BrightSphere Reports Financial and Operating Results for the Fourth Quarter and Year Ended December 31, 2018

  • U.S. GAAP earnings per share of $0.22 for the quarter, compared to
    $(0.45) for the 2017 period, and $1.26 for the year compared to $0.04
    for full-year 2017
  • ENI earnings per share of $0.43 for the quarter, down
    (2.3)% compared to the 2017 period, and $1.86 for the year, up 14.8%
    compared to the 2017 period
  • AUM of $206.3 billion at December 31, 2018, down (15.1)% from
    December 31, 2017
  • Net client cash flows (“NCCF”) for the quarter of $(5.7) billion
    with an annualized revenue impact of $(12.3) million; full year NCCF
    of $(10.5) billion with an annualized revenue impact of $(3.8) million

LONDON–(BUSINESS WIRE)–BrightSphere Investment Group plc (NYSE: BSIG) today reports its results
for the quarter and full year ended December 31, 2018.

“BrightSphere produced solid financial and operating results for 2018,
notwithstanding a challenging equity market environment at year-end, as
our ENI per share of $0.43 for the fourth quarter and $1.86 for the year
reflect a slight decrease of (2)% and an increase of 15% compared to the
same periods of 2017,” said Guang Yang, BrightSphere’s President and
Chief Executive Officer. “Volatility and dislocation in the equity
markets challenged active equity investors across nearly every style,
asset class and geography during the fourth quarter, resulting in a
decrease in our near-term investment performance quarter-over-quarter.
However, the strength and consistency of our Affiliates’ proprietary
investment capabilities continued to produce strong long-term track
records of outperformance. As of December 31, assets representing 31%,
68% and 75% of revenue outperformed their benchmarks on a one-, three-
and five-year basis, respectively. Net client cash flows of $(5.7)
billion resulted in a negative annualized revenue impact of $(12.3)
million, as outflows across a range of strategies, including lower-fee
subadvisory products, exceeded higher-fee gross inflows in managed
volatility, domestic mid-cap equity and other strategies.”

Mr. Yang continued, “With an outstanding group of high quality
Affiliates offering a diverse range of strong performing strategies and
proven expertise in working with them to enhance and expand their
product offerings and distribution capabilities, BrightSphere is well
positioned to accelerate the organic growth potential of our business.
We plan to work closely with Affiliates to further strengthen and expand
our global presence, particularly in the Asia-Pacific region, a growing
and underserved market where scale offers measurable advantages.”

“As we look to this next phase of growth, we took a number of steps to
streamline our business, with a focus on creating a more nimble,
flexible organization. Our Center total compensation for 2018 was $20
million lower than 2017 as we linked Center variable compensation more
closely to results and streamlined management positions in 2018.
Additionally, headcount reduction of approximately 20% at the Center in
Q1 2019 along with other cost measures we have taken will further lower
total 2019 Center expenses by approximately $8-10 million. These steps
are part of an overall, ongoing examination of areas where we and
Affiliates can gain greater efficiency in our non-investment functions.
In addition, given the recent valuation of our shares, we also
maintained the stock buy-back program initiated earlier in 2018, and
have repurchased 5.1 million shares from October 1 through February 6,
2019. We will continue to manage our capital to maximize value for
shareholders through prudent share repurchases and continued investment
in global expansion opportunities.” Mr. Yang concluded, “Finally, I am
very pleased to welcome Suren Rana to BrightSphere. Suren will fill the
open role of Chief Financial Officer, and brings many years of
experience in corporate finance and asset management, as well as an
understanding of BrightSphere’s business from his previous service on
our Board.”

