Acadian Asset Management Inc. (AAMI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Investor Call and Webcast to discuss BrightSphere's divestiture of affiliates Barrow, Hanley, Mewhinney & Strauss and Copper Rock Capital Partners. [Operator Instructions] Please note that this call is being recorded today, Monday, July 27, 2020, at 11:00 a.m. Eastern Time. I would now like to turn the meeting over to Elie Sugarman, Managing Director, Strategic Development. Please go ahead, Elie.

Thank you. Good morning and welcome to BrightSphere's conference call to discuss our press release and investor presentation issued yesterday evening. Before we get started, please note that we may make forward-looking statements about the Barrow Hanley and Copper Rock transactions as well as 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 press release and investor presentation and under the heading Risk Factors in our 2019 Form 10-K and in our 10-Q for the first quarter of 2020. 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 presentation. 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 it over to Suren. Suren?

Thanks, Elie. Good morning, everyone, and thank you for joining us today to walk through this important development in our business. Let me start with Slide 3 in our investor deck to provide the basics. We announced yesterday divestiture of 2 affiliates in our Liquid Alpha segment, Barrow Hanley and Copper Rock in separate transactions. We have agreed to sell our majority interest in Barrow Hanley to Perpetual, which is a diversified asset management and financial services firm listed on the Australian Stock Exchange. In consideration, we will receive $319 million for our equity interest and will be redeemed in full for our seed capital in Barrow Hanley, which was $44 million as of June 30. So a total of $363 million in proceeds before tax. We have 0 tax basis in the business, but we'll be able to utilize our DTA to reduce the cash taxes on sales, so that after taxes, we expect to get $320 million of proceeds from the transaction. Separately, we have sold our majority interest in Copper Rock to Spouting Rock LLC and the management team of Copper Rock. From this transaction, we will receive about $15 million, including seed capital after-tax adjustments, and we also have some arrangements for upside sharing. Let me now turn to Slide 4 and summarize why these divestiture opportunities were compelling for us. First, the $335 million of expected after-tax proceeds from both transactions combined will allow us to pay down debt, in line with our previously announced intent but now we can do it much faster, and repurchase shares. So we would expect to get double-digit EPS accretion as a result. And the additional capital and liquidity also gives us more flexibility to seed new strategies to drive organic growth at our affiliates. From a strategic perspective, and most importantly, this move gives us a pro forma business that has generated consistently positive flows historically, and that's because these divestitures focus our business going forward even more on quantitative strategies at Acadian and secondary private market strategies at Landmark. The 2 segments, Quant & Solutions and Alternatives account for 88% of our EBITDA on a pro forma basis. Also, 29% of our revenue will be under long-term contracts on a pro forma basis, and we expect this proportion to grow as we raise additional capital in our secondary strategy. I also want to take the opportunity to highlight that the valuation received here, even after some value leakage to taxes, allows us to delever, create meaningful EPS accretion and provide capital flexibility for growth investments like seeding new strategies. This clearly demonstrates the high intrinsic value of our business compared to the trading levels, especially considering that our pro forma business is now even stronger. Given these divestitures, I think it's worthwhile to recap what our key businesses are in each of our 3 segments on a pro forma basis, which we lay out on Slide 5. On the left is our Quant & Solutions segment, which is primarily Acadian and would comprise 68% of our EBITDA on a pro forma basis. Acadian is a leader in its category. Our broad-based Quant capabilities and ongoing investment in cutting-edge research, data and technology differentiates us and allows us to effectively provide specific exposures and strategies that the clients desire as markets evolve. An example is our multi-asset class strategy, which we seeded a few years ago and leveraged the core equity capabilities to provide a multi-asset class solution to our clients that can be highly customized. We're seeing strong client momentum in this strategy. In the middle is our Alternatives segment, which is primarily Landmark and would comprise 20% of our EBITDA on a pro forma basis. As we have discussed, this business is very well positioned because the demand for private market strategies continues to grow, and secondary strategies, in particular, can efficiently meet that demand by deploying capital quicker while providing diversification across GPs, fund vintages and underlying investments. Landmark is a pioneer in the secondaries business and has one of the best reputations and long-term track record. And also, as we have discussed previously, we expect this business to continue growing very well as we raise our next vintage funds. On the right is our Liquid Alpha segment, which is now primarily TSW pro forma for the divestitures and comprises 12% of our EBITDA on a pro forma basis. This segment diversifies and complements our overall business, because in this segment, we provide a mix of fundamental long-only strategies in equities and fixed income across cap ranges and regions. This segment is well positioned to benefit when value returns to favor. So we really like our pro forma business mix, which is now not only stronger, but also a lot simpler. The strength of this mix is reflected on the next slide, Slide 6. As you can see here, our net flows have been consistently positive in 2017, '18, '19 and YTD on a pro forma basis. Slide 7 shows the meaningful improvement in our business mix. Quant & Solutions and Alternatives segments, combined, go from 70% or so, depending on what metric you look at, to 88% across EBITDA and revenue on a pro forma basis. With the upcoming fundraising in the Alternatives segment and continued growth in Quant & Solutions, we expect that this proportion would go higher from here. Now I'd like to turn the call back to the operator and I'll be happy to answer any questions you may have.

[Operator Instructions] Your first question comes from Craig Siegenthaler from Crédit Suisse.

I was interested in hearing your plans for additional affiliate dispositions, especially related to Landmark, which will be entering its next sizable fundraising cycle in about 6 months.

