Earnings Call Transcript - AAMI Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2021. Please note that this call is being recorded today, Thursday, February 3, 2022 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 fourth quarter ended December 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 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, second, and third 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, President and Chief Executive Officer

Thanks, Elie. Good morning, everyone, and thank you for joining us today. I'll start off with slide 5 of the presentation deck, as usual. Over the last few quarters we completed the divestiture of six of our seven affiliates. The fourth quarter of 2021 was the first quarter of the company operating as a pure-play quant business rather than a multi-boutique business, and we're pleased that we had a solid start in this new phase, with strong financial results for the quarter. We reported EPS per share of $0.53 for 4Q '21 compared to $0.28 for 4Q '20 and also $0.28 for 3Q '21. The increase was primarily driven by strong performance. In the fourth quarter of 2021, we also deployed a large chunk of our excess capital: we repurchased $1.1 billion of our shares, reducing our share count by 45%, and also paid down $125 million of retail notes, which will collectively generate significant earnings accretion and reduce leverage. Pro forma for the redemption of the retail notes, which happened in January after the quarter end, our cash balance is $125 million and we will continue deploying capital towards share repurchases and to support organic growth. Now turning to the operating highlights for Acadian on slide 7. Acadian generated $87.6 million of adjusted EBITDA in 4Q '21 compared to $40.4 million in 4Q '20 and $49.1 million in 3Q '21. The increase in EBITDA was mainly driven by strong performance fees. Acadian recorded net outflows of $0.8 billion in 4Q '21, compared to net outflows of $1.3 billion in 4Q '20. On a revenue basis, the flows were breakeven in 4Q '21 compared to an annualized revenue impact of negative $6.1 million for 4Q of 2020. Acadian's investment performance continued to be excellent, and got even stronger in 4Q '21 with 82%, 86% and 90% of strategies by revenue now beating their respective benchmarks over the prior three-, five- and 10-year periods. Last quarter, we spent some time diving into the Acadian platform a bit more, as laid out on slides 8 through 12 in this deck. This time, let me take the opportunity to touch on the long-term outlook for Acadian's business and the drivers of growth. On slide 13, we look at the key secular trends impacting our business. Firstly, there continues to be explosive growth in alternative data available to investors. It includes company-related information, sector trends, macro data, ESG data—you name it. Processing it all efficiently and extracting useful takeaways from it is getting harder and harder for human analysts. At the same time, the techniques and technology for making meaning of the data keep getting better and better, including machine learning and artificial intelligence approaches. Also, the scale of investment in technology, data and talent is becoming more and more important to truly make the most use of the signals available in the data. Acadian is a pioneer in quant investing and has been investing heavily in its capabilities for 35 years, building a unique combination of data, technology and talent. We're seeing a growing demand for uncorrelated strategies and for customized solutions to client objectives, such as ESG or diversification. These types of strategies are particularly suited for big data-driven approaches. We believe that these long-term trends position us really well to produce superior output for our clients and meet this growing demand for data-driven strategies. We are on the cutting edge of quant and we can apply our edge in adjacent asset classes such as alternatives and new markets, such as China. On slide 14, to review some specific initiatives that we have underway on these themes. First, investors around the globe are looking for yield with downside protection and robust diversification across market environments, and of course this trend continues to power the growth of private alternatives. We have developed two very good solutions to satisfy this demand which we are very excited about. One is systematic macro, which is applying our multi-factor model across asset classes, including equity, fixed income, currency, and commodities, to generate absolute returns with very high diversification. We've been getting very good traction from clients for this strategy. The other is equity alternative strategies, which use alternative signals, alternative data and differentiated portfolio construction techniques to produce uncorrelated returns. We are very happy with the investment results we're getting here. We are also seeing continually increasing demand for ESG-focused strategies, which have already exceeded $1 trillion in AUM. With Acadian's focus on quant and technology, our advantage in the ESG space is that we can quantify the ESG signals and more precisely customize client portfolios for their ESG values. We can implement dynamic programs related to client ESG goals, such as quantifying their carbon exposures, decarbonizing their portfolio and measuring the impact on risk and return of their portfolio. These sophisticated techniques are far superior to crude methods, such as excluding or divesting some names or just incorporating ESG considerations qualitatively without explicit measurement of ESG exposures. Doing the latter doesn't really achieve the ESG goals, and clients may be unwittingly sacrificing return or taking on additional risk. We're seeing increasing demand and engagement from clients on the ESG theme and expect this to continue for a long time. As an example of applying our quant edge in new markets, we see a strategy for the China market, which is performing pretty well. The China market is large and liquid and rich in opportunity and inefficiencies since it's retail-driven. To summarize our growth strategy, we will continue investing in our quant capability to remain on the cutting edge and we will leverage our quant edge to tap into several secular growth areas such as ESG, absolute return alternatives, and new markets such as China. Now let me turn the call back to the operator, and we're happy to answer questions at this point. Thank you.

