BrightSphere Investment Group Inc. - Quarter Report: 2020 March (Form 10-Q)

---

---

---

---

---

---

---

---

---

•	Quant & Solutions—comprised of versatile, often highly-tailored strategies that leverage data and technology in a computational, factor based investment process across a range of asset classes and geographies, including Global, non-U.S., emerging markets and managed volatility equities, as well as multi-asset products.

•	Alternatives—comprised of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

•	Liquid Alpha—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S., global, non-U.S. and emerging markets equities, as well as fixed income.

---

---

---

(1)	Equity-accounted investments in consolidated Funds is comprised of Investments in partnership interests where a portion of return includes carried interest. These investments are accounted for within the scope of ASC 323, Investments - Equity Method and Joint Ventures because the Company has determined it has significant influence.

---

---

(1)	Assets and liabilities measured at fair value are comprised of financial investments managed by the Company's Affiliates.

---

(2)

Investments in separate accounts of $37.4 million at March 31, 2020 consist of approximately 30% of cash equivalents and 70% of equity securities, fixed income securities, and other investments. Investments in separate accounts of $44.3 million at December 31, 2019 consist of approximately 3% of cash equivalents and 97% of equity securities, fixed income securities, and other investments. The Company values these using the published price of the underlying securities (classified as Level I) or quoted price supported by observable inputs as of the measurement date (classified as Level II).

(3)

Investments related to long-term incentive compensation plans of $89.3 million and $88.8 million at March 31, 2020 and December 31, 2019, respectively, were investments in publicly registered daily redeemable funds (some managed by Affiliates), which the Company has classified as trading securities and valued using the published price as of the measurement dates. Accordingly, the Company has classified these investments as Level I.

(4)

The uncategorized amounts of $28.9 million and $48.2 million at March 31, 2020 and December 31, 2019, respectively, relate to investments in unconsolidated Funds which consist primarily of investments in Funds advised by Affiliates and are valued using NAV which the Company relies on to determine their fair value as a practical expedient and has therefore not classified these investments in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to amounts presented in the Condensed Consolidated Balance Sheets. These unconsolidated Funds consist primarily of real estate investment Funds, UCITS and other investment vehicles. The NAVs that have been provided by investees have been derived from the fair values of the underlying investments as of the measurement dates. UCITS and other investment vehicles are not subject to redemption restrictions.

---

---

---

(1)	Includes equity investments the Company has made or is required to make and any earned but uncollected management and incentive fees. The Company does not record performance or incentive allocations until the respective measurement period has ended.

---

(1)	Fair value approximates carrying value because the credit facilities have variable interest rates based on selected short term market rates.

(2)	The difference between the principal amounts and the carrying values of the senior notes in the table above reflects the unamortized debt issuance costs and discounts.

---

---

---

---

---

---

(1)	Income available to participating unvested securities includes dividends paid on unvested restricted shares and their proportionate share of undistributed earnings.

---

i.	U.S. equity, which includes small cap through large cap securities and substantially value or blended investment styles;

ii.	Global / non-U.S. equity, which includes global and international equities including emerging markets;

iii.	Fixed income, which includes government bonds, corporate bonds and other fixed income investments in the United States; and

iv.	Alternatives, which is comprised of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

---

---

---

---

•	Quant & Solutions—comprised of versatile, often highly-tailored strategies that leverage data and technology in a computational, factor based investment process across a range of asset classes and geographies, including Global, non-U.S., emerging markets and managed volatility equities, as well as multi-asset products.

•	Alternatives—comprised of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

•	Liquid Alpha—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S., global, non-U.S. and emerging markets equities, as well as fixed income.

---

---

(1)

The most directly comparable U.S. GAAP measure of ENI revenue is U.S. GAAP revenue. The most directly comparable U.S. GAAP measure of ENI operating expenses is U.S. GAAP operating expenses, which is comprised of ENI operating expenses, variable compensation and Affiliate key employee distributions above. The most directly comparable U.S. GAAP measure of earnings after Affiliate key employee distributions is U.S. GAAP operating Income. The most directly comparable U.S. GAAP measure of ENI is U.S. GAAP net income attributable to controlling interests.

(a)	Adjusted to exclude earnings from equity-accounted Affiliates, which are included in U.S. GAAP investment income, and to include consolidated Funds revenues and the separate revenues recorded for certain Fund expenses reimbursed by customers, which are included in U.S. GAAP revenue.

(b)

Adjusted to include non-cash amortization expense for pre-acquisition employee equity, non-cash expenses for key employee equity and profit interest revaluations, capital transaction costs, goodwill impairment and amortization of acquired intangible assets, restructuring costs, consolidated Funds’ operating expenses and the Fund expenses reimbursed by customers, each of which are included in U.S. GAAP operating expenses.

