Acadian Asset Management Inc (AAMI) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2021. (Operator Instructions) After the presentation, we will conduct the question-and-answer session. (Operator Instructions) Please note that this call is being recorded today, Thursday, July 29th, 2021, at 11 a.m. Eastern Time.

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

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30, 2021.

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 2020 Form 10-K, and our Form 10-Q for the first quarter of 2021. 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 I'm pleased to turn the call over to Suren. Suren?

Thank you, Elie. Good morning, everyone, and thanks for joining us today. I'll start with Slide 5 of the presentation deck as usual. And let me begin with a summary of a few recent developments that collectively mark an important shift in our business model.

We closed on the divestiture transaction of Landmark Partners in May. And as we announced in the press release last week, earlier this month we also closed on the divestiture transactions of 2 other Affiliates, TSW and ICM. And we still expect the closing of the announced transaction for sale of another Affiliate, Campbell Global, in the third quarter of this year. After that sale is completed, our sole business will be Acadian, a market-leading quant manager with a great track record of outperformance. So at that point, we will have completed a full transition from what's referred to as a multi-boutique or multi-manager business model, to a single focused investment manager model, providing our investors pure-play exposure to Acadian's highly differentiated business.

Now moving to our financial results for the quarter. We reported ENI per share of $0.40 for the second quarter of this year, compared to $0.24 for the second quarter of last year. ENI for both these periods excludes Landmark and TSW since they have been moved into discontinued operations. But these numbers still do include ICM and Campbell, just given how the accounting guidelines work. It seems several analysts may have included TSW in their earnings estimates since the TSW sale closed in July after the end of the second quarter. So to make it easier to compare, I want to point out that if TSW was included in our results, it would have added another $0.06 to the EPS for 2Q '21, which would make the second quarter EPS $0.46. As I mentioned, ICM and Campbell are still included in these results, but since ICM sale is now closed, and Campbell sale is expected to close in the third quarter, we're now really focused on our sole go-forward business, Acadian.

So let's now turn to Slide 8 to zero in on Acadian. As you can see in the first column relating to 2Q '21, with an AUM of $118 billion, Acadian has significant scale, particularly for a very focused, differentiated business. The business generated $53 million of EBITDA in the second quarter of '21, compared with $33 million in the second quarter of 2020, and $46 million in the first quarter of 2021. The biggest driver for the increase in EBITDA relative to both the year ago quarter and the prior sequential quarter was higher revenues, driven in turn by the increase in our AUM from market appreciation.

Acadian net flows in the quarter were negative $1.3 billion, primarily driven by reallocation from select strategies, such as low volatility strategies, given the generally rising markets we have had. Looking at investment performance, you can see on the chart on the lower left-hand side, that Acadian's investment performance strengthened further in this quarter with 82%, 85% and 88% of strategies by revenue, beating the respective benchmarks over the prior 3, 5 and 10-year periods. We're optimistic that this strong long-term track record will help generate robust net flows and organic growth over time.

Turning to our balance sheet and capital management on Slide 14. Our cash balance as of June 30, '21, was $1,175 million. We expect this balance to grow to more than $1.3 billion over the next few months when we include the after-tax proceeds from TSW, ICM, Campbell sales, and pay the taxes on gain on sale of Landmark, which hadn't been paid since they weren't due just yet. We expect to deploy this cash balance to pay down debt and return capital to our shareholders.

As of June 30, 2021, we had outstanding notes of $400 million, so our cash balance net of this debt would be $900 million. So basically, you can think of the company currently as 2 distinct parts, our operating business generating $53 million of quarterly EBITDA, and our balance net of debt of more than $900 million.

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

(Operator Instructions) Your first question comes from the line of Robert Lee with KBW.

Maybe, Suren, you could start off with -- understanding it involves years to return capital and pay down debt, but I guess, maybe you would have thought, concurrent with the earnings, there would have been a little bit more -- specifics on that. Could you maybe talk to what -- maybe why we haven't had the specific set, particularly with the retail notes already callable, I believe at par? And then as a follow-up question, the adjusted EBITDA for Acadian, is that -- how much of that is related to maybe the performance fees in the quarter, and what can we think of as kind of a core EBITDA for Acadian? Thank you.

