Acadian Asset Management Inc. Q1 FY2021 Earnings Call

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. 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.

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.

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 5 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 a 16.4x EV to adjusted EBITDA multiple and with total proceeds from the sale to us of $724 million pretax and $630 million after tax. So this transaction unlocks and crystallizes significant value for our shareholders. Given the announced sale, 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. With Landmark now included in discontinued operations, we no longer have an Alternatives segment. Campbell Global, our affiliate focused on forest resources, which used to be included in Alternatives along with Landmark, has now been moved to the Other segment. Moving to our financial results for the quarter, we reported EPS 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, EPS 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 reporting, the EPS for 1Q 2021 would be $0.45 if you add Landmark.

Your first question comes from the line of Craig Siegenthaler with Credit Suisse.

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

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 next step is closing on the Landmark sale, which we have near certainty on, but it's always good to have it fully in the bag.

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

I appreciate the color on the quarter and non-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 equities because 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.

Yes. Thank you, Glenn. Sometimes, what happens is when markets are doing well and our strategies are performing well, some clients will do some profit taking 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. These kinds of idiosyncratic things do happen. Now, of course, some regular outflows and inflows are related to people just looking at what strategies we do invest in. For example, 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 it's a very diversified business, and so there are other strategies, regional strategies, and strategies of different objectives that see inflows. So it's a combination of all of those, but definitely some idiosyncrasy and lumpiness.

I appreciate that. Maybe 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 thought a little bit for both the Quant and Liquid Alpha side, that would be great.

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 the clients are looking for them to do and to provide. We continue to encourage our affiliates to develop products that we can seed. So it's essentially a recurring R&D effort.

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

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 conversations been for the overall franchise during those conversations? And any restrictions or headwinds in the way for further demand?

Yes. The M&A environment over the last 1.5 years has been very constructive. Industry participants are looking for capabilities or looking for scale. There are a variety of factors at play. As we've said to the market and our shareholders, our primary focus is fiduciary duty to maximize shareholder value. We have a good plan, and our affiliates are strong businesses that generate really good cash flow. So we don't necessarily have to do anything, but 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. If there's anything of interest, we discuss further. That's generally how we've been approaching things.

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, in the second quarter, should we not assume much in terms of buybacks?

Yes. It's really hard to peg. Like I said, we prefer to not transact in pieces. We would like to have a holistic plan for the entire amount. 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.

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

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.

Ken, I think we missed the first part of your question earlier. Sorry if I don't answer it. You can ask again, but I think I got it in terms of what's the motivation to sign the revolver to Acadian. That really has to do with deleveraging. We had a large facility originally of $450 million, which we reduced because we had cash building up, so we didn't really have a need for that much credit. We reduced it first. 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. Revenues and earnings in subsequent quarters more than pay off for that. So it's a classic credit line need, and it's more needed at Acadian. We basically moved it there because at the parent level, we don't have a need for credit given the excess capital we have. From a leverage perspective, it's very low relative to Acadian's EBITDA in the sense that an $80 million draw is a fraction of their EBITDA. So it's a pretty robust facility that meets their needs.

Great. That's helpful. 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.

Yes. That varies quarter-to-quarter. It's pretty diversified overall. Most strategies at Acadian are seeing demand. At TSW, we saw some good wins, as you saw in Liquid Alpha flows on the international equity side. In Acadian, one strategy we didn't see a lot of demand for in this environment was low volatility or managed volatility strategies. But generally, we see pretty good demand across the board. Some of these new strategies we're seeding, while not big numbers yet, continue to get traction. For example, the multi-asset class strategy, which goes beyond high equities but leverages the same multi-factor approach, data and philosophy, continues to gain traction.

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

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 you were in such discussions?

Yes. We do have those types 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 in conversations on a material part of the business. Yes. So that would restrict us from time to time.

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 a small public company with a large cash position but a significantly smaller business? What sort of scenario could such a thing play out?

We would generally not consider that specific kind of scenario. We are very pleased with our businesses. As you saw with Liquid Alpha, we have flows, and Acadian is a very strong business that's highly regarded and reputed around the world. But if inquiries came in from the perspective of fiduciary duty, we would consider them. 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. That would also be a factor. So the scenario in which we sell our largest business, pay a big tax bill and have a much smaller business remaining is unlikely. It would only be something so compelling that, in spite of that, we would go ahead.

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

Just real quickly, two questions. First, just an actual modeling question. In the Liquid Alpha segment, is there anything — I guess largely TSW right now, is there anything — if we want to be at $9 million of adjusted EBITDA, is that a good run rate? Is there anything seasonal maybe around comp or something as you're trying to think beyond 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.

Yes. Rob, it's mostly TSW. We announced the sale of ICM in our 10-K, and that's to be closed. ICM results and flows are in there as well, so there is slight noise. ICM is not material to the full P&L. I would say next quarter would be a clean quarter essentially, but you can consider it mostly TSW.

Okay. And just another quick question on the revolver that you transferred to Acadian. Just to cross every T and dot every I, that's moved down there in a nonrecourse way to the parent company, but there's no recourse to the whole company. Sounds correct?

Yes, that is right. As I mentioned, deleveraging was a driver. By moving it to Acadian and having very low leverage ratios at Acadian, it's nonrecourse to BrightSphere Investment Group. While it's consolidated in our debt presentation, it is not apples-to-apples because it's nonrecourse to the parent. That's correct.

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

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, we didn't have much left to use.

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

A 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 corporate center as well? And how does that affect how bondholders might view the unsecured basis that the holding company still has that kind of EBITDA available to them?

Thank you, Justin. It seems like it wasn't clear in the material, so I appreciate the question. Essentially, that is the benefit: at the parent level we don't have any debt-to-EBITDA covenants because our bonds did not have such covenants, but we did have a debt-to-EBITDA covenant on our revolver. 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 on the facility, but their EBITDA, if you look at the most recent quarter, is close to a multiple of the draw, so there is ample cushion at Acadian given this is a small portion of their EBITDA. There are only restrictions in terms of distributions that come to us, except in extreme scenarios where debt servicing was a problem and all our business went away, which is highly unlikely. So it's a prudent approach, a very low leverage at Acadian levels, with no covenants at the parent level.

Okay. Thanks for that clarification. And as you think about the year coming forward by the end of 2021, you stated the intention to delever. Given you have two affiliates with maybe less overall EBITDA, how do you think about leverage at the holding company going forward? What's your target area for that?

Generally, we would want to stay below 2x in terms of total leverage. Excluding the seasonal need, we have about $400 million on our bonds and our cash is already $450 million, and then we would have another $630 million coming from the sale of Landmark. So we have essentially pretty low leverage on a net basis, but even in terms of debt-to-EBITDA multiple, we would generally want to stay below 2x, if not lower.

There are no questions at this time.

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