Earnings Call Transcript - AAMI Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Third Quarter 2024. Please note that this call is being recorded today, Thursday, October 31, 2024 at 11:00 a.m. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead, Melody.

Melody Huang, SVP, Director of Finance and Investor Relations

Good morning and welcome to BrightSphere’s conference call to discuss our results for the third quarter ended September 30, 2024. 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 2023 Form 10-K and our Form 10-Q for the first and second quarter of 2024. 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 Rana, President and Chief Executive Officer

Thank you, Melody. Good morning, everyone, and thanks for joining us today. I’ll cover the highlights on Slide 5 of the deck in my initial remarks, and then we can move to Q&A. So for the third quarter of 2024, we reported ENI per share of $0.59, and compared to $0.45 in the third quarter of 2023 and also $0.45 in the second quarter of 2024. The ENI in the third quarter of 2024 increased by 15%, $22.2 million compared to $19.3 million a year ago in the third quarter of 2023. The increase was primarily driven by the growth in management fee revenue due to higher AUM from the market appreciation that we’ve seen over the last 12 months. And additionally, we continued our expense discipline during this period. The ENI per share increased by 31% in the third quarter of 2024 compared to the year-ago quarter, which is higher than the 15% increase in ENI over the same period. And that’s because the ENI per share was additionally driven by the $100 million of share repurchases that we started in December 2023 and continued in the first half of 2024. Acadian investment performance remained very strong in the quarter. As of September 30, 2024, 85%, 93% and 94% of Acadian strategies by revenue outperformed their respective benchmarks across 3-, 5- and 10-year periods. Turning to flows, we reported positive net client cash flows of $0.5 billion this quarter compared to the breakeven NCCF we had in the second quarter of 2024, and negative $0.5 billion of NCCF that we had in the third quarter of 2023. Our organic growth initiatives continue to progress well and in line with our expectations. On our systematic credit initiative, all three credit strategies seeded so far are building nice track records. As a reminder, these three strategies comprise a U.S. high-yield strategy, which we seeded in November 2023, a global high-yield strategy seeded in April 2024, and a U.S. investment-grade strategy seeded in Q3 of 2024. On our equity alternatives initiative, our multi-strategy fund seeded about two years ago in Q4 of 2022 continues to build a strong track record of outperformance. And in September 2024, we also seeded a new global equity extension strategy, which is a variant of our global equity strategy with some ability to go short. Turning to capital management, at the end of the third quarter we had a cash balance of approximately $53.6 million, and Acadian has fully paid down its revolving facility compared to the outstanding balance of $36 million at the end of the second quarter. As discussed previously, this revolving facility supports Acadian’s first-quarter seasonal needs and is generally paid down fully by year-end from the cash generated from Acadian’s operations. Now as we announced earlier this month, this will be my last earnings call as BrightSphere CEO. Effective 1Q 2025, we will rebrand BrightSphere as Acadian Asset Management since Acadian is our only remaining business. Our current ticker, BSIG, will change to AAMI and Kelly Young, who is currently the CEO of Acadian, our sole operating business, will assume the role of the public company CEO as well. These steps basically complete our transition from a multi-boutique conglomerate to a streamlined and singularly focused asset manager. We successfully sold six of the company’s seven affiliates to strategic acquirers and retained Acadian, our largest and the most differentiated business. Thanks to the divestitures, we returned $1.3 billion of capital to shareholders via share buybacks, and we also paid down $125 million of debt. We expanded Acadian’s business into new areas, including credit and equity alternatives that I touched on earlier. And we expect these new asset classes to generate sustained organic growth for the company over time. We also reduced our corporate overhead by approximately 70% over the last few years. Collectively, these efforts have produced very strong returns for our shareholders. Now Acadian is one of the top-performing systematic investment managers in the world and the completion of the transition to a singularly focused asset management company presents an exciting opportunity to focus exclusively on this exceptional business. I’d like to close my initial remarks by reiterating, as I’ve done for about 24 quarters now, that the company will remain focused on maximizing shareholder value, and will continue using its free cash flow to support organic growth and to buy back shares. I’ll now turn the call back to the operator, and I’m happy to answer questions at this point.

Operator, Operator

And the first question comes from the line of Kenneth Lee of RBC Capital Markets. Please go ahead.