Thanks, Rob. Yes, on the first question, you're right, we still have not finalized our action plan decisively around the capital. It's a rather large amount of capital. So we continue to tinker. However, as we said, high-level, it is for debt pay down and returning capital to shareholders. And in terms of sequencing, yes, we plan to at least pay the retail notes of $125 million first before returning capital to shareholders. But yes, there is -- it's -- is that part as straightforward? Yes, I agree. We just want to execute the entire plan more holistically.

And the second part, now regarding EBITDA for Acadian, yes, it's -- this quarter, we've had performance fee similar to 1Q. As you know our performance fee largely is -- 4Q is generally the quarter where we have the largest amount of performance fee. So when you sort of normalize all of that now, we would say median performance fee, at least, it's probably middle of the fairway, this quarter because 4Q is larger, and there may be certainly years when we don't have performance fee in earlier quarters. But this quarter is probably, call it, an average, if you were to average out a full year. Does that answer your question?

Well, maybe a follow-up. So was that -- the $20 million of performance fees, was that driven mainly by Acadian? Maybe that's Acadian, maybe that was also Campbell Global. And I guess of the Acadian $53 million of adjusted EBITDA, which had a nice increase sequentially and obviously, some of that's going to be just a market improvement in asset levels. But I guess, I'm just trying to get a sense of how much of that EBITDA increase we can carry forward versus maybe being more onetime related to performance fees in the quarter?

I see what you mean. Yes. So the performance fee that -- of the $20 million that you see, it was really only $5 million in Acadian and more -- about $15 million was from Campbell Global, which, I guess, we provide that breakup in our segment information, but you're right, this performance fee doesn't get broken out. So that's the breakup. And of course, we've announced sale of Campbell Global. And so what's included in the Quant and Solutions segment is only the $5 million performance fee, which as I mentioned earlier, is more sort of -- you can think of it as an average run-rate because 4Q would typically be higher, and there may be times when earlier quarters don't have performance fee.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one on Acadian. You talked about seeing some client reallocation activities in the quarter. Wondering what your expectations are for the near-term? What are you seeing in terms of positioning? And which products and strategy do you think could garner some potential growth in this environment?

Ken, yes, I know, we're very pleased with the performance of the firm overall. As we look at the performance right now on a 1-year basis, it's 87%, 3-year is 82%, 5 and 10, it's like more than 85%. So vast majority of our strategies are beating their benchmarks. So it's really some -- I guess, the category of low volatility strategies that in this kind of rising market environment, while they are delivering low volatility, you would expect and clients would expect, I guess -- or should expect in this environment that they don't necessarily beat the core benchmarks. But because of that, we do have some clients that take directional macro positions that's choosing market over low volatility targets, for example. So that's where essentially we would -- we're seeing the negative flows. But most other strategies, the track record is good. And so these things change by the market, but essentially, given that more than 80% across all-time periods, in some cases, more than 85% of strategies are beating their benchmarks, we are optimistic about the outlook going forward.

Got you. That's very helpful. And one follow-up, if I may. With the pending divestitures, so Campbell Global and within a few quarters, you'll just essentially be Acadian. Wondering if you could just share with us any thoughts around longer-term strategic plans, any changes you could expect as you're operating in an industry down fashion.

Yes. Thanks, Ken. Yes. So essentially -- we really have essentially would have completed our transition to a single manager model. So we won't be a multi-boutique anymore. And with the Affiliate sales and as we've said, our focus has always been value maximization for the shareholders. And when we got prices for our assets that were more than where the market was valuing them, we took back to create value to shareholders. But also another interesting dichotomy in the market is that we've always had what was the multi-boutique discount. So now that we are a single manager, it's much easier, it's a pure-play exposure that investors can expect. It's a very differentiated and scaled business. So investors know what they are getting.

