Acadian Asset Management (AAMI) Q4 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 fourth quarter and year-ended 2018. [Operator Instructions] Please note that this call is being recorded today, February 7 at 10:00 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's conference call to discuss our results for the fourth quarter and full year ended December 31, 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, believe, 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 annual report on Form 10-K for the year ended December 31, 2017, 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 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 Guang Yang, our President and Chief Executive Officer; Suren Rana, our Chief Financial Officer; Aidan Riordan, Head of Affiliate Management; and Dan Mahoney, our Head of Finance. I will now turn the call over to Guang.

Thanks, Brett. Good morning, and thank you for joining our call. Before we turn to our Q4 results, let's spend a minute on BrightSphere's highlights and why we believe this is a attractive business with strong growth potential. Our diversified multi-Affiliates business has over $200 billion in assets under management and seven widely recognized at-scale Affiliates. Together, they offer more than 100 investment strategies across a range of investment styles, asset classes and geographies to more than 850 institutional and sub-advisory clients from 30 countries. Our unique operating model where our affiliates own equity and share profit aligns our interests and provides meaningful incentives for long-term growth. This strength have provided stability to our business across market cycles, including challenging periods of market volatility, such as the one our industry experienced last quarter. In the face of difficult market environments, BrightSphere generated solid financial results, which we will discuss in a minute. Finally, we have a strong balance sheet, with ample financial capacity, which will help support our growth going forward. Turning to the next page. BrightSphere has a broad global reach that offers significant expansion opportunities. We and our affiliates have 20 offices around the globe, serving sophisticated institutional investors in key international markets. We see meaningful potential in leveraging our scale to enhance our presence in underserved, high-growth areas, such as the Asia-Pacific region. The next slide sets out greater detail about the steps we have taken and plan to take to reposition our business for the future. First, we will focus on organic growth, seeking to serve more clients with a greater range of products to meet their evolving needs. We will expand our Global Distribution capabilities, again, with the view to achieving greater penetration in high-demand markets, such as APAC region. We will also continue to use seed and co-investment capital to support new product development and capacity expansion through investments in personnel and technology. While M&A maybe a lower capital allocation priority going forward, we will selectively considered deals that offer attractive synergies or distribution capability. Second, we will focus on efficiency and entrepreneurship. In the first quarter of 2019, we reduced our workforce at the Center by 20%, which translates into about $10 million of savings in compensation and the benefits for 2019. In the fourth quarter of 2018, we reduced Center compensation by $20 million compared to 2017, as Center and Global Distribution variable compensation was restructured to be more linked to results. We will continue to focus on efficiency and in building a leaner and a stronger organization that can respond rapidly to new opportunities and challenging changing conditions. But let me emphasize, however, that those cost reductions had no impact on our Affiliates operations or our investment teams. We will continue to emphasize effective capital management and use the strong cash flow from our diversified revenue streams and our balance sheet capacity to support growth and enhance value for our shareholders. We will maintain our accretive share repurchase program and a consistent dividend policy. Lastly, to simplify our corporate structure, we expect to complete our corporate re-domicile to the U.S. in the first half of this year. In addition, our ownership transition from HNA to Paulson & Co. remains on track. Turning to the next page. In terms of Q4 results, as you know, the fourth quarter was extremely difficult period for financial markets, but with our cost reduction measures and the stability provided by our operating model, we are able to report solid results. ENI per share of $0.43 for Q4 was down 2% from Q4 '17 and $1.86 for 2018 was up 15% over 2017. Let me pause here and turn to Suren, Aidan and Dan to provide more detail on our results. As you know, Suren recently joined us as the CFO. Suren has many years of experience in corporate finance and the asset management industry. And he brings a strong understanding of BrightSphere's business from his previous service on the board. Suren?

