Brightsphere Investment Group Inc

NYSE:BSIG

Earnings Call Analysis

BrightSphere's Q2 2024 Soaring ENI and Strategic Expansions

In Q2 2024, BrightSphere Investment Group reported an ENI per share of $0.45, up 61% from $0.28 in Q2 2023. This boost was due to a 13% rise in average AUM, enhancing management fee revenue by 14%. Effective expense control led to a 43% ENI increase. Share repurchases (11% of shares) also bolstered ENI. Investment strategies performed well, with 93% outperforming benchmarks over 10 years. Net client cash flows were flat due to offsetting large inflows and outflows. The company launched new credit and equity strategies, and ended Q2 with $72 million in cash and a $36 million revolving credit balance.

Strong Earnings Performance

In the second quarter of 2024, BrightSphere Investment Group reported an Economic Net Income (ENI) per share of $0.45, marking a 61% increase from $0.28 in the same quarter of 2023, and a slight rise from $0.44 in Q1 2024. This rise was primarily driven by a 14% increase in management fee revenue, which correlates with a 13% growth in Average Assets Under Management (AUM) due to market appreciation. Notably, keeping operating expenses flat year-over-year allowed ENI to increase 43%, reflecting effective expense management and operating leverage in the business.

Significant Share Repurchases

Over the recent quarters, BrightSphere has engaged in substantial share repurchase programs. Since December 2023, the company repurchased approximately 4.7 million shares, equating to 11% of its outstanding shares, at a total cost of $100 million. During Q2 alone, 0.9 million shares were repurchased for $21 million. This strategic approach not only enhances shareholder value but also reflects confidence in the company’s financial health.

Investment Performance and Strategy Development

Acadian, a key part of BrightSphere’s operations, continues to exhibit strong investment performance, with 86%, 92%, and 93% of its revenue-generating strategies outperforming benchmarks over the 3, 5, and 10-year periods, respectively. The company is nurturing its systematic credit initiatives, having seeded a U.S. High-Yield strategy in November 2023, along with a Global High-Yield strategy in April 2024. A new U.S. Investment Grade strategy was also introduced in July 2024, indicating a commitment to diversifying and enhancing its investment offerings.

Stable Client Cash Flows Amid Fluctuations

BrightSphere reported flat net client cash flows for Q2 2024, reflecting a balance of significant large inflows and outflows. Despite larger institutional clients' impactful actions, these flows largely offset each other. Management indicated that such 'lumpy' cash flows are typical in their institutional business, though the healthy pipeline across various strategies has remained intact.

Guidance on Revenue Growth and Expense Control

Looking forward, the company anticipates that the combination of organic growth and market dynamics will drive further revenue increases. The management stated that operating expenses are expected to remain steady, with potential increases limited to general cost of living adjustments projected at 2% to 3%. This discipline suggests a continued capacity for operational leverage as revenues grow, allowing for profit margins to expand as well.

Client Demand and Emerging Markets Outlook

During the earnings call, management noted mixed sentiment among clients regarding emerging market strategies. While some clients see value in the lagging emerging markets as a potential growth opportunity, concerns about geopolitical risks remain. The overall demand appears to be stable, but BrightSphere is prepared to adjust its strategies according to market dynamics and client needs.

Capital Allocation Strategy

BrightSphere's capital management strategies continue to focus on share repurchases and seeding organic growth opportunities. The company has maintained cash reserves of $72 million, with plans to retain approximately $20 million for operational needs. Any excess capital beyond that will potentially be used for share buybacks or fostering new growth initiatives, indicating a balanced approach to capital allocation.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2024. [Operator Instructions]

Please note that this call is being recorded today, Thursday, August 1, 2024, at 11:00 a.m. Eastern Time.

I would now like to turn the call over to Melody Huang, Senior Vice President, Director of Finance and Investor Relations. Please go ahead, Melody.

[Melody Huang, executive]

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30, 2024. 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 2023 Form 10-K, and our Form 10-Q for the first 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 the 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, executive]

Thank you, Melody. Good morning, everyone, and thanks for joining us today. I'll cover some of the main highlights on Slide 5 of the deck in my initial remarks, and then I can answer any questions. So for the second quarter of 2024, we reported ENI per share of $0.45 compared to $0.28 in the second quarter of 2023 and $0.44 in the first quarter of 2024.

The 61% increase in ENI per share compared to the year-ago quarter was primarily driven by increase in management fee revenue due to higher AUM from the market appreciation that we saw over the last 12 months. And secondly, it was also driven by our share repurchases over the last few quarters. Our average AUM increased approximately 13% compared to the second quarter of 2023, and management fee revenue increased 14%, in line with the AUM increase.

