Earnings Call Transcript - AAMI Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us. Welcome to the Acadian Asset Management Inc. Earnings Conference Call and Webcast for the Third Quarter 2025. Please be aware that this call is being recorded today, Thursday, October 30, 2025, at 11 a.m. Eastern Time. I will now hand the meeting over to Melody Huang, Senior Vice President, Director of Finance and Investor Relations. Please proceed, Melody.

Melody Huang, Senior Vice President, Director of Finance and Investor Relations

Good morning, and welcome to Acadian Asset Management Inc.'s conference call to discuss our results for the third quarter ended September 30, 2025. Before we begin the presentation, 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 2024 Form 10-K and our Form 10-Q for the first and second quarter of 2025. 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 prospects. Kelly Young, our President and Chief Executive Officer, will lead the call. And now I'm pleased to turn the call over to Kelly.

Kelly Ann Young, President and Chief Executive Officer

Thanks, Melody. Good morning, everyone, and thank you for joining us today. I'm thrilled to share our Q3 2025 results with you as Acadian continues to grow and reach new heights. Every milestone we hit reflects our team's discipline and dedication in executing the organic growth plan we articulated when I assumed the CEO role at the beginning of the year. We remain focused on expanding targeted product and distribution initiatives to deliver long-term growth and shareholder value. Beginning on Slide 3. Acadian is the only pure-play publicly traded systematic manager. Founded in 1986, Acadian has pioneered systematic investing, and we continue to lead the space through constant innovation. We have delivered sustained outperformance across various investment strategies and through numerous market cycles. We managed $166.4 billion of AUM and a pure systematic manager applying data and cutting-edge techniques to the evaluation of global stocks and corporate bonds. 95% of our strategies by revenue have outperformed benchmarks over a 5-year period with a 4.5% annualized excess return. Our competitive edge comes from a combination of world-class talent, data-driven insights and innovative tools, which enable us to generate unique research and risk-adjusted returns that help our clients achieve their long-term investment goals. Our investment team is comprised of over 100 individuals with the depth and breadth of experience across many disciplines of finance, statistics and economics and a shared culture of collaboration and innovation. We're implementing focused product and distribution initiatives to drive sustainable growth, which I will discuss in more detail. Slide 4 showcases Acadian's Q3 2025 strong performance. Our U.S. GAAP net income attributable to controlling interest was down 11% and EPS was down 7% compared to the prior year due to increased operating expenses, driven by increased non-cash expenses, representing changes in the value of Acadian LLC equity and profit interest. Our ENI diluted EPS of $0.76, was up 29% and our adjusted EBITDA was up 12% driven by significant growth in recurring base management fees as well as share repurchases. We realized $6.4 billion of positive net client cash flows in Q3 of '25, 4% of beginning-period AUM, the second highest in the firm's history, driven by enhanced extension and core strategies such as non-U.S. equities. AUM surged to $166.4 billion as of September 30, 2025, marking another record high for Acadian. Turning to Slide 5. Acadian investment performance track record remains strong despite a more challenging recent period. We have 5 major implementations, which comprise the majority of our assets. As of September 30, 2025, global equity, emerging markets equity, non-U.S. equity, small cap equity and enhanced equity have 100% of assets outperforming benchmarks across 3-, 5- and 10-year periods with 1 minor variation. Global equity markets delivered strong returns in Q3 of '25. However, crowding in lesser quality high beta stocks created a more challenging environment for Acadian's fundamentally driven quality-oriented approach. We have seen these periods before but remain confident in our approach and believe we are well-positioned for when markets refocus on company fundamentals. Slide 6 details how our disciplined systematic investment process has weathered various market cycles and generated meaningful long-term alpha for our clients. Our revenue weight 5-year annualized return in excess of benchmark was 4.5% as of the end of Q3 2025 on a consolidated firm-wide basis. Our asset weight 5-year annualized return in excess of benchmark was 3.5% as of the end of the quarter. By revenue weight, 94% of Acadian strategies outperformed their respective benchmarks across 3-, 5- and 10-year periods as of September 30, 2025. And by asset weight, 90% of Acadian strategies outperformed their respective benchmarks across 3-, 5- and 10-year periods. Next, on Slide 7, I'd like to focus on Acadian's extensive global distribution platform, which has helped us achieve robust gross sales and will continue to be a major driver of growth in the years ahead. Acadian has had a strong global presence for many years with 4 offices headquartered in Boston, London, Sydney and Singapore. We have continued to expand our client and distribution team with over 100 experienced professionals, serving more than 1,000 client accounts in more than 40 countries. The team has established strong, deep relationships with many institutional lines as our average client relationship length with top 50 clients is over 10 years. We work with over 40 investment consultants across market segments and geographies, leading to a diverse client base invested across multiple strategies. We have $39 billion of gross sales in the first 9 months of 2025, which has surpassed our previous record of annual sales of $21 billion in 2024. In tandem with expanding our distribution capabilities, Acadian's business and product development teams have been focused on expanding our strategy and vehicle offerings in high demand and growing areas where Acadian's systematic approach is particularly well suited. Our current pipeline remains robust after the funding of several large mandate wins in Q3 of 2025. Moving to Slide 8. Acadian's standing as a highly regarded institutional asset manager is a testament to our proven investment process as well as Acadian's world-class investment and distribution teams. We have 5 clients among the top 20 global asset owners and 24 clients among the top 50 U.S. retirement plans. More than 40% of our assets are from clients invested in multiple Acadian strategies. Our client base is diverse, with 43% of assets managed for clients outside the U.S. We offer over 80 institutional quality funds for investors. And we achieved $39 billion of gross sales in the first 9 months of 2025 and reached $166 billion of AUM as of September 30, 2025. Slide 9 highlights the sustained momentum in Acadian's net flows. We realized positive net flows of $6.4 billion in Q3 of 2025, the second highest in the firm's history, representing 4% of beginning-period AUM. This quarter's net flow is diverse across products and client types. Both enhanced and extension equities generated strong NCCF, and core strategies such as non-U.S. also saw meaningful net inflows. Year-to-date, we generated net flows of $24 billion. With positive flows of $1.8 billion in 2024, we have now generated 7 consecutive quarters of positive net flows. As indicated earlier, our current pipeline remains robust after the funding of a number of significant client wins year-to-date. I'm now going to turn it over to our CFO, Scott Hynes, to provide you with more detail on our financial performance this quarter and an update on capital allocation.

