Ladies and gentlemen, thank you for standing by, and welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Third Quarter 2020. [Operator Instructions] Please note that this call is being recorded today, Thursday, October 29, 2020 at 11 a.m. Eastern Time..

I would now like to turn the meeting over to Elie Sugarman, Managing Director, Strategic Development. Please go ahead, Elie. .

Good morning, and welcome to BrightSphere's conference call to discuss our results for the third quarter ended September 30, 2020..

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 in our 2019 Form 10-K and our Form 10-Qs for the first and second quarters of 2020.

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?.

Thanks, Elie. Good morning, everyone. Thank you for joining us today. As usual, I'll focus my initial remarks on the key highlights in the quarter laid out on Slide 5 of the presentation deck..

We reported ENI per share of $0.47 for the third quarter, which is 12% higher than the $0.42 we reported for the third quarter last year.

While our revenue declined compared to the third quarter of last year due to the COVID-19-related market impact on our average AUM, our ENI increased due to the cost savings from our corporate repositioning and the continuing discipline on the OpEx by our affiliates..

And then our share repurchases in the first half of this year helped to further build the ENI on a per share basis.

The ENI per share of $0.47 in the quarter is also 15% higher than the $0.41 we reported for the second quarter of this year, which reflects the increase in AUM and management fee revenue from the continuing market recovery, while our expenses remained largely flat compared to Q2..

We previously announced divestitures of our Barrow Hanley and Copper Rock affiliates. As a reminder, we completed the sale of Copper Rock early in the quarter in July, and we still expect the sale of Barrow Hanley to be completed in the fourth quarter..

Our net client cash flows in the quarter on a pro forma basis, that is excluding Barrow Hanley and Copper Rock, were negative $0.5 billion. But the annualized revenue impact of these flows was a positive $1.4 million as the fee on our inflows was higher than the fee on outflows..

In the Alternatives segment, we had net inflows of $0.7 billion in this quarter, which reflects a modest pickup in the pace of our fundraising, but we still continue to see a delay in the timing of our fund raise because of the restrictions imposed by the pandemic.

As we have previously discussed, we still expect the bulk of our fundraising to come in 2021 and 2022..

Our investment performance remains generally stable. In the Quant & Solutions segment, our investment performance continued to be strong, with 45%, 49%, and 88% of strategies by revenue beating their respective benchmarks over the prior 3-, 5- and 10-year periods..

Moving to capital management. We reduced the borrowings on our corporate revolver from $130 million at the end of Q2 to $80 million at the end of Q3, which reduced our net debt ratio to 1.5x compared to 1.7x earlier.

Additionally, we fully paid off the remaining $22 million of outstanding amount on our nonrecourse seed facility since we have an adequate amount of capital to seed new strategies for our affiliates..

Now as we look toward closing the Barrow Hanley sale in the fourth quarter, we intend to use the proceeds from that closing to fully pay down our revolver, and we plan to use part of the proceeds towards repurchases.

We're still on track to deliver annual cost savings of over $20 million by Q1 of 2021 from the previously announced repositioning of our corporate center..

Next few slides highlights the strength of our differentiated business mix, with 87% of the ENI post the divestitures coming from Quant & Solutions and Alternatives segments. We already walked through this a fair bit on our last earnings call, so I'd like to now move to Slide 14 to provide some more color on our flows by segment..

Looking at the chart on the left-hand side of the page, in the second column, the pro forma column, you'll see in the Alternatives segment, we posted net inflows of $0.7 billion. You may recall, this number was a small positive in Q2.

In the pro forma Liquid Alpha segment, that's excluding Barrow Hanley, we posted net inflows of $1.1 billion for the quarter, and that number was positive $0.1 billion in Q2. In the Quant & Solutions segment, we had net outflows of $2.3 billion this quarter. In Q2, the segment had net inflows of $0.3 billion.

The net outflow in Q3 was primarily a result of 2 large withdrawals driven by rebalancing considerations..

Now I'd like to turn the call back to the operator, and I'm happy to answer questions at this point. .

[Operator Instructions] Your first question comes from the line of Michael Cyprys from Morgan Stanley. .

