BrightSphere Investment Group plc (BSIG) Q3 2021 Earnings Call Transcript

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BrightSphere Investment Group plc (BSIG 0.97%)
Q3 2021 Earnings Call
Oct 28, 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 Third Quarter 2021. [Operator Instructions] Please note that this call is being recorded today, Thursday, October 28, 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, Elie.

Elie Sugarman -- Head of Corporate Development and Investor Relations

Good morning and welcome to BrightSphere's conference call to discuss our results for the third quarter ended September 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 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.

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 the call over to Suren. Suren?

Suren Rana -- Chief Executive Officer

Thank you, Elie. Good morning everyone and thanks for joining us today. I'll kick off with slide 5 of the presentation deck as usual. Well, in the third quarter of this year, we officially crossed the key milestone. We closed on the previously announced divestitures of three affiliates, TSW, ICM and Campbell Global. And now, going forward, our sole 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 to a single focused integrated business which will now provide our investors pure-play exposure to Acadian's highly differentiated business.

We also expect to fully deploy our excess capital in this fourth quarter which will 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 affiliates at attractive valuations and now the deployment of excess capital generated from these transactions significantly simplifies our business and our balance sheet. But going forward, BrightSphere is essentially just the Acadian business publicly listed.

Now, moving to our financial results for the quarter, we reported ENI per share of $0.28 for the third quarter of this year compared to $0.30 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 after the share buyback that I mentioned. So it would be topical to look at the financials for Acadian, our sole operating business going forward.

Turning to slide 7 to zero in on Acadian, the business generated $49.1 million of adjusted EBITDA in the third quarter of 2021 compared to $37.4 million in the third quarter of 2020 and $53.1 million in the second quarter of 2021. The adjusted EBITDA in 3Q '21 is lower compared to 2Q '21 primarily due to performance fee seasonality, because we generally have fewer performance fee measurements in the third quarter. We have a lot of our measurements in the fourth quarter. So 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 volatile [Phonetic] strategies continue to reduce. We reported net outflows of $0.7 billion in 3Q '21 compared to net outflows of $2.4 billion in 3Q '20 and net outflows of $1.3 billion in 2Q '21. Looking at investment performance, you can see on the revenue weighted chart on the lower left-hand side, but Acadian's investment performance continues to be very strong 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 this strong long-term track record will help generate robust net flows and organic growth over time.

I would also like to take this opportunity to delve into Acadian a little bit more. On slide 8, we provide a high-level overview on the Acadian platform. Acadian is a differentiated and scaled business with $114 billion of AUM and a long track record of performing for its clients for 35 years. At the heart of the business, is an exceptional combination of one specific talent comprising people with PhDs and other advanced degrees in finance and technology. Two, our unique data comprising 200 million observations daily across 43,000 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 geographies. We have deep capability across long-only, long-short, multi-asset class, managed volatility, ESG and other areas with our AUM spread across more than 70 different strategies. And I would also note that approximately 80% of our AUM is invested outside the US.

On slide 9, revisiting investment performance again in a bit more detail, you can see that Acadian platform has outperformed across long and short periods with 81% to 89% of strategies by revenue outperforming their benchmarks. I would also like to spend a minute on slide 13 summarizing our growth strategies. Our growth strategy going forward is primarily organic. There is a growing demand for majority of our strategies and solutions. And our offerings have capacity and are scalable. We will continue to leverage our Quant platform to provide solutions thought 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.

A growing demand for ESG solution is another example of a market opportunity that is particularly suited to our capability. Hence, we can really methodically quantify the various ESG factors for any given security as well as the impact on returns with a lot more precision than others could. 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 through our distribution as our needs evolve. And we will always continue to look for all 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.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Kenneth Lee with RBC Capital Markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, good morning and 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 you're thinking about either a tender offer or an accelerated share repurchase? Thanks.

Suren Rana -- Chief Executive Officer

Hi, Ken. Thanks. Yeah, just as you alluded given just the size, particularly relative to our market cap, probably -- tender offer is probably the only option as most of their options take a long amount of time.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Very helpful. And then just one on within the Acadian franchise. Really appreciate the further breakdown and the overview of the business. It sounds like you've very broad set of strategies there, which -- are there any particular strategies that you're particularly excited about? And which ones potentially have the best growth prospects in the current environment? Thanks.

