Acadian Asset Management Inc. Q2 FY2021 Earnings Call

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. 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, Elie.

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.

Thank you, Elie. 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 that 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 track record of outperformance. So, at that point, we will have completed a full transition from what's referred to as a multi-boutique or 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 2021, which would make the second quarter EPS $0.46. As I mentioned, ICM and Campbell are still included in these results, but since the ICM sale is now closed and the Campbell sale is expected to close in the third quarter, we're now really focused on our sole go-forward business Acadian.

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

Good morning, Suren. Thanks for taking my questions. Could you start by discussing plans to return capital and pay down debt? I would have expected more specifics with the earnings, so can you explain why we haven't had concrete details, especially regarding the retail notes that I believe are already callable? As a follow-up, for Acadian, how much of the adjusted EBITDA in the quarter was driven by performance fees, and what should we consider its core EBITDA to be? Thank you.

Thanks, Rob. On the first question: you're right, we have not yet finalized a decisive action plan for the capital. It's a large amount, so we continue to refine our approach. At a high level the capital is intended for debt paydown and returning capital to shareholders. In terms of sequencing, we plan to at least pay the retail notes of $125 million first before returning capital to shareholders, but we are trying to execute the entire plan more holistically. On the second question about Acadian's adjusted EBITDA: this quarter we had performance fees similar to the first quarter. As you know, performance fees are generally largest in the fourth quarter. If you normalize for that, this quarter's performance fees are probably around the middle of the range. The fourth quarter is typically larger and there are years when earlier quarters have no performance fees, so this quarter is roughly an average quarter if you annualize it. Hope that answers your question.

Yes. Well, maybe 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 talking about 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?

I see what you mean. Yes, so 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 break up in our segment information, but you're right, that performance fee doesn’t get broken out in the headline. So, that's the split and of course we have announced sale of Campbell Global and so what's included in the Quant & Solutions segment is only the $5 million performance fee, which as I mentioned earlier, is more sort of — you can think of it as an average run rate because fourth quarter would typically be higher. And there may be times in earlier quarters when we don't have performance fees.

Okay, great. That is helpful. Thank you.

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

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.

Yes, hi, Ken. We are very pleased with the performance of the firm overall because we look at that performance right now on a one-year basis it's 87%, three-year is 82%, five and 10 is like more than 85%. So, the 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 as clients expect, they don't necessarily beat the core benchmarks. Because of that, we do have some clients that take macro-driven decisions choosing market over low-volatility targets, for example. So, that's where essentially we're seeing the negative flows. But most of the strategies' track records are good. 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 meeting or beating their benchmarks, we are optimistic about the outlook going forward.

Got you. That's very helpful. And one follow-up if I may. With the pending divestitures such as 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.

Yes, thanks Ken. So, essentially we will have completed our transition to a single-manager model. So, we won't be a multi-boutique anymore and with the affiliates' sales, 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 valuing them, we took that to create value for shareholders. Another point in the market is that we've always had a multi-boutique discount. Now that we are single manager, it's much easier—it's pure-play exposure that investors can expect. It's a very differentiated and scaled business. So, investors know what they are getting and strategically, as we've discussed in the past, which was the reason for these divestitures, we have found very limited synergies of having multiple different businesses under one roof. In fact, there were some dis-synergies from the coordination work and central initiatives that weren't necessarily in tune with the 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 marketplace benefits for us.

Great, very helpful. Thanks again.

Thank you.

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

Hey, good morning. Thanks for taking the question. Just on the 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, there are any restrictions on the debt side and how that differs from the equity side?

Yes, I guess 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 would like line of sight on the entire capital plan because the retail 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.

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?

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.

Okay. And just a follow-up question on the Quant & Solutions segment, just wanted to clarify, 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 it and the moving pieces there?

Yes, so we're really focused on the Quant & Solutions segment, which is Acadian, and yes, that $53 million is the right run rate in the ballpark. Of course, quarter-to-quarter there are some things that happen—$1 million or $2 million seasonal items. But that's about the right run rate for Quant & Solutions. The other segment I would say is temporary because in there we used to have Liquid Alpha 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 not as a Holdco anymore; it's really now the team of people that's focused on handling public company responsibilities, given that it 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. For those reasons we don't really view these costs in the other as core and are much more focused on the EBITDA that's produced by our operating business.

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?

So, in 3Q we would have a month of ICM and we would have probably one quarter of Campbell, but 4Q is when you would really just see 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 as Acadian continues to scale, there would be more that we can do on the center side. Over time, we would expect that to continue to get smaller and smaller.

Great, thank you.

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

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 order or was that more a function of how the deals just came in where investor or partner interest shook out? And then follow-up on that.

Yes, hi Glenn. Yes, we've been open-minded about unlocking value for shareholders and that's been 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.

Okay and then just a follow-up I had was Acadian 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?

We're very happy with the business; it's a scale business in a very differentiated area 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.

Okay, cool, thanks. Thanks, Rana.

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

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.

That's actually something that we are working on in terms of how we slice and dice on a consistent quarterly basis and provide it 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-vol group of strategies that's about less than maybe about 18% or 20% of our AUM. That will have slightly different objectives than our core or recovered emerging markets which is about 20%. There is a variety of geographical regional strategies of Europe, non-U.S., etc. Then there are global strategies as well which include U.S. and developed markets. So, it's quite diversified and that's why when you have some strategies that are less in demand in a rising market environment, you have other strategies that are getting demand. We will sort out the right slicing and dicing and probably report back next quarter with that.

Got it, okay. That'll be helpful. If I could just—maybe just one more 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? I imagine the managed low-vol that's more quant, what about some of the EM and global equity strategies—is the result of quant or is that just part of the investment process but more fundamental? Any help there would be appreciated.

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, 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 in technology beyond equity.

Great, thank you.

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

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