Acadian Asset Management Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2020. Please note that this call is being recorded today, Thursday, February 4, 2021 at 11:00 a.m. Eastern Time. I would now like to turn the meeting over to Elie Sugarman, Managing Director and Strategic Development. Please go ahead, Elie.

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

Thanks, Elie. Good morning, everyone and thank you for joining us today. I will focus my initial remarks on the key highlights in the quarter laid out on Slide 5 of the deck and then we can switch to Q&A. We reported ENI per share of $0.47 for the quarter compared to $0.50 that we reported for the fourth quarter of 2019. The EPS decline compared to the year ago quarter primarily reflects the impact of closing the sale of Barrow Hanley in the middle of the quarter and hence missing the earnings from that affiliate for the back half of the quarter and this was only partially offset by us achieving our target for expense reduction in our corporate center and our share buyback activity in the year. The ENI of $0.47 in the quarter is flat compared to the third quarter of this year, which was also $0.47 and this again reflects the Barrow Hanley disposition in the quarter, which led to lower ENI in our Liquid Alpha segment. But the decline in the Liquid Alpha segment relative to the third quarter was offset by higher ENI in our Quant & Solutions segment driven by the continuing market recovery and higher ENI in our Alternatives segment driven by net inflows. Our net client cash flows in the quarter on a pro forma basis that is excluding Barrow Hanley, improved slightly to minus $0.3 billion compared to minus $0.5 billion that we had in the third quarter. The fourth quarter net outflows of $0.3 billion comprised net inflows of $0.6 billion in Alternatives, reflecting continued fundraising and other flows and net inflows of $0.4 billion in pro forma Liquid Alpha. So a combined $1 billion of net inflows from these two segments, which was offset by net outflows of $1.3 billion in Quant & Solutions resulting in the $0.3 billion of net outflows. Our investment performance remained generally stable and is similar to the third quarter. As I mentioned earlier, in the fourth quarter, we reached our target a bit ahead of schedule of reducing our annualized corporate center cost by $20 million.

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

Good morning, Suren. Hope all is well. I am good. So given the improving capital position, but also the higher stock price, can you just remind us how we should think about the method in which you will return capital to shareholders this year?

Yes. Thanks, Craig. We haven’t made a specific decision yet. We continue to evaluate what the best use of capital is, but returning capital to shareholders remains our top priority. And then as I mentioned earlier, we are also looking into using some of the proceeds potentially toward a bit more de-leveraging. A couple of ways we could do that is repurchases. We are monitoring the market. There is a lot of volatility, so we will see what the right timing may be. We do have a bias toward using up the capital sooner rather than later. You could also consider a one-time special dividend, for example. We are thinking through that so more to come in the next month or a couple of months on that but essentially the return of capital to shareholders being the primary use and maybe a little bit more de-leveraging.

Got it. Very helpful. Just as my follow-up, I wanted to get your perspective on the potential timing of the next vintages of fundraising at Landmark and maybe you could just compare it in terms of sizing when we think about the last fundraising cycle they experienced 2 to 3 years ago?

Yes. No, we are still essentially, as we have said, targeting more or less the same amount as our last vintages. In 2020, you would have noticed that we got it started amid COVID. And so we definitely have had an impact on the normal cadence of fundraising from COVID, both logistical issues as well as clients somewhat delaying things, but in 2020, having gotten it started, you would have noticed in our filings that we have about $1 billion that we raised in 2020, just getting warmed up. That was in one of our strategies, which is infrastructure and real assets secondary strategies, and then we would expect to get to our targets essentially over the next couple of years, this year and 2022 essentially. And we probably expect north of $10 billion remaining to be raised and that sort of compares to what we did in the last vintage.

Thank you, Suren.

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

Hey, thanks for taking the question. Maybe you could just dig in a little bit more on the capital management. I was hoping you could give us a little bit more color around how you might approach evaluating whether you would shift a little bit more toward a special dividend versus a buyback. What factors are you going to be considering in that sort of analysis? And then similarly, as you think about sizing the debt pay-down again how are you thinking about sizing that and what are the factors you are going to be looking to take into consideration there?

Yes. Thanks Mike. Essentially, value accretion remains our primary lens in terms of use of capital and it is that reason that we are not focused on acquisitions. For example, we have been consistent that we think acquisitions would be EPS accretive, but the value of those incremental earnings we don’t consider high enough to warrant that capital use. So in terms of looking at it from here, essentially just returning the capital to shareholders, there is some definitiveness to that in terms of what that value is, whereas in terms of de-levering or repurchasing, we have to take into account the market conditions, the timing and the size and how much we can actually get done. So those are the things we are looking at, but I would say that those are all good options. It’s a good problem to have in a way. I am trying to figure out which one is the most optimal; it could be a combination.

Great. And just maybe as a follow-up question, I was hoping if you could give a little bit of color on maybe the institutional pipeline here, how that stands today versus maybe last quarter and a year ago. And any color you can share on the Quant-related outflows in the quarter, in particular, how some of the managed volatility strategies are performing and holding up at Acadian, maybe you can remind us of where they stand from an AUM standpoint and how they contributed from a flow standpoint in the quarter?