(c)	Adjusted to include restructuring costs and the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments, which are included in U.S. GAAP compensation expense.

(d)	Adjusted to include the cost of seed financing, which is included in U.S. GAAP interest expense.

---

(e)	Adjusted to include net investment income (loss), net income (loss) attributable to non-controlling interests in consolidated Funds, and the gain on disposal of discontinued operations, all of which are included in U.S. GAAP net income attributable to controlling interests.

(f)	Adjusted to include the impact of deferred taxes resulting from changes in tax law and the amortization of goodwill and acquired intangibles. Also adjusted to include tax expense or benefits relating to uncertain tax positions, the tax impact of certain ENI adjustments and other unusual items that are not included in current operating results for ENI purposes.

---

•

Overview provides a brief description of our Affiliates, a summary of The Economics of Our Business and an explanation of How We Measure Performance using a non-GAAP measure which we refer to as economic net income, or ENI. This section also provides a Summary Results of Operations and information regarding our Assets Under Management by Affiliate, strategy, client type and location, and net flows by segment, client type and client location.

•	U.S. GAAP Results of Operations for the Three Months Ended March 31, 2020 and 2019 includes an explanation of changes in our U.S. GAAP revenue, expense and other items for the three months ended March 31, 2020 and 2019, as well as key U.S. GAAP operating metrics.

•

Non-GAAP Supplemental Performance Measure — Economic Net Income and Segment Analysis includes an explanation of the key differences between U.S. GAAP net income and ENI, the key measure management uses to evaluate our performance. This section also provides a reconciliation between U.S. GAAP net income attributable to controlling interests and ENI for the three months ended March 31, 2020 and 2019 as well as a reconciliation of key ENI operating items including ENI revenue and ENI operating expenses. This section also provides key non-GAAP operating metrics and a calculation of tax on economic net income. In addition, this section provides segment analysis for each of our business segments.

•	Capital Resources and Liquidity discusses our key balance sheet data. This section discusses Cash Flows from the business; Adjusted EBITDA; Future Capital Needs; Borrowings and Long-Term Debt. The discussion of Adjusted EBITDA includes an explanation of how we calculate Adjusted EBITDA and a reconciliation of U.S. GAAP net income attributable to controlling interests to Adjusted EBITDA.

•

Critical Accounting Policies and Estimates provides a discussion of the key accounting policies and estimates that we believe are the most critical to an understanding of our results of operations and financial condition. These accounting policies and estimates require complex management judgment regarding matters that are highly uncertain at the time the policies were applied and estimates were made.

---

•	Quant & Solutions—comprised of versatile, often highly-tailored strategies that leverage data and technology in a computational, factor-based investment process across a range of asset classes and geographies, including Global, non-U.S., emerging markets and managed volatility equities, as well as multi-asset products.

•	Alternatives—comprised of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

•	Liquid Alpha—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S., global, non-U.S. and emerging markets equities, as well as fixed income.

---

◦	Acadian Asset Management LLC (“Acadian”)(2)—a leading quantitatively-oriented manager of active global and international equity, and alternative strategies.

◦	Landmark Partners, LLC (“Landmark”)—a leading global secondary private equity, real estate and real asset investment firm.

◦	Campbell Global, LLC (“Campbell Global”)—a leading sustainable forestry and natural resource investment manager that seeks to deliver superior investment performance by focusing on unique acquisition opportunities, client objectives and disciplined management.

◦	Barrow, Hanley, Mewhinney & Strauss, LLC (“Barrow Hanley”)—a widely recognized value-oriented investment manager of U.S., international and global equities, fixed income and a range of balanced investment management strategies.

◦	Copper Rock Capital Partners LLC (“Copper Rock”)—a specialized growth equity investment manager of small-cap international, global and emerging markets equity strategies.

◦	Thompson, Siegel & Walmsley LLC (“TSW”)(2)—a value-oriented investment manager focused on small- and mid-cap U.S. equity, international equity and fixed income strategies.

◦	Investment Counselors of Maryland, LLC (“ICM”)(1)—a value-driven domestic equity manager with product offerings focused on small- and mid-cap companies.

(1)	Accounted for under the equity method of accounting.

(2)	Certain smaller Acadian strategies are included in Alternatives and certain TSW strategies are included in Quant & Solutions where the classification is more appropriate.

---

---

---

(1)	U.S. GAAP operating margin equals operating income from continuing operations divided by total revenue.

(2)	Economic net income is a non-GAAP measure we use to evaluate the performance of our business. For a reconciliation to U.S. GAAP financial information and a further discussion of economic net income refer to “—Non-GAAP Supplemental Performance Measure—Economic Net Income and Segment Analysis.”

