Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2020. Please note that this call is being recorded today, Thursday, February 4, 2021 at 11:00 a.m. Eastern Time.

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

Good morning and welcome to BrightSphere’s conference call to discuss our results for the fourth quarter ended December 31, 2020..

Thanks, Elie. Good morning, everyone and thank you for joining us today. I will focus my initial remarks on the key highlights in the quarter laid out on Slide 5 of the deck and then we can switch to Q&A. We reported ENI per share of $0.47 for the quarter compared to $0.50 that we reported for the fourth quarter of 2019.

The EPS decline compared to the year ago quarter primarily reflects the impact of closing the sale of Barrow Hanley in the middle of the quarter and hence missing the earnings from that affiliate for the back half of the quarter and this was only partially offset by us achieving our target for expense reduction in our corporate center and our share buyback activity in the year.

The ENI of $0.47 in the quarter is flat compared to the third quarter of this year, which was also $0.47 and this again reflects the Barrow Hanley disposition in the quarter, which led to lower ENI in our Liquid Alpha segment.

But the decline in Liquid Alpha segment relative to third quarter was offset by higher ENI in our Quant & Solutions segment driven by the continuing market recovery and higher ENI in our Alternatives segment driven by net inflows.

Our net client cash flows in the quarter on a pro forma basis that is excluding Barrow Hanley, improved slightly to minus $0.3 billion compared to minus $0.5 billion that we had in the third quarter.

The fourth quarter net outflows of $0.3 billion comprised net inflows of $0.6 billion in Alternatives, reflecting continued fundraising and other flows and net inflows of $0.4 billion in pro forma Liquid Alpha.

So a combined $1 billion of net inflows from these two segments, which was offset by net outflows of $1.3 billion in Quant & Solutions resulting in the $0.3 billion of net outflows. Our investment performance remained generally stable and is similar to the third quarter.

As I mentioned earlier, in the fourth quarter, we reached our target a bit ahead of schedule of reducing our annualized corporate center cost by $20 million..

Our first question is from Craig Siegenthaler from Credit Suisse. Your line is open..

Good morning, Suren. Hope all is well..

Hi, Greg.

How are you?.

I am good.

So given the improving capital position, but also the higher stock price, can you just remind us how we should think about the method in which you will return capital to shareholders this year?.

Yes. Thanks, Craig. We haven’t made a specific decision yet. We continue to evaluate as to what the best use of capital is, but returning capital to shareholders remains our priority in the top news. And then as I mentioned earlier, we are also looking into using some of the proceeds to work potentially towards little bit more de-leveraging.

So couple of ways we could do with that is repurchases. We are monitoring the market. There is a lot of volatility. So we will see what the right timing maybe. We do have a bias toward using up the capital sooner rather than later. You could also consider 1x special dividend for example.

We are thinking through that so more to come in the next call it month or a couple of months on that but essentially the return of capital to shareholders being the primary use and maybe a little bit more de-leveraging..

Got it. Very helpful.

Just as my follow-up, I wanted to get your perspective on the potential timing of the next vintages of fundraising at Landmark and maybe you could just compare it in terms of sizing when we think about the last fundraising cycle they experienced 2 to 3 years ago?.

Yes. No, we are still essentially, as we have said that we are targeting and I guess I am glad you had referenced the last fundraising because as we have always said, we are targeting essentially more or less the same amount as our last vintages. So in 2020, you would have noticed that we got it started amid COVID.

And so we definitely have had an impact on the normal cadence of fundraising from COVID, both logistical issues as well as just clients being a little bit – somewhat delaying things, if you will, but in 2020, having gotten it started, you would have noticed in our filings that we have about $1 billion that we raised in 2020, just getting warmed up, if you will.

And that was in one of our strategies, which is infrastructure and real assets secondary strategies and then we would expect to get to our targets essentially over the next couple of years, this year and ‘22 essentially. And we probably expect north of $10 billion remaining to be raised and that sort of compares to what we did in the last vintage..