   

Table 1: Key Performance Metrics (unaudited)

($ in millions, unless otherwise noted) Three Months Ended December 31,     Twelve Months Ended December 31,

U.S. GAAP Basis

2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Revenue $ 214.5 $ 249.2 (13.9 )% $ 928.2 $ 887.4 4.6 %
Pre-tax income from continuing operations attributable to
controlling interests
39.1 82.5 (52.6 )% 141.3 137.1 3.1 %
Net income (loss) attributable to controlling interests 23.0 (48.8 ) n/m 136.4 4.2 n/m
Diluted earnings per share, $ $ 0.22 $ (0.45 ) n/m $ 1.26 $ 0.04 n/m
U.S. GAAP operating margin 14 % 11 % 325 bps 9 % 8 % 103 bps
 
Economic Net Income Basis (Non-GAAP measure
used by management)
(1)
ENI revenue $ 212.0 $ 252.3 (16.0 )% $ 919.1 $ 900.7 2.0 %
Pre-tax economic net income 61.1 71.7 (14.8 )% 262.5 251.3 4.5 %
Economic net income 45.6 48.7 (6.4 )% 199.8 180.9 10.4 %
ENI diluted earnings per share, $ $ 0.43 $ 0.44 (2.3 )% $ 1.86 $ 1.62 14.8 %
Adjusted EBITDA 67.8 79.4 (14.6 )% 290.6 281.9 3.1 %
ENI operating margin 37 % 39 % (220) bps 38 % 38 % 27 bps
 
Other Operational Information(2)
Assets under management at period end ($ in billions) $ 206.3 $ 243.0 (15.1 )% $ 206.3 $ 243.0 (15.1 )%
Net client cash flows ($ in billions) (5.7 ) (3.7 ) n/m (10.5 ) (6.0 ) n/m
Annualized revenue impact of net flows ($ in millions) (12.3 ) 6.8 n/m (3.8 ) 32.9 n/m

(1) Please see Table 7 for a reconciliation of U.S. GAAP net income
attributable to controlling interests to economic net income.

(2)
Operational information (including AUM and flow data) excludes Heitman
for the third and fourth quarters of 2017 (Heitman remains in
operational information for the first half of 2017). Actual U.S. GAAP
and ENI financial results continue to include Heitman through November
30, 2017.

Please see “Definitions and Additional Notes.”

Assets Under Management and Flows

At December 31, 2018, BrightSphere’s total assets under management
(“AUM”) were $206.3 billion, down $(31.4) billion, or (13.2)%, compared
to $237.7 billion at September 30, 2018, and down $(36.7) billion, or
(15.1)%, compared to $243.0 billion at December 31, 2017. The decrease
in AUM during the three months ended December 31, 2018 reflects net
market depreciation of $(25.6) billion combined with net outflows of
$(5.7) billion. The net flows in the three months ended December 31,
2018 were impacted primarily by outflows in lower-fee subadvisory
products. For the three months ended December 31, 2018, the annualized
revenue impact of the net flows was $(12.3) million, with gross inflows
of $4.3 billion during the period into higher fee asset classes yielding
approximately 46 bps, versus gross outflows and hard asset disposals in
the same period of $(10.0) billion out of asset classes yielding
approximately 32 bps.

For the twelve months ended December 31, 2018, BrightSphere’s AUM
reflected net market depreciation of $(24.6) billion and net outflows of
$(10.5) billion. The net flows in the twelve months ended December 31,
2018 were impacted primarily by outflows attributable to subadvisory
products and lumpy institutional re-balancing, along with hard asset
disposals. For the twelve months ended December 31, 2018, the annualized
revenue impact of the net flows was $(3.8) million with gross inflows of
$27.6 billion during the period that yielded an average of approximately
48 bps, versus gross outflows and hard asset disposals in the same
period of $(38.1) billion that yielded approximately 36 bps.

   

Table 2: Assets Under Management Rollforward Summary

($ in billions, unless otherwise noted)

 

    Three Months Ended, Twelve Months Ended,

December 31,
2018

 

September 30,
2018

 

December 31,
2017

December 31,
2018

December 31,
2017

Beginning AUM $ 237.7 $ 234.3 $ 235.9 $ 243.0 $ 240.4
Acquisition (removal) of Affiliates(1) (32.4 )
Gross inflows 4.3 6.9 7.4 27.6 31.0
Gross outflows (9.9 ) (7.9 ) (11.0 ) (36.2 ) (36.2 )
Net flows before hard asset disposals (5.6 ) (1.0 ) (3.6 ) (8.6 ) (5.2 )
Hard asset disposals (0.1 ) (1.6 ) (0.1 ) (1.9 ) (0.8 )
Net flows (5.7 ) (2.6 ) (3.7 ) (10.5 ) (6.0 )
Market appreciation (depreciation) (25.6 ) 6.0 10.8 (24.6 ) 41.0
Other(2) (0.1 )     (1.6 )  
Ending AUM $ 206.3   $ 237.7   $ 243.0   $ 206.3   $ 243.0  
 
