Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the First Quarter 2022. Please note this call is being recorded today, Thursday, May 5, 2022 at 11 a.m. Eastern Time.

I now would like to turn the meeting over to Elie Sugarman, Head of Strategy and Corporate Development. Please go ahead, Elie..

Good morning and welcome to BrightSphere’s conference call to discuss our results for the first quarter ended March 31, 2022. 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 our 2021 Form 10-K.

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 measure 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 please turn the call over to Suren.

Suren?.

Thanks, Elie. Good morning, everyone. Thank you for joining us today. I will start off with the financial highlights on Slide 5 of the presentation deck as usual. We reported ENI per share of $0.52 for 1Q ‘22 compared to $0.27 for 1Q ‘21.

The increase in EPS compared to 1Q ‘21 was primarily driven by share repurchases, including the large tender offer we did in the fourth quarter of 2021. And also performance fee was stronger in 1Q ‘22 compared to 1Q ‘21.

Turning to our investment performance, we are pleased that our multifactor client investment process continues to produce outperformance for our clients across most of our strategies through what was a very challenging macro and geopolitical environment.

As of March 31, ‘22, 96%, 86%, 88% and 90% of our strategies by revenue beat their benchmarks over the prior 1, 3, 5 and 10-year periods respectively.

Our net client cash flows in 1Q ‘22 were negative to $2.2 billion, but the annualized revenue impact of the flow was negative $1.1 million, which is about 0.3% of Acadian’s management fee revenue for 2021. Looking past one or two quarters, we are very well positioned on our flows trajectory.

Our investment performance is impressive and has continued to strengthen and we believe flows should follow. We generally do see a few quarters of lag between performance strengthening and flows. We also have a very healthy pipeline across a few different strategies.

And from a longer term perspective, we are very excited about our newer strategies, such as ESG, equity alternative and China since these strategies have secular tailwinds that we expect to drive long-term growth for us. Turning to capital management, in 1Q ‘22, we bought back about 9% of our outstanding shares for $100 million.

We also completed the previously announced redemption of $125 million of senior notes, which now leaves $275 million of executional premier notes maturing 2026 as our only long-term debt.

As of March 31, ‘22, we did have $88 million outstanding on our Acadian’s revolving credit facilities, which is a facility that’s been in place to support our regular first quarter seasonally. And we expect the outstanding amount to be fully paid down by the end of the year like what we did in 2021.

We had a cash balance of $89 million as of March 31, ‘22. And as our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and buyback our shares.

Now, turning to some operating highlights for Acadian on Slide 7, Acadian generated $48.1 million of adjusted EBITDA in 1Q ‘22 compared to $45.5 million in 1Q ‘21. The increase in EBITDA compared to 1Q ‘21 was mainly driven by stronger performance fees of $10 million in 1Q ‘22 versus $4.6 million in 1Q ‘21.

The EBITDA in the prior sequential quarter 4Q ‘21 was $87.6 million, which was driven by seasonality as we typically earn majority of our performance fees in the fourth quarter. And that quarter included $56 million of performance fees.

Given our continuing strong investment performance and the stronger performance fee we are seeing in 1Q ‘22 compared to 1Q ‘21, we are optimistic about our performance fees for the full year ‘22, a majority of which is expected to accrue in the fourth quarter.

Turning to Slide 9 briefly, I would just like to highlight that our investment performance is very strong across short and long-term horizons and we believe this performance will generate positive growth in due course.

I want to end my prepared remarks with Slide 14, to summarize some of our ongoing initiatives that we expect to drive growth over the medium to long-term. And then we can move to Q&A.

First, as we discussed last quarter, institutional investors around the globe are looking for yields, but with downside protection and low correlation to broader markets. We are very well positioned to meet this secular demand and we have created some strategies a few years ago, which are now getting ready to be marketed more broadly.

One example of that are our systematic macro strategies, such as Multi-Asset Absolute Return and Commodities Absolute Return strategies.

With these strategies, we basically apply our multifactor models, including macroeconomic factors, across asset classes like equity, fixed income, currency, commodities and others to generate uncorrelated absolute returns. We have been getting very good reception from clients and consultants for this strategy and the pipeline is building up well.

Another example is our group of equity alternative strategies, which includes a few different strategies that use new signals, alternative data and unique portfolio construction techniques to produce uncorrelated returns. We are pleased with the investment results and the momentum we are building here.

Secondly, we continue to see growing demand for ESG-focused mandates. And we expect this to be a secular trend for a long time. We are very well positioned to be a big beneficiary of this trend.

ESG factors are anyway a key part of our core investment process, because ESG factors such as sustainability are often not given due consideration by the markets and are mispriced allowing our models to generate excess returns.

