Acadian Asset Management Inc. annual report, FY2019

Business context and reporting period

This is BrightSphere Investment Group Inc.’s (NYSE: BSIG) Form 10-K for the fiscal year ended December 31, 2019, filed March 2, 2020. Although the request metadata names Acadian Asset Management, Acadian is one of BrightSphere’s seven asset-management affiliates, not the registrant. BrightSphere reported through Quant & Solutions, Alternatives, and Liquid Alpha segments following a 2019 segment realignment. The company completed its redomestication from the U.K. to Delaware on July 12, 2019.

Financial performance and liquidity

• Revenue was mainly recurring management fees; those fees fell 10.8% to $807.0 million. Performance fees were $(0.1) million, versus $9.8 million in 2018.
• GAAP net income rose despite lower revenue and ENI, reflecting, among other items, a $65.9 million non-cash reduction in Affiliate key-employee equity revaluations versus a $107.2 million expense in 2018. GAAP results also include investment returns and consolidated-fund effects that ENI excludes or adjusts.
• AUM flows were materially negative: net outflows of $32.7 billion, partly offset by $32.1 billion of market appreciation; realizations and other activity reduced AUM by $1.3 billion. Several Vanguard sub-advisory reallocations accounted for $22.8 billion of outflows and an estimated $34.6 million adverse annualized revenue impact.
• Affiliate AUM was mixed: Acadian rose to $102.2 billion from $86.2 billion, while Barrow Hanley declined to $51.7 billion from $72.0 billion.
• Cash from operating activities, excluding consolidated funds, was a use of $106.6 million, compared with $252.3 million provided in 2018; management attributed the decline primarily to operating-liability reductions as the Landmark earnout was settled. Investing activities provided $17.7 million and financing activities used $140.4 million, excluding consolidated funds.
• Year-end cash and cash equivalents were $111.3 million, versus $340.6 million; working capital was $204.9 million. Total borrowings were $568.8 million: $533.8 million of third-party debt and $35.0 million under a non-recourse seed-capital facility. The company reported compliance with debt covenants; third-party debt/Adjusted EBITDA was 2.1x and interest coverage was 7.7x.

Fourth-quarter snapshot

For Q4 2019, revenue was $207.4 million, operating income $83.8 million, net income attributable to controlling interests $67.8 million, and diluted EPS $0.79. These unaudited quarterly results are not a substitute for full-year figures.

Material changes versus the prior comparable period

• Revenue declined $108.7 million (11.7%) year over year; ENI revenue declined $107.8 million (11.7%) and ENI declined $39.0 million (19.5%). Management cited lower average AUM, significant outflows, lower performance fees, and non-repeating 2018 alternative-fund catch-up fees.
• Operating margin under GAAP increased sharply, but this comparison is affected by non-cash Affiliate-equity revaluations and acquisition-related compensation accounting. ENI margin, which excludes several such items, fell 3.3 percentage points.
• Average AUM excluding equity-accounted affiliates declined 8.0% to $214.1 billion. Liquid Alpha had $36.7 billion of net outflows; Alternatives had $1.2 billion of net inflows and Quant & Solutions had $2.8 billion of net inflows.
• Debt increased by $175.5 million year over year, including utilization of the new $450 million revolving facility and the seed-capital facility. The company also repurchased 19.48 million shares during 2019 for approximately $235.4 million, materially reducing weighted-average shares.

Outlook, commentary, risks, and unusual items

• The filing gives no specific quantified earnings, revenue, margin, AUM, or cash-flow guidance. Management stated that cash and cash equivalents expected from operations, supplemented by financing as needed, should fund operations and capital requirements for at least the next 12 months.
• Management describes growth priorities as organic growth at affiliates, product and geographic expansion, global distribution, seed and co-investment capital, and selective potential acquisitions. It reported that new initiatives, seeding, and global distribution generated over $7 billion of gross sales in 2019.
• Principal risks include reliance on affiliate profitability and investment performance; substantial AUM concentration at Acadian and Barrow Hanley; fee pressure and client outflows; key-person retention; affiliate relationship and governance risks; leverage and liquidity; market, foreign-exchange and interest-rate exposure; cybersecurity and regulatory risk; and potential tax, litigation, and reputational exposures.
• Unusual items include $6.7 million of restructuring costs and $2.5 million of redomestication costs in 2019; the final $32.7 million cash settlement of the deferred tax asset deed with former parent OM plc; and the absence in 2019 of the $65.7 million Heitman-sale gain recorded in 2018. The effective GAAP tax rate was 7.1%, affected by tax-position adjustments and other items; ENI’s effective tax rate was 23.7%.
• No material litigation accruals were reported. The company identified a foreign-tax contingency but said estimated maximum exposure was not material and recorded no accrual. KPMG issued unqualified opinions on the financial statements and internal control; the audit highlighted valuation of the $221.8 million cash-settled Affiliate-awards liability as a critical audit matter.

Important facts for investors to verify

• Whether the Vanguard-related sub-advisory outflows are largely one-time reallocations or signal ongoing client-retention or product-demand challenges.
• How AUM flows, market performance, and fee mix affect recurring management-fee revenue, especially at Acadian and Barrow Hanley.
• Why GAAP earnings rose while ENI and ENI margin declined; review the non-GAAP reconciliation and the large year-over-year swing in non-cash Affiliate equity revaluations.
• Cash conversion and liquidity following negative operating cash flow, share repurchases, the Landmark earnout settlement, and increased borrowings; verify facility availability, maturities, and covenant headroom.
• The valuation assumptions and cash-funding implications for Affiliate compensation liabilities, and any developments in tax examinations or other contingencies.