Basis points: inflows 45.9 52.5 56.8 47.8 51.3
Basis points: outflows 32.0 33.2 31.7 35.6 34.1
Difference between inflows and outflows 13.9 19.3 25.1 12.2 17.2
Annualized revenue impact of net flows ($ in millions) $ (12.3 ) $ 4.7 $ 6.8 $ (3.8 ) $ 32.9
Derived average weighted NCCF ($ in billions) (3.3 ) 1.2 1.7 (1.4 ) 8.5

(1) The Company has removed Heitman from its AUM and cash flow
metrics as of the beginning of the third quarter, 2017.

(2)
“Other” in 2018 primarily relates to the decline in billable AUM as a
legacy alternative fund transitioned from billing based on committed AUM
to net asset value.

Please see “Definitions and Additional
Notes”

Balance Sheet and Capital Management

Condensed Consolidated Balance Sheets as of December 31, 2018 and
December 31, 2017 are provided in Table 3 below. As of December 31,
2018, the Company had $393.3 million of long-term bonds ($400.0 million
face value, net of discount and fees), $0.0 million outstanding on its
$350 million credit facility and $0.0 million drawn on a non-recourse
seed capital financing facility. Shareholders’ equity (attributable to
controlling interests) amounted to $103.3 million. As of December 31,
2018, the Company’s ratio of debt(3) to trailing twelve
months Adjusted EBITDA was 2.1x. The Company expects to settle an
acquisition agreement in the first quarter of 2019 utilizing a mix of
cash on hand and external revolver capacity. At the completion of this
settlement, the Company’s ratio of debt(3) to trailing twelve
months Adjusted EBITDA ratio is expected to be at the lower end of the
Company’s target range of 1.75-2.25x. Of the Company’s cash and cash
equivalents of $340.6 million at December 31, 2018, $133.7 million was
held at Affiliates and $206.9 million was available at the Center.

As of December 31, 2018, the Company has total seed and co-investment
holdings of $156.6 million. During the twelve months ended December 31,
2018, the Company has made investments of approximately $93.1 million to
support Affiliate strategies and product capabilities. Amounts
previously drawn on the non-recourse seed capital financing facility
have been repaid, leaving $65.0 million available to be drawn down as of
December 31, 2018.

In 2018, the Company purchased a total of 5,549,861 shares at a weighted
average price of $13.35 per share, or approximately $74 million in
total. As of February 6, 2019, the Company has purchased an additional
3.9 million shares in 2019 at a weighted average price of $11.85 per
share.

     

Table 3: Condensed Consolidated Balance Sheets

($ in millions) December 31, 2018 December 31, 2017
Assets
Cash and cash equivalents $ 340.6 $ 186.3
Investment advisory fees receivable 159.1 208.3
Investments(1) 198.5 244.4
Other assets 710.9 698.8
Assets of consolidated Funds(2) 144.6   153.9  
Total assets $ 1,553.7   $ 1,491.7  
 
Liabilities and equity
Accounts payable and accrued expenses $ 225.3 $ 241.0
Due to OM plc 33.0 59.1
Non-recourse borrowings 33.5
Third party borrowings 393.3 392.8
Other liabilities 711.1 583.5
Liabilities of consolidated Funds(2) 14.9   10.5  
Total liabilities $ 1,377.6 $ 1,320.4
 
Shareholders’ equity 103.3 75.4
Non-controlling interests, including NCI of consolidated Funds(2) 72.8   95.9  
Total equity 176.1   171.3  
Total liabilities and equity $ 1,553.7   $ 1,491.7  
 
Debt / trailing twelve months Adjusted EBITDA(3) 2.1 x 1.4 x

(1) Includes investment in Heitman of $53.8 million at December 31,
2017.

(2) Consolidated Funds represent certain seed
investments and co-investments.