This is actually Stephanie filling in for Mike. My question is around the outflows in Quant & Solutions. In particular, the redemptions have picked up this quarter.

So wondering if you can give us some more color on the rebalancing withdrawals that you called out and update of what you're seeing in terms of the latest trends in client activity and what strategies are well positioned at this point. .

Yes, certainly. As I pointed out, that largely was 2 specific withdrawals, which were withdrawals, not terminations, that withdrawals driven by rebalancing considerations.

One of them, in fact, was a tactical rebalancing that we had received earlier in the year when the environment was starting to change and it was understood to be a short-term tactical allocation that we received, and so that it sort of ran its course.

We don't generally have a lot of the tactical things coming in and out, so it was a little bit of an aberration. But generally, we have longer-term allocations that we receive. And the other one was driven by as equity markets moved around, that people are rebalancing.

So sometimes you're on the receiving end of it, sometimes you're on the giving end of it..

But generally, as we see -- as we look at our Quant & Solutions business, it's a very broad-based business, but ultimately, the core is the multifactor approach that we have powered by decades of data and research and -- but the strategies are very diversified across regions and approaches in terms of the client goals, whether it's targeting low volatility or longer-term performance.

So we see -- now we see ins and outs in a variety of strategies. I mean, generally, the business we see is very well positioned given the differentiated capabilities that we have. .

Your next question comes from Kenneth Lee from RBC. .

Just in terms of the Alternatives fundraising, you mentioned that the bulk would occur in the 2021, 2022 time frame.

Wondering if you could just provide any additional granularity, whether you would expect the fundraising to steadily increase throughout that 2021 time frame or perhaps the pickup might be a little bit later than what you would have originally thought. .

Yes. The exact timing is, of course, hard to peg given the dynamic situation with the pandemic. But generally, we are encouraged that fundraising has kicked off and is moving along and clients are starting to commit. But there are idiosyncratic issues with a new fundraise, for example, with new clients not being able to meet them in person is an issue.

In specific jurisdictions, people have to meet in person, and they aren't able to do that from an investment committee perspective..

But notwithstanding that, we are moving along with the dialogue with the clients. And so I would say that we still are targeting the same sizes as we always were. We are very hopeful that we'll get to our targets. That timing may be hard to pinpoint, there is the delay that we've discussed previously about 2 quarters.

It's hard to get more specific than that just given the dynamic situation. But I would say that if things were to normalize very quickly, then we would definitely be a beneficiary of that because it's really the pandemic restrictions that are slowing things down a bit. .

Got you. Very helpful. And just one follow-up, if I may. Just given all the recent focus around potential industry consolidation, wondering if you have any updated thoughts on potential M&A. .

Yes. I guess, no, we're definitely seeing increased activity in the sector, which is encouraging to some extent that the people are realizing the value in the industry.

From our perspective, as we've always said, we like our pro forma business as evidenced by our flows and our improved fee rates and margins, but also we still believe that our intrinsic value is higher than where we trade..

So with that in mind, we -- as a public company, we are always open to consider things that might unlock value, and that's really our overall approach. But we're also hopeful that over time, the market will recognize the intrinsic value of our businesses. .

Your next question comes from Gayathri Ramkrishnan from Bank of America. .

This is Gayathri on behalf of Mike Carrier. It was great to see some of the strong expense management this quarter. And I was wondering if you can sustain that report into 2021 and how you're looking at expense management in the near term in terms of different levers that you can pull. .

On the expense management front, as we've said, we're on track to deliver the savings that we were expecting from the corporate repositioning and might have a slight upside on that front as we continue to execute over the next couple of quarters. And then our affiliates operate autonomously, as you know, but they also are very mindful of expenses.

We also benefited from things like T&E being lower. So at least on T&E front, we can't wait for things to be normalized and we would have very happily write those checks so that our sales force can be out and about and service clients. But generally, we continue to be mindful.

On the expenses front, I wouldn't expect a lot of upside but more of a continuing discipline. .

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

Thank you. In summary, I'd really say, we continue to execute on our longer-term strategy of really focusing on our differentiated business mix, and we continue to deploy capital toward paying down debt and doing accretive repurchases. So thank you for joining us today and stay healthy and well..