Kenneth Lee, Analyst, RBC Capital Markets

Hey, good morning. Thanks for taking my question and Suren, it’s been great working with you for the past several years. In terms of the transition, and I think you also mentioned the streamlining of the company structure. And once again, I appreciate that BrightSphere had undergone some major cost reductions in the past. Do you think there is any potential opportunities for any further expense reductions going forward as the structure gets streamlined? Thanks.

Suren Rana, President and Chief Executive Officer

Hi, Ken. Yes, as we’ve always said, we maintain expense discipline, and we continue to find opportunities, and we continue to be really laser-focused on being as efficient as we can be. So going forward, we’ll continue the same approach, but it’s hard to say at this point whether there are any obvious opportunities. As we’ve talked about the last two years, we’ve actually been investing in the infrastructure: we’ve upgraded our investor reporting capabilities and we’ve invested in our trading capabilities. What that will do is it makes our platform much more scalable. And we also face inflation pressures that we’ve touched on. So what I would say is that at this point, we’ve built up a lot over the last couple of years. So we may not see expense growth necessarily as our revenue grows. So we would see the benefit of operating leverage going forward. But it’s hard to say whether that would be a reduction in absolute dollar terms of the expense levels.

Kenneth Lee, Analyst, RBC Capital Markets

Got it. Very helpful there. And just one follow-up, if I may. Just wanted to see if you could give us an updated outlook in terms of potential cash usage for the remainder of this year and as well related to that, what’s sort of like the outlook for share repurchases over the near term there? Thanks.

Suren Rana, President and Chief Executive Officer

Yes. Thank you. At a high level, as I just said earlier, the two primary uses for our cash haven’t changed. And as I understand, even after the end of my tenure, they won’t change. So they remain investment in our organic growth on seeding new strategies and then share repurchases. Between the two, it would really have to be opportunistic and see what opportunities present themselves, whether in terms of opportunity to seed something if the client is looking for a new product from us and also being vigilant about market conditions with regard to share repurchases. So it’s hard to put a relative prioritization of the two, but those two remain the primary and, I would say, almost exclusive uses for the cash.

Kenneth Lee, Analyst, RBC Capital Markets

Got you. Very helpful there. Thanks again.

Operator, Operator

Your next question comes from John Dunn of Evercore ISI. Please go ahead.

John Dunn, Analyst, Evercore ISI

Hi, Suren. Could you maybe give us a little update on the institutional pipeline, like composition, magnitude, time to funding, maybe geography?

Suren Rana, President and Chief Executive Officer

Hi, John. Yes, I guess we are pleased with the pipeline. Of course, as we saw in the numbers in the third quarter, the pipeline has been good and we are working through it. As it progresses, some of it has been converting into sales. It’s pretty healthy, it’s pretty robust, and it goes across geographies and across strategies. So it’s not concentrated in any particular area. We are also seeing good response from some of the newer areas, like we have an enhanced strategy that offers a low tracking error to indices but also with low risk. So I think we are happy with how things are going in the pipeline. Also, we saw some outflows from managed volatility in this quarter as well. So we have pockets of risk as well. On balance, we were satisfied with where things are and we expect ideally to have positive flows or maybe breakeven as we look forward to the next few quarters. We’ll always remain opportunistic and see if there are opportunities to enter any new asset classes, but I would say we do have our hands full at the moment. The areas that we’re looking to expand into are credit and equity alternatives, and we’ve got some other product variants in the mix. These are large markets, and we are really keeping our eye on the ball and going quarter-to-quarter in terms of building out the necessary capabilities and starting to talk to clients. Opportunistically, if something great comes along, we’ll look at it, but we want to stay disciplined on execution as well.

John Dunn, Analyst, Evercore ISI

Make sense. Thank you and all the best, Suren.

Operator, Operator

Your next question comes from Michael Cyprys from Morgan Stanley. Please go ahead.

Michael Cyprys, Analyst, Morgan Stanley

Hi, good morning, Suren. Congratulations on your tenure with BrightSphere and the strong execution on unlocking value for shareholders over the past number of years. It’s been great working with you. I wish you all the best in your new endeavors. Just a couple of questions here, just curious in your dialogue with the Board, among others, maybe you could just elaborate a bit on the new strategy, what prompted it? And what is the scope for strategic alternatives from here? In the past, you guys have looked to pursue maybe potential buyers. Just curious what the reception feedback has been; it seems like the change in strategy is moving on from the strategic alternatives chapter to the organic growth chapter next?