Thank you, Guang, and thanks for that kind intro. Good morning, everyone. First, let me just express my excitement about this opportunity to participate in the next phase of our company's growth. I'm really looking forward to working with Guang and our team here at the Center, as well as at our Affiliates, to grow our company and create shareholder value. So to pick up from Guang, on Slide 6. And I think it bears repeating that the environment in this quarter was obviously very challenging. But as you see, it had a rather muted impact on our quarter's results, and certainly, our full year 2018 ENI EPS. And this was an outcome of a few factors: one, the growth in our alternative assets and the higher fees we get on those assets; the structural variability that Guang touched on that we have on the variable costs and profit sharing at our Affiliates, which protects us on the downside in environments like this; and very importantly, the actions that we took at the Center to reduce our expense base and to make it more variable and more aligned with the shareholders. As Guang mentioned, comp expense in 2018 was 20 million lower than in 2017. And that came from streamlining our overhead functions and making our variable comp lower and more variable. And we've continued this efficiency drive this year in this quarter of 1Q '19 with further reductions of headcount and other cost measures that will save us another $8 million to $10 million. And it's also worth repeating that a key reason for these changes is not just one-off cost reductions, but it's really to make our company more nimble, more entrepreneurial, because the reduced hierarchy allows our senior leadership to work more closely with our Affiliates and ultimately make the Center more effective in helping our Affiliates grow, and also, that the comp being more variable definitely encourages entrepreneurial behavior that's more aligned with the shareholders. So it's a long-term step, but it is helpful. It does help us in 2018 and years beyond. Moving to AUM and loans. The market dislocation in this quarter, and particularly in December, definitely impacted our AUM, which ended at $206 billion, down about 13.2% from the last quarter. However, as you all know, we're already seeing a good recovery in January, so a chunk of that negative impact can hopefully reduce. Our client outflows for the quarter were better than the year-ago quarter, but we did see lower inflows in this quarter. So as a result, our net client cash flows were negative $5.7 billion, with a revenue impact of $12 million annualized, which is about a little more than 1% of our revenue. On a full year basis, our net client cash flows were negative $10.5 billion. But given the higher fee that we get on our inflows compared to our outflows, the revenue impact was more muted at $3.8 million, which is about 40 bps of our total revenue. Moving to performance. Our long-term performance remains strong and consistent, as you see, with 68% and 75% of strategies -- or strategies representing that much revenue, outperforming the benchmarks on a three year and five year basis, respectively. And as Guang mentioned, too, our balance sheet is very strong, with full capacity being available on our $350 million revolver, and we're actively returning capital to shareholders. We resumed our repurchases in mid-December last quarter, repurchasing about 1.2 million shares in those couple of weeks. And we have continued the repurchases this quarter, adding another 3.9 million to that repurchase. So this adds up to about 5 million shares that we repurchased for about $60 million, and that's -- quick math, it's about close to 5% of the outstanding shares that we bought in the last 1.5 months. And additionally, on capital management, our board has approved the $0.10 per share dividend, which reflects about 23% payout rate. Moving to the next slide, which compares this quarter's results versus our prior quarters and the year-ago quarter. As you see on the left, top left box, over the last five quarters, our average assets have been very steady as inflows have offset outflows, except this quarter where it dropped because of the market movement, which reduced our average assets by about 7.3%. Looking at our fee rates. Excluding the impact of the catch-up fees from landmark assets, which are in that white part of the bar, our weighted average fee reduced a little slightly from 37.7 to 37.3, and that was a result of a couple of offsetting factors. First, you see the impact of market depreciation in higher fee asset classes, such as EFA and emerging market equities, but that was partly offset by the continuing trend that we have discussed in prior quarters where we saw higher fees on our new assets than on our outflows. On the revenue, the total revenue decreased about 16% from the year-ago quarter, which is obviously more than the decline in average AUM I mentioned. And this was largely because of the absence of the catch-up fees received by Landmark in the year-ago quarter. Notwithstanding this meaningful revenue drop, the impact on our operating margin and our ENI was much more limited. Our net income was down about 6.4% and our EPS was down about 2.3% compared to the year-ago quarter. But to reiterate, this was possible because, even though we did face a very challenging environment, there were several levers that protected our EPS. And those levers are namely: one, the long-term organic growth that we have from several of our strategies; the structural cushion that we have in our model; the cost, the variable compensation and profit sharing at the Affiliates; and the longer-term steps that we have taken to make the business more nimble, and more efficient and more effective; and our strong balance sheet allows us to engage in effective capital management, and we did a good amount of share repurchases in the last quarter, this quarter, as well as throughout the year last year. Moving to the next slide, which looks at our key metrics over the last 5 years to provide you a longer-term perspective of the earnings growth capability of the company. You look at our average assets, and I'm looking at the black portions, which excludes the equity account at Affiliates, like Heitman which is discontinued. Our average assets have increased about 6.2% per year during this period, driven by both organic growth, as well as growth in alternatives post the Landmark acquisition. Our fee rates have gone up from 32.2 bps to 38.9 bps. So these 2 factors combined allowed for our revenue to grow at about 10% per year over this period. Our pretax ENI has grown about 6.5% per year. And our EPS -- ENI EPS has grown a little more than 10% over this period, thanks to the repurchases. Now, if I specifically compare 2018 full year results versus 2017, our ENI EPS has grown by 20%, excluding performance fee, and by about 15%, including performance fee, in spite of this very negative market environment that we saw in 2018. And again, to reiterate, this outcome was driven by the growth that we have inherent in many of our strategies, the structural protections we have in our business model and the steps that we have taken and continue to take to be a more nimble organization and deliver returns to the shareholders. We expect that these levers will continue to help us in growing our EPS going forward. And with that, let me turn it over to Aidan Riordan who will provide some more color on our investment performance and flows.