Yes, certainly. On the institutional pipeline, things are starting to come back to more normal — normal in the sense of the remote environment, in the sense that clients and consultants are all engaged and have gotten used to working remotely and doing diligence remotely and awarding mandates remotely; that’s becoming more normal. So even if it’s not work-from-office for a while, I think things are picking up and pipelines are building up to pre-COVID levels. So that’s encouraging going into 2021. On the flipside, there are times when clients are looking to do things that we don’t have, and that’s the flipside, but we expect to be winning more often than losing when new things come up. In terms of performance, Acadian has a pretty diverse set of strategies and the managed volatility group of strategies is one of the larger ones. They are pretty diversified within that. There is U.S., international, other regions. But as a group, the similarity there is that they generally have low beta securities as opposed to high beta; the theme being that when picked well using multiple factors, low beta strategies delivered just as much return as high beta over longer periods, if not more. But during the specific circumstances of 2020 and COVID, low beta sold off as much as high beta and on the recovery you had high beta stocks, which turned out to be tech and home-related stocks that performed much better. So you would have periods like that, which does not negate the long-term statistical power of the strategy, which is born over time. But yes, there are periods when low volatility strategies underperformed, and there could be clients focused on nearer-term performance, but the vast majority of our clients are focused on longer-term periods. We do see some pressures on those strategies, but generally, it’s a very diversified group. We have managed volatility, a variety of international and non-U.S. strategies across different cap ranges — non-U.S. small cap, global equity. So there are lots of puts and takes and that’s the main benefit of having a diversified business.

Great. Thank you.

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

Hi, thanks for taking my question. Just one follow-up around capital management wondering whether you could share with us any preliminary thoughts about key considerations for future potential target leverage? Thanks.

Hi, Ken. On leverage, we are glad to have fully paid off our revolver. So now we have essentially the bonds outstanding, which are longer dated. We do generate a lot of cash flow still and we have the proceeds on our balance sheet sitting. So first priority, as I said, was returning capital to shareholders, then we would see about opportunities to de-leverage further. But just given the growth in the earnings and cash flow generation, we would expect, even if we were to keep our current level of gross debt, we would probably expect to end up with less than 2x gross debt-to-EBITDA most times. We have generally, as I mentioned in earlier calls, particularly around first quarter, some seasonal needs, but that tapers off in the course of the following quarters. So we would probably expect as we get into second and third quarter and fourth quarter, we would expect gross debt-to-EBITDA to generally be less than 2x.

Got it. That’s very helpful. And just one quick follow-up if I may. I wonder if you could just share with us any thoughts around any potential need for reinvestments within the business over the near-term, either on technology platforms or other areas? Thanks.

Thanks, Ken. We have been investing in our businesses in the normal course. At Acadian, for example, we’ve been investing in technology for multiple years to stay ahead of the curve in terms of data, investor reporting tools as well as trading capability to both expand capacity and help with alpha generation. Similarly, at Landmark, we’ve been investing on nearly all fronts in terms of fundraising, deploying capital and investor reporting. That’s already reflected in our run-rate P&L, the recurring investments that we do. We also use part of the capital to seed new strategies so that we continue to do that across all three of our segments and their management teams. We encourage the management teams to come up with new strategies where they can produce alpha and where the market is big. We will continue to do that and we have enough in our seed capital pool that that’s adequate as opposed to needing more to support new strategy development.

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

Thanks, Ken.

Our next question is from Gayathri Ramkrishnan with Bank of America. Your line is open.

Hi there. I was wondering about the expenses. Your guidance was definitely better compared to last quarter and I was just curious in terms of what has changed and how to generally think about long-term margins?

Hi, Gayathri. There have been a lot of ins and outs on the expense side, particularly with the disposition of Barrow Hanley and Copper Rock earlier and then there is the corporate center expenses that we had guided to that we would achieve $20 million of reduction by first quarter 2021, but we were able to get there by this quarter. That’s essentially the effect on expenses. We also had a marginal benefit on the travel and entertainment front that would normalize over time, but that was a factor. Going into 2021, we will stay disciplined on expenses. We will continue to invest in growth, particularly at Acadian and Landmark, and some travel and entertainment will normalize. The result of all that is we will probably stay more or less at the same place with some moderate growth in expenses. We expect the market recovery and fundraising to drive revenue growth that outpaces expense growth. As a result, we would expect some modest improvement in our margins.

Got it. Thank you.

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

Great. Thanks. So what are you hearing these days from your institutional customers with all the corporate level changes going on? I know that’s not necessarily a new development, but it’s been happening for a bit of time. And is this having an impact on the flows in any way?

Based on the perspective of institutional clients, no changes is best from their perspective. That’s definitely a given. But if there were to be changes, the multi-boutique model’s benefit is that our affiliates, the actual investment managers, are fairly insulated from corporate changes in the sense that our affiliates have always had full investment autonomy and operational autonomy. With the changes that we announced in the second quarter last year, we went further ahead on that autonomy so much so that they basically operate their businesses autonomously. That helps because from a practical perspective, there is nothing that really impacts the underlying investment managers and hence their clients. The question does come up from time to time as clients do diligence, but most of the time our managers are able to provide enough information that corporate changes at BrightSphere don’t impact what they do for the clients day-to-day and certainly don’t impact the clients.

