Business context and reporting period
BrightSphere Investment Group Inc. (NYSE: BSIG) filed this unaudited Form 10-Q for the three months ended March 31, 2023. The company operates through Acadian Asset Management LLC, its sole reportable segment, Quant & Solutions, serving predominantly institutional clients. The filing is by BrightSphere, not a standalone Acadian Asset Management Inc. filing.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $91.8 million | $112.2 million; down 18.2% |
| Management fees | $90.6 million | $102.2 million; down 11.4% |
| Performance fees | $0.5 million | $10.0 million |
| Operating income / margin | $19.8 million / 21.6% | $43.2 million / 38.5% |
| Net income attributable to controlling interests | $12.0 million | $23.8 million |
| Diluted EPS | $0.28 | $0.53 |
| Economic net income (non-GAAP) | $11.8 million | $23.4 million |
| Adjusted EBITDA (non-GAAP) | $23.6 million | $43.0 million |
| Operating cash flow | $(34.3) million | $(14.4) million |
| Investing cash flow | $(5.6) million | $(4.0) million |
AUM was $97.5 billion at quarter-end, up 4.2% from December 31, 2022 but down 11.5% year over year. Q1 net flows were positive $0.1 billion, compared with negative $2.2 billion a year earlier; market appreciation added $3.8 billion. Average AUM fell 13% year over year to $96.4 billion. The reported annualized revenue impact of Q1 net flows was positive $1.0 million.
At March 31, cash and cash equivalents were $154.1 million, with a further $12.6 million of restricted cash in consolidated funds. Debt comprised $87.0 million drawn on the $125 million revolving facility and $273.6 million of senior notes, or $360.6 million in total carrying value. Stockholders’ equity was negative $8.3 million. The company paid $0.5 million of dividends to stockholders and made no share repurchases during Q1.
Material changes and management commentary
- Revenue and earnings declined substantially, primarily reflecting lower average AUM and sharply lower performance fees. Management attributed lower AUM versus the prior year to equity-market and currency depreciation and net outflows over the preceding 12 months.
- Operating expenses rose $3.0 million to $72.0 million. Compensation and benefits increased $2.3 million and general and administrative expense increased $1.5 million, partly offset by a $1.5 million decrease in depreciation and amortization. Variable compensation declined with lower pre-bonus profits.
- Positive quarterly net flows reflected lower outflows than in Q1 2022; gross inflows were $2.2 billion and gross outflows were $3.0 billion. Institutional and non-U.S. clients had positive net flows, while U.S. clients and sub-advisory flows were negative.
- Operating cash use worsened year over year, in part because of changes in accrued incentive compensation and other operating liabilities. Financing provided $85.5 million excluding consolidated funds, principally reflecting $100 million of revolver borrowings and $13 million of repayments.
- Management said available cash, operating cash generation and financing, if needed, should be sufficient for operations and capital requirements for at least the next 12 months. No numerical earnings or revenue guidance was provided.
Outlook, risks, contingencies, and unusual items
- Results are sensitive to market levels, client flows, investment performance, fee mix and foreign exchange because most management revenue is AUM-based. Management estimated that a 10% AUM change would alter annualized gross management fees by about $37.1 million and post-tax economic net income by about $18.7 million, assuming the stated model conditions.
- The $87.0 million revolver carries variable interest rates and matures March 7, 2025. Credit covenants cap leverage at 2.5x and require interest coverage of at least 4.0x; reported ratios were 0.6x and 74.5x, respectively. The company does not hedge this interest-rate exposure.
- Management reported no material litigation accruals and did not expect existing matters to have a material adverse effect. It estimated a non-material maximum potential foreign-tax exposure and recorded no accrual because a loss was not considered probable. A $2.5 million office-security-deposit guaranty expires in 2033.
- Q1 2022 included a $3.2 million debt-extinguishment loss related to redemption of $125 million of 5.125% notes; there was no comparable loss in Q1 2023. Q1 2023 ENI excludes $0.4 million of costs associated with transferring an insurance policy from the former parent.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Confirm the correct issuer: the filing is BrightSphere Investment Group Inc.; Acadian is its operating affiliate and sole reportable segment.
- Track AUM, fee rates, market performance and client flows, including whether positive net flows persist and how much future revenue depends on performance-fee accounts.
- Assess cash conversion: operating cash flow was negative $34.3 million despite positive net income, and accrued incentive compensation fell substantially during the quarter.
- Monitor revolver utilization, floating-rate costs, covenant headroom and the 2025 facility maturity alongside the 2026 senior notes.
- Interpret ENI and Adjusted EBITDA alongside GAAP results; both are non-GAAP measures and the filing cautions that they have limitations and may not be comparable with similarly titled measures at other companies.