Acadian Asset Management (AAMI) Q3 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 Third Quarter 2018. During the call, all participant 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, November 1st 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 third quarter and nine months ended September 30th, 2018. One note this morning for those of you who saw a release on the wires such as wire, such as Bloomberg, please note that we’ve issued a corrected version in the last few minutes and you should see that come across. 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 28th 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 under 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 on 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, Aiden Reardon, Head of Affiliate Management and Dan Mahoney, our Head of Finance. I will now turn the call over to Steve.

Thanks Brett. Good morning everybody. In a period of strategic and financial challenge for the sector, I actually feel very good about our positioning coming into 2019. When we last spoke with you at the end of the second quarter, we had a results that had higher than usual outflows as well as underperformance and at that time, I think we explained that we felt that those were sort of aberrational results relative to the trend. And I'm happy to report that as you can see today, that I think that -- that's indeed the case. If you look at our net client cash flows, they were back to the usual trend we've seen before, with some negative AUM related flows of 2.6 billion of outflows, but positive revenue weighted flows of 4.7 million. I think most importantly though, if you really divide out your net client cash flows between client driven flows and those related to hard asset disposals where we're actually selling assets as part of the investment process, you can see quite a large improvement from the second third – second quarter to the third quarter. In the third quarter, we had one $1.6 billion of hard asset disposals, which means that we really just had about 1 billion of client driven NCCF that compares to $4 billion in the second quarter. And what again, you saw driving that change was that we had inflows coming in at significantly higher basis points and outflows. In the third quarter we had $6.9 billion of inflows at 53 basis points and $9.5 billion of outflows at 33 basis points, which again is a trend for those of you that cover the company that is quite typical and quite usual. The other thing I think, that it was really a positive impact for us this quarter, was a rebound in our investment performance. Last quarter, if you recall we had about 43% of our revenue weighted assets on a one year basis outperforming benchmark and this year that's back, this quarter it's back up to 53%. On a three year basis, we went from 71% to 64% and on a five year basis 81% to 80% of revenue beating benchmark. While I don't like to be too short term focus when we think about performance, when we looked at what was our revenue weighted performance just in the third quarter, we had about 68% of our revenue beating benchmark in the third quarter. So clearly, we are back performing in line with what we'd like to -- like to be achieving, but obviously the goal for us is to outperform in as many products as possible and generate strong returns for clients. I would say the current market environment is probably, well obviously, no one likes to see a down market. If you look at the outperformance of value versus growth particularly outside the U.S. and in emerging markets over this most recent period, that I think actually bodes well for the outperformance of a number of our important products particularly in emerging markets, as our products tend to be more value oriented. If you look at the financial performance for the quarter, which Dan will talk about in more detail, our ENI per share was $0.46 which was up $0.07 or 7% rather from ENI per share of $0.43 in the third quarter of 2017, and that was really driven by increases in average AUM and weighted average fee rate. During the quarter, we bought back about 2.6 million shares for $34 million, and I'll talk more about capital management on the next slide, but clearly in the current environment, looking at where asset management stocks are trading in particular, where BrightSphere is trading, we continue to believe that stock buybacks have to be an increasingly important part of capital management. Finally, we wanted to welcome Maliz Beams to our board. Maliz joined the board this week, and brings with her experience over a long career in financial services most recently at Voya and we’re excited about the experience that she will bring. On page three, you have our growth pyramid, and I think the thing that is really important to think about in this environment in particular is really the diversity of the growth opportunity from our strategy. I think, we like many of our peers are trying to sort through what the changes that are going on in the asset management business mean for a multi boutique, and how do you evolve the model in a way that will create a multi boutique, which can thrive and succeed in an evolving asset management business. And for us, a lot of what that means is really being able to have the mechanisms not only to focus on acquisitions, but to be able to focus on generating organic growth in the business. Because as all of you know, ultimately if there's one statistic that's most correlated to PE multiples and driving value from an asset management point of view, it's really being able to generate organic growth in your existing franchise. And we are built within the center to be able to help our affiliates grow faster than they can on their own, through both global distribution, as well as investing new seed capital, investing in new initiatives. Our seed capital this year will increase by about 50% relative to where we started the year, it’s helping to fund, use its initiative for dividend focused product for Barrow Hanley. It's supporting the growth of -- a bank loan product, the Barrow Hanley and it’s supporting the growth of ongoing investment with an Acadian, within the multi asset class area, and we are excited about these opportunities they are beginning to bear fruit. But obviously, this is organic growth and new product investment and technology investment are areas that have to continue and are part of a long process of building value over time within the asset management business. In terms of new partnerships, obviously when we look at our franchise, we realize that there are a number of attractive product areas where we are underweight or don't have exposure, in particular on the alternative side. I'll turn to credit, real estate, and these are all areas that I think over time we think are important to add to our franchise. At the same time, if you look at the transactions that have taken place over the last couple of quarters, and the pricing that they've taken place, the price for these private managers is significantly higher than where public asset managers are trading. You know to buy a good alternative credit manager a real estate manager, people are paying 10 plus times EBITDA. Same time we're trading at less than five times EBITDA in the public markets. And so in that environment, we really you know as we think about how do we allocate capital. I think, while we continue to look at acquisitions, our view is that we really need to turn the dial a bit, and be focused on where in this environment, can we increase shareholder value and drive the stock price. And I think the view would be that being more aggressive within the stock buyback side is the area to do that, when we're trading at what I believe are absolutely rock bottom multiples for this sector, and if you look at BrightSphere, we’re probably one of the lowest PE multiples within the sector. And so, certainly within my career in asset management this is the most attractive valuations that I've seen for asset managers even with the challenges that we all know exist, and I can certainly see for myself in terms of where the sector is trading right now. Turning to page four, looking at the progress of AUM and AUM mix between our affiliates, and AUM by asset class, you can see over the last 12 months AUM increased slightly from 235.9 to 237.7 driven mostly by market, 4.4% percent increase from market offset by about 8.5 billion of outflows, or a net increase of AUM of 0.8%. Over the third quarter, again, we had very strong markets,2.6% market driven increase to 237.7 billion of AUM. Clearly as you've had the downturn in markets in the beginning of the fourth quarter that will have an impact as we head into the fourth quarter and continue on to the next year. I think the most important thing to think about though, is really our financial structure and the profit share model. And we have about 50% of our cost structure is variable in nature, a variable comp adjusts explicitly with the profitability of the business before variable comp, the distributions that get paid out to employees, adjust with the profitability of the business and so well nobody likes to say down market. I think from a financial structure point of view, we are better prepared from a financial model point of view to retain profitability and margin during challenging periods, which are inevitable through the market cycles. So with that, wanted to turn it to Aidan to give some overview of investment performance and flows.

