Acadian Asset Management / BrightSphere Investment Group — Q1 2020 10-Q
Filing context: The supplied filing is BrightSphere Investment Group Inc.’s consolidated Form 10-Q, not a standalone Acadian filing. Acadian Asset Management is an affiliate in BrightSphere’s Quant & Solutions segment. Reporting period: three months ended March 31, 2020; comparisons are with Q1 2019 unless noted.
Business context and reporting period
BrightSphere is a global asset manager whose fee revenue is substantially tied to assets under management (AUM), market performance, client flows and fee mix. Its three segments are Quant & Solutions, Alternatives and Liquid Alpha. Acadian’s reported AUM was $79.6 billion at March 31, 2020, down from $102.2 billion at December 31, 2019.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $182.6 million | $207.2 million; down 11.9% |
| Management fees | $178.5 million | $207.5 million; down 14.0% |
| Operating income | $74.1 million | $68.0 million |
| GAAP operating margin | 40.6% | 32.8% |
| Net income attributable to controlling interests | $32.6 million | $52.7 million |
| Diluted EPS | $0.38 | $0.54 |
| Economic net income (ENI, non-GAAP) | $34.3 million | $39.2 million |
| ENI operating margin | 33.1% | 33.3% |
| Adjusted EBITDA (non-GAAP) | $56.2 million | $58.9 million |
GAAP operating income and margin rose despite lower revenue, in part because compensation expense included a larger non-cash credit from revaluing affiliate employee equity interests. ENI, which excludes several such items, declined. ENI and Adjusted EBITDA are management-defined non-GAAP measures and should not be treated as substitutes for GAAP results.
AUM and flows: Period-end AUM was $161.8 billion, down $42.6 billion, or 20.8%, from year-end 2019 and down 27.2% from March 31, 2019. The quarterly reduction chiefly reflected $43.5 billion of market depreciation amid COVID-19 market disruption; net client flows were positive $1.0 billion. Management fees also faced the effect of a $22.8 billion Vanguard strategy reallocation in Q4 2019. Liquid Alpha ENI revenue fell 26.2% year over year; Quant & Solutions fell 4.9% and Alternatives fell 4.8%.
Cash flow and liquidity: Cash used in operating activities, excluding consolidated Funds, was $29.1 million; including Funds, total operating cash use was $33.5 million. The comparable 2019 amounts were $299.5 million and $292.5 million, respectively, with the prior-period outflow largely related to settlement of the Landmark earnout. Investing activities excluding Funds provided $1.1 million; financing activities provided $41.1 million. Balance-sheet cash and cash equivalents were $124.4 million; $131.2 million was reported at period end including restricted cash at consolidated Funds.
Debt: Third-party borrowings were $613.9 million, including $220.0 million drawn on the $450 million revolving facility. Total borrowings were $635.6 million including $21.7 million of non-recourse seed-capital debt. Third-party debt rose from $533.8 million at year-end 2019. The company reported compliance with debt covenants; leverage was 2.5x trailing-twelve-month Adjusted EBITDA and interest coverage was 7.8x, against limits of 3.0x maximum and 4.0x minimum.
Other balance-sheet and capital items: Goodwill was $258.2 million, down from $274.6 million after a $16.4 million impairment of the Copper Rock reporting unit. Other compensation liabilities were $356.4 million, down from $404.9 million at year-end. The company repurchased 3.23 million shares for approximately $19.2 million and paid $0.10 per share in dividends during the quarter.
Material changes, outlook, risks and contingencies
- COVID-19 drove sharp market depreciation, lower AUM and pressure on management-fee revenue. Management said the duration and full operational and financial effects remained uncertain; no specific earnings or AUM guidance was provided.
- Management stated available cash, operating cash generation and financing should be sufficient for operations and capital needs for at least the next twelve months, while noting future financing access depends on profitability, leverage and credit-market conditions.
- Further market declines or adverse AUM developments could lead to additional goodwill or intangible-asset impairments. The filing reported no Q1 impairment of acquired intangibles.
- Unfunded co-investment commitments were approximately $41 million, expected to be funded through investment periods ending as late as 2022. A $2.5 million office-security-deposit guarantee expires in 2022. No material litigation accruals were reported.
- Management identified market, foreign-currency and interest-rate exposure. It estimated a 10% AUM change would alter annual post-tax ENI by approximately $22.5 million under its assumptions; the analysis is a sensitivity, not a forecast. The company did not hedge corporate exposure to market or interest-rate movements.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track subsequent AUM, market performance and client flows, especially at Acadian and Liquid Alpha, and assess whether fee revenue stabilizes.
- Review the drivers and assumptions behind the Copper Rock goodwill impairment and monitor for further impairment charges.
- Check revolving-credit-facility usage, covenant headroom and refinancing conditions, including the seed-capital facility maturing in January 2021.
- Reconcile GAAP earnings with ENI and Adjusted EBITDA, paying particular attention to non-cash compensation revaluations and other exclusions.
- Assess operating cash generation, share repurchases, dividends and the timing of the $41 million co-investment commitments against liquidity needs.