Thank you, Suren..

Thanks, Craig..

Our next question is from Michael Cyprys with Morgan Stanley. Your line is open..

Hey, thanks for taking the question. Maybe you could just dig in a little bit more on the capital management, I was just hoping you could just give us a little bit more color around how you might approach evaluating whether you would shift a little bit more toward a special dividend versus a buyback.

What factors are you going to be considering in that sort of analysis? And then similarly, as you think about sizing the debt pay-down again how are you thinking about sizing that and what are the factors you are going to be looking to take into consideration there?.

Yes. Thanks Mike. Yes, I guess, no, essentially, just value accretion remains our primary lens if you will in terms of just use of capital and it was that reason that we are not focused on acquisitions.

For example, as we have been consistent that we think that it would be EPS accretive, but for the value of those incremental earnings, we don’t consider them – we wouldn’t consider high enough to warrant that capital use.

So in terms of looking at it from here, essentially just returning the capital to shareholders, there is some definitiveness to that in terms of what that value is, whereas in terms of de-levering or repurchasing, there is – we have to take into account the market conditions, the timing and the size and how much we can actually get done.

So those are the things we are looking at, but I would say that those are all good options. It’s a good problem to have in a way. I am trying to figure out which one is the most optimal, could be a combination..

Great. And just maybe as a follow-up question, I was hoping if you could give a little bit of color on maybe the institutional pipeline here, how that stands today versus maybe last quarter and a year ago.

And any color you can share on the Quant-related outflows in the quarter, in particular, how some of the managed vol strategies are performing and holding up at Acadian maybe you can remind us of where they stand from an AUM standpoint and how they contributed from a flow standpoint in the quarter?.

Yes, certainly. I think on the institutional pipeline, things are starting to come back to more normal, normal in the sense of the remote environment normal in the sense that clients and consultants are all engaged and have got used to working remotely and doing diligence remotely and awarding mandates remotely, that’s becoming more normal.

So even if it’s not work-from-office for a while, I think things are picking up and sorting, and pipelines are building up to pre-COVID environment. So that’s encouraging going into 2021. But on the flipside as well, I guess, there are times when clients are looking to do things moving into products that we don’t have.

And so that’s the flipside of it, but we expect to be winning more often than losing when new things come up. And in terms of performance, yes, Acadian has a pretty diverse set of strategies and managed vol group of strategies is one of the larger ones. They are pretty diversified within that. There is U.S., international, other regions.

But as a group, the similarity there is that they generally have essentially low beta securities as opposed to high beta, the theme being that when picked well using all the multiple factors, low beta strategies delivered just as much return as high beta over longer periods, if not more.

But during the specific set of circumstances, during 2020, during COVID, as you had a situation that low beta sold off as much as high beta and on the recovery you have high beta stocks, which turned out to be tech stocks, the home stocks that have actually gone twice as better.

So you would have periods like that, which is not to question the long-term academic statistical power of the strategy, which is born over time. But yes, you would have curious like that when low vol strategies underperformed.

And then yes, certainly, there could be clients that are focused on nearer term, but the vast majority of our clients are focused on longer term periods. Yes, we do see some pressures there on that sort of strategies. But generally as I said, it’s a very diversified group of strategies. We have managed vol.

We have a variety of international and non-U.S. strategies across different cap ranges, non-U.S. small cap, global equity. So, there are lots of puts and takes and that’s the main benefit of having diversified business..

Great. Thank you..

Our next question is from Kenneth Lee with RBC Capital. Your line is open..

Hi, thanks for taking my question. Just one follow-up around capital management wondering whether you could share with us any preliminary thoughts about key considerations for future potential target leverage? Thanks..

Hi, Ken. On leverage, we are glad to have fully paid off our revolver. So now we have essentially the bonds outstanding, which are longer dated. We do generate a lot of cash flow still, right and we have that – the proceeds on our balance sheet sitting.

So first priority, as I said, was returning capital to shareholders then we would see about opportunities to de-leverage further.