Yes, okay. And just to verify on the capital management, thanks for all your comments on that: a big increase in the cash balance this quarter from the sale of Barrow Hanley. You’ve laid out the options and it sounds like you are going to make a decision in a month or two with the Board on what to do with that excess cash on the balance sheet. Is that a fair summary?

Yes. That’s a good summary. You said it better than I did.

Okay, alright. Thank you.

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

Hi, Suren. So a question on talent management. What’s obviously missing from all those options is acquisitions to add to the strategy of high-end demand in Quant Solutions and Alternatives. Is it fair to assume that organic growth will come from investments within Acadian and Landmark? And the follow-up on that is, is that self-funded by them or does the parent company fund the seed investments?

Yes. As I touched on earlier, our recurring P&Ls do have a healthy amount allocated for technology investments at Acadian and Landmark where we’re investing in proprietary technology that’s helpful to their clients. We do that as part of the run-rate P&L as well as growth in headcount to support investor relations and fundraising. We also provide seed capital at all of our businesses to support new strategies and fundraising, and we have a seed capital pool to support that. In our new strategy announced in April 2020, the main uses of capital are return of capital to shareholders, de-levering and supporting our affiliate businesses. We have enough for the third item carved out in the P&L and in the seed capital pool. We remain supportive of bolt-on inorganic acquisitions should our affiliates find complementary strategies, teams or platforms. In that case we would support them with capital. That is very much an affiliate-led approach because affiliates have ground-level knowledge and diligence; it’s better to underwrite such decisions at that level than at the corporate level.

Fair enough. If I could ask a related follow-up for Acadian and Quant: I’m curious how they fared during the January retail-driven volatility. Were their models able to account for that volatility, and do they anticipate making any tweaks to adapt or is it really just business as usual?

It’s more business as usual. Our business is long-only; even in strategies like managed volatility, it’s generally low beta securities rather than having put options or short positions. So the volatility you saw in specific securities in January did not affect us from that perspective. One way these events can affect us is when certain large securities move dramatically and that impacts the benchmark return, which can make us underperform the benchmark. But the January volatility had limited impact because those securities represented smaller portions of most benchmarks. It was manageable. Acadian and our other affiliates have stayed true to their disciplined processes — multifactor at Acadian or value approaches elsewhere — and those processes tend to prove out over time. We remain committed to our investment discipline rather than chasing near-term momentum.

Thanks a lot, Suren. Yes, absolutely. Thank you.

Our next question is from Yogesh Modak with ClearBridge. Your line is open.

Hey, Suren. How are you?

Hi.

All my questions have been asked and answered. Thank you.

Okay, thanks.

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

Hey, Suren. Thanks for taking the follow-up. I just wanted to circle back on Landmark with the upcoming fundraising. Hoping you might be able to help quantify the impact of any step-down on the fees or predecessor funds as you raise the new funds and turn on fees for those? And can you provide any color on how the existing set of Landmark funds are performing in the marketplace, where they stand in terms of distributions back to LPs? And lastly, any color around the GP commitment that’s needed from BrightSphere versus Landmark itself versus the affiliates — how that’s going to be split up and paid for?

In terms of track record, Landmark has one of the best and longest track records; it was a pioneer in the secondary business and has a consistent record of returns, including during the global financial crisis. That’s why Landmark continues to be well regarded. Regarding fees, our fees are charged on committed capital and there is a period when capital is uninvested and later it flips to invested capital. Unless there are a lot of distributions, when it flips to invested capital it should be more or less the same. As we get closer to dates where funds shift from committed to invested capital, we’ll provide more guidance on impact, but we’re raising funds ahead of that so any step-down impact should be manageable. These secondary funds are long-dated so not much gets distributed out early that would create large gaps between committed and invested capital. On GP commitments, in the last set of funds the split was roughly 60/40 with BrightSphere funding 60% of the GP commitment and the team funding 40%. We generally provide 1% GP commitment and on carry the team had about 85% and BrightSphere about 15% on the last vintages. For the next vintages we will discuss what the right split should be, but essentially we provide some capital and we receive some carry.

Great. And just to clarify, you mentioned the step-down taking place more in 2022. Does that suggest the funds will be raised or starting to be raised in 2021 but you wouldn’t necessarily be charging fees on that until 2022?

No. The way our funds work in the secondary strategy is that fees are charged on committed capital from the time it’s committed, whether it’s deployed or not. Secondary funds tend to deploy relatively sooner compared to primary funds, which is one of their advantages. When we have fund closes, fees are accrued, and for subsequent closings there is an element of catch-up fees — clients that come in later may pay fees going back to the first closes. As for step-downs, different strategies have different timelines; we will see some step-downs in 2022, but it depends on the specific funds and timing.

Got it. Okay. We can take that offline. Appreciate all the color here. Thanks so much.

Thank you.

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

Great. Thank you, everyone, for joining us today and for asking good questions. I hope that was helpful. Wishing everyone a successful 2021 and a healthy one. Thank you.