Thanks, Suren, and good morning, everyone. Turning to Slide 9. Our medium and long-term investment performance remains quite strong, with 68% and 75% of our strategies outperforming their benchmarks on a revenue-weighted basis over the critical three and five year time periods. Our shorter-term performance, however, has declined since last quarter's call, as our one-year revenue-weighted performance fell from 53% to 31% as of the fourth quarter of 2018. This decline was driven, in large part, by a very challenging market environment for active equity firms, as macro events, including the ongoing trade impasse with China, slowing global growth and continued Fed activity, created significant market volatility and pushed investors into more defensive positions. This resulting uptick of defensive stocks has been a headwind for both growth and value investors, as the best performing sectors in the S&P 500 for the fourth quarter were consumer staples, utilities and REITs. Morningstar data shows that only 20% of active equity managers outperformed their respective benchmarks in 2018. This is the second lowest result over the last 10 calendar years. It was also a tough stretch for quants as the efficacy of many common factors was reduced in this period of extreme market volatility. We've seen a strong rebound in Affiliate performance in January as Suren mentioned, however, as the sectors that led the markets down in Q4 are also leading a reversal upward for the month. This mean reversion in the markets has broadly benefited our portfolio, thanks to our firm's focus on long-term investing style. The good news for BrightSphere is that, despite the significant headwinds that we've seen in the fourth quarter and over this protracted market cycle has protracted market cycle, our Affiliates continue to post attractive and marketable mid and long-term performance across a broad set of strategies, strategies which align closely with a number of client and industry trends. Slide 10 breaks out our net client cash flows on AUM and revenue basis. Our net AUM flows of negative 5.7 billion resulted in a decrease in annualized revenue impact of 12.3 million for the quarter. While our fee rate on inflows continues to meaningfully outpace those on outflows, this quarter, the fee rate differential was a healthy 14 basis points. The magnitude of outflows in several low fee sub-advisory accounts outweighed inflows this quarter. As you know, flows in the institutional space can be large and lumpy. And aside from the continued outflows in the areas of secular decline, such as large cap value, our flows this quarter did not have a discernible pattern that we would expect to continue. I would also note that the migration of our business to higher-fee assets is very apparent on a full year basis. As you can see, on a percentage basis, revenue flow has been flat to positive in each of the past three years, notwithstanding negative net AUM flows over the same period. On Slide 11, we show further detail on our flows by asset class. You can see here that it was a difficult quarter overall with outflows in most asset categories, with the exception of alternatives, which continue to carry significantly higher fees. As you may recall, we have over the last couple of quarters provided you a broad overview of specific growth initiatives that we've undertaken in partnership with our Affiliates. As we've discussed, we have a firm commitment and a long track record of working collaboratively with our Affiliates to broaden and diversify their businesses by leveraging core capabilities and expertise to create new investment strategies and address new geographies and channels. One of our more recent collaborations was at Acadian. BrightSphere worked alongside Acadian's investment team and business leadership to scope and execute on the multiasset class opportunity. Over the last two years, Acadian has built out a team of investment professionals, along with the necessary infrastructure to support this key initiative. Importantly, the MACS strategy at Acadian is truly an extension of their existing investment philosophy and process. And the addition of these capabilities will enhance their ability to serve the evolving needs of both current and future clients. The MACS strategy went live in late 2017, and it recorded a strong first year track record, which has been well received in the market. And I'm very pleased to say that, as of the end of January, Acadian has successfully closed on one mandate and is in the final stages of a couple of more of these opportunities. It's a very positive sign and a testament to the type of work that we're doing together with our Affiliates. In summary, our business is operating as we have intended it to. Our Affiliates' adherence to their investment disciplines continues to produce attractive long-term outperformance as we would expect. And as the 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 market cycles. And now Dan will provide additional commentary on our financial results.

Thanks, Aidan. Slide 12 provides insight into the drivers that impacted management fees from Q4 '17 to Q4 '18. The overall trend during this period was a continuation of the positive mix shift toward higher fee assets, even as the equity market decline in Q4 '18 drove management fees lower. As noted, our average fee rate decreased year-over-year by 2.3 basis points to 36.9 basis points in Q4 '18. In the left box, you can see average assets for Q4 '17 and '18 split out by our 4 key asset classes. The box on the right provides the ENI management fee revenue generated by these average assets and basis points of fees also broken up by asset class. Global non-U. S. equities and alternatives had average fee rates of 39 basis points and 73 basis points, respectively, including net catch up fees in alternatives, while U.S. equities and fixed income have average fee rates of 24 basis points and 20 basis points, respectively. Between Q4 '17 and Q4 '18, the combined share of higher fee global non-U. S. equity in alternative assets and consolidated Affiliates increased by 2% to 63% of average assets, while the share of U.S. equity decreased 2% to 31%. On the right side of the chart, you can see that ENI management fee revenue decreased to $204 million. Of this total, 77% was made up of higher fee global non-U. S. and alternative assets. Slide 13 provides perspective regarding ENI operating expenses. Total ENI operating expenses grew by 2% between Q4 '17 and Q4 '18 for a total of $86.1 million for the quarter, as we continued to invest in affiliate growth initiatives and projects, offset by lower fixed comp in benefits and sales based compensation. On an aggregate basis, the ratio of operating expenses to management fees increased from 36.3% in Q4 '17 to 42.2% in Q4 '18, primarily reflecting the 13% market-driven reduction in management fees. Factoring in the significant impact of the 2018 market declines on 2019 average AUM, we expect the operating expense ratio to be approximately 42% for full year 2019. The next key driver of profitability is variable compensation, shown in more detail on Slide 14. Cash variable compensation decreased 35% to $42.1 million from Q4 '17 to Q4 '18. This decrease in cash variable compensation reflects the cost variability of the profit share model and reductions made at the Center. On a total basis, variable compensation decreased 31% to $48.3 million for Q4 '18. This exhibit also calculates the ratio of total variable compensation to earnings before variable compensation or the variable compensation ratio. This ratio decreased from 41.6% in Q4 '17 to 38.4% in Q4 '18. The variable compensation ratio for full year 2019 is expected to be approximately 40%. Affiliate key employee distributions are shown on Slide 15. Distributions represent the share of affiliate profits owned by the affiliate key employees. Between Q4 '17 and Q4 '18, distributions decreased 37% from $21.8 million to $13.7 million, while operating earnings decreased 21% quarter-over-quarter. The decrease in operating earnings and distributions resulted in a decrease in the distribution ratio from 22.3% to 17.7%. For full-year 2019, this ratio is expected to be approximately 19%. On Slide 16, we present a summary of our balance sheet and capital position at December 31. We continued to believe that our balance sheet provides the flexibility and liquidity to support our growth initiatives. We have agreed to terminate the DTA deed with Old Mutual plc at an approximately $13 million discount and expect to settle that within Q1 '19. Our debt to adjusted EBITDA ratio of 2.1x as of December 31 includes an accrued earn-out. We expect to settle this acquisition agreement this quarter, utilizing a mix of cash on hand and external revolver capacity, at which time, our leverage ratio is expected to decrease to within the low end of our target range of 1.75x to 2.25x. Now I'd like to turn the call back to the operator. We are happy to answer any questions you may have.