Operator, Operator

Our first question is from Kenneth Lee with RBC Capital Markets.

Kenneth Lee, Analyst, RBC Capital Markets

Hi, thanks for taking my question. I'm wondering if you could just talk a little bit more about how you think about capital allocation as it pertains to what's needed for organic growth and share buybacks. Thanks.

Suren Rana, President and Chief Executive Officer

Hi, Ken. Thanks. Yes, our business generates a lot of cash, and that's of course a good problem to have. At the same time we think our stock is undervalued and our long-term prospects are really great, so we will probably be using a lot of our cash generation toward repurchases. In terms of organic growth, as I said, we've been investing in our capabilities for decades. A lot of that investment is already baked into the P&L in terms of the talent that we have, the data that we pay for, and the technology that we build and continue to invest in—all of that is expensed into the P&L. So the incremental need is really mostly seeding new strategies, for which we have an active program. As data opportunities come, we will continue to see new strategies, such as the types I described, which we seed from time to time, but a bulk of the cash generation really is available for repurchases. Currently, our cash balance is about $125 million after having paid the retail notes. So we have about that much capacity now for repurchases, and then we'll see how the year progresses in terms of additional cash flow generation.

Kenneth Lee, Analyst, RBC Capital Markets

Great, that's very helpful. And just one follow-up question, if I may. Wonder if you could comment whether you've had any discussions around potential value-enhancing transactions in the quarter, and perhaps frame the likelihood of seeing any kind of potential transaction over the near term. Thanks.

Suren Rana, President and Chief Executive Officer

Yes, as we've always said, our objective and our duty remains to maximize shareholder value. Having completed our divestitures, we are very well positioned with our unique business, and we really believe in our long-term growth prospects. We are very optimistic about future growth, and we generate a lot of cash flow, and we can add value through buybacks, so we're happy continuing on that path. At the same time, if we have a serious proposal that is attractive for our shareholders and recognizes the value, we're very open to it. It's hard to really peg the timing of anything, but if something happens that's great for shareholders, we of course have a fiduciary duty to consider it.

Operator, Operator

Our next question is from Rob Lee with KBW.

Rob Lee, Analyst, KBW

Great. Thanks. Good morning, Suren. Hope all's well. Just real quickly, could you maybe update us on where you are with corporate overhead and holding company expenses, and then talk about room to drive those down some more? And maybe as part of that, is there an avenue here where the public company gets collapsed into Acadian? I'm not sure — if Acadian might want to run a public company. You've seen some of those in the past in the industry. Is that something we should be thinking about that ultimately, if there is no transaction, the public holding company essentially gets absorbed into the operating business?

Suren Rana, President and Chief Executive Officer

Hi, Rob. Yes, that is our plan. We're not necessarily counting on a transaction, but we're always open to one. Given our capabilities and our business positioning, that could very well happen—our business is scarce. At the same time, we are continuing on the path of simplifying our business and making things easier. We are in the process to more closely integrate our public company functions with the operating business. In fact, what you're describing—sort of collapsing—is already underway. Of course, we're doing it thoughtfully to ensure all the work streams are streamlined, and it'll take a few quarters. As that continues, there are efficiencies that we expect will be realized from the simplification.