But just given the growth in the earnings and cash flow generation, we would expect, even if we were to keep our current level of gross debt, we would probably expect to end up with less than 2x gross debt-to-EBITDA most times.

We would have – I guess we have generally, as I mentioned in earlier calls, particularly around 1Q, we have some seasonal needs, but that taper off in the course of the following quarters. So we would probably expect as we get into second and third quarter and fourth quarter, we would expect gross debt-to-EBITDA to generally be less than 2x..

Got it. That’s very helpful. And just one quick follow-up if I may. I wonder if you could just share with us any thoughts around any potential need for reinvestments within the business over the near-term, either on technology platforms or other areas? Thanks..

Thanks, Ken. We have been investing in our businesses during normal course. So at Acadian, for example, we’ve been investing in the technology for multiple years.

So I’m trying to stay ahead of the curve in terms of data, but also having the latest investor reporting tools as well as having the latest trading capability to both expand capacity and to help with alpha generation.

Similarly, at Landmark, we’ve been investing in – based in nearly all fronts in terms of fundraising, deploying capital, investor reporting. So, that’s just already reflected in our, if you will, the run-rate P&L, the recurring investments that we do.

But we also use a part of the capital to seed new strategies so that we continue to do across all three of our segments and the management teams. We encourage the management teams to come up with new strategies where they can produce alpha and where the market is big.

So we will continue to do that and we have enough in our seed capital pool that that’s adequate as opposed to needing more to support that new strategy development..

Great. That’s very helpful. Thank you very much..

Thanks, Ken..

Our next question is from Gayathri Ramkrishnan with Bank of America. Your line is open..

Hi, there. I was wondering about the expenses.

Your guidance was definitely better compared to last quarter and I was just curious in terms of what has changed and how to generally think about long-term margins?.

Hi, Gayathri. Yes, there has been lots of ins and outs on the expense, particularly with the disposition, if you will, Barrow Hanley and Copper Rock earlier and then there is the Center expenses that we have guided to that we would achieve $20 million of reduction and so by 1Q ‘21, but we were able to get there by this quarter.

So, that’s essentially the – on the expenses. We have also this year I guess there is a marginal benefit we had on the T&E front that would normalize over time, but that was the expenses. So going into ‘21, we will stay disciplined on expenses. We will continue to invest in growth, particularly at Acadian and Landmark and then some T&E will normalize.

So the result of all that we probably stay more or less at the same place with some moderate growth. But we expect, just given the market recovery that has happened and the fundraising we’re doing in the all. So the revenue growth we expect to outpace the expense growth. So as a result, we would expect some modest improvement on our margins..

Got it. Thank you..

Our next question is from Chris Harris with Wells Fargo. Your line is open..

Great. Thanks. So what are you hearing these days from your institutional customers with all the corporate level changes going on? I know that’s not necessarily a new development, but it’s been happening for a bit of time.

And is this – are those changes, do you think, having an impact on the flows in anyway?.

Yes. Based on the perspective of institutional clients, Chris, yes, no changes is best from their perspective. That’s definitely a given.

But if there were to be changes, I think the multi-boutique model the benefit of that model is that our affiliates, the actual investment managers are fairly insulated from any changes in the sense that our affiliates have always had full investment autonomy and operational autonomy.

And with the changes that we announced in the second quarter last year that we went further ahead on that autonomy and so much so that now is basically operate their businesses autonomously. So, that helps because from a practical perspective, there is nothing that really impacts the underlying investment managers and hence their clients.

So the question does come up from time to time as clients do their diligence, but most of the time, our managers are able to provide them enough information that from a practical perspective, the corporate changes at BSIG don’t impact what they do for the clients day-to-day and certainly doesn’t impact the clients.

But yes, but it is something that clients that read the headlines from time to time would want to check with their managers about something that impacts them..

Yes, okay. And just to verify on the capital management, and thanks for all your comments on that, a big increase in the cash balance this quarter from the sale of Barrow Hanley.