[Operator Instructions] Our first question comes from Craig Siegenthaler with Crédit Suisse. Your line is open.

Guang, I wanted to start one of the bigger questions that we get in the buy side. That's the fact that I believe you still own an asset manager in HPlus Capital, and John Paulson obviously owns Paulson & Co. Now he owns about 25% of BSIG. So I'm wondering could we see a closer relationship between both your firms and BSIG in the future? And could BSIG eventually take an equity stake in either firm?

As you know, HPlus helped Paulson's acquisition of BSIG shares. But now, both Suren and I are 100% focused on BSIG opportunity. And like I said in my remarks earlier, that BSIG represent a very, very exciting opportunity. There are a lot of growth opportunities, particularly in Asia. So this is my only focus. This is Suren's only focus.

Then just as my follow-up, and I want to follow up on Asia because we know the economy there is growing quickly and there's also a nice expansion in middle-class and wealth overall. But there's only a handful of foreign firms that have really succeeded, especially in mainland China, on an AUM basis. So I'm just wondering, how is your strategy unique? What can BSIG offer that's differentiated? And maybe the answer is because BSIG is a smaller firm, it doesn't need a lot of AUM to really move the needle.

That's correct. I mean in terms of the opportunities there, I think now we're probably at a better time than before. As you know, the regulation has relaxed quite a bit in terms of the foreign managers like ours now can have a majority ownership. And also, the size of the markets are getting to pretty interesting level that will make a difference. So we do believe going forward, it could be a very different opportunity for managers like BSIG versus, let's say, five or 10 years ago.

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

Since this is the first public outing for both of you, best of luck down the road. I guess my first question maybe is on capital management. Once Paulson closes on his 24.9% stake, what is the capacity or ability for his ownership stake to go above that? I know, previously, HNAs had started to rise above 24.9%, but I guess I think investors are getting the sense that there had started to be push back against having a stake over 24.9%. So once he buys his stake, what is the capacity to actually keep buying back stock? Because I would presume maybe incorrectly that Mr. Paulson would want to pro rata sell stock down here or at what -- current prices would actually be a slight loss to what he purchased some of it at.

Thank you, Robert. And it's definitely something we wish to clarify because there does seem to be a misconception on that. We believe that we really have no major restrictions on continuing our repurchase program. At these levels, we certainly think repurchases are very attractive and probably one of the best uses of our capital, which we have ample capacity, as I mentioned. So from a financial perspective, we have ample capacity. The markets are attractive. And then the potential obstacle you mentioned, we have really discussed that extensively and do not believe that's an obstacle. We are continuing our repurchases. And even after the transaction between Paulson and HNA closes, which would have Paulson & Co. be at right below 25%, there are various alternatives that we have discussed and that are available to us to continue our repurchases. And one of those you mentioned that we could be buying from Paulson & Co. pro rata, and there are a variety of structures possible there. We also will continue to look into the support of our shareholders as well if needed. But long story short, without going in too much detail, we have looked at that and do not believe that to be an obstacle in executing a sizable buyback program.

And then maybe as a follow-up. In talking about trying to think through, you had some of the efficiency initiatives, and you talked about the incremental 8 million to 10 million that I guess taking out the expense base, but at the same time, investing in high-growth markets. And certainly, some of those can cost money. So should we be thinking that most of that savings is really being recycled into maybe reinvesting back into the Global Distribution platform? Or how should we -- obviously, you gave guidance on expenses. But I'm just trying to think, practically speaking, is that really how we should think of this? Your cost savings or at least for the time being are going to be recycled into building out more infrastructure to support growth?