However, since we were able to keep our operating expenses generally flat year-over-year, our ENI increased 43% because of the 14% increase in revenue. This disproportionate increase in ENI versus revenue increase reflects our continued expense discipline and the embedded operating leverage in our business. We would expect to continue to benefit from this operating leverage as our revenue grows.

Additionally, the increase in ENI per share versus year ago was 61% and compared to the 43% increase in ENI that I just went through. And that difference was driven by our share repurchases over the last year. Between December 2023 and June of 2024, we repurchased 4.7 million of our shares or 11% of our total outstanding shares for $100 million.

Acadian's investment performance remained great. As of June 30, 2024, 86%, 92% and 93% of Acadian's strategies by revenue outperformed their respective benchmarks across 3-, 5- and 10-year periods.

Turning to flows. Net client cash flows were incidentally flat for the second quarter. In the second quarter, we had select large and lumpy inflows, but we also had select large and lumpy outflows, and these lumpy flows basically offset each other.

Our growth initiatives continue to progress. On our systematic credit initiative, Acadian's U.S. High-Yield strategy that was seeded in November 2023, and the Global High-Yield strategy, seeded more recently, in April of 2024, both continue to build good track records. Additionally, we just seeded our third Credit strategy, U.S. Investment Grade strategy in July 2024. And that strategy is also building a track record now. On our Equity Alternatives initiative, our multi-strategy fund, seeded in Q4 of '22, continues to build a strong track record of our performance.

Turning to capital management. As I mentioned earlier, we repurchased 11% of our outstanding shares since December of 2023 for $100 million. Specifically, in Q2 of '24, we repurchased 0.9 million shares or 2% of our total outstanding shares for $21 million. At the end of second quarter, we had a cash balance of $72 million, and Acadian had an outstanding balance of $36 million on their revolving credit facility which, similar to prior years, is expected to be repaid fully from cash from operations by year-end.

I'd like to close my initial remarks by reiterating, as I usually do, that we remain focused on maximizing shareholder value, and we'll continue using our free cash flow to support organic growth and to buy back our shares.

I'll now turn the call back to the operator and I'm happy to answer questions at this point. Thank you.

[Operator]

[Operator Instructions] Our first question for today comes from the line of Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Maybe just starting out with the lumpy flows that you alluded to on both the gross sales and the redemption side. I was hoping you could unpack both of those. Maybe talk about some of the types of strategies, customer channels, et cetera, where you're seeing some of the strains come in. And similarly, on the redemption side, what you're seeing there? And if you could also just touch upon the pipeline as it looks today, how is that shaping up versus, say, last quarter?

[Suren Rana, executive]

Yes. Thanks, Michael. As we've touched on, ours is an institutional business. And so some of the numbers can be large and they are episodic. So they weren't necessarily in pattern to unpack. It was just sort of coincidence, if you will, that we had these large numbers on both sides.

On the inflows, it's really almost just really just 3 large clients that came in. There was a client that was more than a couple of billion, another one for $1 billion, and another one close to $1 billion. So these were really large numbers. And they were in assorted strategies. I wouldn't say there were any patterns to unpack in terms of any particular strategy. It was just that the strategies that these clients came in, that they came in large numbers. And it happened to be that these 3 large inflows happened to be in the same quarter.

On the outflow side, similar story, that we had really a large client close to a couple of billion, another client more than $1 billion, another client with similar number, different strategies, but just happened to be in the same quarter. So it was sort of quite a bit of a coincidence that it just all happened in one quarter. But yes, it all sort of canceled each other out, so that's interesting.

And going forward, if we get that sort of, another part of your question, as we've sort of guided in the past few quarters, we see more of a breakeven to flat cadence, but we do have -- the pipeline has remained healthy across stages. We have a good pipeline across different strategies and across different stages, and we still see some pressures from managed volatility strategy, among others. We see rebalancing going on by clients in these rising equity markets, when they take some chips off the table. There are some clients that are moving to fixed income as a way to manage their -- following the liability-driven investing. So all of those puts and takes, we think about a breakeven kind of cadence for a few quarters here.

[Michael Cyprys, analyst]

Great. And just a follow-up question on capital allocation. Just curious how you're thinking about and planning to sort of approach that as we move in here in the second half and into '25. Cash balance, $72 million, I think you mentioned. How should we think about that potentially drawing down, if at all, just given, I know, in the past, I think you've mentioned, you think about minimum cash level that you need to run the business is meaningfully lower than that. So what can we expect in terms of buybacks here as we move forward?