You’ve laid out the options and it sounds like you are going to make a decision about in a month or two on – you and the Board on what to do with that excess cash in the balance sheet.

Is that a fair summary?.

Yes. That’s a good summary. And you said it better in a big foray than I did..

Okay, alright. Thank you..

Our next question is from Glenn Schorr with Evercore ISI. Your line is open..

Hi, Suren. So, what 15 question on talent management, sorry, but what’s obviously missing from all those options is acquisitions to add to the strategy of high-end demand Quant Solutions and Alternatives strategies.

So fair enough to assume that the organic growth will come from investments within Acadian and Landmark and then the follow-up on that is, is that self-funded by then or does the parent company fund the – and you’ve mentioned seed investments.

How that worked between self-funding and parent company?.

Hi, Glenn. Yes. So as I touched on earlier, essentially, that our recurring P&Ls do have a good healthy amount that we’ve needed of technology investments, for example, at Acadian as well as at Landmark, where we’re investing in proprietary technology that’s helpful to their clients.

So we do that a fair bit and as well as their growth in headcount to support investor Relations, fundraising that’s already in there and runs to the P&L and then we provide seed capital at all of our businesses to support new strategies as well as to support fundraising. And we have a seed capital pool to support that.

So essentially, that is definitely one of the uses from a capital management perspective that we laid out in our new strategy in April of 2020, that essentially, the main uses are return of capital to shareholders one, de-leveraging two and third supporting our Affiliate businesses. But we happen to have enough on the third item.

We already have it carved out, if you will, in the P&L and in the seed capital pool that we have. And we remain supportive of bolt-on inorganic acquisitions should our Affiliate find complementary strategies, teams or platforms. And in that case, we would support them with that capital. So – but that’s very much with our new approach.

We’ve switched to more of an Affiliate-led approach on those issues because they have really their ground level knowledge and diligence. It would be much better to underwrite a decision like that as opposed to corporate making the decision..

Fair enough. If I could ask a related follow-up on – for Acadian and Quant, I’m just curious on how – this is by knowing their business.

I just want to see how will they fare volatility and if they see changes coming down the pipe that will alter how they navigate those markets with their models?.

Glenn, you broke up there a little bit.

Would you mind restating or rephrasing the question?.

Sure. No problem. That’s me. I guess I am curious on how Acadian did during the January big retail volatility. That was going on within models.

We’re able to account for all of that volatility, and if they see either changes in the marketplace, coming or tweaks they need to make to adapt or is it really just business as usual?.

Yes. It’s more of the lateral, the business as usual, in the sense that, as I mentioned, our business is long-only business. Even in strategies like managed volatility, it’s basically just having low beta securities as opposed to having put options or short positions. So we don’t really have a long-short business. It’s very tiny.

So the volatility that you saw in specific securities in January did not affect us from that perspective. But one way these things can affect us, to be candid, would be if there were larger securities that just rise, and that would then have essentially the – an increase in the benchmark, right, because the way – in the benchmark return, right.

So that’s why it would be then underperforming the benchmark. But the volatility in January had some impact on the benchmark, but given those were in smaller portions of the security – smaller portions of the benchmark, it did not impact us that much. It was manageable.

But of course, our Acadian as well as our other Affiliates, they’ve stayed true to their discipline, right, that whether it’s – we’re doing the multifactor approach in the Acadian or value approach, and that will prove out and generally has proven out over time, right, as opposed to dabbling in near-term momentum because we have a firm belief that it’s an investment process that we stick to that we adhere to and we haven’t geared from that, right? So there is – if some investors, retail investors are enjoying a hot air balloon, right, if you will, right now, we know that’s not going to take them to the moon, right? It’s when the air finishes then it could be a hard landing.

So we will say true to our discipline, essentially, but yes, but acknowledging that we don’t have any short positions, any put options. But if the benchmarks get impacted, then, yes, then we miss out on the return that we would just be scratching our heads how something like that can happen.

Does that answer your question?.