Yes. I mean these are -- the savings we mentioned are truly incremental savings because we're doing both things at the same time. We are saving net costs. At the same time, our remaining resources, we are reallocating towards growth opportunities. So as you know, when our Center was built, at that time, it was for a much different operating structure and operating reality when we had 40 Affiliates. The reality is that now we have -- we're a much nimbler place, we have seven Affiliates, so we did have a good amount of excess capacity, if you will, in our resources. And so the reductions we have taken have not impacted, as Guang mentioned earlier, our ability to service our Affiliates and have not impacted Affiliates at all. Now we are reallocating our remaining resources to be more focused on helping our Affiliates grow. For example, in Global Distribution, we are reallocating some efforts towards Asia Pacific. So to answer the question, I think you would -- the savings are net, so you can take it to a pretax number, if you will.

Your next question comes from the line of Bill Katz with Citi. Please go ahead. Your line is now open.

Congratulations to everyone on the management team. Just coming back to the growth for a moment. So if you look at the gross sales momentum, I certainly appreciate that the fourth quarter was particularly unusual. I think a lot of the benefit you had throughout late 2017, '18 was leveraging Landmark. And I think they're, it seems like now, probably on the other side of some of their capital raises. So as you think about the growth sales prospects for 2019, where do you see the biggest drivers? You mentioned selling on Acadian, I was wondering if you could maybe size that within that. And how quickly do you think you can tap into some of these Asia Pac initiatives where you also sort of see a more decisive increase in gross sales?

Sure, Bill. It's Aidan. Thanks for the question. As you look at the market opportunity and you look at what's driving flows, we generally see the same trends and dynamics from a product demand standpoint and from a geography standpoint. So naturally, things like non-U. S. long-term, we think about emerging markets. And then the broad suite of product sets that we're developing will take hold. And I've mentioned on other calls, certainly, in the past, the investments that we've made really across nearly all the Affiliates to create additional capacity that you don't necessarily see, and some of that is going to be in things like emerging markets. Naturally, you've heard us talked about a fairly broad set of things at Acadian which we're now beginning to see online. And the size of those markets are quite large, and we'll also have derivative follow-ons. We can't specifically talk about it, but we've also mentioned that our alternative platform has additional growth opportunities in it in the form of additional products down the line, and we see those coming. And then even in things like Barrow Hanley where we've made investments in the emerging markets platform, which, again, given the fact that the market maybe has been out of favor in recent past, there are still going to be long-term growth there. And then lastly, things like fixed income and other product sets at Barrow Hanley, which have marketable track records, just haven't been scaled up. So again, as we think about the seed pool, and what it does and the time line, we're constantly putting capital in, in an R&D kind of a way, and you're going to see those things come through. The timing and the size is always hard to predict. And naturally, as I think we've given guidance in the past, the balance between historical Landmark fundraising and the timing of some of these new things, you can't always match those. But in the main, when you think about the portfolio, broad set of companies that have growth capability and then many of which we've seeded, and once those things take off, we'll seed other things. The last thing I would point to is -- and just to mirror what Suren was saying, there is going to be an opportunity to do more in a programmatic way with both the seed and the focus on integrating distribution into a broader geography base, and that's another opportunity for us. So hopefully, that answers the question for you.

And just as a follow-up, a bit of a 2-parters, so I apologize for the complexity of it. So the first part is, as you think about the commentary on capital return, how should we think about the interplay between free cash flow and the balance sheet? So should we be sort of targeting a payout of free cash flow? Should we think about using leverage to enhance the buyback? And then secondly, just on the sheer headcount reduction out of the corporate center, it does strike me as a very big number. And I was just wondering if you could frame out some of the areas where you rationalized the footprint.

Thank you, Bill. It's Suren. So on the first part, on balance sheet and capital management. We obviously want to manage our balance sheet very prudently and keep our leverage levels manageable to be successful across cycles. So that's clearly a priority and that has played into we want to maintain our ratings. Now in terms of what we have is we have cash on the balance sheet, we have a revolver and we have free cash flow coming. And we look at the best possible uses of our cash. And as we touched on earlier, we see repurchases as a very attractive investment relative to, for example, M&A, given where M&A is priced. We see our Seed Capital as another attractive investment, which we are growing a little bit in support of organic initiatives, including expansion in China where we have some Seed Capital deployed. And we continue to invest in technology and personnel at the various affiliates for new product development and keeping our dividend consistent. If you look at our dividends, since the IPO, they have grown, so that's also important for our shareholders. So those are our priorities, and we are fortunate that we have ample capacity to execute on all of these. Relatively speaking, as attractive opportunities come up, while we could always reprioritize a little bit, but right now, it's a problem of plenty, if you will, but we see a lot of places where we can invest our capital very, very accretively. Part two of your question in terms of the headcount reduction. Yes, it may seem like a big reduction, but again, as I mentioned upfront, there are two parts to this. One, there was a fair bit of hierarchy, if you will, at the Center, which ultimately was reducing our effectiveness in our view. So there is a little bit of delayering and reducing the hierarchy, so that our senior leadership can work more closely with the Affiliates, advising and counseling them, which we find valuable. And part two is that, we frankly did have excess capacity, given the current scale. The scale was built for a much different operation as opposed to what we have, especially keeping in mind that if we are not, given where M&A opportunities trade, particularly the sizeable ones, we don't see us tripling or quadrupling our scale this year, for example. So we do think there was excess capacity. Now as we grow our scale, we'll continue to add selectively as needed. But the reductions we've done, again, to reiterate, have had no impact in our ability to be helpful to our Affiliates, and importantly, had no impact on our Affiliates' operations, including the investment or the procedural operation.