Scott Hynes, CFO

Thanks, Kelly. Turning to Slide 11. Our key GAAP and ENI performance metrics are summarized here. As previously noted, we manage the business using ENI metrics, which better reflect our underlying operating performance. You can find complete GAAP to ENI reconciliations in the appendix. Let me now turn to our core business results. Starting on Slide 12. Q3 '25 ENI revenue of $136 million increased from Q3 '24 by 12%, primarily due to management fee growth, partially offset by a decline in performance fees. Management fees increased 21% from Q3 '24, reflecting a 34% increase in average AUM driven by strong positive NCCF and market appreciation. Moving to Slide 13. In Q3 '25, our ENI operating margin expanded 157 basis points to 33.2% from 31.7% in Q3 '24 driven by increased ENI management fees. Our Q3 '25 operating expense ratio fell 40 basis points year-over-year to 43.3%, reflecting the impact of improved operating leverage. Our Q3 '25 variable compensation ratio decreased to 41.5% in Q3 '25 from 43.3% in Q3 '24. We now expect that our fiscal year 2025 operating expense ratio will be approximately 44% to 46%, and while our fiscal year 2025 variable compensation ratio is now expected to be approximately 43% to 45%. Turning to Slide 14 on capital resources. I'll focus on our strengthened balance sheet and the refinancing of our $275 million senior notes. This morning, we noticed the redemption of these notes that were to mature in July 2026, will be funding the redemption with a committed 3-year bank term loan and balance sheet cash. The term loan will have a floating rate based on SOFR and does not require annual amortization or principal payment prior to maturity, and that it is prepayable at any time with no fees or costs. We expect the senior notes redemption to be completed and for the term loan to fund around December 1, 2025. As of September 30, 2025, prior to the senior notes refinancing, our gross debt-to-adjusted EBITDA ratio was 1.4x, and net debt-to-adjusted EBITDA ratio was 0.8x. As adjusted for our senior note refinancing, our gross debt outstanding declines from $275 million to $200 million, with our gross debt to adjusted EBITDA ratio moving lower to approximately 1x and our net debt-to-adjusted EBITDA ratio to approximately 0.9x. Stepping back, this refinancing transaction is consistent with our disciplined approach to maximizing shareholder value. It increases our balance sheet flexibility, enables further deleveraging and enhances cash flows to capital management priorities, including investments in organic growth, share repurchases and dividends. Moving to Slide 15. We have a track record of creating significant value through share buybacks in recent years. Outstanding diluted shares have decreased 58% from $86 million in Q4 '19 to $35.8 million in Q3 '25. Over the same period, $1.4 billion in excess capital was returned to stockholders through share buybacks and dividends. During the third quarter of 2025, we repurchased 0.1 million shares or $5 million of stock at a volume weighted average price of $48.58. The Board declared an interim dividend of $0.01 per share to be paid on December 24, 2025, to shareholders of record as of the close of business on December 12, 2025. Going forward, we expect to continue generating strong free cash flow and deploying excess capital that maximizes shareholder value. I'll now turn the call back over to Kelly.

