies are beating their benchmarks, we are optimistic about the outlook going forward.

Kenneth Lee -- RBC -- Analyst

Got you. That's very helpful. And one follow-up if I may. With the pending divestitures such Campbell Global and within a few quarters you'll just essentially be Acadian, wondering if you could just share with us any thoughts around longer-term strategic plans, any changes that you could expect as you're operating in this come down fashion? Thanks.

Suren Rana -- Chief Executive Officer

Yes, thanks, Ken. Yes. So, essentially we really have -- essentially would have completed our transition right to a single manager model. So, we won't be a multi-boutique anymore. And with the Affiliates sales and as we've said, our focus had always been value maximization for the shareholders and when we got prices for our assets that were more than where the market was -- value in them. We took back to go create value to shareholders, but also another interesting dichotomy in the market is that we've always had what was a multi-boutique discounts.

So now that we are single manager, it's much easier, it's a pure play exposure that investors can expect. It's a very differentiated and scaled business. So, investors know what they are getting and just strategically as we've discussed in the past, which was the reason for these divestitures, we have found that very limited synergies of having multiple different businesses under one roof. In fact, there were some dissynergies from the coordination work, central initiatives that maybe not necessarily weren't in tune with customized needs of each business.

So, this simplified business and also providing a much simpler story for our investors to understand, we think it has operational benefits and we also think it has the marketplace benefits for us.

Kenneth Lee -- RBC -- Analyst

Great, very helpful. Thanks again.

Suren Rana -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. Thanks for taking the question. Just on capital management front, I know in the past, you've mentioned that when you're in conversations around selling certain businesses, you might be restricted or you are restricted from buying back stock. Just curious if that restriction also extends to redeeming debt and how -- if and to what extent are there any sort of restrictions there on the debt side? How that differs from the equity side?

Suren Rana -- Chief Executive Officer

Yes, I guess, it's, we've discussed that from time to time. We don't think that restriction would apply to redeeming debt and I guess, as I mentioned the retail notes are more straightforward, we can probably do that in advance. Having said that, we just would like -- with line of sight on the entire capital plan because the retails notes are relatively easy to redeem. There isn't much execution risk to it. But on the repurchases, yes, from time to time if there are non-public things going on, we would be restricted.

Michael Cyprys -- Morgan Stanley -- Analyst

And just any color on the timeframe for the retail notes. You mentioned that is pretty straightforward. Is that something we can expect here in the third quarter or is that maybe more later in the year or next year?

Suren Rana -- Chief Executive Officer

Yes. Because -- when it happens, it will be quicker. I hesitate to give a timeframe because we just aren't necessarily very sure, but it's relatively straightforward. I guess, it's just really when we have a holistic plan, we will start with the retail notes first.

Michael Cyprys -- Morgan Stanley -- Analyst

Okay. And just a follow-up question on the Quant and Solutions segment. Just wanted to clarify, is that's now all entirely Acadian as you reported in your segment results, one Affiliate there in the $53 million or so of EBITDA in the quarter, that's kind of the right run rate to be thinking about on a go-forward basis, if I hear you right just in terms of thinking about the movement of performance fees, kind of ebb and the flow, but this is a good run rate, but then maybe you could also elaborate a bit on the other segment, which I think had the impact of ICM and Campbell in the quarter? Just how to think about what the right run rate for that other segment should be, which historically had been more of the center costs and just how to think about to when the moving piece is there?

Suren Rana -- Chief Executive Officer

Yes. So, we're really focused on the Quant and Solutions segment, which is Acadian and yes, that's -- the $53 million is the right run rate in the ballpark. Of course, in the quarter-to-quarter if there are some things that happen $1 million or $2 million seasonal items. But that's about the right run rate for Quant and Solutions.

The other segment I would say is temporary because in there -- we used to have Liquid Alpha segment and since ICM which already closed, but is included in the results for Q2. That's in the other now. It's moved from Liquid Alpha to the other. Campbell Global again used to be in the Alternatives segment and is expected to close, but that's in the other now and in center. So, with the closing of ICM and Campbell, ICM already closed, Campbell will be closing in this quarter then that other segment would basically just become center again, like it used to be and we think of center really more not as holdco anymore, our center as we used to call it, but it's really now is because the department, the team of people that's focused on handling public company responsibilities, given that is just one business now.

So, over time, we would expect more efficiency in handling public company costs, so that the full Acadian EBITDA of $53 million and going from there goes to the shareholders. We have of course proven over the last year and a half that we can continue to get more and more efficient. So, we'll always look to minimize the overheads. Also, if there were ever to be an acquisition in that scenario, a buyer would not need the public company costs. So, for those reasons, we don't really view these costs in the other as core and are really from a management perspective much more focused on the EBITDA that's produced by our operating business.

Michael Cyprys -- Morgan Stanley -- Analyst

Great, thanks. So, maybe just a quick follow-up there, just on the other segment. I guess, what can we expect near-term into 3Q and 4Q for that sort of corporate overhead and then what sort of timeframe would it take for that to get, I guess, in your view eliminated where you basically kind of get really closer to that $53 million? What sort of actions have to be taken and how realistic is that as a public company to really achieve that?