Your next question comes from the line of Chris Harris with Wells Fargo. Please go ahead. Your line is open.

You mentioned a nice recovery in performance to start 2019. And obviously, the equity markets are way up. Any read you can give us on what you guys are seeing internally with respect to flows to start the year?

Yes. I mean we're not really typically going to focus on short-term flows. Generally speaking, our business is lumpy and hard to predict, and I don't have a good feel of the trend lines that would be developing at this point. So I think it would be premature to comment on that without additional time and input. But we're not seeing anything that causes me to have a different view on the outlook of the business today.

And with respect to the focus on APAC, I mean, clearly, that's a very large region. I wonder if you can maybe break that down a little bit, like where in APAC you guys see the most interesting opportunities, or where do you think you have the best opportunity for growth, I guess?

Sure, Chris. I think definitely, Greater China would be one area of our focus and Japan could be a very interesting market, and also Australia and New Zealand has also been an interesting place for us. We have some business there but we can do a lot more. So in general, we feel like Asia will be pretty interesting place for us particularly like I think Craig asked that question earlier, we are a little bit late to that market, but still, we are not that far behind because the market is still at a very early stage, so everyone should have a pretty good shot at it.

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

This is actually Sameer Murukutla on for Michael. Just as a follow-up to Bill's questions on capital management. I guess how much minimum operational and maybe regulatory cash do you need to run the business? And I guess maybe as well, how much money do you think you are going to allot for Seed growth in the future?

Yes. Hey, you broke up a little bit there, but I think -- this is Dan. I think the question was, how much minimum operational cash do we need to operate? And so we've talked about this before. We typically target around $10 million in terms of certain minimum operating cash at the Center. So to Suren's earlier points around the different available pools of capacity, when we run our full analysis and we look out for -- and consider our upcoming uses of cash, we feel pretty comfortable based on that analysis in our current capacity, in our revolver, in our distributions, our generation that we're projected to create over the near and long-term that we have ample capacity for a variety of activities.

And this is Suren. One other thing I would add to what Dan said is that, from a regulatory perspective that you asked about, frankly, that's one of the reasons and benefits why we are redomiciling back to the U.S. so there were some -- the rules that apply with regards to the U.K. FDA regime that we had to go through a process which involved paperwork. So it didn't impact actual cash, but once we come back to the U.S. this year, it will simplify a lot of those procedures.

Okay. I guess just as another follow up maybe on expenses. You've talked about rightsizing the organization with expense reduction. And have you -- you're down to the seven Affiliates. Is there more to come? And maybe how should we think about the core expense growth in maybe '20 and beyond?

At a very high level, as with any business, we will constantly evaluate our needs and allocate resources to high-growth areas. So we just have to stay focused and focus on -- allocate our resources to the growth areas. And you guys want to add some more color to it? Yes?

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

I guess I have this maybe a two-part question. When I think of -- look in the past two years, Affiliates and shareholders have gone through a couple of CEO changes, a lot of changes at the top, a lot of kind of holding company uncertainty, I guess. So looking forward, I mean, a lot of the strategies, working So looking forward, I mean, a lot of the strategies, working with the Affiliates, providing Seed Capital are, clearly, a continuation of what was taking place before. So how should we think of what's really changing now and how the Affiliates -- what's their receptivity been? And how should we think about really what is changing from kind of the old -- the strategy as it's evolved, even over the last couple of years?

Yes. Again, at very high level, we're really, really focused on the area we can support our Affiliates and only do things that are truly valuable to them, and so that's one change. Another change is that we're going to focus on how we can leverage our scale outside of the U.S., particularly in some of the international markets, and so we can penetrate the distribution channel there. So that will be probably in my view, the biggest shift of our focus. And we -- as a result, we changed our headquarters structure to serve that purpose.

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

Just wanted to circle back on the Asia Pac growth opportunity. You mentioned China a few times. I was just hoping you could elaborate a bit more on your approach to distribution there in mainland China and how you're building that out.

Sure. I mean we will be extremely flexible, going in with a very open mind-set. As you know, the regulatory change there would allow us to set up a either majority-owned or joint venture with a local partner or 100% owned entity. Because for us, as everybody else understands this, the intellectual property is very important for us, so being able to control venture and being able to own 100% of venture and own that investment process is very important to us. So at least the regulatory framework today there would allow us to do that. So as long as we have that control over our process, our investment process, we're open to any type of form of a partnership. On the pure distribution side, we will be more flexible. One area we're looking at is potentially partner with a local bank, let's say, and being our distribution partner. And there, of course, we can now ask for majority control, so to speak. So essentially, it's just pure distribution partnership, we will be okay with any form of arrangement as long as we can have our products on the shelf.

