Business context and reporting period
Filing identity: The supplied 10-Q is for BrightSphere Investment Group Inc. (NYSE: BSIG), not Acadian Asset Management Inc. Acadian is identified as a BrightSphere affiliate. The filing covers the quarter and nine months ended September 30, 2020; amounts are in U.S. dollars.
BrightSphere is a global asset manager with Quant & Solutions, Alternatives, and Liquid Alpha segments. Its fee-based revenue depends substantially on assets under management (AUM), markets, client flows, and investment performance.
Financial performance and condition
- Third quarter: Revenue was $182.4 million, down 7.8% from $197.8 million. Operating income was $40.5 million versus $51.9 million; operating margin fell to 22.2% from 26.2%. Net income attributable to controlling interests was $37.2 million versus $75.4 million, and diluted EPS was $0.46 versus $0.84.
- Nine months: Revenue was $539.7 million, down 11.8% from $612.1 million. Operating income was $140.8 million versus $166.5 million; operating margin was 26.1% versus 27.2%. Controlling-interest net income was $88.7 million versus $156.1 million, and diluted EPS was $1.08 versus $1.68.
- Management’s non-GAAP measure: Third-quarter economic net income (ENI) was $37.7 million, compared with $37.4 million; ENI diluted EPS was $0.47 versus $0.42, and ENI operating margin was 36.4% versus 34.7%. Nine-month ENI was $104.9 million versus $117.6 million; ENI diluted EPS was $1.28 versus $1.26. ENI excludes or adjusts for specified items and is not a substitute for GAAP results.
- AUM and flows: Period-end AUM was $184.8 billion, down $32.0 billion (14.8%) from September 30, 2019, but up $3.8 billion from June 30, 2020. Q3 net flows were negative $1.5 billion; nine-month flows were negative $2.2 billion. Nine-month market depreciation was $14.7 billion. Annualized revenue impact of net flows was negative $0.5 million in Q3 and negative $14.1 million for the nine months.
- Cash flow: For the nine months, continuing-operations cash flow excluding consolidated funds was $144.7 million from operating activities, $26.5 million from investing activities, and negative $140.6 million from financing activities. The company reported $129.8 million of cash and cash equivalents on its September 30 balance sheet. Consolidated-fund and held-for-sale cash affect the cash-flow statement totals.
- Debt and liquidity: Third-party borrowings were $474.2 million, including $80.0 million drawn on the revolving facility and senior notes due 2026 and 2031. Total borrowings declined from $568.8 million at December 31, 2019; the $35.0 million non-recourse seed facility was repaid and terminated. The company reported covenant compliance, 2.0x third-party debt to trailing-twelve-month Adjusted EBITDA, and 8.1x interest coverage. Management said available cash, operating cash generation, and financing were expected to cover operations and capital needs for at least 12 months.
- Balance sheet: Total assets were $1.417 billion and total liabilities $1.146 billion at September 30. Other compensation liabilities were $313.5 million, down from $404.9 million at year-end. Goodwill was $182.1 million, including assets reclassified as held for sale.
Material changes versus the prior comparable period
- Lower average AUM, COVID-19-related market declines, outflows, and a $22.8 billion Vanguard sub-advisory reallocation in Q4 2019 contributed to lower management fees: down 9.3% in Q3 and 13.5% for the nine months. Liquid Alpha was particularly weak, with nine-month segment ENI revenue down 27.3%; Alternatives ENI revenue increased 2.0%.
- Expense reductions partly cushioned lower revenue. Nine-month compensation and benefits fell $48.8 million and general and administrative expense fell $17.7 million. However, nine-month GAAP results included a $16.4 million goodwill impairment.
- Q3 2019 included a $32.0 million tax benefit; Q3 2020 recorded $12.8 million of tax expense. This comparison materially affected reported net income. Nine-month tax expense was $33.7 million versus $3.7 million.
- Shares outstanding were lower, reflecting repurchases: the company repurchased about 5.67 million shares for $35.3 million in the first nine months of 2020; no shares were repurchased in Q3.
Outlook, commentary, risks, and unusual items
- BrightSphere completed the Copper Rock sale on July 24, recognizing a $7.2 million pre-tax gain. It agreed to sell Barrow Hanley for $319 million cash, subject to customary adjustments, with closing expected in Q4 2020. At quarter-end, Barrow Hanley assets of $151.0 million and liabilities of $80.4 million were classified as held for sale; the transaction had not yet closed.
- Management cautioned that the duration and business effects of COVID-19, market volatility, and related uncertainty were not predictable. Further market or AUM declines could lead to additional goodwill or intangible-asset impairments.
- Market sensitivity disclosures estimate that a 10% change in AUM, assuming a uniform change across strategies and the stated cost structure, would change annual post-tax ENI by approximately $26.6 million. The company does not hedge corporate-level AUM market exposure. Variable-rate credit-facility borrowings create interest-rate risk.
- Commitments included up to approximately $37 million of unfunded co-investments through 2022 and a $2.5 million office-security-deposit guarantee. The filing reported no material litigation accruals and no material changes to previously disclosed risk factors beyond those referenced.
- Other notable items included a one-time compensation arrangement involving advances against future compensation, restructuring costs, and seed-investment valuation swings. Management stated disclosure controls were effective and no material internal-control changes occurred during the quarter.
Most important facts for investors to verify
- Confirm the issuer: this document is BrightSphere’s 10-Q, not a filing by Acadian Asset Management Inc.
- Track completion and final proceeds or adjustments for the pending Barrow Hanley divestiture, including the planned reduction of revolving-credit commitments to $150 million upon closing.
- Assess whether AUM and net-flow trends improve, especially in Liquid Alpha, and distinguish market movements from client flows and divestitures.
- Review the sustainability of margins and earnings after one-time, non-cash, and ENI adjustments; compare ENI with GAAP results.
- Monitor COVID-19 and market effects on AUM, fee revenue, seed investments, impairment assumptions, and debt-covenant headroom.