SEI Investments Company (SEIC) Earnings Call Transcript & Summary

Good morning. I'm Chris Donat. I'm a financial technology analyst here at Piper Sandler. I want to welcome you to the -- we'll call it, the final third of our Global Exchanges & Financial Technology Conference. So if you've been tuned in for the last -- a little more than 24 hours, you've seen my colleague Rich Repetto host exchanges and online brokers and some other financial technology companies. To -- for the remainder of today, we're going to be focused on some public and private financial technology companies. So with that, I'm going to actually turn it over to our next fireside chat, where we've got SEI Investments. We have Dennis McGonigle, the CFO; and Steve Meyer, who's Executive Vice President and runs 2 of SEI's 4 main business segments. I think what I'm going to do, since we have both of them here, is I'm going to throw some questions for Dennis and then turn it over to Steve.

So first, Dennis, welcome. We're pleased that SEI could participate again in our conference. I just want to ask one question about the uncertain environment we're in and as we think about what key levers you can pull on expenses in this environment, knowing that the revenue picture might be a little less certain than it would be normally. So start off with that one.

Thanks, Chris, and, yes, thanks for hosting this conference. I know you guys put a lot of effort into putting this together and allow us to take virtual what we used to have a good time with up in New York doing it live. The -- yes, in terms of expense levers, I guess our view, when we get into situations like this where we're disrupted is certainly, we hope we're always managing expenses effectively relative to the strategic course of the business. We feel like we do generally do that and a pretty good job of that. So when we're in cycles like this, it's really -- we try to operate business as usual, that we continue to keep our sights on the long term. We continue to keep our sights on the market opportunity that's not only present, but emerging as a result of this. We lean into clients as much as we can. So sometimes in these environments, you actually need to put more resource towards clients because they're disrupted as well, and that's very important and pays dividends for you, not only now, but in the future. So I wouldn't say we're looking at and have looked at any specific expense levers. There are some things that naturally contract in these environments. Now this is a completely unique environment with the shutdown that we normally don't have travel expenses go to 0. But we've had that occur in this environment. Normally, travel expenses would go up because we put people on the road when things are disrupted. Yes, that's not the case here. Certainly, with assets under management, some of our direct costs associated with assets would contract and expand. So we've seen that kind of early in the quarter, some contraction. And later in the quarter, certainly, as markets continue to perform positively, that will expand. So that's just normal. We are looking at the future and what we are learning relative to this current environment. And should we be investing in things, do we need to invest in some newer technologies to improve the performance of our workforce in this remote environment, particularly if we conclude that some elements of this, at least, or something we want to carry forward strategically into the future with the firm? So we're looking at those areas. I think we'll learn a lot more as we start to bring some more people back to our offices and get more of a hybrid experience with this. Right now, everybody is in the same boat. And I think once we get some people onshore, if you will, while some people are still in the boat, that's where the real learning will come in on how we can take advantage strategically from what we're learning that's positive about this. But I'd say on the expense side, it's generally business as usual, keep our sights on the long term. The market's recovering. It certainly has taken some of the pressure off. Unlike '08, '09, I think I mentioned this on the earnings call, that was a paper-cut environment. Every day you came to work, it was another paper cut. And you really didn't know when that was going to end or have a good feeling for when that was going to end. So we did some contraction, although not much. This environment has a little bit more quicker bounce-back. So there's less focus on that.

Okay. Got it. You just mentioned when you get employees back onshore and operating in sort of a hybrid environment, I think of SEI as having an almost unique corporate culture there and the architecture such that you have these open-floor plans. And for anyone out there, if you want to search the Internet, you can find photos of them, and it's a unique approach, I think, or maybe an extreme approach. Anyway, what are the plans for -- I'll now ask this of you and Dennis for managing -- or Dennis, you and Steve, for managing these open-floor plans in a world where social distancing might be part of the work environment on your campus.