Thanks, Steve and good morning everyone. Turning to slide five, our medium and long term investment performance remains strong with 64% and 80% of our strategies, outperforming their benchmarks on a revenue weighted basis over the critical three and five year timeframes. We're also pleased to see material improvement in our short term performance in the last quarter. Our one year revenue weighted performance increased to 53% from 43% in the second quarter, driven in part by positive results and selected domestic large cap, mid-cap and international equity strategies. Our overall composite also showed improving investment performance across many key strategies during the third quarter. Broadly speaking, the recent market volatility and corresponding interest and earnings, quality and value has provided a tailwind for our portfolio. On aggregate, we battled significant headwinds throughout this protect protracted market cycle, which has benefited from loose global monetary policy and tax reform. While we hesitate to call a market inflection point based on a few weeks of uncertainty, it is great to see many of our key investment strategies performing as we would expect in this type of market environment. Slide six breaks out our net client cash flows on an AUM and revenue basis. Our AUM inflows negative 2.6 billion included one 1.6 billion in hard assets disposals. The remaining 1 billion net outflows from equity strategies reflect a significant reduction in outflows from prior quarter are more in line with historical trends. Net flows resulted in annualized revenue impact of positive 4.7 million, as we continue to see inflows into higher fee strategies and outflows from lower fee areas. On slide seven, we show further detail on our flows by asset class. Our inflows were focused on alternatives and global equities and were spread across several strategies in both segments. Flows into global equity are especially important. This is an area where we have considerable marketable capacity and strong investment results. Stepping back as you may recall, last quarter we provided you a broad overview of a number of the various growth initiatives we've undertaken in partnership with our affiliates. As we discussed, we have a deeply institutionalized commitment to and track record of working with our affiliates, to broaden and diversify their businesses by leveraging their core investment capabilities and expertise in the new strategies, geographies and channels. As much as we see additional scale capacity in our existing product line, we view each of our affiliates as scalable investment platforms in and of themselves. One of our more recent collaboration was at Barrow Hanley as Steve mentioned. BrightSphere worked alongside Barrow's investment team to identify and hire a highly regarded bank loan team earlier in the year. As part of this partnership, we also provided a significant portion of the initial seed capital, required to get this strategy launched. The bank loan strategy went live this quarter and the team has already funded its first client mandate, a very positive sign. The collaborative organic priorities are also tightly in line with our centralized global distribution efforts. We’ve aligned our affiliate management, internal product management and distribution teams to maximize our ability to connect clients with the right capabilities. A good example of this is the recent launch of the rights to our usage platform, which offers a turnkey and streamlined solution for our affiliates, access of broader range of international investors. Our first usage went live in October. The strategy is a U.S. dividend [Indiscernible] its value product that manage apparel [ph] handling. This use of strategy will be distributed by our global distribution team working very closely with their counterparts that they are handling. We estimate through these and other collaborative activities, we can add more than $50 billion dollars of additional capacity to the BSIG [ph] portfolio over the next several years. In sum, our business is operating as we intended. Our affiliate's adherence to their investment disciplines continues to produce the long term outperformance we would expect. As a collaborative initiatives we've undertaken over the past several years season and mature, we and our affiliates are well-positioned for growth and stability across various market cycles. And now Dan will provide some additional commentary on the financial results.