And just strategically, as we have discussed in the past, which was the reason for these divestitures, we had found that -- very limited synergies of having multiple different businesses under one roof. In fact, there were some dissynergies from the coordination work, central initiatives that may be not necessarily weren't in tune with the customized needs of each business. So this simplified business and also providing a much simpler story for our investors to understand, we think it has operational benefits, and we also think it has the marketplace benefits for us.

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

Just on capital management front. I know in the past, you've mentioned that when you're in conversations around selling certain businesses you might be restricted or you are restricted from buying back stock. Just curious if that restriction also extends to redeeming debt and how -- and to what extent are there any sort of restrictions there on the debt side, how that differs from the equity side?

Yes. I guess, it's -- we've discussed that from time to time, we don't think that restriction would apply to redeeming debt. And I guess, as I mentioned, the retail notes are more straightforward, we can probably do that in advance. Having said that, we just would like a line of sight on the entire capital plan because the retail notes are relatively easy to redeem. There isn't much execution risk to it. But on the repurchases, yes, from time to time, if there are non-public things going on, we would be restricted.

And just any color on the time frame for the retail notes? You mentioned that it's pretty straightforward. Is that something we can expect here in the third quarter? Or is that maybe more later in the year or next year?

Yes. I mean, when it happens, it'll be quick. I hesitate to give a time frame because we just aren't necessarily very sure, but it's relatively straightforward. I guess it's just really when we have a holistic plan we'll start with the retail notes first.

Okay. And just a follow-up question on the Quant Solutions segment. Just wanted to clarify, so that's now all entirely Acadian as you reported in your segment results, one Affiliate there in the $53 million or so of EBITDA in the quarter, that's kind of the right run-rate to be thinking about on a go-forward basis? If I hear you right, just in terms of thinking about the movement of performance fees, kind of an ebb and a flow but this is a good run-rate. But then maybe you could also elaborate a bit on the other segment, which I think had the impact of ICM and Campbell in the quarter, just how to think about what the right run-rate for that other segment should be, which historically had been more of the Center cost? Just how to think about some of the moving pieces there?

Yes. So we're really focused on the Quant and Solutions segment, which is Acadian. And yes, that -- the $53 million is the right run-rate in the ballpark. Of course, quarter-to-quarter, there are some things that happen, $1 million or $2 million seasonal items. But that's about the right run-rate for Quant and Solutions. The Other segment, I would say, is temporary because in there, we used to have Liquid Alpha segment. And since ICM, which already closed, but is included in the results for Q2. That's in the other now, it's moved from Liquid Alpha to the Other. Campbell Global, again used to be in the Alternatives segment and is expected to close, but that's in the Other now and in the center. So with the closing of ICM and Campbell, ICM already closed, Campbell will be closing in this quarter, then that Other segment would basically just become center again like it used to be.

And we think of center really more as not as holdco anymore or center as we used to call it. But it's really now -- it's the department, it's the team of people that's focused on handling public company responsibilities, given that it's just one business now. So over time, we would expect more efficiency in handling public company costs. So that the full Acadian EBITDA of $53 million and going from there, goes to the shareholders. We have, of course, proven over the last 1.5 years that we can continue to get more and more efficient. So we'll always look to minimize the overheads. Also, if there were ever to be an acquisition in that scenario, a buyer would not meet the public company costs. So for those reasons, we don't really view these costs in the other as core and are really, from a management perspective, much more focused on the EBITDA that's produced by our operating business.

Great. Maybe just a quick follow-up there. Just on the other segment, I guess, what can we expect near-term into 3Q and 4Q for that sort of corporate overhead? And then what sort of time frame would it take for that to get, I guess, in your view, eliminated where you basically kind of get really closer to that $53 million? What sort of actions have to be taken? And how realistic is that as a public company to really achieve that?

Yes. So in 3Q, we would have a month of ICM and we would have probably 1 quarter of Campbell. But 4Q is when the -- when you would really just see the headquarter costs, which was in the $20 million ballpark and we'll continue to wiggle it down over time. It's not 1 quarter or 2. It's probably longer than that. But it -- as Acadian continues to scale, there would be more than we can do on the other side. But yes, over time, we would expect that continues to get smaller and smaller.