Suren Rana -- Chief Executive Officer

Thanks, Ken. The advantage of having a good number of solid strategy is essentially that diversification right, that there is -- there are always some strategies that are in high demand in any environment and there are some strategies maybe that are not as much in demand, so diversification provides that benefit, that you always have something to sell. In the current environment, we are seeing a lot of demand for some of our scale strategies, emerging markets for example, international equity and we're also seeing demand for some of the new products that we have developed more recently. As we mentioned, multi-asset class, for example, that continues to get good traction, because it provides exposure across asset classes in a very factor driven quantitative way which is just [Phonetic] little bit of a unique capability. And we continue to develop other products on ESG theme, for example, that we are very excited about, as I touched earlier during my introductory remarks, we have equity alternatives and then derivatives of that in terms of market strategy. So I would say there are lot of earlier stage strategies that are smaller right now, but we are very excited about that from the perspective of future growth. And then we have scaled strategies, some of them, because it's a tag that we got [Phonetic] in any given quarter or any given period, some are always in demand.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great, very helpful. Thanks again.

Suren Rana -- Chief Executive Officer

Thank you, Ken.

Operator

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

David Eller -- Wells Fargo -- Analyst

Hey, good morning and 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 as you've sold. So I wondered if you could talk a little bit about why the large share repurchase makes more sense versus maybe taking a look at other asset management platforms are seeding kind of new and emerging managers and then got a related question with Acadian chapter 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.

Suren Rana -- Chief Executive Officer

Hi, David. Yeah, there is a lot to unpack there. But maybe let me start with the first one that, yes, we've definitely taken a lot of steps over the last year and a half to simplify our business and unlock value, the first of which was just really, we used to be a UK company and some folks who covered us from before, remember, we read on the file, we used to be heavy on corporate overhead to reduce that. And then we have a lot of these businesses that were highly valued in the private market. But we weren't 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 better organizations. So we moved ahead on that now, we have fast forward six of our seven affiliates are with other homes, which are win-win situations.

And yes, we got attractive valuations for most of those businesses including some businesses that at the time were seeing a lot outflows. In most cases we've got more than eight times EBITDA, some cases, double digits, EBIT to EBITDA. And then we ended up with a lot of cash on our balance sheet. So as we look at using this 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 half decent platforms, it was nine or ten times EBIT to EBITDA and for the ones that had growth, it was in double-digit, EBIT to EBITDA. So if you 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 the growth opportunities ahead of it. So rather than paying nine or 10 times EBITDA for a business and take on execution risk, we would rather just, buying our own stock is just much smarter and low risk investment for us, as in a part of the proceeds that still delever and just manage an optimal leverage. So that's how we went about our decision than just a bit of a no-brainer in terms of what our own business is, where it's trading compared to the M&A opportunities. I'm not sure if I answered all of your questions, but please repeat it if I missed something.

David Eller -- Wells Fargo -- Analyst

Yeah, no, you covered most of it, obviously you're much smaller scale now. You mentioned kind of the overhead costs and trying to get those down. But when you look at the business today and the overhead costs required, you kind of manage Acadian, do you think it would be more efficient for a different owner that could realize pretty good valuation for your own shareholders but also kind of benefit from the synergies of a larger owner?

Suren Rana -- Chief Executive Officer

Yeah, we have always been very shareholder value focused as those are the people on the phone, who know us for some time now. So we will always be receptive to anything that provides greater value to our shareholders. And we are fortunate that we have very unique and differentiated capability so that might happen will be receptive to it. And now having simplified our business, we have a scale business at the operating level and then we have some -- 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 bring down the $20 million to $10 million pretty quickly. And then maybe because the business is pretty scaled, the remaining $10 million can also over time, we can wither that down.

Now in the context of another scale player who needs these capabilities taking on the business, then of course the entire $20 million is not needed because most of it is in support of public company reporting. So there is -- yeah, there is that a little bit of overhead, which we view as an opportunity. So we really view the operating EBITDA which I touched down 50-ish, $50 million to $53 million per quarter, we really view that as a core EBITDA.