Thanks, Aidan and good morning. Our Q3 results continue to reflect both the strength and diversity of our affiliates. But in addition to improving a number of key metrics around net client cash flows, revenue flows, etcetera, our financial results were solid in a period of continued industry headwinds. Our results benefited from our share repurchase activity as well as from the stability that our profit share structure provides in periods of market volatility. Comparing Q3 2018, to Q3 2017, economic net income was up 4.5% to $48.8 million or $0.46 per share. ENI EPS was helped by a decrease in average diluted shares outstanding of 3.2 million shares as a result of our repurchase activity over the last 12 months ending September 30th. The blended market increases have helped increase consolidated affiliate average assets 2.6% from the year ago quarter, and while we continue to shift our asset mix to a higher fee products, unfavorable market conditions and some higher fee asset classes have impacted management fees, which grew by 3.6% from Q3, 20 17. Our weighted average fee rate increased by point 0.4 basis points over the period of 38.8 basis points, primarily driven by flows into alternative assets, including net catch up fees. Total revenue was effectively flat Q3, 2017 to Q3, 2018 mainly due to lower performance fees and the removal of 5 million of Heitman’s earnings from Q3, 2017. Excluding Heitman in the prior year period, revenue increased 2% year-over-year. Operating expenses were up 7% primarily driven by continued investments in the business and the ratio of operating expenses to management fees increased 36.4% over this period, impacted by management fees, which I'll discuss further on Slide 11 While our operating expenses increased more than revenue, due to the factors previously noted, variable compensation decreased to a lower cost structure at the center and the structural variability in our profit share model. Therefore, ENI operating margins decreased slightly to 38.4%. Our adjusted EBITDA decreased 1.4% to $71 million for the third quarter of 2018 compared to Q3, 2017. Also, our effected ENI tax rate of 24% decreased primarily due to the impact of the lower U.S. corporate tax rate, offset by an increase in U.K. taxes. Another item I'd like to highlight is the increase in our GAAP net income from Q3, 2017 to Q3, 2018. The primary driver of this increase was the anticipated release of approximately 46 million of GAAP tax reserves in the current quarter, as associated statutes of limitations on these positions expired. We have excluded this GAAP tax benefit from ENI consistent with our treatment of GAAP tax reserve activity. Slide nine 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 up the impact of performance fees, which were meaningful in the fourth quarter of 2017. Revenue increased 1.4% excluding performance fees and was flat when including them. As noted, Heitman contributed 5 million to revenue in Q3, 2017. Even excluding that on a comparative basis, revenue increased approximately 2%. When excluding Heitman in Q3, 2017 our overall revenue growth was primarily due to higher consolidated average assets, which have been positively impacted by market performance in 2017 and to a lesser degree 2018 year-to-date market performance. Fee rates which have been positively impact by market appreciation and higher fee asset classes such as -- in emerging markets equities in 2017 have been negatively impacted more recently as the global non-U.S. equity market under performed U.S. equities. Flows into higher fee alternative assets, including net catch up fees, which we have broken out separately, have helped to offset some of this global non-U.S. negative market. Revenue flow trends continued where we saw higher fees earned on new asset sales and lower fees for non outflow, primarily sub advisory assets. On the right side of this chart, you can see pre-tax ENI as well as after tax ENI per share, which were flat and up 7% respectively over the period. ENI EPS was positively impacted by our share buyback activity, which as previously noted contributed to a decrease in weighted average diluted shares outstanding of 3.2 million from Q3, 2017 to Q3, 2018. Slide 10 provides insight into the drivers that impacted management fees from Q3, 2017 to Q3, 2018. The overall trend during this period was a continuation of the positive mix shift for higher fee assets, including continued growth by Landmark. As noted previously, our average fee rate increased year-over-year by 0.4 basis points to 38.8 basis points in Q3, 2018. In the left box, you can see average assets for Q3, 2017 and 2018 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, our different asset classes have very different fee rates. Global non-U.S. equities and alternatives have average fee rates of 39 basis points and 94 basis points, respectively, including net catch-up fees and alternatives, while U.S. equities and fixed income have average fee rates of 24 basis points and 20 basis points respectively. Between Q3, 2017 and Q3, 2018 the combined share of higher fee global non-U.S. equity in alternative assets, consolidated affiliates went up by 3% to 62% of average assets, while the share of U.S. equity decreased 3% 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 $229.6 million. Of this amount, 77% was made up of higher fee global non-U.S. and alternative assets. The largest increase in revenue was an alternative as the Landmark transaction combined with subsequent AUM increases helped to drive an 18% increase in this category. Landmark AUM has more than double since our acquisition in August 2016. Slide 11 provides perspective regarding ENI operating expenses for the three months ended December 30, 2018 and 2017 that breaks out several of our key expense items. Total ENI operating expenses grew by 7% between Q3, 2017 and Q3, 2018 for total of $83.6 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 other asset-driven costs. On an aggregate basis, the ratio of operating expenses to management fees increased to 35.2% in Q3, 2017 to 36.4% in Q3, 2018 reflecting lower management fees somewhat offset by a lower center cost structure. Factoring and market declines for the first half of the year in Q4 to-date and assuming normal market, organic revenue growth for the remainder of the year, we expect the operating expense ratio to be approximately 36% for full year 2018. However a continued period of market volatility could place additional pressure on this metric either decline in the denominator. The next key driver of profitability is variable compensation shown in more detail on slide 12. The table at the bottom of this 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 decreased 7%, $52.6 million from Q3, 2017 to Q3, 2018; this decrease in cash variable compensation reflects the cost variability of the profit share model while the reduction of non-cash equity amortization primarily relates to the lower cost structure at the center. On a total basis, variable compensation decrease 7% to $57.2 million for Q3, 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 40.9% in Q3, 2017 to 39.4% in Q3, 2018. The variable compensation ratio for full year 2018 is expected to be approximately 41%. Affiliate key employee distributions for the three months ended September 30, 2018 and 2017 are shown on slide 13. Distributions represent the share of affiliate profits owned by the affiliate key employees. Between Q2, 2017 and Q3, 2018 distributions increased 3% from $19.9 million to $20.5 million, while operating earnings decreased 1% quarter over quarter. The decrease in operating earnings along with the increase in distributions resulted in an increase in the distribution ratio from 22.4% to 23.3%. 23.3% current ratio is driven by landmark’s 40% employee ownership and the leverage nature of equity distributions at Acadian, which experienced the 7% 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 14, we present a summary of our balance sheet and capital position at December 30. We continue to believe that our balance sheet provide 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 December 30, significantly below our revolving credit facility covenant of three times. We have cash and borrowing capacity for acquisitions of approximately $400 million or more if necessary. One item I’d like to highlight, our GAAP to ENI reconciliation on slide 16, the release of the GAAP tax reserve that I previously mentioned. This GAAP tax benefit is excluding from ENI in the item number seven in the reconciliation. Now, I'd like to turn the call back to the operator. We're happy to answer any questions you may have.