Kelly Ann Young, President and Chief Executive Officer

Before moving to Q&A, let me recap some key points. Acadian is competitively positioned as the only pure-play publicly traded systematic manager with a nearly 40-year track record and competitive edge in systematic investing. Our investment performance track record remains strong this quarter with more than 94% of strategies by revenue outperforming over 3-, 5- and 10-year periods. Business momentum continued in Q3 of '25 with net inflows of $6.4 billion, the second highest in the firm's history and with record AUM of $166.4 billion. Q3 '25 financial results included record management fees of $136.1 million, up 21% from Q3 of '24, ENI EPS of $0.76, up 29% from Q3 '24, and operating margin expansion to 33.2%, up from 31.7% in Q3 of '24. Finally, capital management remained a focus in the quarter as we repurchased 0.1 million shares or $5 million of stock and strengthened our balance sheet with the announced senior notes redemption and term loan refinancing. Acadian is well positioned to continue to drive growth and generate value for shareholders through targeted distribution initiatives and new product offerings. Our talented and dedicated team is acutely focused on achieving these goals, and I look forward to building on the momentum we've seen year-to-date. This concludes my prepared remarks.

Operator, Operator

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

Kenneth Lee, Analyst

On the institutional pipeline, you mentioned that it still remains robust. Wondering if you could just talk a little bit more around the composition. Any particular strategies or strategy buckets that you're seeing demand from clients?

Kelly Ann Young, President and Chief Executive Officer

As I noted, the pipeline continues to look very robust. And the things that I think we've talked about on these calls earlier in the year continue. So enhanced equity continues to resonate with a number of our clients, particularly, I'd say, our international clients outside of the U.S., although increasingly within the U.S. And we've seen a real pickup of interest in the second part of this year in our extension strategies. I would say that's primarily driven by U.S. clients. But again, we're starting to see some interest there outside with non-U.S. investors. So those are clearly 2 themes that I think have continued through 2025. And continue to see really robust interest in our core strategy, where obviously, we have very long-term attractive track records there. And particularly, I'd say international equity clients looking to allocate perhaps strategies that don't have U.S. dominated. So continuing to see a real interest there. So the pipeline looks very diverse by strategy and continues to look very diverse by client domicile. And we continue to edge closer to that 50-50 split of AUM between U.S. and non-U.S. clients that we have been targeting for some time.

Kenneth Lee, Analyst

Got you. Very helpful there. And just 1 follow-up, if I may. Any update around outlook capital management. You mentioned plans to redeem the senior notes as well as with the term loan relatedly, any plans about how you think about paying down that term loan over time?

