Acadian Asset Management (AAMI) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2018. During the call, all participant lines will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded, today, August 2 at 10 a.m. Eastern Time. I would now like to turn the meeting over to Brett Perryman, Head of Investor Relations. Please go ahead, Brett.

Thank you, good morning and welcome to BrightSphere conference call to discuss our results for the second quarter and first half of 2018. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intend, believes, estimate, project and other similar expressions. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in BrightSphere’s filings made with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed with the SEC on February 28, 2018, under the heading “Risk Factors”. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements. During this call, we will discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release, which is available in the Investor Relations section of our website, where you will also find the slides that we will use as part of our discussion this morning. Today’s call will be led by Steve Belgrad, our President and Chief Executive Officer; Aidan Riordan, Head of Affiliate Management; and Dan Mahoney, our Head of Finance. I will now turn the call over to Steve.

Thank you, good morning and welcome to BrightSphere conference call to discuss our results for the first quarter of 2018. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intend, believes, estimate, project and other similar expressions. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in BrightSphere’s filings made with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed with the SEC on February 28, 2018, under the heading Risk Factors. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements. During this call, we will discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release, which is available in the Investor Relations section of our website, where you will also find the slides that we will use as part of our discussion this morning. Today’s call will be led by Steve Belgrad, President and Chief Executive Officer; Aidan Riordan, Head of Affiliate Management; and Dan Mahoney, our Head of Finance. I will now turn the call over to Steve.

Thanks, Brett. This morning, we’d like to give you additional context and perspective around that result, both the positive and the challenging elements. While this has been a difficult quarter for the industry and for BSIG with a number of metrics not where we want them to be and I actually feel no different about our business this quarter when we have significant outflows as last quarter when we had record inflows. I’m actually quite bullish about our prospects. By the end of this call, I hope you have a better understanding of the following five points, which underscore our optimism on the business. First, the profit share model aligns interest through the market cycle and provides financial cushion in choppy markets. Second, the net outflows you’re seeing are part of the normal cyclical evolution of our product mix, driven by performance challenges in certain products as well as reduced sales in growing asset classes in advance of new products coming online. Third, we continue to invest for the future and have seeds of growth firmly planted in various stages of development at all of our affiliates. Within our affiliates are market-leading growth engines. Fourth, long-term investment performance remains strong and the decline in short-term results is a macro driven anomaly. And fifth, we remain focused on capital management and providing a catalyst for sustainable stock price performance. We continue to balance allocation of capital to opportunistic stock buybacks with the pursuit of diversifying investments that will broaden our product set and drive future growth. I hope these points become clear in the following slides and in Aidan's and Dan's commentary. Turning now to a summary of our actual results on slide three. ENI per share was up 11.9% to $0.47 per share compared to Q2, '17 and produced a stable operating margin of about 38%. Of note, we’ve reduced center expenses including global distribution by about 20% year-over-year. Net Client cash flows of negative $4.1 billion for the quarter were certainly a disappointment, but in no way do I believe this represents any kind of new normal. Sales in an institutional business like ours can be lumpy. These results reflect the confluence of both fundings at their lowest level since Q2, '16 at $6.1 billion after an unusually strong first quarter, which saw $10.3 billion of gross sales, and redemptions at an elevated level of $10.2 billion compared to $8.4 billion last quarter. The biggest driver of this sales decline was in the alternatives area, which reflected the final close of Landmark’s real estate fund last quarter and the law before additional anticipated AUM growth in the second half of the year. We are confident that the decrease in overall sales is cyclical and we have a number product and initiative seeds planted and nearing fruition, particularly at Acadian, which will drive significant future growth, although as you know it’s always difficult to predict exactly when flows will come through. On the redemption side, we are seeing the impact of ongoing redemptions within U.S. sub advisory, a result we believe is secular in nature as well as performance driven outflows, which impacted both U.S. and non- U.S. small cap products. In particular, non-U.S. small cap is a higher fee product area, which we continue to monitor closely. The performance challenges driving these outflows been persistent over several quarters and are not related to the dip in one year performance you saw this quarter. In terms of leading