Acadian Asset Management - Q3 2024

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 2024. During the call, all participants will be in the 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, October 31st, 2024, at 11:00 A.M. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead, Melody.

Melody Huang (SVP and 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, 2024. Before we get started, please know 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, our 2023 Form 10-K, and our Form 10-Q for the first and second quarter of 2024. 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)

Thank you, Melody. Good morning, everyone, and thanks for joining us today. I'll cover the highlights on slide five of the deck in my initial remarks, and then we can move to Q&A. So for the third quarter of 2024, we reported ENI per share of $0.59, compared to $0.45 in the third quarter of 2023, and also $0.45 in the second quarter of 2024. The ENI in the third quarter of 2024 increased by 15%, $2 million, compared to $19.3 million a year ago in the third quarter of 2023. The increase was primarily driven by the growth in management fee revenue due to higher AUM from the market appreciation that we've seen over the last 12 months. And additionally, we continued our expense discipline during this period.

The ENI per share increased by 31% in the third quarter of 2024, compared to the year-ago quarter, which is higher than the 15% increase in ENI over the same period. And that's because the ENI per share was additionally driven by the $100 million of share repurchases that we started in December 2023 and continued in the first half of 2024. Acadian's investment performance remained very strong in the quarter. As of September 30, 2024, 85%, 93%, and 94% of Acadian's strategies by revenue outperformed their respective benchmarks across three, five, and ten-year periods. Turning to flows, we reported positive net client cash flows of $500 million this quarter, compared to the break-even NCCF we had in the second quarter of 2024, and negative $500 million of NCCF that we had in the third quarter of 2023.

Our organic growth initiatives continue to progress well and in line with our expectations. On our systematic credit initiative, all three credit strategies seeded so far are building nice track records. As a reminder, these three strategies comprise U.S. high-yield strategy, which we seeded in November 2023, global high-yield strategy seeded in April 2024, and U.S. investment grade strategy seeded in Q3 of 2024. On our equity alternatives initiative, our multi-strategy fund seeded about two years ago in Q4 of 2022 continues to build a strong track record of our performance. And in September 2024, we also seeded a new global equity extension strategy, which is a variant of our global equity strategy with some ability to go short.

Turning to capital management, at the end of the third quarter, we had a cash balance of approximately $53.6 million, and Acadian had fully paid down its revolving facility compared to the outstanding balance of $36 million at the end of the second quarter. As discussed previously, this revolving facility supports Acadian's first-quarter seasonal needs and is generally paid down fully by year-end from the cash generated from Acadian's operations. Now, as we announced earlier this month, this will be my last earnings call as BrightSphere CEO. Effective 1Q25, we will rebrand BrightSphere as Acadian Asset Management since Acadian is our only remaining business. Our current ticker, BSIG, will change to AAMI, and Kelly Young, who is currently the CEO of Acadian, our sole operating business, will assume the role of the public company CEO too.

These steps basically complete our transition from a multi-boutique conglomerate to a streamlined and singularly focused asset manager. We're going to be successfully selling six of the company's seven affiliates to strategic acquirers and retain Acadian, our largest and the most differentiated business. Thanks to the divestitures, we returned $1.3 billion of capital to the shareholders via share buyback, and we also paid down $125 million of debt. We expanded Acadian's business into new areas, including credit and equity alternatives that I touched on earlier, and we expect these new asset classes to generate sustained organic growth for the company over time, and we also reduced our corporate overhead by approximately 70% over the last few years. Collectively, these efforts have produced very strong returns for our shareholders.

Now, Acadian is one of the top-performing systematic investment managers in the world, and the completion of the transition to a singularly focused asset management company presents an exciting opportunity to focus exclusively on this exceptional business. I'd like to close my initial remarks by reiterating, as I've done for about 24 quarters now, that the company will remain focused on maximizing shareholder value and will continue using its free cash flow to support organic growth and to buy back its shares. I'll now turn the call back to the operator, and I'm happy to answer 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 one again. Please hold for a brief moment while we compile the Q&A roster. And the first question comes from the line of Kenneth Lee of RBC Capital Markets. Please go ahead.

Kenneth Lee (Analyst)

Hey, good morning, and thanks for taking my question. Suren, it's been great working with you for the past several years. In terms of the transition, and I think you also mentioned the streamlining of the company structure. Once again, I appreciate that BrightSphere had already, you know, undergone some major cost reductions in the past. Do you think there's any potential opportunities for any further expense reductions going forward as the structure gets streamlined? Thanks.