Yes. I mean I've read some of those articles in the Wall Street Journal and some other publications about, I guess, some challenges to the movement towards open workspaces. And as you know from being at Oaks, we probably even redefined open. And in our case, because of our open-floor plates and the flexibility that we have to move desks and expand space with our pythons, as you -- as we call them, those coils that come from the ceiling, our desks are not tied to an electrical outlet that's rigidly in the ground or in a wall. So that allows us actually more flexibility to do the proper spacing within an environment. Everyone can see everyone on an open floor plan. They know that if they're walking over to someone's desk to put a mask on and the person who's sitting at that desk would know to put a mask on for engagement. We're looking at, yes, specific use of conference rooms and how you space in a conference room, but also the technology that's incorporated into conference rooms for team meetings, that where you're going to have that hybrid-type team setup, some in the office, some outside the office. We want to make sure that is working well. So -- but I would say the open-floor play has actually given us more flexibility than if we had rigid cubes, or in our case, God forbid, offices that people who are locked in, because I don't know what the difference would be coming to an office building, going inside, going in your office, closing the door than just going in your study at home. If you're going to interact with people, you're going to interact with people. So the open-floor play, we think, serves us well, will serve us well.

Got it. Dennis, since -- from your perch as CFO, we're looking at an environment where interest rates are at historic lows, and SEI has no debt on its balance sheet. Does this environment change how you think about debt and how the Board thinks about maybe putting on some debt and taking advantage of being able to do that? Or does that not really change?

I think that I guess what I evaluate, it's always what will we do with it. So if we raise capital by issuing debt, what will we do with the capital? And that's really the question -- or the answer to that question has to come first. And right now, we feel like we're obviously well capitalized. We have the capital to do the things we think are important to grow the business long term. But if something came down the pike or an idea came down to pike on that was good for us strategically, then we will look at the capital situation and say, "If we need to raise capital, here's how, here's the best way to do it." So just to raise money because you can, you still have to have answer what -- why. We'd rather answer that question first and then move forward with capital structure changes.

Got it. And then just kind of one more question in terms of does this environment change anything, just on the investment side and where you're making investments. Is there anything you've seen in grand -- or kind of early days in pandemic that you talked about doing some more services for some clients? But it -- is there anything that makes you think you might reconsider some longer-term investments or reprioritize or do some new things?

Yes. I wouldn't say there's anything big that we would look to reprioritize. I think our priorities are -- make a lot -- make the -- make sense relative to our opportunities. Now clearly, we're going to continue to experiment in these more virtual engagement-type activities. We had fortunately made some fairly good investments. I wouldn't say they are large, but they were good in putting the building blocks together of technologies to support a more digital marketing approach and outreach, and we're doing a lot more experimentation with those assets today than we were 3 months ago. And that's been good and healthy for us as a firm. Employee meetings and employee engagement where you're kind of working through the different types of technologies that help with the best way to present information at the hold meetings with whether they be internal or external, and we'll continue to experiment with those things, I would say they're more modest investments. But it's really all about giving ourselves the best tools possible to do our job. The other thing we are reoriented around now, given the protracted nature of what we've been dealing with, but also the view that some of the -- we like some of this work-from-home flexibility, is making sure our employees are outfitted at home with the appropriate equipment and capabilities to be at their best in a nonoffice setting.

Got it. I wanted to turn some questions to Steve here. And Steve, I think it would be helpful if you, because you run 2 of the segments at SEI, to explain to us and the investors out there how you got to be in this position where you're in charge of both investment managers and private banks.

I might have Dennis answered that, or Al. I think everybody else took a step back now. Kidding. So I think about -- I've been with SEI 28 years. I think about almost 18 months ago, and it's something we've been looking at for a while. If you look at private bank and IMS, they have very similar value propositions in what we offer. And it's really an outsourcing proposition and a platform proposition. And we started to see a big convergence of needs between our wealth manager and private banks and our investment managers. Depending on the organization, we saw a crossover of requirements, platforms, and we definitely see a convergence of the markets coming. We see it continuing, and we see it picking up speed. So we thought it best just from a standpoint of our platforms that we're investing in, the business, how we can, I think, enhance and service clients better. We thought it better to bring these 2 units closer together, and we decided to put them under one leadership. So -- and I think it's worked out well. I think some of the deals we've announced like HSBC and CIBC, they are clear indications of this convergence of needs we're seeing across platforms and capabilities, and we believe it's going to be something that helps us drive growth in the future.

Yes. Can you -- you just mentioned HSBC, and you announced that you had that win on the first quarter call. Because HSBC had been a customer on the SEI wealth platform that was announced back in 2007, can you just tell us what sort of changed in the relationship? And now it does cross over on that IMS, the investment manager segment and the private banks.