indicators, our global distribution and affiliate one not funded pipelines remains strong and we are seeing an increase in global non-U.S. equity wins. But we also have known outflows and until our pockets of weak performance improve, or new products hit the net impact is hard to predict. With respect to investment performance, our longer term three and five year performance numbers remained very strong at 71% and 81% of revenue bidding benchmark respectively. However, our one-year results declined by 19% to 43% of revenue from 62% of revenue at March 31. While our goal is obviously to have all time periods at greater than 60% of revenue bidding benchmark, this reduction in the one-year period is not reflected of systemic underperformance. Rather, it’s the result of one emerging markets product, which accounted for 16% of our benchmark revenue having a bad June. As Aidan will discuss in more detail, the cause of this split is clearly understood, is not related to any structural process issues and is a clear aberration in the long-term stellar quantitative performance record. At the same time, on the positive side, the quarter saw continued improvement in Barrow’s large-cap value composite, which has generated almost 250 basis points of outperformance year-to-date through June 30, and is beating its Russell 1000 Value benchmark on a 1, 3 and 5 year basis. With respect to capital management, we’ve bought back 50 million of our stock in 2018 through July 31 with 3.4 million shares. We believe our shares have excellent value at current levels, particularly today, and will continue to balance opportunistic purchases with the financial flexibility to grow through acquisitions. I'll cover this more on the next slide. Finally, I'm excited to welcome Reggie Love to the board of BSIG as of August 1. Reggie brings a unique and valuable perspective to our board, with experience in both private equity investing in government. Having spent time with them during our search process, as well as over the last two weeks, I'm confident he will bring helpful insights to our board deliberations and assist us in expanding the reach and profile of our business. Turning to slide four, the growth pyramid. I know we keep this slide in every quarter, but I never want to lose focus on why we’re here, to grow the business and create shareholder value. Sophisticated institutional investors are constantly broadening their search for sustainable alpha generation, and as client demand continues to evolve across investment styles, asset classes and geographies we must be proactive in extending our product set to meet their needs and our growth objectives. With this in mind, I think there are two key points to be made this quarter, the first, with respect our acquisition pipeline and the second in regards to our internal product pipeline. In a way, these are two sides of the same coin, with the goal of expanding our product reach in the market segments with secular growth trends. In some cases this can be done by leveraging existing affiliate capabilities and in other situations these capabilities need to be grown through M&A. We talked about turning flows positive; this is how we’re going to do it. At each affiliate we have developed growth plans, our seeding products and have key initiatives in place. This year, we expect to increase our seeding pool by about $85 million to approximately $180 million. We grew the seed pool by about 40 million net in the first half. A significant portion of the current seed allocation is in the Acadian and Barrow Hanley. In addition, we are providing two investment capitals Landmark where there are a number of additional opportunities for us to support existing and new product lines. As noted in a recent Fundfire article, we also have a significant technology initiative in place at Acadian to expand their product development, flexibility and capacity, whether it’s leading-edge quantitative investing or artificial intelligence many of the future trends, we read about in asset management are embodied in Acadian, our largest affiliate and a key driver of our future growth. With respect to acquisitions, we continue to advance discussions with a variety of potential partners and I remain optimistic that we can execute on a transaction by year-end. We have the financial capacity to prudently invest $400 million or more funded with cash or borrowing in the right transaction or transactions. Our focus is on diversifying our mix of affiliates further into alternatives, in particular real estate alternative credit or fixed income statements, which have good secular flow trends. We’re making steady progress, but we will remain disciplined on pricing and need to take the time to structure transactions which offer the appropriate risk return trade-offs. There a lot of high prices being paid in the market right now, but we believe, we offer a unique and differentiated model, which allows our partners to optimize the value of their retained equity over time. Slide five gives a quick overview of our AUM trends, as well as assets broken out by affiliate and asset class. During the second quarter of 2018, AUM declined by 2.4% to $234.3 billion, driven mostly by the 4.1 billion of outflows we discussed, as well as by 1.7 billion or a 0.7% market decline. [Buried] within this aggregate market decline, however, is a disproportionate decline in our higher fee asset classes such as emerging markets and even benchmarks which decline more than U.S. value equity benchmarks in the quarter. This had the effect of dampening our weighted average fee rate excluding catch-up fees, which decline slightly from 38 basis points in Q1 to 37.9 basis points in Q2, '18. Now, I like to turn things over to Aidan, who can provide further insight into investment performance, and flow trends.

