Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Third Quarter 2023. [Operator Instructions] Please note that this call is being recorded today, Thursday, November 2, 2023 at 11:00 a.m. Eastern Time.

I would now like to turn the meeting over to Melody Huang, Senior Vice President, Director of Finance and Investor Relations. Please go ahead, Melody..

Good morning, and welcome to BrightSphere's conference call to discuss our results for the third quarter ended September 30, 2023. Before we get started, please note that we may take 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 2022 Form 10-K and our Form 10-Q for the first quarter and second quarter of 2023.

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..

Thanks, Melody. Good morning, everyone, and thank you for joining us today. As usual, I'll start off with some main highlights on Slide 5 of the deck, and then I can answer questions. So for the third quarter of 2023, we reported ENI per share of $0.45 compared to $0.30 in the third quarter of 2022 and $0.28 in the second quarter of 2023.

This 50% increase in ENI per share compared to the year ago quarter was primarily driven by a 24% increase in revenue due to higher AUM from market appreciation and higher performance fees. Acadian's investment performance remained strong and got even stronger in the third quarter.

As of September 30, 2023, 83%, 88% and 91% of strategies by revenue beat their benchmarks over the prior three-, five- and 10-year periods, respectively. We reported $0.5 billion of net outflows this quarter as we had some lumpy reallocations from select clients out of our managed volatility strategy.

However, we continue to have a robust sales pipeline. The implementation of our growth initiatives continues to be on track. Acadian's Equity Alternatives platform is off to a good start and is showing nice investment outperformance so far.

Acadian's systematic credit initiative will be seeded this month starting with a high-yield strategy, and then that effort will also start to build its investment track record. Turning to capital management. We had a cash balance of $143 million as of September 30, 2023.

Acadian has continued to play down its revolving credit facility and ended the quarter with an outstanding balance of $13 million compared to $38 million at the end of Q2 and $87 million at the end of the first quarter of the year. As in prior years, we expect the facility to be fully paid down by year-end. Our long-term strategy remains the same.

We'll continue to invest in and leverage our unique Quant capabilities to grow and expand into new areas. We'll continue using our free cash flow to support organic growth and to buy back stock whenever opportunities are available and will remain focused on maximizing shareholder value. Now let me turn the call back to the operator.

and I'm happy to answer any questions at this point..

[Operator Instructions] Our first question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead, Kenneth. Your line is open..

Hi, good morning and thanks for taking my question. Just one on the performance fees. Wonder if you could just provide a little bit more details behind that. Were there any specific strategies that drove the performance fees. I was a bit surprised in terms of the timing.

Any other factors that we should be aware of either in terms of performance or high watermarks. Thanks..

Good morning. Yes, you're right. Typically, most of our performance fee comes in Q4, a little bit in Q1 and Q2 and Q3 are generally light. Now having said that, we do have some performance eligible strategies that have measuring periods at the end of Q2 and at the end of Q3.

And sometimes when those are the strategies that outperformed there would be a performance fee. But you're right, that is not typical, certainly the magnitude. And that just goes to the performance. The investment performance has been great and we had a great quarter.

So for our strategies with the measuring period ending this quarter that worked out really well. But for the rest of the fee in Q4, two more months to go, so we'll see how it ends. But we are encouraged with the performance so far..

Got you. Very helpful there. And then in terms of the net flows in the quarter, you mentioned some reallocation within the managed vol strategies. Just as you look ahead, would you expect any continued weakness in the net flows in the near term, just given the market environment or is the reallocation at this point, predominantly done. Thanks..

Yes, the flows, it's - the managed volatility strategies generally have low betas, low risk. And oftentimes, it's been a beta rewarding market. And so it's been challenging to beat the markets to have a higher beta. They have let their own, but in some cases, clients want to take on either more risk or they want to move on to fixed income.

So we'll see how that goes. We hope for our clients to be long-term focused but sometimes clients make reallocation decisions. And so we'll see. But other than that, in other strategies, we don't see that kind of pressure. And as sales pipeline, as I said earlier, is robust.

So we'll see this net flow is ultimately the combination of the sales and what we may see on the outlook. There are always - there can be surprises sometimes. So we're cautiously optimistic that - we can stay flat to above..

Got you. And just one more follow-up question, if I could just squeeze it in. Just wanted to clarify and it sounds like - I just want to clarify that the share repurchase window is still closed..

Yes, the status remains the same on that now. We still haven't had an open window. So we'll see..

Got it. Very helpful. Thanks again. Thank you..

Thanks, John..

Our next question comes from the line of Michael Cyprys with Morgan Stanley. Michael, please go ahead. Your line is open..

Great, thank you, good morning. Maybe just continuing on the buyback question. So it sounds like you did not have an open window in the quarter.

Just want to confirm and I guess when do you expect you might have an open window as you look out? Is that something that might happen next year? Any help on sort of framing the timing around that? And if and when you do have an open window, how should we think about the pace and magnitude of potential buybacks at that point just in terms of tender offer, which would enable you to put more cash to work in terms of buybacks more quickly..