[Operator Instructions] And your first question comes from the line of Craig Siegenthaler with Credit Suisse. Your line is open.

Thanks. Good morning, Steve.

How are you Craig?

Good, good. So I just wanted to start with the -- your thoughts behind a potential U.S. redomecile from the UK. This could simplify your business model, potentially improve your loan-only shareholder base, but also cost you few million bucks in additional expenses. Just what you’re sort of update there?

Well, it depends whether you read business wire or are on email.

What’s your thought are on it?

That was obviously the direction. We were so excited we probably jumped the gun little bit on that. We are -- I think going to recommend to shareholders that they approve a redomicile, any kind of change there would require a shareholder vote and we’re in the process of sort of working through that process. The way we think about it is this. As we look at PE and we look at the complexity of our business, I think its clear in this kind of market environment is that complexity is not your friend and it's not something that really helps you. When we went public as you know there were significant benefits to being UK domicile when there were a big tax differential between the U.S. and the UK. At this point when you look at the differential; it's minuscule. It's probably less than $2 million a year and impact between being UK domicile and U.S. domicile. And so from our point of view, from a simplification of the story being able to just look like BrightSphere Inc. like all of our peers having no questions at all around what's the tax calculation. How does someone do that? How do we think about the sustainability of it from a governance point of view? All of those things I think point to the simplicity and the benefits of U.S domicile. That said, I think from an economic point of view, certainly from ENI per share impact point of view barely insignificant. From a cash tax point of view probably a bit more beneficial, but overall from just a simplification of the story making it more understandable, we think there’s some benefit to that. So, that’s a process that we are beginning to get underway, the anticipation would be that if we started over the next few weeks we’d able to complete it sometime in the first quarter of next year, but again not as you – aside from really the structural simplicity, not any kind of significant economic impact through our tax for ENI.

And Steve, this is my follow-up, just so I'm clear. You guys need to have board approval which you may or may not already have. I don't think you do. And then you also need shareholder approval too?

Well, I mean, anything we do requires board approval. The key thing I think to think about here, I mean, I would say, look, we wouldn't be as excited as we are if we didn’t have support from both board and management to do something that makes sense. But it's really the shareholder approval process that has to happen. So we need a process statement and get to the SEC and then go out with that approval process.

Thank you, Steve.

Your next question comes from the line of Bill Katz with Citigroup. Your line is open.

Hi, Bill.

Yes. Good morning, guys. Thanks for taking the question. Sorry, I was on mute. So first question Steve, just sort of reconciling your prepared commentary about buyback versus sort of the pricing of deals and discrepancy between your multiple and sort of private transactions. It looks like if my calculations are correct, buyback slowed a little bit during the quarter. So I was wondering if you could maybe talk to the pacing dynamic around that number one. And number two if you're unable to sort of purchase shares from, let’s say, one of your sizable investors. Would you be willing to either lever up debt balance sheet or do more aggressive open-market repurchases from here? Thanks

Bill, if you just taking in terms of capital management and the balance sheet point of view, we have about $200 million at the Holding Company right now. And so, we certainly do have fair amount of cash on hand as well as nothing drawn on our credit facility. Certainly from a capital management point of view buybacks would not be an issue. We think it’s an important element to really crank that up. Obviously the timing of it is one that we’re working through. And that's the key thing there, but there is certainly a management view that that's part of our spending, our investment that we would want to increase particularly given where the stock is trading now.

Okay. And just a follow-up, in relation to maybe organic growth, you highlighted a couple different things you’re doing, one with Barrow Hanley. Can you talk little bit about lead lag in terms of how you think this might start to play through in terms of the organic growth? And what kind of capacity might there be associate with some of these initiatives?

Sure. Bill, its Aidan. I think taking the timing standpoint and the lifecycle and then tying it back for our overall business model, as Steve mentioned, part of what we’re doing it at all times is working with affiliates to develop records which can take, in some cases up to a couple years to develop marketable records. And then position those that can be sold into the marketplace. I would say the two that Steve mentioned are in the queue and we think they are seasoned effectively in terms of multiple years of development and marketable records, our performances with marketable and there is both demand for the product as well as we think interest in the client base. It's hard to know exactly the timing for the order of magnitude of the flows and when those will come in. But I don’t think it’s unreasonable to think that in 2019 the few items that we’d mentioned you should see traction. And often what we see in these strategies is there's an initial launch as clients take them up and there's an acceleration of market acceptance. I would say in both and I think we’d mentioned in the past. We see the Mack Acadian multi-asset class product capacity has been quite significant measured in tens of billions of dollars. And then the other is whether it would be emerging markets or the loan product at Barrow Hanley, for example, those are going to also have material capacity put together maybe say another 10 billion or more.

