BrightSphere Investment (US:BSIG)2024-02-27 16:00PART I Business BrightSphere Investment Group (BSIG) is a global asset management company operating through its Quant & Solutions segment, Acadian Asset Management LLC, focusing on systematic investment strategies - The company operates as a global, diversified asset management firm with approximately $104 billion in Assets Under Management (AUM) as of December 31, 2023162 - The business is conducted through its majority-owned subsidiary, Acadian Asset Management LLC, a systematic manager of active global, international equity, and alternative strategies, which forms the Quant & Solutions reportable segment162164 - The distribution model is focused on institutional and sub-advisory channels, which account for approximately 79% and 12% of AUM, respectively. Key institutional clients include public/government pension funds (42% of AUM) and corporate plans (12% of AUM)191 - The company has a diverse client base with no significant concentration. As of December 31, 2023, the top five client relationships represented about 14% of total run rate gross management fee revenue, and the top 25 clients represented about 38%1965 - From January 1, 2019, to December 31, 2023, the company repurchased approximately 63% of its shares, demonstrating a strong commitment to returning capital to shareholders190 - The company is subject to extensive regulation in the U.S. by the SEC under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, as well as by international regulators like the FCA in the U.K., MAS in Singapore, and ASIC in Australia252253 Risk Factors The company faces a wide range of risks, including significant dependency on its sole affiliate Acadian, operational challenges, financial risks, and extensive regulations Risks Related to Operations The company's financial results are almost entirely dependent on its sole affiliate, Acadian, with revenue concentrated in a few critical investment strategies and reliance on key personnel - Substantially all revenue and cash flows are dependent on the profitability of the sole affiliate, Acadian40 - A significant portion of assets are concentrated in a limited number of investment strategies. As of December 31, 2023, 43% of AUM ($44.7 billion) was in three strategies: Emerging Markets Equity (16%), Global Equity (14%), and All-Country World ex-US Equity (13%)46 - The business is dependent on retaining key investment and management personnel, the loss of whom could have an adverse impact47 - The company faces downward pressure on fee levels due to industry competition and changes in how clients access asset management services1013 - Over 95% of total AUM as of December 31, 2023, was invested in global, international, and emerging markets equities, exposing the company to significant foreign currency exchange risk and geopolitical uncertainties18 - As of December 31, 2023, the company had approximately $41 million committed to seed capital invested in five products, which is subject to market risk and potential liquidity constraints24 Risks Related to Financial Structure and Strategy The company's financial structure includes $275 million in outstanding long-term bonds, which could constrain growth and require substantial cash flow for debt service - As of December 31, 2023, the company had $275 million of long-term bonds outstanding. This indebtedness may require substantial cash flow for debt service, reducing funds available for other corporate purposes2930 - The company's $125 million senior unsecured revolving credit facility was assigned to its affiliate, Acadian, in February 2021 and is no longer available for borrowing at the holding company level, making future financing dependent on operating performance and new debt issuances31 - The development and introduction of new products and capabilities, while crucial for growth, may be unsuccessful and expose the company to additional legal, regulatory, and financial risks2728 Risks Related to Technology, Cybersecurity, and Legal Matters The company faces increasing cybersecurity risks, complex data protection laws, potential litigation, and compliance challenges with anti-corruption laws - The company faces a significant and increasing risk of cyber-attacks, which could result in unauthorized access to confidential information, operational disruptions, reputational damage, and financial losses3538 - The company is subject to stringent data protection laws, including the EU/U.K. GDPR and the California Consumer Privacy Act (CCPA), with non-compliance potentially leading to substantial fines (up to 4% of total annual worldwide turnover under GDPR) and reputational harm555657 - The business is exposed to potential litigation from clients alleging misconduct, breach of fiduciary duty, or breach of contract, which could result in substantial legal expenses and reputational damage3234 - Operations are subject to anti-corruption laws like the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, as well as various trade control laws, with non-compliance carrying potential civil or criminal penalties6061 - The exit of the U.K. from