(3) Calculated per terms of
the Company’s external revolver and includes amounts owed under
previously agreed acquisition agreement and excludes non-recourse
borrowings.

Please see “Definitions and Additional Notes”

Investment Performance

Table 4 below presents a summary of the Company’s investment performance
as of December 31, 2018, September 30, 2018, and December 31, 2017.
Performance is shown on a revenue-weighted basis, an equal-weighted
basis and an asset-weighted basis. Please see “Definitions and
Additional Notes” for further information on the calculation of
performance.

 

Table 4: Investment Performance

(% outperformance vs. benchmark)     Revenue-Weighted
December 31, 2018   September 30, 2018   December 31, 2017
1-Year 31% 53% 65%
3-Year 68% 64% 72%
5-Year 75% 80% 83%
 
Equal-Weighted
December 31, 2018 September 30, 2018 December 31, 2017
1-Year 38% 57% 59%
3-Year 61% 58% 69%
5-Year 65% 74% 82%
 
Asset-Weighted
December 31, 2018 September 30, 2018 December 31, 2017
1-Year 34% 61% 61%
3-Year 65% 57% 71%
5-Year 70% 74% 74%

Investment performance is calculated gross of fees.
Please
see “Definitions and Additional Notes”

As of December 31, 2018, assets representing 31%, 68% and 75% of revenue
were outperforming benchmarks on a 1-, 3- and 5- year basis,
respectively, compared to 53%, 64% and 80% at September 30, 2018; and
65%, 72% and 83% at December 31, 2017. The 1-year revenue-weighted
number decreased to 31% due to declines experienced broadly across
several strategies in both U.S. and international equities. The 3-year
performance improved to 68%, particularly reflecting improved returns
from two global managed volatility strategies and a mid-cap value
strategy. The 5-year performance dropped to 75% with certain U.S. equity
value strategies underperforming in the fourth quarter.

Financial Results: U.S. GAAP

Table 5 below presents the Company’s U.S. GAAP Statement of Operations.
For the three months ended December 31, 2018 and 2017, diluted earnings
(loss) per share were $0.22 and $(0.45), respectively and net income
(loss) attributable to controlling interests was $23.0 million and
$(48.8) million, respectively, an increase of $71.8 million. Earnings
per share calculations are impacted by the shares repurchased in 2017
and 2018 which contributed to a year-over-year decrease in average
diluted shares outstanding of (3.2) million, or (2.9)% between the
three-month periods and (3.8) million, or (3.4)%, between the
twelve-month periods. U.S. GAAP revenue decreased $(34.7) million, or
(13.9)%, from $249.2 million for the three months ended December 31,
2017, to $214.5 million for the three months ended December 31, 2018, as
a result of lower levels of average assets under management, excluding
equity-accounted Affiliates, and lower net catch-up fees related to
certain alternative products, combined with lower net performance fees
in the three months ended December 31, 2018. Operating expenses
decreased $(38.0) million, or (17.0)%, from $222.9 million for the three
months ended December 31, 2017, to $184.9 million for the three months
ended December 31, 2018, primarily due to decreases in compensation and
benefits expense, driven by lower variable compensation and lower
Affiliate equity revaluations, offset by increases in general and
administrative expense. The Company recorded revaluations of its DTA
deed with OM plc of $20.0 million in the three months ended December 31,
2018 which primarily reflects the agreement to terminate the DTA deed at
a discount; and $51.8 million for the three months ended December 31,
2017, which reflected reductions in the deed payable as a result of the
U.S. tax law change. Income tax expense decreased from $131.3 million
for the three months ended December 31, 2017, to $16.1 million for the
three months ended December 31, 2018, reflecting lower earnings in 2018,
a lower U.S. corporate tax rate in 2018 and the significant deferred tax
expense in 2017 as a result of the U.S. tax law change.