Thanks, Steve and good morning everyone. Turning to slide six, where we provide details on our investment performance. As Steve mentioned, you can see that our medium and long-term performance remains quite strong, with 73% and 81% of our strategies outperforming benchmarks on a revenue weighted basis over the three and five year time frames. Our one year performance decreased this quarter at 43% and was a result of some recent macro driven volatility and style headwinds, as opposed to any systematic trends in the business. Our short-term revenue weighted performance results were impacted by the confluence of highly specific factors within one of our emerging markets, composites, namely, volatility in particular geographies industries in stocks, particularly in June. These factors were largely as a result of global trade and tariff tensions. Style also continues to play a role as growth has outperformed value in these markets. To put this into context, June was the second worst month for this composite since the end of the global financial crisis, yet it’s performance remains within the volatility range we would expect from a strategy such as this. We’ve seen performance stabilize since the end of the quarter and would expect it to normalize over the remainder of the year. For clarity, this short term performance is not expected to negatively impact flows in the segment. In fact, we believe that this type of market inflection tends to lead to additional investment opportunities, particularly among investors pursuing long-term asset allocation in emerging markets. With respect to the broader portfolio, our affiliates again produced solid investment performance during the second quarter. In particular, results were strong and some of our larger flagship strategies such as global and non-U.S. equities as well as domestic large-cap value equities. On a longer-term basis, our relative outperformance remains stable and spans a range of geographies, asset classes and investment disciplines, including domestic small cap, global and international equities as well as fixed income strategies. While expectations of our broader market volatility processed, equity correlations remain low and we continue to believe that this is a good environment for active asset managers, particularly those with long-term track records of outperformance. Slide seven breaks out our net client cash flows on an AUM and revenue basis -- after a prior quarter of strong net flows. Net client cash flow of negative $4.1 billion resulted in annualized revenue impact of negative $15.2 million. While net flow levels have fluctuated, we’ve seen a consistent migration to a higher fee rate for the overall business. As you can see on the bottom right, the fee rate on inflows has exceeded that of outflows and has remained above 40 basis points in 13 of the past 14 quarters. On slide eight, we show further detail on our flows by asset class. You can see here that the bulk of our outflows were in U.S. equities, where secular trends, particularly passive investments continue to challenge certain strategies such as large-cap value. Flows and institutional space are inherently large and lumpy and in the current environment, we’re seeing shifts both to and away from our affiliates for a number of predictable cyclical reasons. Corporate de-risking, rebalancing and the pockets of performance challenges Steve mentioned. For diverse business of this size, we view these various drivers as part of the normal business cycle. And as much as there may be headwinds for some areas of our product set, we have significant opportunities and many others. Acadian, which I will touch on further in a moment when I talk about growth initiatives, continued to see strong demand and a wide array of its quantitative strategies, including manage volatilities and international equity products. Likewise, Barrow Hanley continued to see interest in its differentiated U.S. equity strategies where performance has been quite strong. Its leverage loan strategy will also become investable in the near to medium term and the firm is very enthusiastic about that team and their prospects. Stepping back a bit, over the past two years, with a broad involvement of many of its next-generation leaders, Barrow has executed a focused strategy to enhance the strength and depth of its investment teams, particularly within its global non-U.S. and emerging markets franchise, and to build out its internal distribution strategy. With these enhanced distribution resources, Barrow is actively and aggressively seeking new opportunities. In fact, the team has completed as many RFPs in the first half of 2018 as it did in all of 2017, and they are poised to gain assets as the markets turns back the value which recent signs indicate may be on the horizon. Landmark, our newest affiliate expects to see continued growth across its business lines in Q3 and beyond. The firm has maintained a strong pace of capital deployment and has identified a wide range of investment opportunities for its funds. Landmark has also been examining new areas where they can extend their secondary investing line of business. With respect to our collaborative organic initiatives, we expect these activities to accelerate over the next several years, both in capital commitments and the range of initiatives we plan to undertake. We are continually working with our affiliates on initiatives that address the following types of opportunities. Creating additional investment strategies that leverage our affiliates current investment skills, opening new sales channel through distribution and product, structuring, and evaluating add-on and [Indiscernible] for our affiliates. Our seed capital investing is critical to all of these initiatives. As of June 30, we had more than 20 seed investments across the franchise with a pipeline of 5 to 10 more underway. To highlight the role that these investments plan our business, let me spend a few minutes to walk through what's happening in Acadian, where Steve alluded to earlier, were working in partnership with the firm's leadership team to expand on the firm's investment capabilities and access to new clients. First, we recognize that Acadians quantitative investment platform offers wide-ranging opportunities for diversification. Based on that, we supported the formation of a dedicated product development group at the firm and this group has led the launch of several promising new business lines. One in particular is its newly seeded China Asia strategy, which has created an access point for us to the second largest investable market for equities in the world. Despite a relatively short track record, Acadian is reporting some early interest in funding into strategy. Longer-term, this strategy is the beginning of a broader entry into the marketplace in China. A geography that we expect will offer significant opportunities. In addition, Acadians, multi asset class capability, which we worked closely with the firm to develop now has almost three quarters of live results and has generated strong early interest from a number of consultants and prospective clients. The firm believes this platform have as much as 25 billion in long-term capacity and an important segment in the marketplace. The other area we are spending time on with Acadian is one Steve touched on, and that's the area of technology investment to support growth and enhancements of the current strategy as well as enabling the development of new products, much in the same way as was done with the multi asset class effort. Clearly, there is a broad potential to leverage their quantitative investment expertise across a wider set of market opportunities and we’re pursuing all of them. There are other examples of similar initiatives across the business, but the point is that over time, extending our affiliates proven, active investment capabilities, into niche strategies and tangents at tangent asset classes has enabled them to better serve their existing clients and broaden their global reach. Touching on our global initiatives, our global distribution team is increasingly integral to our product development strategy. As an example, based on input from this team we are well along the way in launching a usage platform to broaden our offerings in the European – market place. Our global pipeline of opportunities there is strong. While we cannot know the precise size and timing of any commitments, our activity levels are above historical averages, and include investor engagement in all of our target markets spanning a wide range of affiliate products. Broadly speaking, we remain focused on positioning our affiliates and our business to maximize opportunities across market cycles, asset classes and geographies. And with that, I'll pass it on to Dan for additional comments on our financial results. Dan?

