BrightSphere Investment Group Inc. (NYSE:BSIG) Q2 2022 Earnings Conference Call July 28, 2022 11:00 AM ET
Company Participants
Elie Sugarman – Head of Strategy and Corporate Development
Suren Rana – President and Chief Executive Officer
Conference Call Participants
Kenneth Lee – RBC Capital Markets
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2022. During the call, all participants will be in a listen-only mode. After the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, July 28, 2022, at 11:00 AM Eastern Time.
I’d now like to turn the meeting over to Elie Sugarman, Head of Strategy and Corporate Development. Please go ahead, Elie.
Elie Sugarman
Good morning, and welcome to BrightSphere’s conference call to discuss our results for the second quarter ended June 30, 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, our 2021 Form 10-K and our Form 10-Q for the first quarter of 2022. 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?
Suren Rana
Thanks, Elie. Good morning, everyone, and thank you for joining us today. As usual, I’ll start off with the financial highlights on Slide 5 of the deck. We reported ENI per share of $0.41 for the second quarter, 3% higher, compared to $0.40 that we reported for the second quarter of 2021. The EPS for second quarter of 2021 included about $0.07 of contribution from a couple of affiliates: ICM and Campbell Global, both of which have since been divested. Excluding the $0.07, EPS for 2Q 2021 would have been $0.33. And so on an apples-to-apples basis, the EPS of $0.41 for 2Q 2022 is 24% higher than 2Q 2021.
The adjusted EBITDA for our sole operating business Acadian decreased by 26.9% to $38.8 million in the second quarter of 2022, compared to $53.1 million in the second quarter of 2021, primarily because Acadian’s AUM declined 23% due to the depreciation and in equity markets globally in 2022 and also a stronger U.S. dollar given a substantial portion of our AUM is invested outside the U.S.
However, our sizeable share buybacks over the last several quarters more than offset this decline in EBITDA and earnings to drive EPS higher year-over-year. And I’ll get into this in more detail later, but let me also quickly touch on two important initiatives that we’re investing in to support our long-term organic growth.
First, Acadian announced launch of an effort to expand into the large credit market where systematic credit strategies are currently nascent but poised to grow well as industry dynamics become more and more conducive.
Second, in Q4 of this year, we will be seeding Acadian’s multi-strategy equity alternative platform, which will house several equity alternative strategies that are uncorrelated to the broader markets. Our investment performance continues to be strong through volatile markets. As of June 30, 82%, 87%, 86% and 90% of strategies by revenue beat their benchmarks over the prior 1, 3, 5 and 10-year periods, respectively.
Our net client cash flows in 2Q 2022 were negative $2.8 billion, primarily driven by portfolio reallocations from a couple of clients. Looking at the most recent data, we are encouraged that the net flows for June and month-to-date July are positive. Also our sales pipeline remains robust across a cross-section of our strategies.
And from a longer-term perspective, we have several irons in the fire, including credit and equity alternatives that I just touched on, that should benefit from secular tailwinds and that you would expect to drive more consistent organic growth for us.
Turning to capital management. We had $50 million outstanding on Acadian’s revolving credit facility compared to $88 million at the end of 1Q 2022. As a reminder, this is a facility that supports Acadian’s seasonal needs in the first quarter and is typically paid down subsequent quarters.
So we expect the outstanding amount to be fully paid down by the end of the year, similar to what we did in 2021. Our cash balance was $92 million as of June 30, 2022. To reiterate our capital management priorities, as our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back shares.
Now, turning to some operating highlights for Acadian on Slide 7. Acadian generated $38.8 million of adjusted EBITDA in 2Q 2022, compared to $53.1 million in 2Q 2021. The drop in EBITDA compared to 2Q 2021 was mainly driven by approximately 23% decline in AUM over the last 12 months due to market depreciation and a stronger U.S. dollar.
The EBITDA in the prior sequential quarter 1Q 2022 was $48.1 million and the drop in EBITDA for the second quarter compared to the first quarter of 2022 was also mainly driven by market declines.
And secondly, performance fee in the second quarter was lower at $2 million versus $10 million in the first quarter. As a reminder, majority of our performance fees generally come through in the fourth quarter. In second quarter and third quarter, performance fees generally lower than first quarter.
Turning to Slide 8 for a minute. Last quarter, we spent some time to discuss the unique capabilities of Acadian’s platform, which include a powerful combination of a team with deep quant experience, wealth of data on traded assets around the globe and our technology platform, all of which have been built up over decades. Together, these capabilities allow us to uncover sources of alpha unavailable to most other managers.