(3)

Excludes restructuring costs of $0.4 million, costs associated with the transfer of an insurance policy from our former Parent of $0.3 million and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments for the three months ended March 31, 2020. Excludes restructuring costs at the Center of $4.0 million and costs associated with the redomicile to the U.S. of $0.3 million for the three months ended March 31, 2019.

(4)	ENI revenue is the ENI measure which corresponds to U.S. GAAP revenue.

(5)	Pre-tax economic net income is the ENI measure which corresponds to U.S. GAAP pre-tax income from continuing operations attributable to controlling interests.

(6)	ENI operating margin is a non-GAAP efficiency measure, calculated based on ENI operating earnings divided by ENI revenue. ENI operating earnings is calculated as ENI revenue, less ENI operating expense, less ENI variable compensation. The ENI operating margin corresponds to our U.S. GAAP operating margin, excluding the effect of consolidated Funds.

---

(7)	Economic net income is the ENI measure which is most directly comparable to U.S. GAAP net income from continuing operations attributable to controlling interests.

(8)	Net flows and revenue impact of net flows for all periods above have been revised for the inclusion of reinvested income and distributions, and the exclusion of realizations.

(9)

Annualized revenue impact of net flows represents annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts (inflows), less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts (outflows), plus revenue impact from reinvested income and distribution. Annualized management fee for client flow is calculated by multiplying the annual gross fee rate for the relevant account with the inflow or the outflow, including equity-accounted Affiliates. In addition, reinvested income and distribution for each segment is multiplied by average fee rate for the respective segment to compute the revenue impact. For a further discussion of the uses and limitations of the annualized revenue impact of net flows, see "Assets Under Management" herein.

---

i.	U.S. equity, which includes small cap through large cap securities and substantially value or blended investment styles;

ii.	Global / non-U.S. equity, which includes global and international equities including emerging markets;

iii.	Fixed income, which includes government bonds, corporate bonds and other fixed income investments in the United States; and

iv.	Alternatives, which consist of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

---

---

---

(1)	Net flows and revenue impact of net flows for all periods above have been revised for the inclusion of reinvested income and distributions, and the exclusion of realizations.

(2)	Average AUM equals average AUM of consolidated Affiliates.

(3)	Realizations include distributions related to the sale of alternative assets, and represent a return on investments. Other activity primarily relates to the decline in billable AUM as a legacy alternative fund transitioned from billing base on committed AUM to net asset value.

i.	Sub-advisory, which includes assets managed for underlying mutual fund and variable insurance products which are sponsored by insurance companies and mutual fund platforms, where the end client is typically retail;

ii.	Institutional, which includes assets managed for public/government pension funds, including U.S. state and local government funds and non-U.S. sovereign wealth, local government and national pension funds; also includes corporate and union-sponsored pension plans; and

iii.	Retail/other, which includes assets managed for mutual funds sponsored by our Affiliates, defined contribution plans and accounts managed for high net worth clients.

---

(1)	Reinvested income and distributions is allocated based on consolidated total distribution rate multiplied by the beginning of period AUM of each client type.

(2)	Net flows for all periods above have been revised for the inclusion of reinvested income and distributions, and the exclusion of realizations.

---

(3)	Realizations include distributions related to the sale of alternative assets, and represent a return on investments. Other activity primarily relates to the decline in billable AUM as a legacy alternative fund transitioned from billing base on committed AUM to net asset value.

i.	U.S.-based clients, where the contracting client is based in the United States, and

ii.	Non-U.S.-based clients, where the contracting client is based outside the United States.

(1)	Reinvested income and distributions is allocated based on consolidated distribution total rate multiplied by the beginning of period AUM of each client location.

(2)	Net flows for all periods above have been revised for the inclusion of reinvested income and distributions, and the exclusion of realizations.

---

(3)	Realizations include distributions related to the sale of alternative assets, and represent a return on investments. Other activity primarily relates to the decline in billable AUM as a legacy alternative fund transitioned from billing base on committed AUM to net asset value.

---

---

i.	management fees earned based on our overall weighted average fee rate charged to our clients and the level of assets under management;

ii.	performance fees earned or management fee adjustments when our Affiliates’ investment performance over agreed time periods for certain clients has differed from pre-determined hurdles;

iii.	other revenue, consisting primarily of consulting services as well as reimbursement of certain Fund expenses our Affiliates paid on behalf of our Funds; and

iv.	revenue from consolidated Funds, a portion of which is attributable to the holders of non-controlling interests in consolidated Funds.