Rob Lee, Analyst, KBW

And I assume that's embedded in whatever savings will be there and embedded in your guidance on expenses. With the performance fees, the magnitude really took me by surprise; I would not have expected anything of that magnitude. Can you give us a little color — were there one or two products that drove that, or was it a broad-based pickup? Was this just a one-off of that size?

Suren Rana, President and Chief Executive Officer

Right, yes, we had a strong performance fee year and we're very happy with that. It came on the back of impressive investment performance. As we've been reporting, our investment performance has been great and in 4Q it improved even more, with more than 80% of strategies beating across all time horizons and some reaching 90% over certain periods. Performance fees will largely depend on how investment performance stacks up at the end of 2022; generally performance fees are a 4Q-determined event for us. We have smaller amounts in earlier quarters, but the outcome is rarely fully determined until Q4. So for 2022, it will probably be lower than 2021 but we're hoping for another good performance year; the environment is constructive so we'll see. The fees came from a wide variety of clients and strategies, but of course it just depends on performance.

Rob Lee, Analyst, KBW

Is there any way of sizing the $117 million — is there $20 billion of assets that are performance-fee eligible or 10 or 50? Just trying to get some sense of the potential asset base supporting it.

Suren Rana, President and Chief Executive Officer

Yes, that's about right. We try to keep performance-fee eligible assets to less than a quarter of AUM—about 20% to 25%, one could say.

Rob Lee, Analyst, KBW

Okay, great. And one last — really just a modeling question: post the tender and everything, what is the year-end actual share count at that point? Just want to make sure I'm level-setting correctly for going forward.

Suren Rana, President and Chief Executive Officer

Yes, the exact number will be in the 10-K, but it's around 46 million basic shares as of the end of the year. As we do repurchases, if you put the $120 million to work, maybe we can reduce that by 4 million or 5 million shares.

Operator, Operator

Our next question is from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst, Morgan Stanley

Hey, thanks for taking the question. I was just hoping you could maybe share a little color on how the quant strategies are holding up from a performance standpoint so far in 2022, given the volatility in the marketplace. What are you seeing there? And related to that, what are you seeing from clients in terms of demand for these sorts of strategies in a choppier market?

Suren Rana, President and Chief Executive Officer

Hi, Mike. It's only a month into the year, so of course it's too soon to tell, but thematically we like this environment. It is a better environment for our strategies in the sense that the markets are more discerning about rewarding different investment factors rather than what we had for a few years where growth was often bid up regardless of fundamentals. In that sense, we view this as a constructive market that rewards a sound investment process. In terms of client demand, we'll see how the market develops and what strategies clients favor, but we do have a variety of strategies. As we've said, our low-beta strategies for example are performing well in this environment; they typically outperform their beta and in this environment are also outperforming core indices like the S&P and MSCI. It's a little too soon to call the full-year trajectory, though—we'll see how the market plays out.

Michael Cyprys, Analyst, Morgan Stanley

Great, and maybe just circling back to the performance fees — hearing your earlier commentary suggesting 2022 is likely to be lower on performance fees than 2021. Do you have any historical periods you could share for context on what performance fees were in 2020 or 2019, either for the fourth quarter or full year? Understandably, with all the affiliates and moving pieces in prior years, there were some clawbacks and other items. Any help there would be appreciated. Also, what changed in 2021 relative to prior years? Was it just one-year outperformance or multi-year performance across strategies?

Suren Rana, President and Chief Executive Officer

Yes, performance fees certainly bounce around depending on performance, and some of that depends on one-year performance and some on two-, three- or five-year performance periods. There have been times historically when the dollar amount was similar on a smaller AUM base when a combination of things came together and a lot of strategies outperformed. There are also times when only a few strategies outperform. The simple point is that our investment performance was very strong across the board in 2021, and when that happens, you get strong performance fees.

Michael Cyprys, Analyst, Morgan Stanley

And given the strong performance backdrop you're articulating, do you think this is enough at this point to reverse the outflow trajectory and drive inflows? Or what do you think needs to happen to really inflect toward a more sustainable inflow trajectory?