For the twelve months ended December 31, 2018 and 2017, diluted earnings
per share were $1.26 and $0.04, respectively, an increase of $1.22, and
net income attributable to controlling interests was $136.4 million and
$4.2 million, respectively, an increase of $132.2 million. U.S. GAAP
revenue increased $40.8 million, or 4.6%, from $887.4 million for the
twelve months ended December 31, 2017, to $928.2 million for the twelve
months ended December 31, 2018, primarily as a result of increases in
management fees due to weighted-average increases in our AUM driven by
market appreciation in the first three quarters of 2018 and shifts into
higher fee rate products. Operating expenses increased $28.0 million, or
3.4%, from $816.4 million for the twelve months ended December 31, 2017,
to $844.4 million for the twelve months ended December 31, 2018,
primarily as a result of higher compensation and benefits (see Table 6)
and increases in general and administrative expense. The increase in
compensation and benefits is predominantly due to growth of investment
teams combined with increases in the revaluation of Affiliate equity and
profit interests offset by lower variable compensation due to a lower
Center cost structure. Compensation expense also reflects the
amortization of contingent consideration and the portion of equity not
acquired by the Company at Landmark. Under U.S. GAAP, the fair value of
both the contingent consideration and the portion of equity not acquired
by the Company is recorded as compensation expense over the applicable
term because service requirements exist for holders of these units.
These units are also revalued each quarter, with any change recorded in
that period as an adjustment to compensation expense. Total compensation
expense related to the Landmark transaction was $203.8 million for the
twelve months ended December 31, 2018 and $120.8 million for the twelve
months ended December 31, 2017. The $39.1 million increase in investment
income for the twelve months ended December 31, 2018 compared to the
twelve months ended December 31, 2017 primarily reflects the Company’s
gain recognized upon the sale of its investment in Heitman. Income tax
expense decreased from $132.8 million for the twelve months ended
December 31, 2017, to $5.0 million for the twelve months ended
December 31, 2018 due to the impact of U.S. tax law changes recorded in
2017, the lower U.S. corporate tax rate in 2018 and the adjustment to
liabilities for uncertain tax positions in 2018. These decreases were
partially offset by a reduction to interest expense in the fourth
quarter of 2017 due to U.K. tax law changes.

               

Table 5: U.S. GAAP Statement of Operations

($ in millions) Three Months Ended December 31, Twelve Months Ended December 31,
2018 2017

Increase
(decrease)

2018 2017

Increase
(decrease)

Management fees $ 204.0 $ 233.9 (12.8 )% $ 905.0 $ 858.0 5.5 %
Performance fees 6.9 14.4 (52.1 )% 9.8 26.5 (63.0 )%
Other revenue 2.4 0.6 300.0 % 9.6 1.2 n/m
Consolidated Funds’ revenue 1.2   0.3   300.0 % 3.8   1.7   123.5 %
Total revenue 214.5   249.2   (13.9 )% 928.2   887.4   4.6 %
Compensation and benefits (see Table 6) 143.6 184.4 (22.1 )% 696.4 682.8 2.0 %
General and administrative 35.7 32.0 11.6 % 126.0 112.9 11.6 %
Amortization of acquired intangibles 1.7 1.7 % 6.6 6.6 %
Depreciation and amortization 3.9 3.2 21.9 % 14.5 11.7 23.9 %
Consolidated Funds’ expense   1.6   n/m 0.9   2.4   (62.5 )%
Total operating expenses 184.9   222.9   (17.0 )% 844.4   816.4   3.4 %
Operating income 29.6 26.3 12.5 % 83.8 71.0 18.0 %
Investment income (3.1 ) 6.9 n/m 66.5 27.4 142.7 %
Interest income 1.2 0.3 300.0 % 3.2 0.8 300.0 %
Interest expense (6.2 ) (6.3 ) (1.6 )% (24.9 ) (24.5 ) 1.6 %
Revaluation of DTA deed 20.0 51.8 (61.4 )% 20.0 51.8 (61.4 )%
Net consolidated Funds’ investment gains (losses) (6.6 ) 5.6   n/m (13.4 ) 15.5   n/m
Income from continuing operations before taxes 34.9 84.6 (58.7 )% 135.2 142.0 (4.8 )%
Income tax expense 16.1   131.3   (87.7 )% 5.0   132.8   (96.2 )%
Income (loss) from continuing operations 18.8 (46.7 ) n/m 130.2 9.2 n/m
Gain (loss) on disposal of discontinued operations, net of tax     n/m 0.1   (0.1 ) n/m
Net income (loss) 18.8 (46.7 ) n/m 130.3 9.1 n/m
Net income (loss) attributable to non-controlling interests (4.2 ) 2.1   n/m (6.1 ) 4.9   n/m
Net income (loss) attributable to controlling interests $ 23.0   $ (48.8 ) n/m $ 136.4   $ 4.2   n/m
Earnings per share, basic $ $ 0.22 $ (0.45 ) n/m $ 1.27 $ 0.04 n/m
Earnings per share, diluted $ 0.22 (0.45 ) n/m 1.26 0.04 n/m
Basic shares outstanding (in millions) 105.6 109.0 107.4 110.7
Diluted shares outstanding (in millions) 105.8 109.0 107.6 111.4
 