Okay. Thanks for taking the questions.

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

Great. Thanks. Thanks for taking my questions. I apologize if this was benched on the call. This been kind of busy morning that you can imagine. Looking at landmark could you maybe just refresh us in kind of where they are with their fundraising cycle obviously, they had some, I guess, some good closes this quarter, but is there – how should we thinking as we kind of look at the balance of the year and into next year in terms of where they with their cycle?

Sure. It’s Aidan again. With regards to both their private equity fund, as well as their real estate funds, both of those products have now kind of reached their conclusion and are closed and funded. And I would say from expectation standpoint we’re very pleased with the outcomes and they are very much in line with what we were expecting and in line with what we would have hoped from an underwriting standpoint. I think the timing of new products will depend on the pacing of how much investment it made. I think when you look back into the media, you can kind of get a sense of to probably fast those funds gets raised and invested. And I think with regard to the near term, the things to look for out for there would be a product that looks like energy related investment, infrastructure related investment they could talk about in the past.

Just in addition, obviously part of the key element of that business overall which is raising funds, and then you are taking in co-investments from certain large institutional clients, the funds themselves which begin earning fees right away we book as close as the assets are raised. Co-investments generally do not begin earnings fees until the money is called and invested. And so even within the product categories of real estate for private equity you could see some additional capital calls over the next few years as co-investments relating to those product categories are called and invested. And those would be what just flows at the time that money is called.

Okay, great. And then maybe shifting, another question on capital management. So, have the landmark earn outs been and recall those have been funded, I mean are those are we thinking of those as a component of the fall on capital over the next couple of quarters or those have already been funded?

Yes. That is we are those should get paid out in the first half of next year, once the calculations are finalized relating to the earn outs. So, those will be those have been accrued. That's one of the primary adjustments from our GAAP to ENI because I think if you recall. Because there was service requirements relating to those earn outs, people had to stay working being in their seat. At the time they were earned, the accrual those earn outs has gone through GAAP compensation. But it's not within our ENI. The funding of that investment will basically occur next year. And we will determine what the mix to fund that is between debt or some kind of other instrument based on really what the financial balance sheet of the business looks like at that time.

Okay, thank you.

Sure.

Your next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Your line is open.

Hey, good morning guys. This is actually Sameer Murukutla on for Michael Carrier. I just want to piggy back a bit off of Bill's question. Maybe when it grew, just look at the valuation levels, where do you start rethinking the whole buyback first M&A initiatives?

Well, I think first of all, in terms of the M&A side, well I want to be clear, look, it's not to say that some manager may not be worth a higher multiple than a publicly traded asset management company. Because clearly, if you have an alternative manager that's growing faster and has very strong growth prospects into the future, you clearly economically will be perfectly happy to pay a higher multiple for that manager. At the same time, it comes back to in my mind relative value. And even if you thought it was fair value, the pay call it 10 times EBITDA or a manager you thought was going to grow faster and that represented sort of true fair value but you looked at your own stock and you say that look fine maybe I'm not growing as fast but relative to my intrinsic value I'm trading much lower. Then, I think the idea would be that you can generate more value per shareholders by buying back your own shares that you think are intrinsically under value. And look, I think I'm speaking to one of the interesting things about this sector is everybody who's investing in your stock is in the same business are you're in. And they're clearly elements of the sector that are under pressure and are challenged but at the same time certainly at least in my own personal view I think there has been an overreaction in the negativity around the valuations of asset managers in general, I think multi boutiques in particular. And look, maybe to my surprise since I'd run a multi boutique but I actually really like the optionality for growth than a multi boutique has and to be able to grow not only through acquisitions but by working growth initiatives through each of our affiliates having the diversification of multiple affiliates, having the ability to do acquisitions at the affiliate level as well as the holding company level. All of those things I think make a multi boutique a great structure to generate growth of over multiple environments. And so, when I look at the sector and our stock at a five times less than five times EBITDA multiple, I have to say look in my view that is a great use of shareholder funds buyback shares on a relative value basis right now.

Okay, thanks for that color. I guess just one more on expenses. You give us good expense guidance for the year but maybe more high level, how do you think of the longer term expense growth rate maybe as you kind of balance efficiencies and investments?

Yes. I mean, with even though we don’t break out in a lot of detail, expenses by affiliate versus expenses of the holding company in all that, if you look you know the numbers, what you would see over the last year is our holding company expenses are probably down on a normalized basis about 20%. We have taken some of those funds and reinvested them back into the affiliates. Now, I know when as everybody looks at particularly in the current environment with the down market and that sort of thing, revenues potentially coming under pressure, I think you have to still take a step back and look at what's going to be required to run a successful asset management company in the future. And there is going to be additional requirements in terms of technology, in terms of investing in future products that have good growth trajectories. And so, what we've done is really allocated both some of the money from the tax cuts as well as money from the holding company back into the technology and back into our new product initiatives. And when we think of initiatives, not typically about 2% of our margin that we spend on initiatives and I would certainly anticipate that into the future, likewise in our seed capital pull has gone up 50% but it was in the range of around a 150 million or so. I would anticipate that all of those elements are going to be an important part of the business to keep growth growing and to build organic growth. We've been able to do all that while still maintaining margins at about 38%. So, my view would be that look there is always going to be some range of motion of margins but you have to continue to invest in the business if you want to have growth.