And just as a follow-up. What investment products or strategies are you most focused on for distributing in mainland China? Where do you see the growth more? Is it more Global products? Or is it local manufactured products? And how much local manufactured product, AUM product strategies investment expertise do you have today in mainland China?

All above, I think whatever we can sell, we will sell. But with that maybe Aidan can add.

Yes. Sure. I think it's important to recognize that we're operating in China already. We have a team in Asia that's been distributing products and making relationships with significant investors. And they've been doing that for quite some time. These are also folks who've had relationships selling and distributing products for other companies. And when you look at the demand that's coming out of Asia, it's pretty broad. It comes from both global, as well as continued interest in specialized domestic U.S. equity products for that matter, but there is also demand for a broad set of alternatives that are within our platform. So I think really what we're talking about is continuing and building on that track record, and then also, working in a more collaborative, coordinated way with our Affiliates to enter that market which is far from here and is developing around a regulatory catalyst. And I think that ends up an exciting opportunity for us. Now certainly, as we look at that, there will be new product development opportunities around both our quant as well as our fundamental products. And when you segment them, without getting stuck in the weeds, you're talking about two different markets: the existing institutional demand, as well as an evolving opportunity likely to tap into platforms and individual investors through different structures. So again, we're here already. We've been moving in this path. We're going to be working together with the Affiliates to do it. And it's a gigantic market for us.

Yes. Just to add to that. I mean, longer-term, we see the local market is extremely attractive. As you may know, we already have Asia products, and that will be, in terms of the potential size, it could be quite interesting.

Any sizing of the incremental headcount and resources that are needed to achieve the growth that you're looking to target?

That really depends on the opportunity. We just started those conversations and I plan to travel there towards the end of this month after everybody comes back from the Chinese New Year holiday. We will allocate whatever resources we need to attack that market.

Your next question will come from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Wanted to follow up on prepared remarks that the variable comp was made more variable, realizing you saw some benefits from the Center cost reductions. But could you flesh out whether anything's changed in terms of the comp structure, and maybe just understand how much flexibility this item could have during market volatility?

Yes. Thank you, Ken. As you know, with our Affiliates, we already have the structural cushion where it's formulaic so the variable comp and profit shares go down when revenues go down. At the Center, we did have variable comp, but practically speaking, it wasn't as variable in the years past. So the structural change -- and it's also a little bit about of a cultural change that we made to engender a more entrepreneurial culture and more accountable culture. So definitely, it's a little bit closer to the other firms in financial services industry where you see more variability. And in good years, with individual performance, people get paid lot more, and in years where that's not the case, much less. So that's more of a cultural change rather than a particular formula different from -- at the Affiliate level where it is a formula. And I blanked on the -- was there a second part on that question, Ken?

No. That pretty much clarifies everything. Just one follow-up. This is on the change in the U.S. domicile. It looks as if the expectation is for first half completion. Sounds like the key milestone is going to be shareholder vote. Just want to see if there's any other milestones, what should we be looking for? And perhaps, maybe give us a little bit more time frames within the first half that we should be looking for.

Yes. Certainly. So it's been a topic that has been socialized within the company for a long time, as you know, and certainly the board. So one milestone that we did cross is our board approved the redomicile, so now it's really just the shareholder vote. And I can share with you that our key shareholder, once the Paulson & Co. and HNA transaction closes, is supportive of the move. So I guess in that case, 24.95% of the vote is sort of in the bag, if you will, and we've spoken with other shareholders. We feel positive that it's highly supported, so we're confident it will happen on the redomicile. It's just a matter of going through the process, the SEC process, the U.K. process, and that process is expected to take about five months or so. It could slip into the Q3, but we're hoping to target end of Q2.

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

Just wondering, it's early days in 2019 obviously, but I wonder if where the market's gone has maybe changed some of the investment performances in your strategies, and if there's any key strategies that have kind of performance inflection points that may be coming? I know large-cap value has some poor performance rolling off its three-year, but are there any other examples of things that you see coming down the pike?

Yes, it's Aidan. Thanks for the question and I appreciate the question because I probably should have addressed this earlier in one of the other questions. It's important when you look at our performance that you focus on the longer term three and five year track records. And the reason is when we're thinking about the institutional market and the way investors are making decisions, they're looking over the full market cycle, and that's going to be measured at least in a three year record, if not longer. And when you look at our client base, these are folks who have kind of longer term holds. So while we report on the one year number, we need to remember what it is and what it isn't, and it's going to be a more volatile reflection of performance that's made furthermore volatile in periods of high volatility. And so when we have seen that number shift down, in some of the math, it's reflecting the volatility. Interestingly, when you look at last quarter and then you roll it into what we're seeing this year, you did see a fairly broad swath of factors that drove performance in Q4. But to your specific question, there isn't really any concentration in our portfolio that one needs to focus on or worry about as it relates to performance, and -- so the answer is no, not really. There isn't anything that I would point to that, I would say, you need to keep an eye on the performance side. I think when you look maybe on emerging markets, that is an area that has had some pressure, but again, the long-term records there are strong.