Thanks, Aidan, and good morning. Our results reflect both the strength and diversity of our affiliates, as well as the stability that our profit share structure provides in periods of market volatility. Management fees increased approximately 10%, compared to Q2, '17, ENI EPS increased approximately 12%, and ENI operating expenses as a percentage of management fees decreased from 36.8% to 36% despite a negative market and net outflows for the quarter. Comparing Q2 '18 to Q2, '17 economic net income was up 8.4% to $50.5 million $0.47 per share. While market-driven increases resulted in a 7% increase in consolidated affiliate average assets from the year ago quarter, our continued shift in asset mix through higher fee products enabled us as previously noted to increase management fees by 10% during this period. Our weighted average fee rate increased by 0.9 basis points over the period to 38.4 basis points primarily driven by flows into alternative assets. While management fees grew by 10%, total revenue increased 4% from Q2, '17 and was impacted by lower performance fees as well as the sale of Heitman at the beginning of 2018. Operating expenses were up 7%, but the ratio of operating expenses to management fees declined over this period which I’ll discuss further on slide 12. Our operating expenses increased more than revenue due to the factors previously noted. Variable compensation remained flat, due to a few factors Steve mentioned in his remarks, namely a lower cost structure of the center and the structural variability in our profit share model and thus ENI operating margin remained unchanged at 38.1%. Our adjusted EBITDA increased 3% to $72.8 million for the second quarter of 2018 compared to Q2, '17. Also our effective ENI tax rate of 23.3% decreased primarily due to the impact of the lower U.S. corporate tax rate offset by an increase in U.K. taxes. Slide 10 gives a better perspective of our financial trends over the last five quarters as average assets from consolidated affiliates have increased over this period. In each quarter, we show the core earnings power of the business by breaking out the impact of performance fees, which were meaningful in the second and fourth quarters of 2017. Revenue increased 8% excluding performance fees, and 4% include including them as we recognize the significant performance fee in Q2, '17 but did not recur in the current quarter. As noted, revenue was also impacted year-over-year by the sale of Heitman in 2018. Our overall revenue growth was primarily due to higher consolidated average assets and improved fee rates. Increased average fee rates have been driven by market appreciation and higher fee asset classes and flows into alternative assets, including net-catch up fees which we have broken out separately, but which were not significant in the current quarter, and the revenue flow trends we have seen over the last few years where higher fees were earned on new asset sales and lower fees were earned on outflows primarily sub advised assets. On the right side of this chart, you can see pretax ENI as well as after-tax ENI per share, which grew by 4% and 12% respectively over the period. ENI, EPS was positively impacted by our share buyback activity, which contributed to a decrease in weighted average diluted shares outstanding of $3.2 million from Q2, '17 to Q2, '18. Slide 11 provides insight into the drivers that impacted management fees from Q2, '17 to Q2, '18. The overall trend during this period was a continuation of the positive makeshift or higher fee assets, including continued growth by Landmark. As noted previously, are average fee rate increased year-over-year by 0.9 basis points to 38.4 basis points in Q2, '18. In the left box, you can see average assets for Q2, '17 and '18 split out by our four key asset classes. The box on the right provides the ENI management fee revenue generated by these average assets in basis points of fees, also broken out by asset class. As you recall, different asset classes have very different fee rates. Global non-U.S. equities and alternatives have average fee rates of 40 basis points and 82 basis points, respectively, including that catch-up fees and alternatives, while U.S. equities and fixed income have average fee rates of 25 basis points and 20 basis points respectively. Between Q2, '17 and Q2, '18 the combined share of higher fee global non-U.S. equity in alternative assets are consolidated affiliates went up by 5% to 63% of average assets, while the share of U.S. equity decreased 5% to 31%. All asset classes except U.S. equity grew in absolute terms during this period. On the right side of the chart, you can see that ENI management fee revenue increased to $226 million. Of this amount, 77% was made up of higher fee global non-U.S. and alternative assets. The largest increase in revenue was in alternatives as the Landmark transaction combined with subsequent AUM increases helped to drive a 27% increase in this category. Landmark AUM has increased approximately 89% since our acquisition in August 2016. Slide 12 provides perspective regarding ENI operating expenses for the three months ended June 30, 2018 and 2017 that breaks out several of our key expense items. Total ENI operating expenses grew by 7% between Q2, '17 and Q2, '18 for total of $81.4 million for the quarter, as we continue to invest in affiliate growth initiatives including non-U.S. and leverage loans at Barrow Hanley and multi-asset class at Acadian. Operating expenses were also impacted by higher fixed compensation and benefits as a result of new hires and annual cost-of-living increases. G&A expenses, excluding sales based compensation increased due to continued technology investments along with asset-driven data and systems costs. On an aggregate basis, the ratio of operating expenses to management fees fell from 36.8% in Q2, 2017 to 36% in Q2, 2018 reflecting higher management fees and a lower center cost structure. Factoring in market declines for the first half of the year and assuming normal market and organic revenue growth, we expect the operating expense ratio to be approximately 36% for full year 2018. The next key driver of profitability is variable compensation shown in more detail on slide 13. The table at the bottom of the slide divides total variable compensation into two components; cash variable compensation and equity amortization. In this exhibit, you can see the benefit of the profit share model which links variable compensation to profitability, cash variable compensation increased 1% to $55.9 million from Q2, 2017 to Q2, 2018; slightly below the 3% increase in earnings before variable compensation. The slight increase in cash variable comp reflects the cost variability of the profit share model, while the reduction of non-cash equity amortization relates to the lower cost structure at the center. On a total basis, variable compensation remained relatively unchanged at $61.3 million for Q2, 2018. This exhibit also calculates the ratio of total variable compensation to earnings before variable compensation or the variable compensation ratio. This ratio decreased from 42% in Q2, 2017 to 41.1% in Q2, 2018. The variable compensation ratio for full year 2018 is expected to be approximately 41%. Affiliate key employee distributions for the three months ended June 30, 2018 and 2017 are shown on slide 14. Distributions represent the share of affiliate profits owned by the affiliate key employees. Between Q2, 2017 and Q2, 2018 distributions increased 13% from $16.5 million to $18.7 million, while operating earnings were up 4% quarter over quarter. A lower increase in operating earnings relative to distributions resulted in an increase in the distribution ratio from 19.6% to 21.3%. The 21.3% current ratio is driven by landmarks 40% employee ownership and the leverage nature of equity distributions at Acadian, which experienced the 11% AUM growth over the last 12 months and is our largest affiliate by AUM. For full year 2018 this ratio was expected to be approximately 22%. On slide 15, we present a summary of our balance sheet and capital position. We continue to believe that our balance sheet provide the flexibility and liquidity for acquisitions or buybacks, while continuing to invest in the business. With approximately $393 million of long-term debt and nothing drawn in our $350 million revolving credit facility, our debt to adjusted EBITDA ratio is 1.3 times as of June 30, significantly below our revolving credit facility covenant of three times. We've cash and borrowing capacity for acquisitions of approximately $40 million or more if necessary. Now, I'd like to turn the call back to the operator. We're happy to answer any questions you may have.

