Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2020. [Operator Instructions]. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Please note, this call is being recorded today, Thursday, August 6, 2020, at 11 a.m. Eastern time. I would now like to turn the meeting over to Elie Sugarman, Managing Director, Strategic Development. Please go ahead, Elie.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30, 2020. Before we get started, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including our Form 8-K filed today containing the earnings release and in our 2019 Form 10-K and in our 10-Q for the first quarter of 2020. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures. Information about any non-GAAP measures referenced, including a reconciliation of those measures to GAAP measures, can be found on our website along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Suren Rana, our President and Chief Executive Officer, will lead the call. And now I'm pleased to turn it over to Suren. Suren?

Thanks, Elie. Good morning, everyone, and thank you for joining us today. I hope everyone and their loved ones are healthy and well. Let me start with Slide 5 of the presentation deck as usual to provide some key updates on our business in the second quarter. We reported ENI per share of $0.41 for the second quarter of 2020 compared to $0.45 in the second quarter of last year and $0.40 in the first quarter of this year. While our revenue declined more compared to the year ago quarter due to the impact of the market decline on our average AUM, the impact on ENI was much lower, and this was due to our continuing discipline on the OpEx, and the built-in variability that we have discussed from time-to-time on our other costs like variable compensation and employee share of the distributions. Also, the repurchases that we did in Q1 and Q2 helped to further reduce the impact of the revenue decline on ENI on a per share basis. We previously announced divestitures of Barrow Hanley and Copper Rock which results in a more attractive pro forma business mix that has consistently generated positive net flows historically. In the second quarter, too, our total net client cash flows on a pro forma basis, that is excluding Barrow Hanley and Copper Rock, were positive across our three segments with a total of $0.4 billion, which is another encouraging data point for the pro forma business. We will use the $335 million of expected after-tax proceeds primarily to pay down debt and repurchase our shares, which we would expect to produce double-digit accretion to ENI per share in 2021. The additional capital also allows us to see new strategies to enhance organic growth of our affiliates. In the Quant & Solutions…

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

Good morning, Suren. Hope all is well. After a successful disposition of Barrow Hanley and Copper Rock, I just wanted your perspective on the potential for similar exits with your two other traditional matter affiliates, which could actually improve your business mix, and more importantly, your organic growth rate further?

Hi, Craig, thanks. Yes, as we've mentioned, when we announced those divestitures, pro forma regards to divestitures, we have a very strong business mix now with a strong record of producing positive flows. And the Liquid Alpha segment, too, had positive flows this quarter, may not happen every quarter, but we do like the diversification that we have in our overall business. Having said that, as you pointed out, it is our duty to consider any compelling opportunity that may come up from time-to-time to on large shareholder value or things that may be compellingly attractive to shareholder value. So we will consider those things as they come up.

Thanks, Suren. And just as my follow-up on Landmark, I think many of us were already running with a two-quarter delay on the Landmark fundraising cycle after the May 1Q earnings call. Does this two-quarter delay equate to 1Q 2021 when we should start seeing the first closes? Or is this actually incremental to what you were saying on the last earnings call?

Thanks for asking that. To the extent there is confusion, we definitely want to clarify that we were just reiterating the prior discussions that we've had last earnings call that is the same two-quarter delays. Initially, we had been saying that the second half of 2020 is when we would expect fund rating to pick up pace. And what that means is that most of the fundraising moved to 2021, and first half of 2022, which was earlier second half of 2020 and all of 2021.

Thank you. Our next question comes from Mike Carrier with Bank of America Merrill Lynch. Your line is open.

Good morning. Thanks for taking the question. First one, just on the accretion with the divestitures and the pay down and buybacks. I don't know if you I know you guys, when you announced the transaction, you mentioned like sort of the net income impact, and I just want to make sure that, that correlate to the economic net income. I just kind of want to know like the earnings that you're going to be losing. And then obviously, you can back into the buyback and the debt pay down, but I think maybe slightly tougher to get to certain levels of appreciation given what that earnings loss is.

Hi, Mike, yes, if I understood the question correctly, yes, the guidance that we gave last week was that, yes, we would lose the EBITDA and the earnings from the affiliates that we are divesting. But by deploying those proceeds in paying down debt and repurchasing shares, we expect double-digit accretion to the ENI per share. So we were referring to ENI in terms of ENI per share in terms of the accretion. So essentially, if you do the math, we had announced that $40 million annualized EBITDA that we would lose from those divestitures and you can tax effect that. And but by using the proceeds and paying down the debt and repurchasing our shares, and we use a variety of our repurchase price scenarios and debt pay down scenarios. But in most scenarios, we are comfortable that we pay down debt as well as get about a double-digit EPS accretion ENI EPS, I mean. Does that answer your question, Mike?

Yes, yes. That makes sense. And then just on some of the pro forma like expense ratio guidance that you gave, just given the timing of these transactions, is that like a pretty good base for us to be thinking for 2021?