Suren Rana -- Chief Executive Officer

Yes. So, in 3Q, we would have a month of ICN and we would have probably one quarter of Campbell, but 4Q is when the -- when you would really just see the the headquarter costs, which was in that $20 million ballpark and we'll continue to whittle it down over time, it's not a quarter or two, it's probably longer than that, but it's -- as Acadian continues to scale, there would be more that we can do on the others' side. But, yes, over time, we would expect that continues to get smaller and smaller.

Michael Cyprys -- Morgan Stanley -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Glenn Schorr with Evercore. Please go ahead. Your line is open.

Glenn Schorr -- Evercore -- Analyst

Thank you. Hi, sir. Question, with the benefit of hindsight, you've now sold off -- since your selling of the boutiques to get down to this single manager model and I think you've gotten some good fair value to shareholders on the prices. Was there any specific staging or quarter or was that more a function of how the deals just came in where investor or partner interest stick out? And then follow-up on that.

Suren Rana -- Chief Executive Officer

Yes, hi, Glenn. Yes, we've been -- as we've said, we've been open-minded about unlocking value for shareholders and that's been on to the marketplace. So, as legitimate inquiries have come in, we have had those conversations and where things worked out for us, for our team and for the buyers, we moved forward. So, I would say, no particular staging except that Acadian being our largest and most differentiated business, it would make sense that that's the business we have now, save the best for last, as they say and also because it's largest, if you were to sell this business as an asset, the tax bill would be hefty. So, that's the only one I would say probably by design.

Glenn Schorr -- Evercore -- Analyst

Okay and then just a follow-up I have is, was Arcadian on the list of things you'd take calls on -- meaning, is it just -- you haven't found the right partner, the right price yet or is it that tax potential liability that is just still laying the conversation. In other words, is this just a matter of time.

Suren Rana -- Chief Executive Officer

We're very happy with the business, it's a scale business in a very differentiated areas and it's a great team, great track record to serve their clients very well. So, we think it's a very good business for the public markets and we're happy to keep going. At the same time, we've always maintained that it is our fiduciary duty to our shareholders that to the extent there was a party that was really able to award our shareholders, we would consider it.

Glenn Schorr -- Evercore -- Analyst

Okay, cool, thanks. Thanks, Rana.

Operator

Your next question is a follow-up question from the line of Michael Cyprys with Morgan Stanley. Please go ahead. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Thanks for taking the follow-up. Just on the Acadian business, I was just hoping you might be able to remind us of the top three or five strategies at Acadian, how much they contribute in AUM? And if you could also maybe help us -- maybe some of the flow trends that you're seeing in each of those strategies, which ones would you say are seeing more positive flow trends versus ones that are seeing more challenges in the flows and if you're able to also help quantify that as well across the top three or five strategies at Acadian? Thank you.

Suren Rana -- Chief Executive Officer

Yes. Thanks, Mike. That's actually something that we will -- we are working on it in terms of what -- how we slice and dice on a consistent quarterly basis and provided to you all. So, we will do that probably next quarter onwards. In terms of the level, that's the right level for people to have enough granularity. But as we've said, we have the managed low-ball group of strategies that's about less than maybe about 18% or 20% of our AUM. That will be bit of a slightly different objectives than we have recovered in emerging markets that's about 20%.

There is a variety of geographical regional strategies of Europe, non-U.S. etc., and there are some -- there's global as well which is U.S. and developed markets. So, it's a variety -- and then where there's some newer strategies like multi-asset class that are doing well and getting great traction. So, it's quite diversified and that's why when you have some strategies that are less in demand in rising market environment, you have other strategies that are are getting demand. So, we will sort of figure out the right slice and dicing -- slicing and dicing and probably report back next quarter with that.

Glenn Schorr -- Evercore -- Analyst

Got it, OK. That'll be helpful. If I could just -- maybe just one more just around the quantitative strategies, I guess, what portion of the AUM would you say are in quantitative strategies versus more fundamental. And how do you think about that spectrum of more Quant informed strategies in there, imagine the managed well, that's more Quant. What about some of the EM and global equity strategies? There is also Quant or is that just part of the investment process, but more fundamental. Just any help there would be appreciated.

Suren Rana -- Chief Executive Officer

Yes. Our entire business is multi-factor Quant. So all the strategies that we have, are informed by the same core data, core technology, and core investment philosophy, right, which is informed by decades of data that we have and the technology that we have continued to invest in and the team of researchers and academics that continue to improve the process. So, that's applied across all strategies and including our newer strategies like multi-asset class, we're applying the same philosophy and approach now and technology beyond equity.

Glenn Schorr -- Evercore -- Analyst

Great, thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Suren Rana.

Suren Rana -- Chief Executive Officer

Thank you, operator. Thank you everyone for joining us. And then as I said, we are excited about this -- by this transition to a single-focused differentiated business and we look forward to reporting on our progress next quarter. Thank you.

Duration: 31 minutes

Call participants:

Elie Sugarman -- Head of Corporate Development and Investor Relations

Suren Rana -- Chief Executive Officer

Rob Lee -- Keefe, Bruyette & Woods -- Analyst

Kenneth Lee -- RBC -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Glenn Schorr -- Evercore -- Analyst

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