And your next question comes from the line of Chris Harris with Wells Fargo. Your line is open.

Thanks, guys. And thanks for the comments in the buyback. Wondering if you can talk to us a little bit about how much stock you'd be comfortable buying back using debt. If we got there, I know you got plenty of cash in the balance sheet today. But if you got in a situation, we thought you might want to tap the revolver. What do you think is appropriate?

I mean, look. I think you have to think about buybacks you might consider to be strategic buybacks versus just buybacks in the market. And I think you need to, I'd probably differentiate a little bit from that. Obviously the extent you achieve strategic objectives stability objectives and I think I'm prepared to have a little bit more leverage than just purely sort of day-to-day buyback. We have authorization as you know for 600 million of which we've spent probably 80 million 90 million of that. Our goal and what's important to is to maintain investment grade ratings. And so, to me the idea is that ultimately even if you would not want to ever go above the three times debt to EBITDA multiple but if you were in that 2.5 to 3.0 times range for a period of time. And we're allocating all of your cash flow but delivering, that's something I'm comfortable with. But for me, the goal overall should be to be under 2.5 times debt to EBITDA. I think we've been very open that our target debt to EBITDA as in that 1.75 at 2.25 but that's the way we think about it.

Okay, good. And as it relates to your international business, in your conversations with investors, what is the appetite today to allocate money to emerging markets. Do you think it's going up or it's going down following the recent down moves you've seen in the stocks over there?

That's a good question. I mean I think when we think about emerging markets or some of them potentially more bolder sectors were really at least in the institutional space, thinking that most folks have a longer term asset allocation program that they have in mind for emerging markets. And that takes into account the volatility that you're going to get from it. So, I think it's tempting to look in this short term and look at asset movements but that's not necessarily what we're seeing. I think you may see that people will look at the drive down in that sector and use it as a way to allocate actually into the product as the asset industries come down. As about we've seen over time and I think if you were to talk with the folks that are allocating to our larger managers, those are the kind of conversations that they're having. It's a little bit of a difference, I think for each of the retail market and institutional market, whereas retail investors may get more concerned in a down draft period whereas I think almost in an institutional markets, the opposite with the end of last year when you'd had a big run up in the emerging markets, some of our clients were over allocated and withdrew capital. Whereas in this type of environment, where there is a correction, I think many people will look at as a buying opportunity. The other thing I would say is we have a track record in our portfolio of where that may happen if people want to rebalance or allocate, we have had a really good track record of actually refilling that capacity given the strong investment performance and the particular capabilities that we have, I'm thinking those products has. One of the things we're actually really excited about is, at Barrow Hanley we'd invested in merging market capability, that probably about two or three years ago. The product has managed with sort of a value orientation and particularly over this last period, you've actually had really significant outperformance that's being generated and we're hopeful that will lead to some momentum in terms of generating flows into that product. That really gaining some traction as a driver growth which hasn’t happened up until now.

Very good, thank you.

Yes.

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

Hi.

Yes.

Can you kind of talk about the profile some of the supervisor mandates that are exiting, maybe if you have an idea where they're going in-house or elsewhere or passive. And then also just maybe the remaining book that because it's 30% semi percent, the composition and maybe any concentrations that might be there?

Sure. I'll cover that first part first. And I don’t think these responses are going to be unique to us. But if you were going to look at the sub advisory space, it's probably a handful of trends that are going to affect allocations. And it's kind of flow through all the way their end clients. And that's going to be a combination of specular trends, things like allocation away from certain larger cap domestic strategies sometimes in favor of passives. I mean, so that's just a market trend. I would say given the overall industry dynamics, you'd expect to see consolidation in certain channels where managers are looking to simply allocate a larger amount of capital to a fewer number of platforms with which they have relationships or get a scale from that. I think in some cases you're seeing consolidation of actual underlying products on platforms, that's affecting things. And then lastly, I would just say things like rebalancing without and what not. And so, I think if you really look at our portfolio and look at some of the allocations and changes from the advisory space, you'd see some of that. And it would be both expected and precipitated to some degree. So, I mean that would be where I would focus my answers.

Got you. And then just as a follow-up a follow-on to the emerging market question. Just looking at the public data, even in the month of October it seems as though retail flows in the emerging market front, haven’t been all that dead it just actually held up decently. Is that fair to say here?

I don’t have those numbers at the top of my head but that wouldn’t surprise me necessarily given the comments that I made before.

Got you. Thank you, very much.

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

Hi, thanks for taking my question. Just another cut on the valuations that you're seeing in the M&A pipeline. In your view, are the valuations currently reasonable or is there sort of like a bid/ask spread in terms of expectations. And if so, is there what sort of factors could potentially narrow the bid/ask expectations in terms of valuations. Thanks.