Yes. So HSBC, actually still -- before this deal announced is still a client, mostly on our asset management side. They also were a client on the wealth platform for a specific piece of their business. It was announced back in 2007, 2008. That business then kind of got consolidated in with some other corporate initiatives with HSBC. That was consolidated under a different corporate-wide service provider, which was not us. Along the path of that, they have been considering us for this private -- their global private bank and supporting their global business and all their distribution centers around the globe, so older booking centers. And that's really what this business entailed. So we've been working on this for a number of years. It's large. It is truly global in that it crosses multiple jurisdictions. But again, to that converging of needs and requirements, one of the things we saw during this, SWP certainly has a very powerful wealth management spit to it, and it's a powerful wealth management platform that really integrates and provides a straight-through processing for more -- for wealth management accounts. But we also have this large investment, a platform that supports the manufacturing side of investment managers. And one of the nuances we saw, there was this huge need because there's a huge part of HSBC's business that is held in these alternative assets that specific clients have exposure to outside third-party as well as internally, HSBC alternative assets, whether they be hedge funds, private equity funds, real estate holdings. And really, that capability, we really don't need to rebuild an SWP. We have a world-class industry-leading capability in our platform in IMS. So we really saw the ability to bring those 2 platforms together and that capability from IMS to augment what we're doing in SWP. So really, that's where it crosses both and provides a value proposition that, quite frankly, HSBC could not find anywhere else in the market.

Okay. I wanted to ask one question about acquisitions because when I think about SEI, traditionally, it hasn't been a -- acquisitions haven't been a big part of the story. But the one place they have been is in the IMS segment with your Archway Technology acquisition 2 years ago. And this is really for both of you, but what is the appetite in SEI for other acquisitions? And can you use Archway as sort of a case study for what you might be looking for in the future?

Yes. Sure. I think -- and then I'll turn it to Dennis. I'll try to go through it. I think it starts with what our strategy is, what our long-term strategy is as a company and how we want to expand and grow. And we do not look at acquisitions just to buy market share or to -- as the active growth, if you will. Archway was a great example of a market that we were kind of tangentially playing in. We had some hedge fund managers that shut down shop and set up family offices, and we were servicing them. And we started to get references from other founding offices. What we've realized was there was some technology development we needed, and it was a market that was growing that we were interested in. So I think for the longest time, we had a mental model around organic growth. And we realized, done the right way for the right strategic reasons, acquisitions, strategic partnerships play a role and should play a role. So I think we went down the path. We started to look at ways that we could enter new markets like family -- the family office, single-family office, multifamily office market, and Archway clearly came to us as one of the leaders. Important to us, we mentioned earlier -- you mentioned earlier, Chris, we have a unique culture. That's very important to us. It's been part of us since day 1, 51 years ago. And Archway had a very similar culture. The founder reminded us a little bit of the young Al West, and he had a very similar culture on how we built the company, open-floor plan, innovation, collaboration. And really, from a standpoint of entering a new market, growing into an adjacent market and expanding our solution, we said this was one that we definitely thought fit the whole bill. So I think going forward, we would look similarly. If we saw an opportunity that could -- an acquisition that could speed us into a new market, expand us geographically into the markets that we are in or want to be in or expand our platform and solution faster and better than we can build it, we would definitely be open to that because that fits in with our long-term strategy.

Dennis, anything to add to this?

Nothing to add. 100% agree.

Okay. Okay. And just kind of about 5 minutes left here. Steve, I wanted to ask you about the current environment. I asked Dennis a little bit about it before. But as your sales force has transitioned to a work-from-home environment and you talked more about sort of digitizing some of your marketing efforts and things like that, just how has that changed how you do business? Is it -- and I'm also curious, are you seeing more -- any types of inbound traffic that's different from what you normally had? And so from a sales perspective and from a client perspective, what's different in the last 3 months?