Additionally and importantly, we are seeing an increasing demand from clients to customize their portfolios to match their ESG value. For example, on the environment factor, in some cases they want to make their portfolios carbon free or in other cases, it’s a 3 or a 5 or a 10-year glide path to getting to zero carbon.

Our big advantage in helping clients customize their portfolio to match their ESG value is that we can leverage our data and technology to explicitly measure their carbon exposures today and then decarbonize their portfolio by the desired target with precision. And we can also measure the associated impact on risk and return of the portfolios.

We are increasingly deploying this capability for clients across our strategy and expect this to help retain existing assets and win new assets, especially with regards to ESG-focused mandates. Lastly, I will touch on China market in which we see as a strategy a few years ago for China A shared market, which is coming along well.

China market is of course large and liquid, but it creates an opportunity since its retail driven and is often inefficient. We expect this strategy to scale in due course. These ongoing initiatives underscore our ability to leverage our unique quant platform into new areas.

Over time, we expect to similarly apply our quant edge in other parts of the market that we haven’t yet touched on, such as credit. And we expect to distribute our products in newer channels such as retail, where we are not present today. In summary, we are very excited about our longer term growth prospects.

Now, let me turn the call back to the operator to happily answer questions at this point..

Your first question today comes from the line of Kenneth Lee with RBC. Your line is now open..

Hi, good morning and thanks for taking my question.

Just wondering if you could just share with us in terms of the net flows that you saw in the quarter, were there any particular contributions from certain strategies either positively or negatively? And more specifically, what have you been seeing across your managed volatility strategies in terms of net flows recently? Thanks..

Yes, good morning, Ken. Thanks. Yes, we are not seeing any particular patterns yet in terms of first quarter. It was just idiosyncratic is probably the best way to describe it. There are, of course, a couple of larger outflows that determined that number.

And I guess specifically, any question about the managed vol, we didn’t have some outflows from managed vol, but that again is sort of as we have touched on last quarter that’s been reducing. So, there were some lagged numbers from managed vol. We believe managed vol has mostly played out and it’s done.

And now actually, when we turn to performance, as you see that more than 85% of our strategies are beating the benchmarks on a longer term basis, but to look at the 1-year, it’s 96%.

So, of course, that includes managed vol and performance in managed vol has – at least a near-term performance has been great, beating core benchmarks, because this environment has produced a rather good environment for managed vol. So, we would expect given the performance that at some point, it should – that should actually be inflows.

So, we will see. But as I mentioned earlier that essentially if you go – if you look past one or two quarters, then the base is loaded well, in the sense the performance is good, pipeline is healthy. So we would expect a flow situation to be better.

And then we have the – looking out even further, we have these – the growth drivers that we expect to kick in. But specifically this quarter, nothing specific to really point to that, it was just a few idiosyncratic things that, sort of, determine the outcome..

Got it. Very helpful. And just one follow-up if I may. Wondered if you could just give us a little bit more updates around ongoing cost reduction efforts? Thanks..

Yes, certainly. Yes, so we think going forward, our focus is a lot more on growth and we’re actually looking and have been investing in our – in these new initiatives. It’s reflected in our OpEx P&L, we would also be seeding these newer strategies.

But one area where we are looking to continue to be disciplined in expenses and reduce, as we have touched on, is the center and that we continue to evaluate, and are looking probably more kind of towards the end of the year, beginning of next year, when we would, sort of, see that fully baked in..

Got it. Thanks very much..

Thank you, Ken..

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open..

Great, thanks. Hi, good morning, Suren. Thanks for taking my questions here.

Maybe just going back to your last point, just around organic growth, talking about investing in the business there around organic growth, seed strategies that you’re deploying into? Can you just maybe help quantify how much of the overall cash flow of the business you see putting into the seed book, which I think is maybe around $53 million today? How do you expect that to, sort of, grow and trend from here versus how much cash flow would you envision being available on a go-forward basis for buybacks?.

Yes, thanks Mike. Yes, we don’t, sort of, allocate any specific budgets. Those two are definitely the primary uses, the seeding new strategies and repurchasing our shares. And so we ended the quarter with about $89 million total cash.

And as we, sort of, continue to go forward and cash will build up more, we will look to spend it on organic growth and repurchases. It’s hard to say, sort of, a specific allocation at this point as the timing could vary.

And we will also, generally, be opportunistic and both with regards to repurchases and also with regards to opportunity to deploy capital towards growth in the sense if a great team becomes available for a new asset class, that could – where we could leverage our quant capability, that could be interesting.

So we will hold a little bit of war chest to support organic growth and seed new strategies. But we will also look to repurchase shares opportunistically..