U.S. GAAP operating margin 14 % 11 % 325 bps 9 % 8 % 103 bps
Pre-tax income from continuing operations attributable to
controlling interests
39.1 82.5 (52.6 )% 141.3 137.1 3.1 %
Net income (loss) from continuing operations attributable to
controlling interests
23.0 (48.8 ) n/m 136.3 4.3 n/m

Please see “Definitions and Additional Notes”

 

Table 6: Components of U.S. GAAP Compensation and Benefits
Expense

($ in millions)     Three Months Ended December 31,     Twelve Months Ended December 31,
2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Fixed compensation and benefits(1) $ 45.9 $ 45.8 0.2 % $ 188.7 $ 172.9 9.1 %
Sales-based compensation 4.1 5.1 (19.6 )% 17.4 18.6 (6.5 )%
Variable compensation(2) 53.5 69.6 (23.1 )% 235.9 252.2 (6.5 )%
Affiliate key employee distributions 13.7 21.8 (37.2 )% 76.6 73.1 4.8 %
Non-cash key employee-owned equity revaluations 8.7 24.4 (64.3 )% 107.2 95.4 12.4 %
Acquisition-related consideration and pre-acquisition employee equity(3) 17.7   17.7   % 70.6   70.6   %
Total U.S. GAAP compensation and benefits expense $ 143.6   $ 184.4   (22.1 )% $ 696.4   $ 682.8   2.0 %

(1) For the three and twelve months, respectively, ended December 31,
2018, $44.7 million and $181.4 million of fixed compensation and
benefits (of the $45.9 million and $188.7 million above) is included
within economic net income, which excludes compensation and benefits
associated with the 2018 CEO transition and fixed compensation paid by
our Affiliates on behalf of their customers that is subsequently
reimbursed. For the twelve months ended December 31, 2017, $172.4
million of fixed compensation and benefits (of the $172.9 million above)
is included within economic net income, which excludes the compensation
and benefits associated with the 2017 CEO transition costs.

(2)
For the three and twelve months, respectively, ended December 31, 2018,
$48.3 million and $230.7 million of variable compensation (of the $53.5
million and $235.9 million above) is included within economic net
income, which excludes variable compensation associated with the 2018
CEO transition and variable compensation paid by our Affiliates on
behalf of their customers that is subsequently reimbursed. For the
twelve months ended December 31, 2017, $243.4 million of variable
compensation expense (of the $252.2 million above) is included within
economic net income, which excludes the variable compensation associated
with the 2017 CEO transition costs.

(3) Reflects
amortization of contingent consideration and equity owned by employees,
both with a service requirement, associated with the Landmark
acquisition; revaluation of the Landmark interests is included in
“Non-cash key employee-owned equity revaluations” above.

Please
see “Definitions and Additional Notes”

Financial Results: Non-GAAP Economic Net Income

For the three months ended December 31, 2018 and 2017, diluted economic
net income per share was $0.43 and $0.44, respectively, a decrease of
(2.3)%. For the three months ended December 31, 2018 and 2017, economic
net income was $45.6 million and $48.7 million, respectively, a decrease
of $(3.1) million, or (6.4)%.

For the three months ended December 31, 2018, compared to the three
months ended December 31, 2017, ENI Revenue (see Table 8) decreased
$(40.3) million, or (16.0)%, from $252.3 million to $212.

Contacts

Brett Perryman
ir@bsig.com
(617)
369-7300

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