Yes. I think outside the in-person meetings, things have continued. I've said this before, we have a very good and sharp and experienced sales force across the board. And they're not going to let a crisis get in the way of them going after and achieving their sales targets. And I've been very impressed how they've changed tactics and really gone to a more virtual mode. They're sharing among teams, among markets. That's the other benefit we had. So the IMS team is focused on -- investment managers are sharing with the banking and wealth manager team and vice versa as well as the Archway team. To be honest with you, we've seen a pickup in activity. We've seen an extreme pickup of activity in our family office services, which is Archway, and from what I understand from the guys, because this was absolutely before acquisition, the same thing happened in 2008 and 2009. It seems like when we have these crises in the market, some of the family offices, that's when they kind of get around to looking at their infrastructure and technology needs and consider this. So we see a big influx there. I think we see the pipeline continue and the funnel continues. We've actually sold and closed some deals that were in process from the beginning before the crisis. And we're actually seeing the larger ones continue. But my belief is those larger ones, especially since some of them are New York-based, they will continue. No one has said, "Hey, we're going to stop our sales process." We're going to continue -- they're going to continue their due diligence in this virtual model. I think they've just changed their decision time frame probably to a little bit more in the fall versus maybe a June, July. So I think for the larger agendas, they're going to take their time a little bit because they can at this point, but none of them have indicated, and I've been on a number of these calls, have indicated that they're going to slow down or stop their agenda. They're just going to slow it down a little bit. From a virtual standpoint, we are still having demos, due diligence calls. And we've actually seen an uptick in RFPs we're getting across the board, both in investment managers and in the banking side. And I think that's a reflection of there are some people that had this on their strategic plan to look at outsourcing. And I think in many ways, this crisis has given us a little bit -- given them a little bit of an ability to focus on this and start to put the RFPs together and send them out.

And when you mentioned RFPs, should we think about that as being mostly new relationships for you? Or that -- would that be an RFP often coming from an existing client who's looking for a new solution on top of it?

Most of them would be new clients to SEI. There are -- there is a good bit of cross-sell activity going along with existing clients. To my knowledge, there's only one, in the banking segment, that's in an RFP that's an existing client, and that's more just from a -- they haven't gone to market in a while and they're looking, but we feel very well positioned on that. I think the other thing we're seeing, quite frankly, as the assets have moved up in the Investment Manager segment, we have a lot of large clients, and private equity continues to grow. And over the past month, 3 of our largest private equity firms have called $13 billion of new capital to be funded into new products. And some of those products have already started and funded. So we're seeing a lot of activity and new business from certain segments of our clients.

Got it. I was going to ask one other different question in the last couple of minutes we have. But since you mentioned the private equity line, I just want to dive a little deeper on that one. Is -- when I -- when we think about private equity and the revenue implications, when you -- with some other companies that cover where we think, okay, relative to hedge fund, your fee yield on assets is going to be lower with private equity because it's less velocity of trading and lower servicing and things like that. Is -- first, is that a reasonable way to think about it? And then can you just give us some context on your history with private equity and how that's moving along?

Yes. So, private equity, I think that's a reasonable way to look at it. I think the one factor you might be missing is, obviously, size matters from private equity. So the larger players with the larger capital, you're not going to get a -- typically, the process they go through, they call capital, they invest capital. You have your investment period, you have your harder -- harvest period, your wind-down period. And typically, what you'll see is the fees we earn, whether they're tied to assets or basically a platform fee times to some accelerators, we were seeing a consistent fee stream during that period, whether it be 5 to 7 years. So you don't get as much as the upticks or downticks, but it's a more stable, predictable revenue model for us. And the areas we're seeing growing right now are private credit and real estate. Our history of private equity, and we first got into alternatives as we got in through the fund of funds and hedge funds back in 1998, 1999, as we've grown this business and continually grown the -- grew the revenue and the margins, we've expanded the markets we're in and the solutions. And one of the markets we expanded in, probably about 6 years ago, was private equity. And we started with private equity fund to funds, and then we've grown from there to direct strategy, venture. And there are so many subsegments, including credit and real estate. And we've kind of grown in all of those. I think the thing that's important for private equity, that business is still in-sourced to a good degree, so there's a lot of people first-time outsourcers. And the business is very diversified in certain segments. And it's an area that we see a lot of growth in for the next 3 to 4 years.

Got it. I'm tempted to ask another follow-up question, but unfortunately, we're out of time. I got to give everybody opportunity to transition to the next meeting here. So I do want to thank Dennis McGonigle and Steve Meyer from SEI for participating. You guys have been faithful participants at our conferences over the years and really appreciate that, and I appreciate you joining us virtually today.

We appreciate you having us.

Yes. Thanks, Chris. Thanks, Chris.

And for those of you staying with us here, so we're going to exit this Zoom room and rejoin in a few minutes with Broadridge Financial, with CFO Jim Young. See you in few minutes, everyone.