And just as we think about the cash flow generation and the ability to buy back stock and use that for organic purposes, I guess, how should we think about the cash flow generation here? It looks like about $48 million of adjusted EBITDA from the Acadian business. Maybe you could just help flesh out, sort of, what costs we should be thinking about.

Would it be, sort of, counting against that and, sort of, getting down to a run-rate cash flow generation that would be available for use, for buybacks and for organic initiatives?.

Yes, generally, our ENI is a pretty good proxy for the cash generation because of course we do have to pay interest and taxes so that ENI is a fair proxy. And that, of course, for this one field was about 23.4. In the fourth quarter, it’s generally higher because of the performance fees, the 4Q events.

So, those are probably a couple of data points to keep in mind..

Got it.

If I could just maybe sneak in another one here, just on the buyback, maybe you could just a little – elaborate a bit on what, sort of, buyback program you have in place? Is that a 12b1-5 program and when might you be able to be in the market next?.

Yes, so the repurchases that we did in 1Q were open market repurchases because there was enough time in the entirety of the quarter to put that capital to work. So we felt we didn’t need anything else. And we think that that’s clearly a good option, open market repurchases, to take advantage of whenever levels are very attractive.

And the tender offer we did in the fourth quarter, it was just that there was simply no other way to put that large an amount to work, right? Open markets, not the right method.

So we think we could do open market or if there is capital building up and levels are attractive, when we’re going into an earnings window, we could – there is 10b5-1 Safe harbor available as well. So between those two, we think we have good tools..

Great, thanks. I will get back in queue..

Thank you, Mike..

Your next question comes from the line of Girard Sweeney with KBW. Your line is now open..

Hi, Good morning. Calling in for.

I just wanted to ask about that, kind of, share purchase, any restrictions you see for the rest of the year in terms of debt levels or excess capacity? What could restrict any repurchase plans?.

Yes, I guess, of course there are closed windows during the earnings period. So for example, April was a closed window after we closed the quarter and before we release earnings. There could also be times if we are having any partnership-type conversations with potential partners when we get restricted.

That’s a possibility that has happened in the past, over the last few years, as we’ve been selling Affiliate. But other than that, no, there aren’t other restrictions that could prevent us from repurchasing our shares. Those are the primary ones..

Great. Thank you. And then just a quick follow-up to that.

Could you share your ending share count for the quarter?.

Yes, certainly. I guess, it’ll be in the Q – in the 10-Q, which should be upcoming shortly. But we have about 41.4 million basic shares and the loaded count would be about 42 million..

Okay. Perfect. Thank you very much..

Your next question again comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open..

Hi, thanks for taking my follow-up. Just broadly thinking about strategic actions, you mentioned the possibility of maybe adding a team. Just curious how your views on M&A and strategic actions, whether strategic alternatives, but similarly on potential additions to the platform, how that thinking is evolving..

Yes, certainly. Thanks Mike. And it’s a good question. We’re basically focused on really leveraging our unique platform, right, to other asset classes to really fully monetize what we have. And we have lots of opportunities in front of us right now. I mean, we touched on a few which we’ve invested in for a long time. Our ESG capability, for example, is a.

It, sort of – it goes really right along with the quant capability. We’ve been investing in it for a while. Similarly, our uncorrelated returns, we’ve seeded these strategies and build the teams and the capabilities, as well as China.

But there are others where we haven’t invested as much historically, but these are great opportunities and that align well with what we are able to do and what our capabilities are. Credit is one example of that, for example.

Then similarly in terms of distribution, we can increase our distribution on the institutional side, but retail or RIA, things like that, are new.

So we would essentially, if – we are investing organically both through our P&L and seeding strategies to access these areas, but if there was an opportunity to – if there was a team available to accelerate these things, we would look at it.

What we are not looking at is the legacy, multi-boutique, kind of, M&A, right, where you add an unrelated affiliate to the business. We are essentially looking at basically purely from a monoline to staying focused on our quant platform and adding capabilities that where we have that fit well in our culture and that where we can get synergies.

And by definition, they would be generally smaller things, like a team is a good example of that..

Great. And maybe just on the retail point, I was hoping you might be able to elaborate a bit, how you think about accessing the retail channel.

Would that require an acquisition or partnership, such as maybe sub advisory? I guess, how do you think about accessing that channel and what sort of actions would you need to take there?.

Yes, a bit of it is opportunistic when something right becomes available, but yes, it could take many forms. It could be a JV or a revenue-share relationship with somebody who has that or if it’s a merger-type partnership, of course, that’s one of the things that can be very synergistic.

So we’re looking at it from multiple angles and it would just depend on what, sort of, comes through It’s a little bit of – there is this opportunistic element to it..

Great. Thanks so much..

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

Great. Thank you everyone. Thanks for joining us today. And we look forward to seeing everyone next quarter..