Thanks a lot, Suren. Yes, absolutely. Thank you..

Our next question is from Yogesh Modak with ClearBridge. Your line is open..

Hey, Suren.

How are you?.

Hi..

All my questions have been asked and answered. Thank you..

Okay, thanks. .

Our next question is from Michael Cyprys with Morgan Stanley. Your line is open..

Hey, Sure. Thanks for taking the follow-up. I just wanted to circle back on Landmark with the upcoming fundraising.

Just hoping you might be able to help quantify the impact of any step down on the fees or predecessor funds as you raise the new funds and turn on fees for those? And then if you can provide any sort of color on how the existing set of Landmark funds are performing in the marketplace, maybe where they stand in terms of distributions back to LPs? And just lastly, any sort of color around the GP commitment that’s needed from BrightSphere versus the Landmark itself versus the affiliates just in terms of how that’s going to be split up to be paid for, for the GP commit?.

Right. So that’s I think it’s – if I miss anything, Mike, feel free to ask again. But in terms of the track record, and that’s been one of the best and the longest track record. The Landmark was a pioneer in the secondary business. So it’s been a consistent track record of returns, including a very strong track record during the global financial crisis.

So that’s why Landmark continues to be well regarded and a strong track record in the most recent vintages.

So in terms of the last vintages that we raised, and yes, you asked a good question that essentially, our fees are charged on committed capital, and there is a period of time during which remains uncommitted capital and then it flips to invested capital.

And unless there are a lot of distributions or a lot of change generally when it flips to invested capital, it should be more or less the same. But that would be coming up – starting ‘22, there would be some changes from committed capital to the net asset value.

That impact, as we get closer to that date, we’ll provide more guidance on what that impact will be. But of course, and fortunately, we’re raising funds much ahead of that.

So – but – so some of that, essentially, it would be way more than offset, of course, just given the flat set of fundraises over a similar size, but the step down is much smaller in terms of the change from committed capital to now because these are very long-dated funds, so not that much gets distributed out that would create that gap between committed capital and now.

And I know that was a third part of the question, Mike, if you could refresh, if I missed it?.

Just on the GP commitment, how are you thinking about funding that and kind of splitting it between the parent versus Landmark itself and the employees?.

Yes. So essentially, yes, it’s a split that we discussed with the team. And on the last set of funds, essentially, the split was 60-40. We generally provide 1% of GP commitment and 60% was funded by BSIG and 40% by the team. And there was a split of carry on the last set of vintages, we – BSIG we wanted the team to have a majority of the carry.

So the team has about 85%. BSIG has about 15%. On the next set of vintages that will still – we’ll be discussing that in terms of what that right split should be. But essentially, we provide some, and we get some carry..

Great.

And just sorry to clarify, you mentioned the step down taking place more in 2022, does that suggest that the funds will be raised or starting to be raised in ‘21 but you wouldn’t necessarily be charging fees on that until 2022?.

No, the way our funds work in the secondary strategy is that essentially the fees is charged on committed capital, whether it’s deployed or not. It, of course, gets deployed relatively sooner compared to primary funds. And that’s one of the advantages of secondaries, but the fees starts getting accrued from the time it’s committed.

So when we have fund closes, the fees is accrued. And you may recall that we also have this element of catch-up fees. For subsequent closings, for clients that come in later, they pay fees going back to the first closes.

Does that clarify?.

If that’s the case, how come the funds are not – the earlier ones are not stepping down in ‘21 I was just curious on that sort of dichotomy there?.

Yes, because we have different strategies. And so the step-downs are different for different strategies. But essentially, we will see some step-downs in ‘22. But I don’t understand the specific why you would expect some funds to be stepping down in ‘21..

Got it. Okay. We could take offline. That’s okay. Appreciate all the color here. Thanks so much..

Thank you..

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

Great. Thank you, everyone, for joining us today and for asking us good questions. I hope that was helpful. Wishing everyone in those maybe like wishing everyone successful 2021 and a healthy one. Thank you..