Scott Hynes, CFO

Yes. Ken, it's Scott. Thanks for joining this morning. It's good to talk again. In regards to capital management, I think, look, I would anticipate that we'll continue to be pretty athletic in this regard. So we feel really good about the senior notes redemption and landing with the committed financing we have in place with the new Term Loan A, a lot of flexibility there. And I think you'll see us look every quarter to steer at what's the best answer for our shareholders, recognizing we do have that prioritization as we've spoken about before about organic growth and prioritizing organic growth and then going from there in terms of return of capital to shareholders. So I think during the balance. I think we're really well positioned. I think we'll be looking again every quarter. And you saw this quarter, I think that's reflected. We have a lot, as you can see going on this quarter. Another great quarter of performance, strong free cash flows, but we did have this refinancing and yet we were still in the market doing share repurchases. So I think that's reflective. Again, my words, I think, are going to be pretty athletic in this regard. Every quarter, looking to step into the market when appropriate in terms of share repurchases, while still being mindful of that debt position. This was, as you can see, clearly, a deleverage move. We think that's the right position to be in. I would note in this regard that we also upsized our existing revolver. So I think we're marching to a place of continuing to have a little less leverage. So that $200 million Term Loan A is a lot of flexibility there for us to repay early, no fees or costs associated with that. So we'll be revisiting that every quarter. Does that make sense?

Kenneth Lee, Analyst

Yes, that makes sense. That makes sense. And actually, if I could squeeze one more question and really appreciate the detail around global distribution. Just curious, what's been driving the pickup, the meaningful pickup in gross inflows that you've been seeing over the last year or 2? Were there any specific initiatives or efforts within the distribution platform? Or is it more related to what you're seeing in terms of the client trends?

Kelly Ann Young, President and Chief Executive Officer

Sure. I think it's a bit of both, Ken. I mean, we've very thoughtfully added resources to our distribution and client service teams across the globe to continue to service our clients to the best of our abilities and obviously, continue to focus on sort of newer channels or channels that have been under-penetrated. So I do think that it's a testament to the quality of the team that we've built here. We've also very intentionally tried to build out a suite of pooled funds. We have a usage range that works very well for our non-U.S. clients. We continue to build out our Delaware and CIT ranges within the U.S. So again, I think making ease of access to clients a lot better. And then I do just think as well as we talked about things like enhanced and extensions are capturing the imagination and satisfying client need at the moment. So I think it's a combination of all of those things. But again, being very intentional about adding to an already incredibly talented team here and being very intentional about that.

Operator, Operator

Your next question comes from the line of John Dunn Tan of Evercore.

John Dunn, Analyst

I wonder you just talked about like the domicile mix of your AUM. Could you remind us of the geographic mix of your investment strategies? And then just any change you're seeing in the demand for non-U.S. exposure relative to the last year or so?

Kelly Ann Young, President and Chief Executive Officer

Sure. Yes. Nice to talk to you again, John. Yes. So we have seen a real pickup in interest, I would say, over the last 12 months in international strategies. It's one of our core strategies here, I would say, alongside global and emerging markets. And is our longest track record at the firm. So again, Acadian is very much known for international investing and we have, I think, a strong brand advantage there. What's been quite interesting, I think, for us is not just seeing a pickup in interest in these strategies from our U.S. domiciled clients, but starting to see some of our non-U.S. clients thinking in this more sort of international or ex-U.S. space. So again, I think there are different drivers, but that's sort of the newer trend that we've seen. And I certainly think we're going to benefit from a tailwind there given our long-standing track record and the established brand in that space.

John Dunn, Analyst

Got you. And then relatedly, one of your competitors recently said that they've seen the other managers that kind of pulling back from emerging markets over the past year. Would you agree with that? And maybe just a little more on emerging markets specifically.

Kelly Ann Young, President and Chief Executive Officer

Sure. Yes. I think if we've been talking in 2024, I would probably completely agree with that statement. I think through this year, we are seeing pockets of interest in emerging. Again, I think Acadian has established an emerging market managers since the early 1990s. So again, I think that very strong robust track record that dates back decades means that perhaps we're kind of front and center when folks are thinking about systematic exposure to EM. I certainly don't think that we're seeing the level of demand that we are in things like developed international. I think that's a fair statement. Again, we are seeing some pockets of interest be on the back of 2 or 3 years, I think, relatively flat demand.

John Dunn, Analyst

Got it. And maybe just one quick modeling one. Could you just kind of outline the puts and takes of the fee rate from here?