the EU ("Brexit") creates ongoing political, legal, and economic uncertainty that could adversely impact the company's business, particularly regarding the regulation of financial services6467 Risks Related to Our Industry The asset management industry is highly competitive and extensively regulated, making the company susceptible to industry trends and compliance risks - The company operates in a highly competitive environment, facing competition from a broad range of domestic and international asset managers, some of which have greater capital resources and name recognition6972 - Being solely focused on asset management makes the company more susceptible to negative events and trends impacting the industry compared to more diversified financial services firms76 - The business is subject to extensive and changing regulations in the U.S. (SEC, Advisers Act, Investment Company Act) and internationally (FCA in the U.K.). Failure to comply could lead to fines, sanctions, and reputational harm777984 Risks Related to Our Ownership Structure and Governance Paulson & Co. Inc.'s significant ownership stake influences business decisions, and future share sales could impact stock price, while the share repurchase program is discretionary - As of February 14, 2024, Paulson & Co. Inc. owned 23.11% of the company's common stock, giving it significant influence over the business and potentially discouraging changes in control85 - Future sales of a substantial number of shares by significant stockholders like Paulson could cause the stock price to decline86 - The company's certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain stockholder lawsuits, which may limit a stockholder's ability to bring a claim in a different judicial forum9091 - The company's share repurchase program is discretionary and subject to market conditions, with no assurance that shares will be repurchased or that they will be repurchased at favorable prices9293 Risks Related to Our Tax Matters The company's global effective tax rate is volatile due to earnings mix and legislative changes, with tax audits posing risks of adjustments and reputational damage - The company's global effective tax rate is subject to volatility due to the global mix of earnings and changes in tax legislation in the U.S., U.K., and other jurisdictions9496 - Changes in tax laws, such as those from the OECD's base erosion and profit shifting (BEPS) project, could increase tax uncertainty and the company's effective tax rate100 - The company is subject to tax audits, and disagreements with tax authorities could result in erroneous filings, adverse impacts on income, and reputational damage9899 General Risk Factors The company's common stock price is volatile, goodwill and intangible assets face impairment risk, dividend payments are discretionary, and public company reporting is costly - The market price of the company's common stock is volatile and can be affected by financial results, changes in analyst estimates, and general economic conditions101104 - The carrying value of goodwill and intangible assets is subject to impairment risk, which could result in a non-cash charge affecting reported earnings105106 - The ability to pay dividends is at the discretion of the Board of Directors and depends on financial condition, earnings, and cash distributions from Acadian107108 - Compliance with public company reporting requirements, including Sarbanes-Oxley Section 404, is costly and time-consuming. Deficiencies in internal controls could lead to a decline in stock price and regulatory sanctions109111112 Unresolved Staff Comments The company reports that there are no unresolved written comments from the Securities and Exchange Commission staff that were received 180 days or more before the end of the fiscal year - There are no unresolved written comments from the SEC staff received 180 days or more before the end of the fiscal year115 Cybersecurity The company has established processes to manage cybersecurity risks, overseen by the Audit Committee, and has not experienced any material cybersecurity incidents - The company has adopted processes to identify, assess, and manage material risks from cybersecurity threats, including an incident response plan116117 - The Audit Committee of the Board of Directors has primary responsibility for cybersecurity oversight and receives quarterly briefings120 - The cybersecurity program is managed by the Head of IT and CISO, who has over 20 years of industry experience and reports to the CEO121 - As of the report date, the company has not experienced a cybersecurity incident that resulted in a material effect on its business strategy, results of operations, or financial condition119 Properties The company's principal executive office is in Boston, with its affiliate Acadian maintaining primary and secondary offices globally to support operations - The principal executive office is located at 200 State Street, 13th Floor, Boston, Massachusetts 02109, with a lease for 7,218 square feet expiring on June 30, 2024124 - Acadian maintains its primary office in Boston, with secondary offices in