And if you look at the secular trends on Slide 11, they highlight that Acadian’s capabilities are becoming only more valuable. There continues to be an explosive growth in alternative data and Acadian’s advanced techniques to extract useful signals from the data are continually improving, which should increase our ability to produce higher sales for the clients.
At the same time, the scale of investment needed to bring all these resources together is getting bigger and bigger, which provides us strong protection from barriers to entry given our decades of lead. The demand from institutional client for uncorrelated returns and customized solutions continues to grow, and our strong quant capabilities allow us to meet this demand across a range of asset classes.
On Slide 12, we cover some of the ongoing initiatives that we have stated in recent years in this regard. We already discussed systematic macro strategies, including multi-asset products, our ESG capability and China A Onshore strategy on our last call. Today, I’d like to discuss our newest initiative of systematic credit and equity alternatives platform a bit more.
On Slide 13, we summarize some key highlights for our systematic credit efforts. The business will be led by Scott Richardson, who was an industry pioneer with long experience in quant and credit from BlackRock, AQR and academia. We’ve started building a team and the data in trading infrastructure. We are looking to build a team of around 15 people over the next two, three years.
The plan is to initially focus on corporate credit markets, which is a $14 trillion market and since the data and resources between corporate credit and equity have meaningful overlap, and we have a unique advantage in this segment. Systematic strategies are nascent right now in the corporate credit market with less than 1% penetration but poised to grow for several reasons. Training is becoming increasingly electronic with 30% of volume already electronic. There’s more and more fixed income data becoming available and the returns from systematic strategies are generally uncorrelated with fundamental credit managers.
On Slide 14, we summarize some key highlights for Acadian’s equity alternatives platform. There is a growing demand for strategies with truly low correlations with the broader markets, but this remains severely underserved because often correlations turn out to be much higher than investors expected. In the fourth quarter, we will be seeding Acadian’s overall equity alternatives platform, which will combine Acadian’s unique capability in multi-asset macro, equity long-short, alpha signal research, alternative data and portfolio construction techniques. We have a core team of 7 people already in place, and this will grow over time.
To conclude on Slide 16, our long-term strategy remains the same. We will continue to invest in our capabilities and leverage our unique quant platform to expand into new areas. We will continue using our free cash flow to support organic growth and for share repurchases, and we remain focused on maximizing shareholder value.
Now let me turn the call back to the operator, and we’re happy to answer questions at this point.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead. Your line is open.
Kenneth Lee
Hey, good morning. Thanks for taking my question. Wondering if you could just provide any update around potential discussions around value-enhancing transactions. And I wonder if you could also just talk about whether the pause in share repurchases would be due to the state of discussions? Thanks.
Suren Rana
Hey, Ken. Yes. And as we’ve said, we’ve been consistent that we’re focused on maximizing shareholder value and remain open to all possible ways in which that can be accomplished. And our capital deployment is an example of that in terms of using it in the places where it’s best used either repurchases or leading our organic growth strategies because that will ultimately help generate a better multiple, whether it’s public markets multiple or an acquisition multiple, and we remain open to strategic discussions as and when as they would happen.
And the repurchases, we definitely find them to be accretive, but we may not necessarily do them every quarter. It’s not that large in amount compared to what we used to have where we were almost needed to do the tender and there was no other way to deploy that much capital. But now with the amount of capital we have, we could always catch up in any quarter. And yes, there are times when we are right out the windows, whether related to earnings calls or conversations, et cetera, when we cannot be in the market.
Kenneth Lee
Got you. Very helpful there. Just one follow-up if I may. You talked about a priority for free cash flow to support organic growth, and you mentioned the systematic credit and equity alternatives platform. Wonder if you could just quantify how much capital would be needed to help build out those capabilities? Thanks.
Suren Rana
It’s only about – for those two combined, we would probably expect about $15 million to $25 million per year for the next, call it, three years. So about $15 million to $20 million this year, another $20 million to $25 million next year and then in 2023 and then maybe another $20 million or so in 2024.
Kenneth Lee
Got you. Very helpful there. Thanks, again.
Suren Rana
Thank you, Ken.
Operator
This concludes our question-and-answer session. I’d like to turn the conference call back over to Suren Rana.
Suren Rana
Thank you, operator. If there are no more questions, we thank everyone for joining us today. We understand it’s a busy day for earnings calls. So thank you, everyone.
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