Mike, Yes, that's right. We still haven't had an open window. We don't know for sure when we might have one. It's certainly possible in the next year that we may have one, we can say that for sure. But in terms of magnitude, we're approaching close to $100 million in terms of what we might have available for buybacks. We've got $143 million of cash.

We'll use some of that proceeds. And maybe, call it, $25 million or so for cash balance. So we're getting close to $100 million, which we would have flexibility could be a tender or it could be open market, but obviously the best execution at the time when we are approaching that decision..

Okay. And then just a follow-up question with investment performance quite strong and improving as you mentioned earlier, maybe you could help us size up the opportunity for potential performance season.

The fourth quarter, which is typically seasonally strong for you? And what's the scope for fourth quarter performance fees this year to be even better than what we saw in a year ago fourth quarter..

Yes, there's still a couple of months to go. So it's always hard to say with the performance fee because there are a variety of different strategies and different clients. And so the measuring period that is coming up, a number of those are for the full year of 2023. So it's hard to say - now we've had a couple of strong years of performance fee.

2021 was definitely high. We had $67 million for the full year. '22, we had $49 million for the full year. So it's hard to say, but I would say in the 40s number, we'd be happy, but it's hard to tag anything at this point..

Okay.

And then just given the - if I could squeeze another one in here, given the commentary on the healthy pipeline, maybe you could just help unpack any way of sort of sizing it? Is it any bigger today than last quarter? And maybe you can provide a little bit more color on kind of what's in there and any scope to kind of get back to positive inflows as you look out over the next quarter or so?.

Yes, the pipeline has been healthy. It's at the same level as we've had for some quarters, which has been historically healthy. It has been moving a bit slower than we hoped for. So hopefully, that changes at some point, but it's robust, not as much speed though as we wanted. But that side is pretty good.

And the flip side, as I said, managed volatility is one strategy where we're hoping to stay flat, but not - but there could always be reallocation decisions that could happen there. So it depends on essentially the balance of the two, we would hope to generally be flat or positive..

Great. Thank you..

Thanks, Mike..

Our next question comes from John Dunn with Evercore ISI. Please go ahead, John. Your line is open..

Thank you. Maybe you could talk about how you think about the flow ramp for the equity alt strategy. in '24? And then maybe any other strategies you think are set up well and want to highlight for next year..

Yes, we've got our core strategies that are generally positioned well. Most of them have had with investment performance. That's why you see the long-term results are really good across the board.

And then there's a new strategy with there are basically two equity alternatives and the systematic credit will actually be seeded this month to start to build a track record. Equity alt already has started to build a track record with the seed capital and some client teams as well.

So we're starting to talk to clients about that and the reception has been good. So we would hope to get assets in the coming years in that strategy in the equity alt strategy.

On the systematic credit strategy we'll probably spend the next few quarters to build that track record and sometimes some clients come in early - if they have enough conversion, sometimes it could take some time. But hopefully, we could - in the back half of '24, we can at least start to get some early client wins.

Did that answer your question?.

Maybe just any - yes, it did.

Any fourth quarter seasonality we should be thinking about either unclosed or expenses or anything else?.

Yes, there is some seasonality in the fourth quarter. Of course, our performance fee is one which we're well aware of. There are some seasonal adjustments in the OpEx as well on the fourth quarter that you may see. But not a business, it's consistent with prior years..

Thank you..

Our next question is a follow-up from Michael Cyprys with Morgan Stanley. Michael, please go ahead..

Thanks for taking the follow-up. Just wanted to ask on the expense side over the past couple of years, you've made some investments launching some of the new products that you spoke about earlier here. And now that these strategies have been developed, you've launched them.

How are you thinking about the pace of expense growth from here? Are we past the major investment spend? Or do you anticipate launching some meaningful new strategies that will require some investment spend from here?.

Yes. On these two, we're mostly built out - and there may be some selective additions here or there, but we're mostly built out. So I would say there is no material additions to expenses for these initiatives. Similarly, on infrastructure, we're well built out.

We've spent a fair bit over the last few years on adding to our infrastructure to make it more scalable. So I think we're good there and nothing - we're not taking on anything new that would be big, at least not that we have any visibility on. We're always open to figuring out new areas that we can leverage our capabilities in, but nothing imminent..

Okay. And just a final question for me. Just from the balance sheet standpoint, you have some maturities coming up in '26 - debt maturity, things like $274 million of senior notes, a little ways off in '26.

But just curious at this point, how you're thinking about that just in terms of would you look to pay that down entirely and building cash to facilitate there? Or would you look to refinance that? And how much in advance, just curious how you're thinking about that..

Yes. That one has a prepayment penalty. So we'll just - we're trying to just let it be alone for some time and we're approaching any way closer to what maybe a year from what we may refinance it. And what we think we can - that much leverage is about right, it's about prudent - so we may just refinance at that same level.

The revolver, as you know, is more of a temporary seasonal need, which we draw on in the first quarter and then just pay down. So we see that as separate. So with both the facilities combined, that gives us adequate cushion for our needs. But now we could probably bring it down a little bit in terms of size, and we have that flexibility.

But I think it's safe to assume that we will just keep those two..

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

Thank you, operator. Thanks, everyone, for joining us today. We appreciate you taking the time..