London, Singapore, and Sydney to support research, distribution, and client servicing124 Legal Proceedings Management does not believe any ongoing legal proceedings will result in liabilities material to the company's consolidated financial condition or results of operations - The company does not currently believe that any ongoing legal proceedings will result in liabilities material to its consolidated financial condition, future results of operations, or cash flow125 Mine Safety Disclosures This item is not applicable to the company - Not applicable126 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "BSIG", and the Board authorized a new $100.0 million share repurchase program in December 2023 - The company's common stock trades on the New York Stock Exchange (NYSE) under the ticker symbol "BSIG"129 - On December 20, 2023, the Board of Directors authorized a new share repurchase program for up to $100.0 million of common stock139 Share Repurchases for the Three Months Ended December 31, 2023 | Period | Total Shares Purchased | Average Price Paid per Share ($) | Value Remaining Under Program (in millions) | | :--- | :--- | :--- | :--- | | Oct 1-31, 2023 | — | — | $100.0 | | Nov 1-30, 2023 | — | — | $100.0 | | Dec 1-31, 2023 | 268,800 | 19.03 | $94.9 | | Total | 268,800 | $19.03 | $94.9 | [Reserved]](index=36&type=page&id=Item%206.%20%5BReserved%5D) This item is reserved - Item 6 is reserved143 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including AUM changes, U.S. GAAP and ENI results, capital resources, liquidity, and critical accounting policies Overview The company operates through its Quant & Solutions segment, Acadian, with profitability driven by AUM management fees and a profit-sharing model, using ENI for performance evaluation - The company operates through a single segment, Quant & Solutions, comprised of its interest in Acadian Asset Management LLC151 - The company's profitability relies on a profit-sharing model with Acadian, where variable compensation is a percentage of earnings, and remaining profits are shared between the company and Acadian's key employee equity holders170171 - Management's key performance measure is Economic Net Income (ENI), a non-GAAP metric that adjusts U.S. GAAP net income to better reflect operating performance and cash generation175176 Summary Results of Operations (U.S. GAAP vs. ENI) | Metric ($ in millions) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | U.S. GAAP Basis | | | | | Revenue | $426.6 | $417.2 | $523.8 | | Net income attributable to controlling interests | $65.8 | $100.6 | $828.4 | | Diluted EPS ($) | $1.55 | $2.33 | $10.29 | | Economic Net Income (ENI) Basis | | | | | ENI revenue | $423.6 | $416.8 | $523.5 | | Economic net income | $75.7 | $81.6 | $118.3 | | ENI diluted EPS ($) | $1.78 | $1.89 | $1.47 | Assets Under Management (AUM) Roll-Forward ($ in billions) | AUM ($ in billions) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Beginning balance | $93.6 | $117.2 | $116.0 | | Net flows | $(2.3) | $(3.1) | $(5.9) | | Market appreciation (depreciation) | $12.4 | $(20.5) | $16.1 | | Sale of Affiliates / Other | — | — | $(9.0) | | Ending balance | $103.7 | $93.6 | $117.2 | U.S. GAAP Results of Operations Total revenue increased in 2023, but operating income and net income declined due to higher compensation and benefits expenses U.S. GAAP Consolidated Statements of Operations Highlights ($ in millions) | Line Item | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total revenue | $426.6 | $417.2 | $9.4 | | Compensation and benefits | $217.9 | $159.2 | $58.7 | | Total operating expenses | $320.6 | $249.3 | $71.3 | | Operating income | $106.0 | $167.9 | $(61.9) | | Income from continuing operations | $67.1 | $100.6 | $(33.5) | | Net income attributable to controlling interests | $65.8 | $100.6 | $(34.8) | - Management fees increased by $5.8 million (1.6%) in 2023 due to an improvement in the blended average basis points, despite a slight decrease in average AUM305 - Performance fees remained relatively stable, increasing by $1.0 million (2.0%) to $50.4 million in 2023314 - Compensation and benefits expense rose by $58.7 million (36.9%) in 2023, primarily due to severance-related costs at Acadian and a $39.9 million change in the revaluation of Affiliate key employee equity liabilities compared to the prior year318 Non-GAAP Supplemental Performance Measure—Economic Net Income and Segment Analysis Management uses Economic Net Income (ENI), a non-GAAP measure, to assess business performance, with 2023 ENI decreasing from 2022 - Economic Net Income (ENI) is a key non-GAAP measure used by management for operational decisions, resource allocation, and incentive compensation271272 Reconciliation of U.S. GAAP Net Income to Economic Net Income ($ in millions) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | U.S. GAAP net income attributable to controlling interests | $65.8 | $100.6 | $828.4 | | Non-cash key employee-owned equity revaluations | $(0.1) | $(40.0) | $32.9 | | Discontinued operations and restructuring | $9.5 | $1.3 | $(743.8) | | Other adjustments (net) | $(0.1) | $18.1 | $1.3 | | Economic net income | $75.7 | $81.6 | $118.3 | ENI Revenue and Operating Expense ($ in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | ENI Revenue | $423.6 | $416.8 | $523.5 | | ENI Operating Expense | $198.4 | $182.1 | $192.8 | | ENI Variable Compensation | $104.9 | $100.3 | $129.6 | | ENI Operating Margin | 28.4% | 32.2% | 38.4% | - The Quant & Solutions segment generated ENI revenue of $423.6 million in 2023, an increase of 1.6% from $416.8 million in 2022, driven by higher performance and management fees393402 Capital Resources and Liquidity The company maintains a solid liquidity position with $273.9 million in long-term debt and sufficient cash flow to fund operations Cash Flow Summary ($ in millions) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Operating activities | $77.7 | $119.0 | $(4.4) | | Investing activities | $(31.4) | $(13.0) | $1,036.0 | | Financing activities | $(8.1) | $(233.7) | $(1,152.4) | - Working capital was $181.6 million as of December 31, 2023, an increase from $117.8 million at the end of 2022409411 - Long-term debt primarily consists of $273.9 million in 4.80% Senior Notes due 2026. Acadian also has a $125 million revolving credit facility, which was undrawn as of December 31, 2023422424 Adjusted EBITDA Reconciliation ($ in millions) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income attributable to controlling interests | $65.8 | $100.6 | $828.4 | | Adjustments (Interest, Taxes, D&A, etc.) | $60.2 | $82.5 | $356.7 | | EBITDA | $126.0 | $183.1 | $1,185.1 | | Other Adjustments (Non-cash comp, discontinued ops, etc.) | $7.8 | $(33.0) | $(973.4) | | Adjusted EBITDA | $133.8 | $150.1 | $211.7 | Critical Accounting Policies and Estimates Management identifies share-based compensation and taxation as critical accounting policies requiring significant judgment due to complex valuations and tax law interpretations - The valuation of cash-settled equity awards for Affiliate key employees is a critical estimate, requiring discounted cash flow analyses with subjective assumptions like forecasted earnings, growth rates, and discount rates268481 - The accounting for income taxes is critical, involving significant judgment in determining the worldwide provision for income taxes, assessing the realizability of deferred tax assets, and establishing reserves for uncertain tax positions266277 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are equity market and foreign currency fluctuations, with minimal interest rate risk - A 10% change in the value of total AUM ($103.7 billion) would result in an approximate $39 million change in annualized management fees and a $17 million change in post-tax economic net income298 - A 10% change in equity markets would affect $101 billion of equity AUM, causing a $38 million change in annualized management fee revenue and a $15 million change in post-tax ENI293 - A 10% change in foreign exchange rates against the U.S. dollar would affect $83 billion of foreign currency-denominated AUM, resulting in a $33 million change in annualized management fee revenue and a $13 million change in post-tax ENI293 - Interest rate risk is minimal as of December 31, 2023, as there was no balance drawn on Acadian's variable-rate revolving credit facility297299 Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for 2023, with an unqualified opinion from KPMG LLP on both financial statements and internal controls - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2023452491 - A critical audit matter identified was the assessment of the fair value measurement of the cash-settled affiliate awards liability, due to the complex and subjective judgments required for key assumptions like forecasted earnings and discount rates479484 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None848 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023876 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023849 - There were no changes in internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls879 Other Information No directors or officers entered into, modified, or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the fourth quarter of 2023 - No directors or officers entered into, modified, or terminated Rule 10b5-1 trading plans during the fourth quarter of 2023880 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable881 PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14 is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of shareholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of shareholders853854855 PART IV Exhibits, Financial Statements Schedules This section lists financial statements and exhibits, including corporate governance documents, debt agreements, and executive certifications - The financial statements required by this item are contained in Item 8 of the report857 - The report includes a list of exhibits filed, such as corporate governance documents, debt agreements, compensation plans, and executive certifications858 Form 10-K Summary This item is noted in the table of contents but no summary is provided in the document - No summary is provided for Item 16898