Acadian Asset Management - Q3 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group earnings conference call and webcast for the third quarter, 2023. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To be added to the queue, please press the star followed by one at any time during the call. If you need to reach an operator, please press the star followed by zero. Please note that this call is being recorded today, Thursday, November 2, 2023, at 11 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.

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, 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 this risk 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 and second quarters 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.

Suren Rana (President and CEO)

Thanks, Melody. Good morning, everyone, and thank you for joining us today. As usual, I'll start off with the main highlights on slide five of the deck, and then I can answer questions. 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 $500 million 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 pay 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 we'll 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 (participant)

At this time, those with questions should lift their phone receiver and press Star, followed by the number one on their telephone keypad. To cancel a question, please press Star and then two. Please hold for a brief moment while we compile the Q&A roster. Our first question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead, Kenneth. Your line is open.

Kenneth Lee (VP of Equity Research)

Hi, good morning. Thanks for taking my question. Just one of 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 water marks? Thanks again.

Suren Rana (President and CEO)

Hi, good morning, Ken. Yeah, 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. Sometimes when those are the strategies that outperform, there will be performance fee. But you're right, that is not typical, certainly the magnitudes. And that just goes to the performance. The investment performance has been great, and we had a great quarter. So for the strategies with the measuring period ending this quarter, that worked out really well.

For the rest of the year in Q4, there are two more months to go, so we'll see how it ends. We are encouraged with the performance so far.

Kenneth Lee (VP of Equity Research)

Gotcha. 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.

Suren Rana (President and CEO)

Yeah, the flows, you know, the, 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 which have higher beta. They have held up 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 and what we may see on the outflows. There are always there can be surprises sometimes. So we're cautiously optimistic that we can stay flat to about.

Kenneth Lee (VP of Equity Research)

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

Suren Rana (President and CEO)

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

Kenneth Lee (VP of Equity Research)

Gotcha. Very helpful there. Thanks again.

Suren Rana (President and CEO)

Thank you, Ken.

Operator (participant)

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

Michael Cyprys (Managing Director)

Great. Thank you. Good morning. Maybe just continuing on the buybacks 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?

Suren Rana (President and CEO)

Yeah. Hi, Mike. Yes, that's right. We still haven't had an open window. We don't know for sure when we might have one. You know, it's certainly possible then 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 got $143 million of cash. We'll use some of that for seed 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 an open market. We'd have to see the best execution at the time when we are approaching that decision.

Michael Cyprys (Managing Director)

Okay, thanks. 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 fees in 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?

Suren Rana (President and CEO)

Yeah, 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. We've had a couple of strong years of performance fee. 2021 was definitely high. We had $67 million for the full year. 2022, we had $49 million for the full year. So it's hard to say, but I would say if they're in the forties number, we'd be happy. But it's hard to peg anything at this point.

Michael Cyprys (Managing Director)

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, you know, any way of sort of sizing it. You know, is it any bigger today than last quarter? And, you know, 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.

Suren Rana (President and CEO)

Yeah, the pipeline's been healthy. It's about 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. You know, 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 on the flip side, as I said, managed volatility is one strategy where we're hoping to stay flat, 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.

Michael Cyprys (Managing Director)

Great. Thank you.

Suren Rana (President and CEO)

Thanks, Mike.

Operator (participant)

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

John Dunn (Managing Director and Senior Equity Research Analyst)

Thank you. You know, maybe you could talk about how you think about the flow ramp for the equity alt strategy in 2024, and then maybe any other strategies you think are set up well and want to highlight for next year.

Suren Rana (President and CEO)

Yes, you know, we've got our core strategies that are generally positioned well. Most of them have had good 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 then Systematic Credit will actually be seeded this month to start to build a track record. Equity alts already has started to build a track record with the seed capital and some client seed as well. So we're starting to talk to clients about that now, and the reception has been good.

So we would hope to get assets in in the coming year 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 conviction. Sometimes it could take some time, but hopefully we could in the back half of 2024, we can at least start to get some early client wins.

John Dunn (Managing Director and Senior Equity Research Analyst)

Gotcha. And then-

Suren Rana (President and CEO)

Did that answer your question?

John Dunn (Managing Director and Senior Equity Research Analyst)

Yeah. Maybe just any... Yeah, it did. You know, any, like, fourth quarter seasonality we should be thinking about, you know, either on flows or expenses or anything else?

Suren Rana (President and CEO)

Yeah, there is some seasonality in fourth quarter. Of course, our performance fee is one which we're all well aware of. There are some seasonal adjustments in the OpEx as well on the fourth quarter that you may see, but nothing it's business, it's consistent with prior years.

John Dunn (Managing Director and Senior Equity Research Analyst)

Thank you.

Suren Rana (President and CEO)

Good. Thanks, John.

Operator (participant)

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

Michael Cyprys (Managing Director)

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, 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?

Suren Rana (President and CEO)

Yeah, on these two, we're mostly built out. You know, there may be some, you know, there are some selective additions here or there, but we're mostly built out. So I'd say there is no material additions to expenses for these initiatives. Similarly, on infrastructure, we're about 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's 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.

Michael Cyprys (Managing Director)

Okay. And just final question for me, just, from, from the balance sheet standpoint, you have some maturities coming up in 2026, debt maturities, I think it's like $274 million of Senior Notes, a little ways off in 2026. 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 that, or would you look to refinance that? And how much, you know, in advance. Yeah, just curious how you're thinking about that.

Suren Rana (President and CEO)

Yeah. That one has a prepayment penalty. We'll just, we're planning to just let it be alone for some time, and we're gonna approach maybe getting closer to what, maybe a year from it, we may refinance it. We think we can, that much leverage is about right, is about prudent. We may, 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 it down. We see that as separate. With both the facilities combined, that gives us adequate cushion for our needs. But, 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 would just keep those two.

Michael Cyprys (Managing Director)

Great. Thank you, Suren.

Suren Rana (President and CEO)

Thanks, Mike.

Operator (participant)

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

Suren Rana (President and CEO)

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