Thanks, Craig. If you look at Slide 6, we now have a very strong pro forma business that has generated really good flows historically and is still well diversified. So we believe the value in the strong business will be recognized by the markets. However, being a public company, it is our duty to consider any compelling opportunities to unlock shareholder value when they come up. But these 2 transactions are an example of that, which we consider to be accretive to shareholder value.

Your next question comes from Glenn Schorr from Evercore.

Curious on -- if you've changed your thought process at all around the leverage range that you've been hanging out in. You're probably towards the bottom of it as you end this quarter already. So in terms of use of proceeds for delevering versus buyback. And any thoughts around how you think about the parameters around the buyback? You could buy back a pretty good chunk of the company with those proceeds.

Yes. Thanks, Glenn. And -- yes, and that's right. We will use the proceeds to pay down debt, as we had previously announced, and we'll also repurchase shares and seed new strategies. So -- and obviously, we have flexibility across those 3. But no, paying down debt is important. So in one illustrative scenario, if we use the proceeds to fully pay the revolver and use the rest for repurchases and seed, we would be around 2x on a gross basis because we would have our bonds with reduced EBITDA. But on a net debt-to-EBITDA basis, which we care about, we would be around 1.5, 1.6, below our prior range of 1.75 to 2.25. And that's acceptable, and frankly, we prefer it to have more flexibility on leverage. Our business, especially on a pro forma basis, has very strong free cash flow, and it's more stable. Because as I said earlier, 29% of the revenue is under longer-term contracts, and that proportion will grow as we raise more capital in our secondary strategies. So longer term, I think we are headed towards lower leverage ratios.

And does this change much at the Holdco? You had an expense plan in place, and I noticed in your release, you said the subs that are left are more self-sustaining, which is right. Does that change your needs at the Holdco? Is there upside to the expense targets as a result of these divestitures?

Yes. Thanks, Glenn. As you recall from our last earnings call, at the center, we had about -- in 2019, about $45 million of OpEx and variable comp expenses, which we had targeted to reduce by $20 million, so to a $25 million run rate starting 1Q '21. And part of the reason was that we went more autonomous with our affiliates that the supplemental distribution and other things we were carrying at the center was really not effective. And as we had mentioned then, most of our affiliates were independent, particularly the large ones like Acadian and Landmark, who are global businesses, have distribution and infrastructure everywhere. But we had touched on how Barrow Hanley, in particular, had very strong distribution capabilities domestically but were using the supplemental distribution overseas. And Copper Rock, being on a smaller scale, was using some of the back office capabilities, and we were in the process of adding those capabilities domestically locally at the affiliate because we do think it's more effective. So what this does is it doesn't change much of the center. We will obviously always evaluate if we have opportunities to be more efficient, and we'll continue doing that. But what it does is that the additions at Barrow Hanley and Copper Rock to compensate for the center services was no longer be -- relevant to us.

Your next question comes from Michael Cyprys from Morgan Stanley.

I just wanted to circle back on the organic growth in seeding, you've mentioned that a number of times. I'm just hoping you could elaborate on that a little bit more just in terms of that -- how much of the proceeds you think you might earmark towards seed. And how you think about prioritizing which strategies and which affiliates at this point?

Yes. Thanks, Michael. On the seed, it's really -- it's not necessarily any particular amount that we ration, that we must invest and seed. It's a very opportunistic approach that if we -- if there are opportunities to seed new strategies that our affiliate teams and we collectively believe will generate AUM in the future, then we would do that. So there are times when some seed is coming back and there aren't compelling opportunities, and that's acceptable because in that case, we can use the seed for other things. As I said, we don't necessarily earmark a particular use of capital. And there are times when there are opportunities that are compelling. So essentially, we would remain flexible. We have a pretty sizable seeding portfolio given ex-Barrow and Copper Rock, so a lot of those needs are satisfied as -- from within the pool itself, from velocity. But we would be -- obviously, it would be a good opportunity if we have multiple seeding opportunities with the affiliates. Does that answer your question, Mike?

Great. And maybe just a follow-up question on Page 6, where you're showing the pro forma flows on, I guess, a historical basis here. I was just hoping you could remind us if these sort of flow numbers capture the dynamics around realizations in the Landmark business as they sell down assets. Is that captured as an outflow within these numbers? And then on a go-forward basis, certainly, Landmark is going into their next fundraising stage here. If you could just remind us how we should be thinking about the impact of any sort of step-downs in fee basis. How meaningful that could be from a flow, from an asset, from a revenue standpoint? How we should be thinking about that?

Thanks, Mike. In our disclosures, and it will be in the upcoming Q as well, we provide a separate line item for realizations. So secondary funds are generally, as we've discussed, are much longer-dated than primary funds. So as a result, it's generally a much smaller number than you'd expect for primary funds. So you'll see that breakup. The numbers here on Page 6 are not including realizations because that's a separate line item. And as we go forward with the fund raises, we may have discussed this in the past that we have -- a large part of our AUM is linked to committed capital as opposed to NAV. And we -- there's a long period of time when the fee basis is essentially committed capital. So we do expect, for the near term, that not to be a key factor.

So there's no step-down of the fee basis as the new funds are raised and the fees turn on to the new funds, that's not going to impact flows or AUM or revenue?

Yes. So it varies, for example, in our private equity strategy. There is an 8-year period. And some other strategies, there's a 4-year period when things mark -- move from a committed capital basis to NAV basis. So step-downs do happen, but there isn't a significant step-down in the near term.

And when those step-downs occur, do they flow through as an outflow? Or -- I'm just trying to get a sense. Are they going to be in the flow number?

It would be a separate line item.