David Eller -- Wells Fargo -- Analyst

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

Suren Rana -- Chief Executive Officer

Thank you.

Operator

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

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. Thanks for taking the questions. I just wanted to circle back to your comment around the buyback in that more likely being a tender it sounded like, I was hoping you could maybe unpack how a tender process would work. What are the sort of different steps and timeframe around how that process might unfold?

Suren Rana -- Chief Executive Officer

Yeah. And as we've mentioned Mike that we expect this to be a Q4 event, so -- 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've mentioned it's that sort of, more of a known and the rest of it is pretty, I think standard pretty typical for how normal tenders go. So we will be coming out with a full package in the near term.

Michael Cyprys -- Morgan Stanley -- Analyst

And would your expectation be 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. Is that their intention, just any thoughts there?

Suren Rana -- Chief Executive Officer

Yeah. We don't know really if they would or would not participate. But we do understand that their intention is not to increase their stake beyond the current, given near closer to 25% stake that they have, so it is the expectation that their stake will not be increasing.

Michael Cyprys -- Morgan Stanley -- Analyst

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 special dividend? What factors led you to consider that? What would you, have led you the other way toward a special dividend?

Suren Rana -- Chief Executive Officer

Yeah, I guess in part of that, as I mentioned in response to David's question earlier, right, that we always look at, for every dollar of capital, we always look at all the possible uses and what could be more accretive than something else. So acquisitions were clearly been on 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 are trading is a key factor that given in our own experience, the businesses that we have divested, we got, would we believe to be a reasonable valuation, but of course compared to where we trade for a business that was sort of our crown jewel, we believe that we are undervalued. So it's a good investment from that perspective. Also dividends for a good number of shareholders, we have received feedback that there wasn't tax efficient for a lot of our investors.

Michael Cyprys -- Morgan Stanley -- Analyst

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

Operator

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.

Suren Rana -- Chief Executive Officer

Thank you. I thought Mike Cyprys mentioned he was getting back in the queue.

Operator

Then, we'll take Mike Cyprys.

Michael Cyprys -- Morgan Stanley -- Analyst

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 the $20 million of center costs going down to $10 million, I was hoping you might be able to elaborate a little bit more on just what are the biggest items that are 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 side into 2022 into next year, as we'd be thinking about the similar sort of operating expense efficiency range into next year, I know, because of the expense saves coming through. Just any help there on the different guidance items that you've given us already for this year, how does that sort of progress into next year?

Suren Rana -- Chief Executive Officer

Yeah, I guess as you would expect, that when we had more than one affiliate then there were some overlapping functions that were needed, but now it's just really one business and really integrated business at this point and continue to be more integrated. So if there is some overlap, particularly on the whole [Phonetic] executive side, which is probably where more of it is and then some overlap in other functions, but of course, much less overlap in public company reporting related areas like finance and legal, because, those are the things that the operating business did not have. So that would represent the remaining $10 million. But the business at Acadian is very scaled business as I mentioned, with fully built back office and investor reporting, so that over time that can probably absorb the public company's reporting responsibility as well. So that's why we think that the remaining $10 million probably would not be coming out in one year, it might maybe take, maybe bit longer than that, but the first $10 million is relatively easier.

Michael Cyprys -- Morgan Stanley -- Analyst

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 next year, just any help on how those might progress?

Suren Rana -- Chief Executive Officer

Yeah, I guess what we have for the full year 2021 is a little bit of, there was some noise in there in terms of affiliates that have been sold enough. Now, it won't be impacting there any anymore. But we'll provide guidance on that in due course. I don't have it that often.

Michael Cyprys -- Morgan Stanley -- Analyst

Okay. Great. Thanks so much for taking my questions.

Operator

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

Suren Rana -- Chief Executive Officer

Thanks. Thank you. Thank you, everyone for joining us today. We are excited about 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.

Duration: 28 minutes

Call participants:

Elie Sugarman -- Head of Corporate Development and Investor Relations

Suren Rana -- Chief Executive Officer

Kenneth Lee -- RBC Capital Markets -- Analyst

David Eller -- Wells Fargo -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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