[Operator Instructions] Your first question comes from Bill Katz with Citi. Your line is open. Bill Katz, your line is open. Your next question comes from Bill Katz with Citigroup. Your line is open.

Hi. Can you hear me?

Yes. Hey, Bill, how are you?

Okay, great. Yes. This is [Brian] filing for Bill Katz. I recognized you touched on this a bit, but could you provide some color on the flow outlook both gross sales and redemptions over the next few quarters. How should we think about some of the potential headwinds or tailwind you're facing?

Yes. I mean, look, I think it is hard to predict these things. I think the overall pipeline as we talked about is in pretty good pretty good shape on the sales side relative to where we've seen it. At the same time there are some known outflows. So in terms of how that actually plays out I think will really be determined at the end on the margin between the stuff we don't know about right now. I think on the positive side as we mentioned, we do expect to see AUM potentially increase on the alternative side of the business, certainly over the next quarter. And we have a lot of seeds planted whether it's multi-asset class or uses platform or some of the stuff we're doing with bank loan products or emerging markets. We have a number of product areas that are very sellable and we think are in demand and it's really a question of as you know with new products, the toughest part is once you have the track record getting that first 100 million, couple of hundred million then on to a billion of assets and in terms of how quickly those new flow products come in will really I think determine when we get into more positive flow territory. I think there are couple of -- on the redemption side, I think again, what we've seen is part secular and part cyclical and performance oriented. I would expect to see U.S. equities, value equities continue to have a fair degree of redemptions over the next few quarters. That's the nature of that product segment right now. What we can do is to have a lot of flavors of products which we've done at Barrow Hanley in terms of the U.S. domestic side with three large-cap value products, and also to generate strong investment performance for clients, which we're doing certainly on the large-cap value side. And our hope is that the combination of having a variety of products and having strong investment performance will cause outflows to reduce in those areas, but hard to see them as growth drivers. There are couple of other products we mentioned that saw pick up in outflows this quarter that – you know look we -- all products go through recycles, nothing is ever always hitting on all cylinders from the performance point of view. That's the way we built the business to where we have. And until those products turn performance which hopefully will be sooner rather than later, we'd expect to continue to see outflow there. So in general I think we have – if anything else, you'd Love to be a turn the dials so that your new products that you have coming on line, come on line just as your more mature products or other products are winding down their sales, but can always happen. We feel confident as they went through and I think a lot of detail that we're doing the right things to position the business to grow over time.

Very helpful. Thanks for taking the question.

Sure.

Your next question comes from Andrew Disdier with Sandler O’Neill. Your line is open.

Hey, Andrew.

Hi, guys. Good morning. So, trying to get a better understanding for these [four] dynamics that are going on; I know that RON Transatlantic and HNA had worked together in the past in order to make a majority investment in another asset manager. So we'd appreciate any color that you can provide on Mr. Love and his firm and any ideas or synergies that he might bring? And then any color on the relationship on Mr.-- Dr. Yang in the Mr. Rana if possible?

Yes. Look, the process that we undertook to fill the seat that was previously filled by Kyle Legg was sort of a normal extensive search process. We hired you Korn/Ferry to do that, went through a number of very high qualified candidates. And as these board processes go, it's a combination of candidates that are identified by other members of the board, as well as candidates that are identified by the search firm you're working with. But in all cases, once candidates are sort of thrown into the pot, there is a clear and extensive diligence and process that goes through. The Reggie was known to the HNA guys through the potential investment that they had had in SkyBridge that never ended up closing. And that was how Reggie was initially identified, but there's absolutely no connection whatsoever between HNA and RON Transatlantic, now that that SkyBridge transaction has closed, there is no investment that RON has at least to my knowledge in BrightSphere, and this was really an opportunity that we saw to really get a very high-quality individual that we might not have thought of first on the board. And having spent time with Reggie, I'm pretty excited to keep working with him and I think he's going to add some great insights to board deliberation. But there's absolutely no connection between the HNA and Reggie other than how we first came across them.

Understood. And looking at live numbers now, trading around six times EBITDA, six times PE. You mentioned the real competitive and expensive backdrop for within the M&A environment. So, is it fair to think that we could see more aggressive buyback to come, just given the valuation of the stock?

We're going to take time to let the results sink in and let news of the last day or so sink in. And then we'll search through the pace and the size of a buybacks. And look, as we've said our buyback strategies and opportunistic buyback strategy and I think by definition that means that when the stock is trading lower is when you want to buy more of it particularly when you have the kind of optimism about our business that I think we've expressed on this call and we all believe personally, I would be looking to buy more. We will at the same time, I think what's very clear is the fundamental benefits of the strategy that diversifies the affiliate base. You look at some of the challenges in the equity markets in the different parts of the business that you saw on the quarter and I think it's fair to say that if we had some of the partners in-house for this quarter that we're talking to our results would have been better. And so it is this -- the fundamental strategy diversifying the business in alternative asset classes with strong fundamental growth characteristics is absolutely the right general strategy. In terms of allocating capital, I don't think in any way it has to be sort of an either/or and in no way though I think it's the right thing to say, okay, we're going to put everything towards acquisitions or everything towards buyback. But clearly given where the stock price is now you turn the dial more towards buybacks than you would -- the stock was up $20. So we will evaluate that with the board as we get together and we talk over the coming period.