Yes. Yes, the guidance that we've given on the ratios in the investor deck, that's pretty good from my 2021 perspective. Some of the ratios, particularly the OpEx ratio that does obviously vary depending on the revenue and what the market does. But with that qualifier, they're generally good based on what we know so far.

Our next question is from Michael Cyprys from Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking the question. I just want to come back to the Quant & Solutions business. I was just hoping you can open the curtain there a bit more on the Quant & Solutions business dedicating. And maybe just give us some color around the diversity and the mix of strategies that they have. And maybe just more specifically, if you were able to help us frame and quantify, say, the top three strategies, how much would have in each of those top three strategies? And then if you could maybe help us understand the top three flowing strategies, what those are indicating recently? And how much is coming in across those different top line strategies?

Hi, Mike, yes, it's one of the largest businesses we have, especially on a pro forma basis; it's more than half of our revenue or EBITDA. That's a very diversified business with a variety of strategies, and we're continuing to see new strategies. So some of the larger strategies, for example, as a regional strategy, emerging market strategies, one of the larger strategies there. We have a variety of non-U.S. regional strategies with different flavors in terms of cap ranges and markets like Japan. We have managed volatility strategies which, again, are low ball of managed wall, but also are further dissected by regions. And we have a number of new strategies that are getting good traction from clients like the multi-asset plant that we've touched on. There are specific factor strategies where clients are looking for exposure to a specific factor or a combination of two or three factors or more and a smaller -- much smaller part of our businesses where we are always experimenting with new things. So it's a very diversified business. And depending on different market environments, different strategies, become inflowing or outflowing, but on balance, it's a lot of things do tend to offset each other. So we're pleased with the capability. The core capabilities, ultimately, the Alpha model and the investment we're doing in the data and the research and the academic research and the team, but it diversifies a lot by region, by the specific objectives that the clients have.

Okay. And just in the quarter, it looked like about $300 million inflows or so into the Quant & Solutions. Imagine all that's at Acadian. There was a negative revenue impact associated with those inflows on Page 14; it looks like $6.8 million negative revenue annualized impact there. I guess that's just the redemptions going out the door at a higher fee rate than the gross sales. So just hoping you could elaborate around that. Maybe just help us a little bit more color there and maybe give us a sense on which strategies were inflowing advocating in the quarter? And which strategies you saw outflows from?

Yes, certainly, Mike. And then I would say that what you see on the revenue side, it's a little bit of happenstance, if you will that the we are not seeing any kind of fee compression or any particular strategies that are outflowing in a recurring way. It's just a function of whether we have the combination of inflows and outflows, whether we have higher fee outflows in a particular quarter compared to inflows because we do have a range of strategies and that also vary by fee, because some are easier to implement, so maybe lower fee, not necessarily lower margin because they are easier to implement, and some are higher fee. So it just depends on the combination. It is a very institutional business, and hence, can be lumpy and choppy. But I wouldn't see necessarily see a particular pattern in terms of higher fee inflowing or lower fee inflowing and vice versa.

And just any color on which strategies are inflowing versus outflowing in the quarter?

It changes from quarter-to-quarter. So we -- as you would expect, for example, the low-vol strategies in 1Q, we had more demand than what we saw in the second quarter. So that strategy in the second quarter wasn't inflowing, but it does change quite a bit from quarter-to-quarter.

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

Great. Thank you. Thanks for taking my questions. Maybe shifting to Landmark. Maybe similar to Acadian. Any a sense of the cadence or pace of fund raising there? And specifically, what I mean by that is, assuming market ran multiple products, not so the same size. So if you think of that a fundraising starting funds started to close hit in the first quarter, say, of 2021, will it be some of the larger strategies that you expect to start getting their closed earlier? Just trying to or maybe some of the larger strategies later in the cycle? Just trying to get some sense of, over the course of that year, fundraising, kind of what we should think of as a pattern, like larger funds later, small funds first? And then second part of that, just to get a flavor of the mix of strategy that, obviously, PEs are important of it, it's more than one strategy some sense of what are the specific strategies they're raising for and maybe having different.

Yes. Thanks, Rob. Yes, I guess, somewhat similar to Acadian, Landmark is also a very diversified business. The core strength is obviously the secondary aspect, which they are one of the pioneers in that business. But also because they are one of the pioneers in the business, it's diversified. So the will be primary strategies we have private equity, real estate, and real assets, which, for example, infrastructure. As you would expect, private equity, the larger strategy being one of the more established in one of the earlier secondary asset classes. So it's diversified and we obviously target to grow ROE and ideally continue to expand the secondary asset class and beyond use for time. But in terms of 2021 and onwards, we wouldn't expect any sort of back-end from that perspective. Or is it a simplified assumption would be that 2021 onwards, we just spread it evenly over five, six, seven quarters.

And maybe as a follow-up. With the pending transaction for fourth quarter, is there any later color on kind of one in the fourth quarter? Are they closing October one versus December 31 so they had some information on that buyback heading into the year, at least in the fourth quarter? So any sense that sort of happening kind of pretty quickly in fourth quarter terms is more kind of be quickly 4th quarter.