Scott Hynes, CFO

Yes, John, it's Scott. As you know, we've seen a transition that is intentional, given the significant traction that enhanced has experienced in recent quarters, especially in the second quarter, which followed another strong quarter of inflows. During that time, there was some downward pressure on the fee rate. Currently, our run rate reflects those inflows in a substantial way, both in the second quarter and now in this quarter. To be candid, this is largely an outcome of various factors beyond our control. Specifically, broader market levels and client demand have played a role. Enhanced has gained considerable traction, and the pipeline remains strong. That said, other products we are seeing traction in could have fee rates higher than the upper 30 basis points we anticipated for enhanced at the beginning of the year. We have observed some substantial installations that can vary from quarter to quarter. In summary, we are trending closer to the mid-30s range for our fee rate. Looking at the current pipeline, we might see a basis point decrease next quarter, especially if enhanced continues to develop as we expect. However, other successful product offerings could change this outcome. Thus, we may see further downward pressure on the fee rate due to the ongoing success of enhanced in the fourth quarter, but this is not something we can reliably predict due to the many variables at play, particularly looking towards 2026 and beyond. Hopefully, that clarifies things.

Operator, Operator

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

Michael Cyprys, Analyst

A question for you on the platform today, clearly really a lot of momentum with your enhanced and extension strategy. But when you look at the platform, are there any capabilities, geographies in areas that are lacking today that could put intended to enhance your value proposition with clients. And just curious how you're thinking about inorganic versus organic initiatives as you look out from here.

Kelly Ann Young, President and Chief Executive Officer

It's great to be speaking with you again, Michael. As you've pointed out, our enhanced and extension strategies have performed well, along with our core capabilities. Supporting clients as they navigate various risk levels has significantly contributed to our business and organic growth. While we haven't discussed systematic credit yet, we've actively developed our offerings in that area and expect to see larger flows there in the medium term. Next month marks the two-year anniversary of our longest-running strategy in that space. As we consider moving away from some equity exposure, I feel much more confident now than I did a couple of years ago regarding our diversification across the risk spectrum and geographies. The team is also putting a strong emphasis on systematic credit, engaging in meaningful discussions with both existing and potential clients as this approach gains traction in the credit market. Over the short to medium term, we anticipate this will remain a key area of focus. We're optimistic that we will see assets grow in line with the strong track records we are establishing, even though our current track records are still under 2 years.

Michael Cyprys, Analyst

And then just on the systematic fixed income, maybe you could elaborate on how that's contributing today? How you think about that evolving over the next couple of years? And what are some of the steps you're taking around to build that out? And do you feel you have the capabilities on the fixed income front, systematic capabilities to capture the opportunity set?

Kelly Ann Young, President and Chief Executive Officer

Yes, definitely. We hired Scott Richardson to lead this initiative about 3.5 years ago, and he has an impressive background in both equity and fixed income investing. Scott has assembled an excellent team of around a dozen people, and we believe we are well-positioned. We have been very deliberate in how we have approached the market with these strategies. Our longest high-yield strategy will celebrate its 2-year anniversary next month, soon followed by our global high yield and U.S. investment-grade strategies, which are all between one and two years old. We have intentionally developed our capabilities, and while those track records are still in an early stage of development, I would say we are further along than just the initial phase. In fixed income, the return expectations are generally lower than in equities. Therefore, these three track records will be crucial for clients to gain confidence. From my perspective, looking at the team Scott has built and its integration with our existing research team and infrastructure, we are well-positioned to generate significant returns for our investors and meaningful cash flows over the medium to long term. I feel very positive about our current standing, with the understanding that clients will expect a 3-year benchmark for reassurance. What Scott and his team have achieved in delivering consistent positive performance month after month and quarter after quarter is beginning to resonate. I am confident in our present position and believe the platform has the potential to manage $10 million to over $20 billion in assets in the future. These 3-year track records may be particularly significant compared to other areas of our equity business.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the conference call back over to Kelly Young.

Kelly Ann Young, President and Chief Executive Officer

Well, thank you, everyone, for joining us today, and I wish you all a great day. Thank you.