Great. Thanks for taking the questions.

Sure.

Your next question comes from Robert Lee with KBW. Your line is open.

Great. Thanks. Hi. Good morning. Maybe first question, Steve, is just on the Landmark, I mean, you're suggesting that maybe some fund closings pick up over the second half of the year, but -- and I know you can't be specific on numbers, but maybe at a high level the possible kind of update us on what strategies they have to be in a market with kind of at a high level? And can you extend that maybe some of these are follow-on or next [Indiscernible] strategies kind of at least how as of the predecessor funds and may help us zero in or how to think of it?

Yes, Rob, I'd really rather not get into the specific just from a regulatory point of view there. There is a lot of information out there in the financial and private equity press on these things, but it just really difficult for us to talk to targets and funds that are in the market.

Okay. Well got to try. Maybe is a follow-up, could you maybe give us some more color, in the earnings release you did talk about I guess effective yesterday or as of yesterday that the two HNA board directors, they'll still be members of your board, but they are no longer I guess working at HNA? How do you think of that in terms of impacting or defining your relationship with HNA, as you think of it maybe its kind of at this point less strategic than maybe you would've hoped or thought couple quarters ago? And what kind of impact you think that has kind of on the HNA?

Sure. I mean, look, I think, its useful to look to the press release that HNA put out I think in China last night our time this morning, their time, which really I think talked about leadership changes within their organization, but probably more importantly define their strategic priorities back to the core elements of their business I think of airlines, hospitality, logistics and does not thoroughly mentioned financial services. They've clearly gone through an evolution of their strategy and ambitions since the period when they made the investment. And I think what you're seeing is sort of the natural outgrowth of that. They have a investments in this business, obviously it's -- that appears to be much more of a financial investment at this point as a strategic invest -- rather than a strategic investment because financial services are no longer a strategic priority. But at the same time, behooves them and their shareholders to make sure that they realize fair value on that investment. And I think as we would all agree this is not the best time to be trying to move big blocks of asset management shares. They are in -- publicly there in this stock at about [50/50] and I think my understanding is that Guang and Suren will continue to represent the interests of HNA on the board and are tasked with realizing value for HNA on this investment as an investment over time. So look, we have the very constructive relationship with Guang and Suren. I think they have always been both personally to me, very insightful and very native in their thought process and have been very helpful to us in introductions on the M&A side. And I would expect that they would continue to play that role. With respect to anything strategically for us with respect to China, look, China is an important market and will continue to be a focus of looking at opportunities with or without a strategic relationship with HNA. It's a market that Guang knows very well and has relationships in and will continue to be helpful and I would expect. And we have a team of three people in our distribution side based in Hong Kong. We have trips planned to Asia to continue to move forward our Asian and China strategy, and all of that will continue. So look, the HNA relationship was an interesting option value, while it was strategic in nature, but I think we will continue to pursue opportunities in that market and benefit from the relationships that we have on the board as we do so.

Okay. Appreciate the thorough update. And then maybe just one quick follow-up on the pipeline, I mean you seem thing pretty optimistic about the status of your unfunded pipeline and maybe RFP activities. Is there any just some color and given that was a quiet quarter, relatively quiet quarter [Indiscernible] maybe some color on, did the pipeline grow quarter over quarter, RFP standing kind of soft fundings not just for you but kind of around the industry it seems. Is that kind of any sense that's kind of maintained or even accelerated at this point?

I mean look, I think we – on the positive side the actual pipeline of one not funded is higher than it's been for several quarters. At the same time I would say that we know of outflows that are occurring certainly less than we did at the end of last quarter, but probably elevated from where we were in 2015 and 2016. So look, it all depends on the pacing of when these one not funded come into play relative to either known terminations or probable terminations. I think the real takeaway for me is we would continue to expect to be taking in assets at higher fee rates than the assets that are going out. And as we've talked about from our perspective, well, look it's great, net client cash flows on an AUM basis are positive, we are really focused much more on net client cash flows from a revenue point of view. And I think the trend that we've seen in the past is what we will continue to see of more flows coming in, in high fee rate asset classes. I think that's the first thing. Second thing is that, look, we have a number of seeds that are planted. We feel very very good about our product pipeline in terms of having products that have good track records that are developing that will be absolutely sellable and that we are leveraging the skill set at our existing affiliates to manufacture that product. At the same time, until we actually generate sales from those products it's very hard to tell what the timing of that momentum will be, but we're absolutely confident that we have the products we need. And then thirdly, look, there are a few pockets of underperformance within the portfolio that are generating outflows, in some cases in products that a year ago we're generating strong inflows. And the focus at those firms and the focus on those portfolio teams is first with the client and turning the performance in those products, and that's the focus on it. Until product performance turns, I would expect to see continued outflows in those areas, but look, the main thing we're focused on is getting that performance turn in those pockets and doing right by clients there.

Great. Thanks for taking my questions.

Sure.

Your next question comes from Kenneth Lee with RBC Capital Markets. Your line is open.

Hi. Thanks for taking my question. Just one on the outlook for potential M&A. Maybe you could comment on the activity you're seeing in this quarter versus prior. What's driving the confidence that a transaction could potentially be announced as early as year-end?