[Suren Rana, executive]

Yes. Thanks, Mike. Yes, we think about minimum cash levels around $20 million or thereabouts. So you could say that maybe close to $50 million is for other uses. And as we've said, really the 2 main uses remain the buybacks and seeding opportunities to accelerate our organic growth. So we remain mindful and opportunistic on both of those fronts. We see that just in this quarter, as we mentioned in the release, we see that our third credit strategy which was the U.S. Investment-Grade strategy.

So we have a sizable seed pool now. So there might be some recycling that happens within the pool. But still, if we get opportunities to see more and to see opportunities for organic growth, we might do that. And we'll also look at the buybacks as we go. So there isn't any particular formula we have. We'll remain opportunistic on both. We don't feel like we necessarily have to buy back our shares every quarter. Particularly, as I touched on, with that $50 million kind of a number, it's not that much to put to work. So we'll remain opportunistic here.

[Operator]

Our next question is from the line of Kenneth Lee with RBC Capital Markets.

[Kenneth Lee, analyst]

Just 1 on the fee rate. There was, I think, a slight pickup in the quarter. Wondering whether it was just due to mix shift? And if so, were there any particularly higher fee rate products that contributed to the fee rate there?

[Suren Rana, executive]

Ken, yes, I think the answer was in the first part of your guess. Largely, the mix does impact the fee rate a little bit, because some of our strategies are higher fee and some are lower fees. So clearly, one of the factors was that the emerging market indices in second quarter did relatively well. They had been lagging for a while. But in Q2, they did better than some of the other indices, fee and others, and they have higher fee. So that was probably most of it and some other puts and takes.

[Kenneth Lee, analyst]

Got you. And just one follow-up, if I may, just in terms of the share repurchases, capital allocation there. Would you expect to see a renewal of your -- the Board to renew the share repurchase authorization sometime near term?

[Suren Rana, executive]

Yes. Thanks, Ken. Yes, as I said, the uses for the capital remain our seeding organic growth opportunities and buybacks. As I said, the excess capital right now is not that much that, that is burning a hole in our pocket. So there isn't necessarily super urgency on that. But yes, in due course, we would expect to get new authorization for buybacks.

[Operator]

Our next question is from the line of John Dunn with Evercore ISI.

[John Dunn, analyst]

Question on the outlook for further expense control from here and your ability to keep expenses in check.

[Suren Rana, executive]

John, yes, as we talked about over the last couple of years, we had a lot of expense increases in the last couple of years, as we were really investing in our infrastructure. We invested in our trading infrastructure. We added to our investor reporting capabilities. So we were really building out a lot in the sense of making our franchise more scalable. So we have done a fair bit of that over the last couple of years. And at the same time, we also faced pressures from inflation, on the cost of data, and inflation was everywhere. So that's abated.

So it appears that now having built up a lot over the last couple of years and having faced the inflation, we are now in a good position to keep the expenses more or less at these levels, barring, of course, the general increases that you would see sort of cost of living type of increases at 2% to 3% kind of levels. So that's what I touched on that, that we do have the operating leverage. As our revenue grows, either from market growth or organic growth, we should be able to keep the operating expenses relatively at these levels. So we should have disproportionate benefit as revenue increases.

[John Dunn, analyst]

Got it. And maybe could you give us a little color on the conversations you're having with clients about potentially a tick up in demand for emerging market strategies?

[Suren Rana, executive]

Yes. There are sort of a variety of opinions, and depends on also the type of client. As you can imagine, many clients view that as sort of -- because there's always rotation in terms of highest performance markets, and emerging markets have been lagging for such a long time. Many clients view that as an opportunity and whose time may be coming soon, if you will, just the levels of valuations overall in emerging markets in China, in particular. So we're seeing that.

On the other hand, there may be some clients who are a little bit worried about the geopolitical situation and worry about the risks, particularly, and then there are some political factors from state clients. So it's a mixed bag, but I think everything said and done, so far, we haven't seen much of a pattern either in terms of a lot of inflows or a lot of outflows.

We are seeing inflows in that strategy. It's a strategy that we really have excellent, very, very strong top performance. So if somebody does want to allocate, we would have really one of the best changes, and so we're seeing inflows in that strategy. We're also seeing some outflows.

[Operator]

Ladies and gentlemen, that will conclude our question-and-answer session for today. I would like to turn the conference call back over to Suren Rana.

[Suren Rana, executive]

Thank you, operator, and thank you, everyone, for joining us today. Have a good one.