I mean, look, at the end of the day I mean you've certainly seen a number of transactions taking place. So, whether there is by definition that would mean as not the bid and asks are coming together. I think really the thing that I would sort of differentiate about the M&A market today is that where there is a real gap between willing buyer willing seller is probably more than the traditional asset management area. Some of the, there are a lot of high quality traditional asset management firms out there that despite putting in good performance had outflow challenges. Because of where they're positioned within the sector. And I think whereas in the past there would have been positive flows at those firms and demand to invest in those firms from a management company point-of-view, we're really not seeing much of that today. So, that whole side of the market I think is where there is not a lot of demand. If you look at the alternative side, whether that's private equity, real-estate, alternative credit, you're seeing I think high quality firms coming to market with higher price expectations but you're also seeing those price expectations get met. In terms of whether they are how do you bridge some of that expectation is really I think in some ways similar to what you've seen so as to with landmark. It's not unusual within the asset management space and in particular some of these alternative investments to have earn outs that come through and so people will underwrite to a certain level at least where we've looked at it is you underwrite to a certain level of growth that you'd feel fairly confident will be achieved and you pay a multiple in the upfront payment that reflects that growth rate. But then you say look to the extent of that manager can generate even faster growth, you're prepared to pay an earn out to them. And that's the way I think you see these businesses gets structured whether -- my point isn’t necessarily that the value getting paid is quote-on-quote too much money, it's more that I think that the value is a full price is probably at best fair value. And when I look at the pricing of our stock or other traditional public asset managers, to me at least, I think that those are trading below where I, you know at least what I think is sort of an intrinsic fair value would be. So, to me it's more about relative value of buying back shares and investing in traditional space relative to the alternative space not that they should all trade at the same multiple or anything like that. They shouldn’t.

Got it, thanks. Very helpful. Just one more follow-up if I may. In terms of the new products being seeded and you mentioned the bank loan products, the multi-asset products. How should we think about the potential fee rates for these kind of products and would they be accretive to the average fee rates of for the firm overall? Thanks.

I think, in general the products the products that we're focusing on on their own they're going to have higher average fees in the long run when compared to our average fees. That would be the way to think of them. That being said, there are a lot of other factors in terms of what channel they go into, the blended fee that comes from things like tier pricing or even things like founder shares. So, my answer is generally higher active potential terms of return higher value add, I think the amount of the kind of headline pricing would be above the average. But until we see how fast they ramp up and what channel, I can't give you a clear answer of how it's going to stage in.

Okay great, thanks.

Sure.

Your next question comes from the line of Patrick Davitt with Autonomous Research. Your line is open.

Hey Patrick, it's Dan.

Hi, good morning. Well, how are you?

Good.

First quick question. You probably can't answer it but I'd be curious to know how much that landmark final close added to 3Q close and the including all of the landmark closing and how much that added to year-to-date flows?

Yes, we don’t. I mean, look if you look at we do break out in the financials alternative assets on table 11.

Table 11.

That would include both landmarks and timber sales primarily. So, that sort of that should be in land.

So, there's no Acadian in there either as well?

No, there is one Acadian fund there but one or two small Acadian funds were there. It's almost entirely timber and landmark. Last year if you go back before the second quarter, it would have included Heitman as well. But we from the third quarter on we stop putting Heitman in there.

Okay, that's helpful. And then the last one I have, one of the other multi-affiliates has been talking about kind of cross-affiliate opportunities in particular overlaying quantitative strategies with other affiliates, which seems like it could be something you could do with the Acadian, have you been looking into that?

Yes, it's interesting. And I'm glad you rate that because there's a lot of talk about solutions and multi-asset class strategies. I would encourage you to think about the Acadian product that's being developed as filling that market opportunity. It's just doing it in a slightly different way. And that’s our answer to that market opportunity and we're really encouraged by the capabilities at and the opportunity that leverage off of what we think is a fantastic alpha generator within our risk managed framework. We actually also have a product that first of all probably five or six years ago between one of our former affiliates analytic which I think is now part of Wells Fargo and Barrow Hanley in the small cap the diversified small cap that actually subadvisors an American Beacon fund. So, we have done stuff like that in the past. It's a little bit, its I would say it's more sort of organically generated as opposed to policy. But as Aidan said, I think our view is that often times what clients feel most comfortable with if you're on the institutional side, is where there's just one affiliate producing a product. Is that you have multiple affiliates going into an institutional product and clients have to diligence both affiliates and all that. We found that the complexity of that is often times hard to sell.

And maybe to build on those comments, I know we alluded to last quarter and Steve mentioned kind of the reinvestment that we're making in our affiliates. Some of the investment that has been made and will continue to be made into Acadian will be to provide other capabilities, support for other capabilities built broader set of asset and products to meet kind of that customized solution based opportunities that which we think is a big market that's probably in demand.

Very helpful, thank you.

Sure.

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open.

Hi, good morning.

Good morning, how are you doing?

Thanks for taking the question. Good, how are you guys. Well, Steve, just wanted to follow-up on your point earlier were you had mentioned that flows are the most important matric for driving the multiple in the sector. I'm sure we all agree with. I guess just on the back of that, what' as the appetite for investing more aggressively in the business to really drive and inflict organic growth. I guess, why not take the operating margin down, why not grow the seed book even faster than the up 50% that you're doing this year which is great. I guess, what how do you think about the buying the constraint and how do you know you're investing enough in the business today?