Yes. I would assume almost toward the year-end could happen sooner, but I would assume December.

Thank you. Our next question is from Chris Harris with Wells Fargo. Your line is open.

So first question on expenses. The operating expense ratio was 43.4% in the second quarter. Your guidance is 45% to 48% for the year. So I know you're giving us a ratio here and not actual numbers, but that seems to imply higher expenses in the second half relative to the second quarter. Is that a reasonable assumption? I mean, do we have that right? Or and if so, what could be driving the expenses up in the second half?

Yes, certainly. Thanks, Chris. The ratio is again, it's a range of evolve assumptions regarding the revenue. But in the second quarter, you'll see that, compared to the first quarter, the dollar amount of expenses was lower. And some of that was driven by T&E, third-party vendors, some slowdown in recruitment that we had, for example, at Landmark. So we would expect some of this to pick up in third quarter and fourth quarter. Just part -- partly that, that, yes, we would expect the some of the operating expenses to increase. And then it's really in terms of ratio, it's really the expectation around what would happen on the market side. So it's a range for that reason.

Okay. Is there any light you can shed on possible performance fees in the second half? I know traditionally, Q4 tends to be a pretty strong quarter for you guys as it relates to that. Is that something we should still be modeling for? And then kind of an unrelated follow-up, what are your thoughts on the pro forma tax rate of this company? Is that really much different than where it stands today?

Yes. On the performance fee, yes, you're right that we would expect, generally, performance fees still to come in, in Q4. And it's generally, there is always something. It's always hard to predict, of course. But Q4 would be the right quarter to model some performance fee. And what was the second question, Chris, if you --

Pro forma tax rate, is it any different than where you are today?

So not that we know. We would will run with it.

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

Hi, thanks for taking my question. Just one in terms of the seed capital, plans for seed capital investments. Wondering if you could just share with us any updated thoughts on any specific areas which you're looking to invest in?

Again, yes, on the seed capital, as we said, it's a similar approach as to our overall business that we are focusing our business on the growing parts of the industry. So you would expect our seed portfolio also to be reflective of that. So it would be primarily Acadian and Landmark in terms of seeding new strategies that we expect to have client demand. Our current portfolio is invested, for example, in the multi-asset class strategy at Acadian and a few others. And similarly, we have participated in GP commitment in some of the Landmark funds that were raised in the last vintage. So generally, that's how it would evolve with the growth of the AUM.

Got you. Very helpful. And just one follow-up, if I may. Wondering if you could just comment on your unfunded institutional type of what sort of products are you seeing in demand there? Thanks.

Ken, I didn't follow the question. Would you mind repeating?

Just want to see if you could share with us any comments on your unfunded institutional pipeline.

I see. Got it. Yes, we generally have not share any specifics on pipelines in the sense that maybe, we always, as you would expect, have some won but not funded, and they eventually are funded, but the times vary. So we're reasonably satisfied with our pipeline. I would say that it's not very different from what we normally have in the pipeline.

Our next question is from Patrick Toma with Autonomous Research. Your line is open. Patrick Toma with Autonomous Research. Your line is open.

Hey, good morning. All my questions have been answered.

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

Hi, just given the strategic shift, can you talk about how big a piece of the puzzle do you think the non-U.S. domicile flows is going to be to growth? Basically, how should we be thinking about that piece?

Yes, John. Yes, the non-U.S. continues to be an important market, both for Acadian and Landmark, in particular, because those are those products are in demand, both in the U.S. and overseas. I would say that with regards to TSW, probably less so because one of the larger strategies there is international, which is more in demand in the U.S. But with our larger affiliates, Acadian and Landmark, continues to be important. And both of those affiliates have very sizable distribution efforts directly at the affiliate level in the U.S. as well as internationally.

Got you. And then I know adding new clients is more complicated due to COVID. But can you give us any color on how maybe existing clients may be looking at adding new strategies?

Yes, that's an interesting dynamic. You touched on, John, that we're seeing those two that adding new clients is logistically a little bit more challenging than before when you were able to go see a client in person. But by the same logic, any clients that do need to allocate more are generally going to their existing managers. And we're seeing that, too. So whether it's a client looking for something different, and we already have that in our wheelhouse, then we have somewhat of an advantage. So we do see that dynamic. At both, for example, Acadian and TSW, which are more on the Liquid side. And on the Illiquid side, but the Landmark is obviously more a ranging phenomena. And there, the delay that we mentioned is more really related to the travel and logistics issues as clients settle into new processes, but we do have a number of clients that are just repeat clients across the prior vintages that we would expect, but there are processes to go through.

And this does conclude our question-and-answer session. I'd now like to turn the conference back over to Suren Rana for any closing remarks.

Thank you. To summarize, we're pleased about our pro forma business mix and the net low trajectory this new mix offers, and we look forward to continuing to unlock and create shareholder value. Thanks, everyone, for taking the time. Stay safe and healthy.