And then just quickly. The dynamic between growth strategies versus value strategies. Are you seeing any change moving maybe towards the value orientation?

I know we've commented on that in the past. I don't have a great answer for you right off the top of my head, to be honest, but -- so that's how I would answer that. I don't necessarily see a meaningful change.

Your next question comes from the line of Patrick Davitt with Autonomous. Please go ahead.

I think there was a fairly large announced Acadian outflow in a Vanguard sub-advisory strategy and a couple others I think I've seen. Can you maybe give us some color in which of those have already gone through flows and which might still be pending?

Yes, sure. Yes, this is Dan. Right, when we look at -- so that particular item you're referring to, as well as some of the comments that we made around Q4 sub-advisory, generally, sub-advisory outflows, that's factored into the overall net outflow number for Q4. So when we were commenting on our flows for the fourth quarter, certainly, the sub-advisory channel broadly, and we were not immune to that, impacted our flows. So that item that you referred to was part of that, and we saw it more broadly in sub-advisory. So we -- it certainly impacted things in the fourth quarter. And when we look quarter-over-quarter, from a Q3 to Q4 perspective, while we had some or even a Q4 to Q4 point of view, while our outflows were fairly stable, given some, I would call it, some lumpiness on sort of the one-time sort of outflow side, we talked about sales and what we're doing to generate more on the gross inflow side going forward, which I think would help turn some of those numbers around.

So it's fair to say that at least large publicly announced sub-advisory losses we've seen have all gone through? There's not any big ones pending?

I think that's fair.

Your next question comes from Bill Katz with Citi. Please go ahead.

Just a couple of follow-ups and thanks for taking them all. You mentioned that you have some footprint already in the AsiaPac-China areas. I was wondering if you could size that. Number two, just coming back to the opportunity with the multi-asset product at Acadian and triangulating that against sort of the institutional basis and more of a 3-year look. How much sort of incremental traction would you expect to get from that product without a 3-year track record? Or is there something specific to that, that would allow for maybe faster traction? And then on the buyback, how do we think, how do you sort of manage through sort of the dilemma of cheap stock versus the float versus the Paulson ownership?

So one, I'll cover the first couple of questions. Bill, it's Aidan, and I think Suren will cover the other two. So I think the first question was, what's the presence in Asia today? And there's a few different components to that. One is the BrightSphere office itself, which consists of a handful of people in that office out of Hong Kong, really focusing on bringing our institutional products into the region. So that's that area. You also have some of our affiliates, namely Acadian having their own presence there in a couple of different regions. And then our Campbell team has some folks in and around Oceania, if you want to think of it that way. So that's kind of the footprint with regard to that. I think your second question was how big is the marketplace for something like MACS? And then how big or how fast can that ramp up? And I think I've talked about this in previous calls. And it's important to kind of think of it as capacity. We size that market as being very large. And between the flagship product that's here and all of its derivatives, you're talking about tens of billions of dollars of capacity. Now how do you get there, and what's the time frame? As you point out, often, you would expect people to need a three year record. I don't think that's necessarily an expectation or a limiter here. One, we have traction already that we're seeing from the product. Two, we think this is a product that's differentiated. And many of our larger Affiliates that have long sophisticated relationships with clients that like to seed product, if they have a track record that they can demonstrate, even if it's shorter than three years, will see take up. And so I think it's reasonable to think that a product like this or others that might come out of it would have that kind of a track record. As far as how fast something ramps up, that's hard to guess. But as I mentioned in my prepared remarks, we've been at this for a couple years. The team is in place. We think what we need to be seeing in terms of being supportive for constructive for flows is there, so we feel optimistic about it.

And Bill, to the last part of your question around repurchases. Yes, so certainly, we think the stock is very cheap, and we find it very attractive. And that's why you saw that in the last 1.5 months, we bought back almost 5% of our outstanding shares. So we're out there full swing, essentially, at these levels and are buying in the market. We will be open to buying blocks and what have you. Now with regards to the float and also in co-ownership, I can certainly share with you right now that we find Paulson & Co. obviously are very sophisticated investors, and they don't have a particular interest in having more than 25% just for the sake of ownership. In fact, they would probably be perfectly comfortable owning less than 25%, but their insights have been very helpful to the board in terms of having been in the same business as ours and see the same opportunities and challenges, to some extent. So they understand the accretion math that we're all looking at, and they also understand that this is clearly one of the levers that is in our control to generate EPS and growth. So what I would say is that you can probably expect our float to continue to be in that 75% range or more while we can continue to do repurchases. As I mentioned, there are several solutions that we have discussed to get us to that outcome, and we feel perfectly comfortable about our ability to buy back stocks, while maintaining the float.

This concludes our question-and-answer session. I'd like to turn the conference call back over to Guang Yang.

Great. Thank you very much. Appreciate it.