Suren Rana, President and Chief Executive Officer

We can't predict flows precisely. When we discussed flows earlier in 2021, clients were moving out of low-beta strategies because high-beta strategies paid off for a while. That led to some outflows from our low-beta strategies. In 4Q, we had a client who decided to insource their business; without that, flows would have been positive for the quarter. So there are idiosyncratic, lumpy items in institutional business. Away from that, there isn't a secular pressure on flows per se. We are getting good sales. To get consistently positive flows and grow them, we expect more contribution from the new strategies that we've seeded and are excited about—these are not yet mature strategies, but if they get good sales they can drive consistent growth. Those include our multi-asset-class systematic macro strategy, ESG solutions, equity alternatives, and new markets like China. Those secular growth themes should help generate more consistent flows, whereas our core strategies may be modestly positive on average but not necessarily produce consistent quarter-after-quarter growth without these new themes.

Operator, Operator

Our next question is from John Dunn with Evercore.

John Dunn, Analyst, Evercore

Hey, just looking at the newer strategies, is there any difference to the way those get distributed? Can you talk about demand for them in the institutional channel versus perhaps the wealth management channel?

Suren Rana, President and Chief Executive Officer

Hi, John. Currently, all our distribution is institutional. We certainly see distribution as an avenue for growth, and where we find good resources we want to use them to open new channels or new markets. The new products follow the same distribution approach—it's a matter of finding more clients, understanding their needs, and in consultation with them providing customized approaches that can later be scaled more broadly. We haven't started retail distribution or created retail wrappers; we don't currently plan to invest in building a standalone retail distribution capability. If retail distribution happens, it would likely be in the context of a partnership with a retail organization that brings synergies. For now, we plan to continue growing in the institutional channel.

John Dunn, Analyst, Evercore

Got it. And then maybe you mentioned the client redemption this quarter. Could you maybe size that for us? And do you see anything chunky coming down the pipe in the next couple of quarters?

Suren Rana, President and Chief Executive Officer

No, we don't see anything chunky on the horizon—by definition these things are idiosyncratic. That redemption was roughly $1.5 billion in assets. As I said, without that, the flows would have been positive for the fourth quarter, but events like that can happen in any quarter.

Operator, Operator

The next question is from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst, Morgan Stanley

Thanks for taking the follow-up. Just as we think about share buyback potential, can you remind us how much cash you like to keep on hand to run the business and how much you think about investing back into the business to drive organic growth? Maybe also update us on some of those seeding initiatives. You mentioned some new products you've invested in prior years, but as you look out over the next couple of years, how are you thinking about that on a go-forward basis?

Suren Rana, President and Chief Executive Officer

We typically like to run with more than $20 million on hand, even at times when we are deploying a lot of cash. In terms of seeding, a lot of our investment in data, technology and talent is already in the P&L, so incremental seeding is relatively modest. We have many seeds already in the works, so it's probably $10 million to $20 million a year that we might use incrementally on seeding, and the rest we would think about for buybacks. As I said earlier, the $120 million to $125 million cash balance is what we have in near-term capacity for buybacks, and then we will see how our cash balance progresses.

Michael Cyprys, Analyst, Morgan Stanley

Great. And just lastly, coming back to the expense commentary — if you recall, there were plans to drive corporate overhead costs from about a $20 million run rate to $10 million. Can you remind us the timing of that, what actions you're taking, and whether $10 million is still the right end state or if there's potential to go even lower?

Suren Rana, President and Chief Executive Officer

Yes, that's a known high-level target and that process is underway to integrate and simplify our processes. We're focused on integrating public company functions with the operating business and streamlining workstreams. We're being thoughtful to make sure there's nothing that slips through the cracks, so this will progress over the next few quarters.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the conference call back over to Suren Rana for any closing remarks.

Suren Rana, President and Chief Executive Officer

Okay. Thank you. Thank you, everyone, for joining us today. We appreciate it and we're looking forward to engaging with you in the coming quarters.