That's really just -- I mean that -- I think the key thing is I think many people are aware is it M&A transactions in asset management are very long drawn-out relationships. It's about building the relationship, building confidence between the two partners. And then even once the partners decide to move forward together in many ways it's about structuring the organizational relationship, reorganizing the equity structure at the affiliates to make sure that it is potential affiliate to make sure that it is positioned to align interest over the long term and transition equity at those affiliates over the long term. And, so it is an extensive process that takes many months. We have had good discussions where we are one of a very small number of people that are being talked to or in some cases where we're only one or two that are being talked to. So, that gives you confidence that these transactions are potentially moving in the right direction, but at the same time they do take time and particularly I would say in markets that are more volatile like you're seeing now, the first priority is we would want it to be and the people we're talking to is on their business and generating strong performance and generating flows in their business. And, so that's another reason why these discussions can go on for a while and our confidence comes from a lot of years of working on these and having the detailed information of where things are on the pipeline and we're clearly further along in discussions now than we were three months from now. And, I hope that by the time we certainly get to year-end we'll have gone down the road enough to have a new partner that we're ready to announce. I think we're absolutely excited that we've identified high quality firms that are a good cultural fit are generating good organic growth that diversify our product set. And, so we're confident we're talking to the right people and it's just really a matter of continuing to sort of move those discussions down the road.

Very helpful, just one follow-up any updates thoughts on potentially changing the UK domicile post U.S. corporate tax reform and what could be the pros and cons of any such change?

Yes. I mean look it's something that we are doing work on and continue to evaluate, on the plus side I think it brings a high degree of heightened simplicity to the story. As you know multi boutiques are complex organizations by virtue of their structure. I think with respect to our story that UK domicile has added a degree of complexity that others don't have. We want investors to understand the story, the value proposition without having to become experts in UK or UK tax. So, that's really the positive regulatory simplicity and just organizational simplicity. On the counterbalance to that is given differential between UK taxes and U.S. taxes and our current structure, we're currently saving between $2 million and $3 million a year in our ENI taxes by being UK domiciled versus U.S. domiciled. So, there is a financial benefit to being UK domicile, but obviously not a big one at this point. And so we're sort of weighing that through it is - there is some complexity to moving back to the U.S. in terms of having to redo your all of your charted and bylaws to get documents ready because it requires a board vote of shareholders. And, so we continue to work that through and that's another one of these decisions that I think we hope to have in place over the next quarter or so, but at least decision. But just the execution of it will take a little bit of time and frankly because we're still - we're benefiting from that lower tax rate it's not like it is absolutely urgent to get it done yesterday or anything.

Got you. Very helpful. Thank you.

Sure

Your next question comes from John Dunn with Evercore ISI. Your line is open.

Hi, just following up on the earlier question about sales. Can you give us a flavor of the conversations you're having with institutional clients? Is it just too early for them to start warming up to value just or given where we are in the cycle in the recent disruption for growth strategies, are we nearing kind of a shift in the appetite to the strategy?

Yes. Dunn, maybe just a way to think of this is to think over the long haul about both asset allocation strategies and the behavior of value versus growth. And, we were simply referring to the point that in many of our strategies the persistent performance of growth related stocks in the market in general as well as embedded in many of our benchmark indices put some pressure on the relative performance and the focus on value, but with regard to [channel] of the global macro trends and the outlook, there's a sense that reversion to value which it would be good to our portfolio, we're kind of better positioned for that than in the past. And that's really the sense that we were pointing out. I think the other thing that is worth noting and we've talked about this in the past is just what represents a constructive market for active asset management in general, which oftentimes connects to value and we feel like things like volatility where correlation fits will affect things like that and we can alike where we are with regard to those markets. So it's less about kind of short-term generating real inflows but more supporting the strategies that we already have in place for the longer term.

Got you. And, you just said you're better positioned now than in the past for the turn to value or maybe you could just talk about what is it?

I was simply saying sorry maybe I wasn't clear. I think the market is more constructive on value strategies today given how value and growth have performed against each other.

We've always had a substantial value bias within our portfolio. Really there's only one growth-oriented affiliate that we have in that's Copper Rock.

Got you. Yes. Thank you very much.

Yes. To be clear when you hear people talk about the impacts of FANG stocks or Facebook, we don't have a broad array of asset allocation to those strategies. So, when those markets are running it's harder for us to participate against those who might. That's the point I was making.

Got you. Thanks.

Thanks.

Your next question comes from Steve Fullerton with Philadelphia Financial. Your line is open.

Hey Steve.

Hey Steve, I just wanted on the deal pipeline, can you talk about the EV-to-EBITDA multiples that you're seeing out there, I mean, with the publically traded guys obviously those multiples have come in. I just want to see it, I think 8 to 10 when we - in the past talked with the range, but what’s the range is now?