Yes. I mean, look, I think like many of our peers, we are well I mean on a constant basis we are looking at strategy, looking at opportunities to increase value or in asking the hard questions about the model and how well it's positioned relative to ongoing evolving client needs and preferences. And we do the same thing with the affiliates. I mean, one of the really probably differentiating ways that we work with our affiliates is we do go through both the budgeting process. We go through discussions with and about investment opportunities in their business. And we have invested substantial amounts of money into our affiliates business. But clearly, I think we as we continue to think about strategy, I think we will in the future be working with our affiliates trying to make sure that they are all going through the same sort of regrets discussions internally about where can they how can they grow their businesses even faster leverage their capabilities and provide opportunities for their clients and their people. And certainly as we work with them to identify those opportunities, you do always need to think about affordability but that has to go side-by-side with any thoughts of acquisition. And that's what we are trying to do.

Okay, great. And then just maybe more on the M&A side, just given industry change and we're seeing some market scale consolidation, internally there's talk about maybe others out there. I guess, to what extent could BrightSphere participate in that more large scale consolidation?

Yes, I mean, look, part of the job of helping the board is always to think about the growth opportunities that we could achieve on our own and the value that we could achieve on our own versus the value that can be achieved by combining with peers. Fairly scale I think almost everyone would agree is becoming a more important part of the industry. But I think it's not just scale, its scale in the right ways, it's ultimately has to start with one of the client trends in the business and how do you see those evolving over time. What are the distribution trends, what are the product trends and then I think successful combinations will be those that not just are formed on the basis of be let's just get scale and synergy cost savings but ones that are actually putting together organizations that can more effectively meet the needs of clients and be more effective competitors going forward and either the companies can do on their own. But look, certainly it's something that you've always need to be thinking about and I think it's something that we as a management team and the board always think of as in the ordinary course.

Great, thank you.

Sure.

Your next question comes from the line of Bill Katz with Citigroup. Your line is open.

Okay, thanks. Hardly I think there's more question but just couple of nips for me if you don’t mind. Just in terms of holding company cash, what's the minimum threshold you have? And second question is when it's gave out then you can answer them. Second question is within the alternative fee, where are we in terms of any residual catch up fees and then could you sort of size the co-investments that sort of drive power at the landmark might be sitting on just in terms that incremental co-invest opportunity? Thank you.

So, in the holding company cash, I think the key thing is there's sort of cash and then there is you have access some of the credit facility. We have $350 million credit facility that you can draw in half a day, you really don’t need to sit on a bunch of cash. I mean, we usually think about maybe having $10 million of cash or so at the holding company. But look if we didn’t have a credit facility, we'd probably want to have more. But $10 million is sort of the right amount when you're sitting with the whole credit facility behind you. Catch up fee is a really a function of where you are in the fund raising cycle and so given that both that landmark is finished it's fundraising in the private equity and real-estate, that is we've seen the end of them for now until the next fundraising begins. And now on co-investors, we don’t really disclose what the pool of undrawn co-investments are.

Okay, thank you.

Sure.

And your next question comes from the line of Robert Lee with KBW. Your line is open.

Great, thanks for taking my follow-up. I'm just curious, I'm thinking some of the guidance like around margins or what not for the year. I guess that you may comment about 36% for example kind of based on where assets have moved year-to-date I guess including so far in this quarter. I mean, so and I don’t recall maybe you'd stated it earlier but you provide an update on kind of where things currently stand and kind of what's maybe some of your some of the detail behind that and kind of have things may have moved on you know underneath quarter-to-date?

Yes. Rob, this is Dan. You're referring to the operating expense ratio?

Yes. That's the margin operating expense, that's right.

Yes. And what we're just trying to get out there, I think if you look at that ratio, any good examples that you got in Q1, it was unusually low given sort of the outsized revenue impact in the first quarter given some of the catch up fee in the like. And so when we just look at that sort of the components of that ratio, we'll think of our operating expense growth compared to management fees. The point that we're just trying to make is while we're still comfortable with the full-year guidance of a third, approximately 36% as management fees could be impacted by a sustained period of market volatility, just reflecting on what we're seeing on October. We do want to make a point that as that impact sort of flows through in the way of effecting the denominator could have an impact on your well 36%. I think a related point that we try to make there is if given the structural variability of the profit share model, if that were to be the case given the variable compensation in the distribution, they are going to just based on sort of topline growth or a reduction we see that a sort of a benefit there as well. Now, sort of the overall point where we're just trying to make in terms of the market impact on that ratio.

Okay, great. And then maybe just one other quick follow-up. I guess relating to Barrow Hanley and its sub-advisory business with I guess the wins are two fund. I know they've been suffering or taking on at this proportion amount of kind of the redemption there. Is any kind of color or since that maybe that's kind of reallocation process that at vanguard level is kind of close to running its course and I could see that kind of a trend kind of moderate?

I think our expectation is that the relative order of magnitude pace of that will remain in the short-to-medium term is now reaching for us to think that that's changing, again driven principally by what we would describe is kind of a secular view of the space. Now look, the performance of the underlying strategy and our contribution to it in this market environment is it's stronger. And whether that remains based on the position in the market, we'll see. But that could have a modest impact in the short term but again in the long term I think the trend will remain the same.

Great. Thanks for taking my follow-ups.

Great.

This concludes our question and answer session. I'd like to turn the conference call back over to Steve Belgrad.

Well, great. I want to thank everybody for joining today. And as usual, if anybody has any follow-ups and all that, we're happy to answer any questions and continue to be helpful where we can. So, thank you everybody and have a good day.