Suren Rana, President and Chief Executive Officer

Yes. Thank you for the kind words, Mike. I would say there is really nothing new; there isn’t necessarily a change of strategy because as we have said for a while, we remain focused on maximizing shareholder value and looking at all possible ways that we can do that. That strategy remains the same where the company remains open to strategic alternatives. So I wouldn’t say that’s no longer an option or that it’s off the table. What we have done over the last few years has really moved us from the conglomerate approach to a singular integrated asset management approach, and this is the most unique and well-positioned business to do that with. We accomplished this almost 1.5 years ago, and we have remained open to strategic alternatives, but of course the partner has to be right. At the same time, we have continued to optimize our position as an independent public company and continue to be disciplined on expense. We have had leadership succession at Acadian in the interim and we have been continuing to optimize on all fronts as an independent public company while remaining open to strategic alternatives. So nothing has changed; this is a continued execution of the strategy we have had for a while and is a culmination of that effort. Going forward, the company is very well positioned as an independent company, but also open to something synergistic that could create shareholder value.

Michael Cyprys, Analyst, Morgan Stanley

And then could you just elaborate a bit on the traction that you are seeing with some of the new strategies that you have been seeding over the past couple of years, just where you are in terms of third-party client assets, traction, interest from clients and how you are thinking about the scope for maybe bringing some newer strategies to the marketplace over the next year or so?

Suren Rana, President and Chief Executive Officer

Certainly. I would say the new strategies have been moving along completely on expected lines. Looking from outside, it’s hard to tell what’s been going on because with anything new, when you can’t see a lot of flows it’s hard to tell. With new strategies in our institutional long-only asset management business, the length of the track record is quite important before we start to see meaningful sales numbers. The execution has been going along well and more or less as we expected: we have built the teams, we have built the models, we have built the necessary technological changes. We have been having great conversations with clients who have taken a lot of interest, but for a variety of reasons they have internal thresholds and requirements to see a certain duration or length of track record. So there is nothing that we are concerned about on the new strategies; they are just taking the time that is typical to build scale. We continue to stay focused on all of these new strategies and are happy with how the execution is going. It’s not that we want to start new strategies because we are unhappy with what we are doing now. We remain opportunistic: if something compelling were to come from client feedback or market opportunities present themselves, the company remains open to seeding new strategies as well. But we do have enough in the pipeline right now.

Michael Cyprys, Analyst, Morgan Stanley

Great. And then just one follow-up question just on capital allocation, I know you mentioned that you look to be opportunistic on the buyback, also looking to seed. As we think about into 2025, just curious how we should think about usage of cash generated across the business — how much might we see deployed into buybacks versus seeding new strategies or otherwise just cash building or other uses? Maybe you could help flesh that out.

Suren Rana, President and Chief Executive Officer

Yes. I mean those two are the uses. We haven’t made any predetermined allocation between the two. It will be a function of market conditions with regard to buyback opportunities and how we see client feedback with regard to any new strategies and how big those markets are. We have enough to digest on the organic side right now. There may be one or two things that come up, but nothing that we know of that would be very large. So you may probably see both of them; with regard to the relative allocation between the two, it’s hard to tell.

Michael Cyprys, Analyst, Morgan Stanley

Okay. Thanks. Wish you all the best.

Operator, Operator

Your next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Kenneth Lee, Analyst, RBC Capital Markets

Hey. Thanks for taking my follow-up. Just wanted to get a better sense of what specific strategies drove net flows in the quarter there. Thanks.

Suren Rana, President and Chief Executive Officer

Yes. They really came from a good cross-section of strategies that did well. One example I mentioned earlier is an enhanced strategy that offers low tracking error with low risk, and that’s resonated with clients that were otherwise going passive. That was one area. We have seen good interest in small-cap equity, non-U.S. as well as U.S., and those are higher fee as well, which is a nice side benefit. We also saw interest in emerging markets small-cap opportunities. So it’s been across a variety of strategies.

Kenneth Lee, Analyst, RBC Capital Markets

Got it. Thank you again for taking my follow-up.

Operator, Operator

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

Suren Rana, President and Chief Executive Officer

Thank you, operator, and thanks everyone for joining us, and thank you also for the kind words. It’s a bittersweet moment for me. As I mentioned, on the one hand, it’s really been a culmination of the strategy that we have been executing for the last few years. But at the same time, it is an exciting new phase as a more streamlined independent public company. I leave with the knowledge that the company is very well positioned without me. Thank you everyone for joining us.