Yes. No, well frankly the types of companies that we're looking at are not directly comparable certainly to the long-only managers that you see. And, I would say that the pricing that's being discussed for alternative managers that have flows are - is above the 8 to 10 times. What I think the real key is to be looking at and where it's hard to have a direct answer is as you know when you're structuring transactions, you have on the alternative side, you have management fee profits and you have performance fee profits. You also have earn-outs relating to these transactions as well. And, so look from my point of view it's all about paying for value. I'm much less focused on a theoretical multiple that we would be paying and where that multiple might be relative to our own stock because we're not buying our stock then the growth characteristics of what we're buying because I think we can all agree that look if you're buying something it's going to grow much faster and you feel confident in that then you'd be willing to pay more for it from a multiple point of view. And so to me it's much more about number one making sure that we are paying appropriate multiples for management fees versus performance fees and making sure that we are not overpaying for more volatile income streams. But secondly structuring a transaction that shares the risk of growth so that if you have a business that grows at 10% a year, you're paying one multiple but if that business can really grow at 20% a year for five years or 20% a year for three years then look you're willing to share that upside with them. So, the upfront multiple is certainly a key element for us and there you may be in that 8 to 10 type of range and you're effectively underwriting a certain growth rate, but to the extent that over time that firm is able to generate faster growth, we would pay an earn-out now which would move that multiple higher. And, to me as I assess that tradeoff between stock buyback versus acquisition, we know that buying back our shares today at these prices is going to give a higher EPS accretion next year than anything we're going to be able to do on the acquisition side. But we're also thinking about two other things; number one what's that EPS accretion going to look like two or three years from now given the growth rate of what you're buying relative to the stock you've bought back. And, then secondly what is the opportunity for rewriting of the stock if not immediately over time when you have the growth characteristics and the diversification characteristics of the type of companies that we're buying. And, those are all the factors that we are factoring in as we turn the dial between allocating towards buyback and allocating towards acquisition.

Got it, and then maybe thinking about on the buyback and just thinking about tools and you're toolkit the stock trading Andrew laid out the massive discount and obviously you laid out the large EPS accretion you would get with the stock coming in so much. You look at Greenhill they've done a tender on their stock and that stocks up 69% year-to-date. Just wondering if the tender obviously even away from just H&A situation, but was a tender something that you would consider as part of your toolkit for buyback if the stocks just at a price obviously it's I think 13%-14% even?

I think it is - to be honest I haven't gotten into the exact tactics that we would use beyond what we've done in the past which is just sort of being in the market. I frankly don't know without talking to bankers what kind of premium you would have to pay for a tender versus buying in the market and how much more you could get. So, would it be something that I personally would consider absolutely, but that's without having a base of knowledge to know what I'm - I'm always willing to consider anything. But I think that's something that we'll need to talk more about with the board and that kind of thing. And, look all of these decisions should be made with full analysis and that's what will do.

Great, just very last one if I can sneak one in and understand about the commentary on the alternative managers trading above 8 to 10. But I just want to get a feel is there obviously with the public market the multiples coming a lot, is there a private market where 8 to 10 is still the EV-to-EBITDA people are paying and if so would you be a seller into that market?

The private market that where people are paying 8 to 10 would be for more tradition long-only managers I think with still pretty good flow, in-flows. I think the reason why you haven't seen a lot of long-only private transactions take place is because a lot of those managers are an outflow and there's not a lot of demand at any reasonable multiple for managers that are in outflow, in terms of would you be a seller of the company into a private market like that or is that what you're asking or…?

Yes, I mean, if you can get 9 times EV-to-EBITDA obviously we're talking about…

Look I'm not going to put a price on the company, but clearly if someone was paying a substantial premium to both the current stock price and was it a level where the board thought was in line with the intrinsic value of the company, of course anybody would as a fiduciary responsibility to try to create value for shareholders.

Great. Thank you.

Your last question comes from Andrew Disdier with Sandler O’Neill. Your line is open.

Thanks for the follow-up. The first question was tied to real asset fun to, and well looks like to be a new fun but understand the color that you provided to Rob Lee. So, I guess the question now is maybe for Aidan just given some of the recent fee cuts we saw BSIG’s exposure to retail fund products is through sub-advisory mandates. So, assuming all things equal, how would revenues be impacted with any fee waivers or cuts at a fund level or the revenues even impacted just given the way some sub-advisory mandates are arranged and the expense ratio, dynamics and underlying components of some of the waivers?

I want to make sure that I understand a question that you're asking. Is that a conceptual question or are you asking in relation to things like the recent fidelity news for example?

I mean it's a combination of both. It's in response to fidelity and also a conceptual type question.

So, with regard to the kind of the fidelity news, I think it's important to remember that the index business, the commodity index business is very different from the value-added active management business that we're in. And, from our understanding the kind of cheapening of index products has fairly [longitude] and in the institutional side it's been in place for some time. So, we don't really see that as really having any impact on us on a day-to-day basis, but I have to spend more time on that. I think with regard to the general retail space as you know most of the accounts that we have are very long-standing with the largest players in the space. We often have kind of programmatic relationships with them across multiple products and those accounts are large and are highly negotiated as it is and we've seen those fees to be relatively stable on the lower end as time has gone by. Naturally to the extent that there's continual structural change in the industry we will participate in it. But we actually think we can be a beneficiary if they're not necessarily a loser on the end because we are better setup to handle those sub-advisory arrangements and scale and we're prepared to do that. So, in general the fidelity news we don't think is something to ruffle us and we're not feeling or seeing other dynamics in that channel that causes us to think that we've got meaningful revenue exposure.

Yes, understood. Thank you.

Okay.

Thank you everybody for joining us this morning. And, I look I hope you came away with the view of the enthusiasm that we have for our business particularly when we're looking at difficult markets that it's always good to take that longer and medium-term perspective of business with a lot of growth prospects ahead of it. So, thank you and we're always available to answer any questions.