Business context and reporting period
BrightSphere Investment Group Inc. (NYSE: BSIG), a global multi-boutique asset manager operating through seven affiliates, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Acadian Asset Management is one of BrightSphere’s affiliates; it is not the registrant. The company completed its redomestication from a U.K. parent to a Delaware corporation on July 12, 2019, after the reporting period.
Financial and operating results
Amounts are in millions except per-share data and AUM.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $207.1 | $233.9 | $414.3 | $483.6 |
| Operating income | $46.6 | $15.3 | $114.6 | $40.9 |
| Net income attributable to controlling interests | $28.0 | $2.1 | $80.7 | $59.4 |
| GAAP diluted EPS | $0.31 | $0.02 | $0.85 | $0.54 |
| Economic net income (ENI, non-GAAP) | $41.0 | $50.5 | $80.2 | $105.4 |
| ENI operating margin | 35.8% | 38.1% | 34.5% | 39.1% |
| Adjusted EBITDA (non-GAAP) | $63.4 | $72.8 | $122.3 | $151.8 |
Q2 management fees fell 9.1% year over year to $205.9; first-half fees fell 12.3% to $413.4. Performance fees were negative $2.2 in Q2 and negative $5.0 for the half, including downward fee adjustments in some sub-advisory accounts. First-half GAAP results include $9.1 of investment income, versus $65.7 a year earlier, when the company recorded a gain on the Heitman sale.
- AUM and flows: Period-end AUM was $225.0 billion, up from $222.3 billion at March 31 but down 4.0% from $234.3 billion a year earlier. First-half market appreciation of $23.4 billion was offset in part by $4.7 billion of net outflows. The annualized revenue impact of first-half net flows was negative $20.3 million.
- Cash flow: First-half operating cash flow was negative $264.6, including consolidated Funds; excluding Funds, operating cash flow was negative $229.5, versus positive $70.6 a year earlier. Management attributed the decline mainly to reduced operating liabilities as the Landmark earnout was settled. Cash and cash equivalents on the balance sheet were $95.9 at June 30, down from $340.6 at year-end; cash flow statement ending cash was $103.3 including restricted cash held by consolidated Funds.
- Debt and liquidity: Borrowings and long-term debt carried at $628.5, compared with $393.3 at year-end. This included $210.0 drawn on the $350 million revolving facility, $25.0 under a non-recourse seed facility, and senior notes. Revolver maturity was October 15, 2019; management said it intended to renew it. The company reported covenant ratios of 2.3x third-party borrowings to trailing Adjusted EBITDA (3.0x maximum) and 10.6x interest coverage (4.0x minimum), and said it was in compliance.
- Capital returns and equity: First-half repurchases totaled approximately $182.6 million for 13.8 million shares; Q2 repurchases were approximately $3.3 million. The company paid $0.20 per share in dividends during the first half.
Material changes, outlook and risks
- Revenue and ENI weakened despite higher GAAP operating income and net income. The GAAP improvement largely reflects lower compensation charges, including lower Landmark-related contingent-consideration and employee-equity charges than in 2018; these items are excluded or adjusted in ENI. First-half 2018 also benefited from the Heitman sale gain, so the GAAP comparison is not a clean measure of recurring performance.
- Management cited lower average AUM, lower weighted-average fee rates, fewer alternative-product catch-up fees, and net client outflows as pressures on fee revenue. First-half average AUM at consolidated affiliates was $217.6 billion versus $239.6 billion a year earlier; the weighted-average fee rate was 38.3 basis points versus 39.7.
- No specific earnings or revenue guidance was provided. Management stated that available cash, operating cash generation and financing, as needed, were expected to fund operations and capital requirements for at least the next 12 months. The filing also reports a post-quarter July 11 amendment and restatement of the revolving credit agreement and the July 12 redomestication.
- Key exposures include market-driven declines in AUM and fee revenue, client withdrawals, investment performance and fee-rate mix, foreign exchange and interest rates. The company did not hedge corporate AUM-related market risks or variable-rate debt interest risk. Management estimated that a 10% AUM change would affect annual post-tax ENI by approximately $30.7 million under its assumptions.
- The company had approximately $62 million of unfunded co-investment commitments through fiscal 2024. It reported no material litigation accruals and assessed a potential foreign-tax exposure as not material, with no accrual recorded. The revolving facility’s near-term maturity and substantial repurchases are also relevant liquidity considerations.
- Adoption of lease accounting in 2019 added a $43.4 million right-of-use asset and $48.6 million lease liability at June 30; it did not affect reported operating results. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the post-quarter credit agreement amendment addressed the October 2019 revolver maturity, and the facility’s updated terms, availability and covenant headroom.
- Whether net outflows and negative annualized revenue impact persist, especially in U.S. equity, sub-advisory and alternative strategies, and how they affect fee rates and AUM.
- How much of the GAAP earnings improvement reflects recurring operations versus lower non-cash and acquisition-related compensation charges; compare with ENI while noting its non-GAAP exclusions.
- The effect of ongoing cash needs—including co-investment commitments, dividends and repurchases—on liquidity, given the first-half operating cash outflow and reduced cash balance.
- Whether performance-fee adjustments, market movements, client flows or other contingencies materially change results after June 30.