Your next question comes from the line of Glenn Schorr with Evercore.

A question. With the benefit of hindsight, you've now sold off 6 or 7 of the boutiques to get down to this single manager model. And I think you've gotten some good fair value to shareholders on the prices. Was there any specific staging or order? Or was that more a function of how the deals just came in where investor or partner interest shook out? And a follow-up on that.

Glenn, yes, we've been -- as we've said, we've been open-minded about unlocking value for shareholders. And that's been known to the marketplace. So as the legitimate inquiries have come in, we have had those conversations and where things worked out for us, for our team and for the buyers, we move forward. So with no particular staging, except that Acadian being our largest and most differentiated business, it would make sense that, that's the business we have now. Saved the best for the last, as they say. And also because it's largest, if we were to sell this business as an asset, the tax bill would be hefty. So that's the only one, I would say, probably by design.

Okay. And then just a follow-up I had is, was Acadian on the list of things you take calls on, meaning, is it just you haven't found the right partner at the right price yet? Or is it that tax potential liability that is just delaying the conversation? In other words, is this just a matter of time?

So we're very happy with the business. It's a scale business and a very differentiated area, and it's a great team, a great track record who serve their clients very well. So we think it's very -- it's a very good business for the public markets. And we're happy to keep going. At the same time, we've always maintained that it is our fiduciary duty to our shareholders, but to the extent there was a party that was really able to afford our shareholders, we would consider it.

Your next question is a follow-up question from the line of Michael Cyprys with Morgan Stanley.

Just on the Acadian business, I was just hoping you might be able to remind us of the top 3 or 5 strategies at Acadian, how much they contribute in AUM? And if you could also maybe help us -- maybe some of the flow trends that you're seeing in each of those strategies, which ones would you say are seeing more positive flow trends versus ones that are seeing more challenges in the flows? And if you're able to also help quantify that as well across the top 3 or 5 strategies at Acadian.

Yes. Thanks, Mike. That's actually something that we will -- we are working on it in terms of what -- how we slice and dice on a consistent quarterly basis and provide it to you all. So we will do that probably next quarter onwards, in terms of the levels -- that's the right level for people to have granularity. But as we said, we have the managed vol, low-vol group of strategies, that's about less than maybe about 18% or 20% of our AUM. That's a little bit of a slightly different objective.

Then we have -- we cover emerging markets. It's about 20%. There's a variety of geographical regional strategy of Europe, non-U.S., et cetera, then there are some -- there's global as well, which is U.S. and developed markets. So it's -- and then there's some newer strategies like multi-asset class that are doing well and getting great traction. So it's quite diversified, and that's why when you have some strategies that are less in demand and driving market environment, you have other strategies that are getting demand. So we will sort of figure out the right slice and dicing -- slicing and dicing. And well, we'll probably report back next quarter with that.

Got it. Okay. That will be helpful. And if I could just -- maybe just one more, just around the quantitative strategies. I guess, what portion of the AUM would you say are in quantitative strategies versus more fundamental? And how do you think about that spectrum of more quant informed strategies in there? I imagine the management follow that's more quant, what about some of the EM and global equity strategies? Are those also quant or is that just part of the investment process, but more fundamental? Just any help there would be appreciated.

Yes. Our entire business is multifactor quant. So all the strategies that we have are informed by the same core data, core technology, and core investment philosophy, which is informed by decades of data that we have and the technology that we've continued to invest in, and the team of researchers and academics that continue to improve the process. So that's applied across all strategies and including our newer strategies like multi-asset class, where we're applying the same philosophy and approach and technology, beyond equity.

This concludes our question-and-answer session. I would now like to turn the conference back over to Suren Rana.

Thank you, operator. Thank you, everyone, for joining us. As I said, we are excited about this transition to a single focused differentiated business, and we look forward to reporting on our progress next quarter. Thank you.