Suren Rana (President and CEO)

I can. Yeah, we're as we've always said, you know, we maintain expense discipline, and we continue to find opportunities, and we continue to be really laser-focused on being as efficient as we can be, so going forward, you know, we'll continue the same approach, but it's hard to say at this point whether there are any obvious opportunities. As we've talked about, the last two years, we've actually been investing in the infrastructure. We've upgraded our investor reporting capabilities. We've invested in our trading capabilities. And so what that will do is that it makes our platform much more scalable. And we also face the inflation pressures that we've touched on. So what I would say is that at this point, we've built up a lot over the last couple of years, so we may not see expense growth necessarily as our revenue grows.

So we would see the benefit of operating leverage going forward. But it's hard to say whether there would be reduction sort of in absolute dollar terms of the expense levels.

Kenneth Lee (Analyst)

Gotcha. Very helpful there. And just one follow-up, if I may. Just want to see if you could just give us an updated outlook in terms of potential cash usage for the remainder of this year. And as well related to that, what's sort of like the outlook for share repurchases over the near term there? Thanks.

Suren Rana (President and CEO)

Yeah, thank you. But at a high level, as I just said earlier, the two primary uses for our cash haven't changed. And, as I understand, even after the end of my tenure, they won't change. They remain investment in our organic growth, seeding new strategies, and then share repurchases. Between the two, it would sort of really would have to be opportunistic, and see what opportunities present themselves, whether in terms of opportunity to seed something if the client is looking for a new product from us, and also being vigilant about market conditions and with regard to share repurchases. So, it's hard to put, you know, sort of a relative prioritization of the two, but those two remain the primary and I would say almost exclusive uses for the cash.

Kenneth Lee (Analyst)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

Your next question comes from John Dunn of Evercore ISI. Please go ahead.

John Dunn (Analyst)

Hi. Could you maybe give us a little update on the institutional pipeline, like composition, magnitude, you know, time to funding, maybe geography?

Suren Rana (President and CEO)

Hi, John. Yeah, I guess we are pleased with the pipeline. Of course, as we saw in the numbers, in the third quarter, the pipeline has been good, and then we are working through it, and as it sort of progresses, some of it has been converting into sales, so it's pretty healthy. It's pretty robust, and it goes across, just like John, it goes across geographies. It goes across strategies, so it's not concentrated in any particular areas, and we are also seeing good response from some of the newer areas, like we have an enhanced strategy that has a low, essentially that offers a low tracking error to indices, but also with low risk, so I think we're happy with how things are going in the pipeline.

Also, you know, we saw some outflows from managed volatility in this quarter as well. So we have pockets of risk as well. I would say on balance, we're satisfied with where things are, that we expect to essentially, ideally, be positive flows or maybe break even as we look forward to the next few quarters.

Kenneth Lee (Analyst)

Got it. And then, you know, you've done some new product launches, but maybe thinking about the next phase, is there kind of like another crop of areas where you would consider maybe, you know, going into as like the next phase of growth?

Suren Rana (President and CEO)

Yeah, we'll always remain opportunistic, and see, if there are opportunities to seed any new asset classes. But I would say we do have our hands full at the moment. We're definitely the areas that we're looking to expand into credit and equity alternatives. And we've got some other product variants in the mix. These are large markets, and we are really, you know, keeping our eye on the ball and executing quarter to quarter in terms of building out the necessary capabilities and starting to talk to clients. So I would say we will definitely focus on what we have already in the hopper. Opportunistically, something great comes along, we'll look at it, but we want to stay disciplined on execution too.

Kenneth Lee (Analyst)

Makes sense. Thank you, and all the best, Suren.

Suren Rana (President and CEO)

Thank you, John.

Operator (participant)

Your next question comes from Michael Cyprys from Morgan Stanley. Please go ahead.

Michael Cyprys (Analyst)

Hi.

Good morning, Suren, and congratulations on your tenure with BrightSphere and the strong execution on unlocking value for shareholders over the past number of years. It's been great working with you. Wish you all the best in your new endeavors. Just a couple of questions here. Just curious in your dialogue with the board, among others, maybe you could just elaborate a bit on the new strategy, what prompted it, and what is the scope for strategic alternatives from here and the past? You guys have looked to pursue maybe potential buyers. Just curious what the reception feedback has been. Seems like the change in strategy is moving on from the strategic alternatives chapter to the organic growth chapter next.

Suren Rana (President and CEO)

Yeah, thank you for the kind word, Mike. I appreciate it. I would say, you know, there's really nothing new, I would say. There isn't necessarily a change of strategy because, as we've said, for a while, right, that we remain focused on maximizing shareholder value and looking at all possible ways that we can do that, so that strategy remains the same. The company remains open to strategic alternatives. I wouldn't say that that's no longer an option or that's off the table. What we've done over the last few years has really sort of moved from the conglomerate approach, singular integrated asset management approach, right? Then this is the sort of the most unique and well-positioned business to do that with, so we and we accomplished this almost a year and a half ago.

And then we've remained open to strategic alternatives, but you know, of course, the partner has to be right. And at the same time, we've continued to optimize our position as an independent public company, and continue to be disciplined on expense. And we've had leadership succession at Acadian in the interim, you know, as we updated. And so we've been, you know, really continuing to be optimized on all fronts as an independent public company, as well as we remain open to strategic alternatives, so I would say nothing has changed, but this is just a continued execution of the strategy we've had for a while. And this is sort of, you know, in a way, a culmination of that effort.

Going forward, the company is very well-positioned as an independent company, but also open to, if something synergistic came along that creates shareholder value, the company remains open to that.

Michael Cyprys (Analyst)

And then could you just elaborate a bit on the traction that you're seeing with some of the new strategies that you've been seeding over the past couple of years, just where you are in terms of third-party client assets, traction, interest from clients, and, you know, how you're thinking about the scope for maybe bringing some newer strategies to the marketplace over the next year or so?

Suren Rana (President and CEO)

Yeah, certainly. So I would say the new strategies have been moving along, completely on expected lines. Now, and I appreciate that looking from outside in, you know, it's sort of really hard to tell what's been going on because with anything new, when you can't see necessarily a lot of flows, it's hard to tell. But with new strategies in our institutional long-only asset management business, it is the, you know, the length of the track record is quite important, you know, before we start to see meaningful sales numbers. But the execution has been going along well and kind of on more or less on the lines we expected that we built the teams, we built the models, we built the necessary technological changes we had to do.

And we've been having great conversations with clients who have taken a lot of interest, but just for a variety of reasons, their internal thresholds, et cetera. People have requirements to see a certain duration, a certain length of track record. I would say that these, you know, there's nothing that we're concerned about on the new strategies. It's just moving along. Things take awfully long in terms of coming up with new strategies that over time build scale. That's what I would say, that we continue to stay focused on all these new strategies, and we are happy with how the execution is going. It's not that we would want to then start new strategies because we're unhappy with what we're doing right now.

But we remain opportunistic, as I said, that if something compelling were to come from either client feedback or market opportunities present themselves, the company remains open to seeding new strategies as well. But we do have enough, you know, in the pipeline right now.

Michael Cyprys (Analyst)

Great. And just one follow-up question. Just on capital allocation, I know you mentioned that, you look to be opportunistic on the buyback, but also looking to seed as we think about into 2025. Just curious how we should think about the usage of cash generated across the business. Do you look for cash balance to continue to build versus, you know, how much might we see of cash flow deployed into buybacks versus seeding new strategies or otherwise just cash building or other uses? Maybe you could help flesh that out.

Suren Rana (President and CEO)

Yeah, I mean, those, those two are the uses. And it's really, we haven't made any sort of predetermined allocation between the two. We do remain opportunistic. And it will be a function of the, you know, market conditions with regard to the buyback opportunity and just sort of how we see sort of client feedback with regard to any new strategies and how big those markets are. You know, we have, as I said, we have enough to digest on the organic side right now. There may be some one or two things that may come up, but it may not be very sizable, at least nothing that we know of that would be very large.

So I would say that you may probably see both of them, you know, with regard to the relative allocation between the two that it's hard to tell.

Michael Cyprys (Analyst)

Great. Thanks so much, Suren. Great working with you. Wish you all the best.

Suren Rana (President and CEO)

Thank you, Mike.

Operator (participant)

Your next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Kenneth Lee (Analyst)

Hey, thanks for taking my follow-up. Just wanted to get a better sense of what specific strategies drove net flows in the quarter there. Thanks.

Suren Rana (President and CEO)

Yeah, they really came from, I mean, it's a good cross-section of strategies that did that, but one of them, for example, just to touch on is, as I mentioned, we have some new variants as well, so one of them is enhanced, whereby we offer low tracking error with low risk, and that's resonated with clients that were otherwise going passive, so that was one area, for example. We've seen good interest in small-cap equity, non-U.S., as well as U.S., and those are high-fee as well, so that's a nice side benefit, and we also saw interest in emerging markets, small-cap opportunities, so it's been across a variety of strategies.

Kenneth Lee (Analyst)

Gotcha. Thanks again for taking my follow-up.

Suren Rana (President and CEO)

Okay, thank you, Ken.

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, and thanks everyone for joining us. Thank you also for the kind words. It's a bittersweet moment for me. As I mentioned, on the one hand, it's really been a culmination of the strategy that we have been executing for the last few years, but also at the same time, it is an exciting new phase as a more streamlined independent public company. I leave, you know, with the knowledge that the company is very well-positioned without me. Thank you, everyone, for joining me.