(1)	Amounts shown are equivalent to ENI management fee revenue. (See “ENI Revenues”)

---

i.	compensation paid to our investment professionals and other employees, including base salary, benefits, sales-based compensation, variable compensation, Affiliate distributions, revaluation of key employee owned Affiliate equity and profit interests, and the amortization of pre-acquisition employee equity;

ii.	general and administrative expenses;

iii.	impairment of goodwill;

iv.	amortization of acquired intangible assets;

v.	depreciation and amortization charges; and

vi.	expenses of consolidated Funds, a portion of which is attributable to the holders of non-controlling interests in consolidated Funds.

---

(1)

Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. For the three months ended March 31, 2020, $46.6 million of fixed compensation and benefits (of the $47.6 million above) is included within economic net income, which excludes Fund expenses initially paid by our Affiliates on the Fund’s behalf and subsequently reimbursed. For the three months ended March 31, 2019 $49.7 million of fixed compensation and benefits (of the $50.8 million above) is included within economic net income, which excludes Fund expenses initially paid by our Affiliates on the Fund’s behalf and subsequently reimbursed.

(2)	Sales-based compensation is paid to our and our Affiliates’ sales and distribution teams and represents compensation earned by our sales professionals, paid over a multi-year period, related to revenue earned on new sales. Its variability is based upon the structure of sales-based compensation due on inflows of assets under management and market-based movement in both current and prior periods.

---

(3)

Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses and compensation paid by our Affiliates on behalf of their Funds that are subsequently reimbursed. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI profits before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. In Affiliates with an agreed split of performance fees between Affiliate employees and BSUS, the Affiliates’ share of performance fees is allocated entirely to variable compensation. Center variable compensation includes cash and our equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between 25% and 35%.

(a)

For the three months ended March 31, 2020, $39.7 million of variable compensation expense (of the $46.1 million above) is included within economic net income, which excludes $0.4 million of variable compensation associated with restructuring at an Affiliate and $6.0 million of a one-time compensation arrangement entered into that includes advances against future compensation payments. For the three months ended March 31, 2019, $48.7 million of variable compensation expense (of the $52.7 million above) is included within economic net income, which excludes $4.0 million of variable compensation associated with restructuring at the Center.

(4)

Affiliate key employee distributions represent the share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equity and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates with tiered equity structures, BSUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold, the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately 20% to 40% of marginal ENI operating earnings at each of our consolidated Affiliates.

(5)

Non-cash Affiliate key employee equity revaluations represent changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by BSUS at a value based on a pre-determined fixed multiple of twelve-month earnings and as such a liability is carried on our balance sheet based on the expected cash to be paid. However, any equity or profit interests repurchased by BSUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure BSUS is not required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve month period.

(6)	Amortization of pre-acquisition employee equity represents amortization of the value of employee equity owned prior to the acquisition of Landmark. This is included in U.S. GAAP compensation expense as a result of ongoing service requirements for employee recipients.

---

---

i.	investment income;

ii.	interest income; and

iii.	interest expense.

---

(1)	Excluding the effect of Funds consolidation in the applicable periods, the U.S. GAAP operating margin is 40.1% for the three months ended March 31, 2020 and 32.6% for the three months ended March 31, 2019.

(2)	Excludes consolidated Funds expense of $0.1 million for the three months ended March 31, 2020 and $0.2 million for the three months ended March 31, 2019.

(3)	Excludes the effect of Funds consolidation for the three months ended March 31, 2020 and 2019.

(4)	Excludes consolidated Funds revenue of $1.5 million for the three months ended March 31, 2020 and $1.1 million for the three months ended March 31, 2019.

---

(5)	The following table identifies the components of operating income before variable compensation and Affiliate key employee distributions, as well as operating income before Affiliate key employee distributions:

•	We exclude the effect of Funds consolidation by removing the portion of Fund revenues, expenses and investment return which were not attributable to our stockholders.

•	We include within management fee revenue any fees paid to Affiliates by consolidated Funds, which are viewed as investment income under U.S. GAAP.

•	We include our share of earnings from equity-accounted Affiliates within other income in ENI revenue, rather than investment income.

•	We treat sales-based compensation as a general and administrative expense, rather than part of fixed compensation and benefits.

---

•	We identify separately from operating expenses variable compensation and Affiliate key employee distributions, which represent Affiliate earnings shared with Affiliate key employees.

•	We net the separate revenues and expenses under U.S. GAAP for certain Fund expenses initially paid by our Affiliates on the Funds’ behalf and subsequently reimbursed, to better reflect the economics of our business.

i.

We exclude non-cash expenses representing changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by BSUS at a value based on a pre-determined fixed multiple of trailing earnings and as such this value is carried on our balance sheet as a liability. Non-cash movements in the value of this liability are treated as compensation expense under U.S. GAAP. However, any equity or profit interests repurchased by BSUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure BSUS is never required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve-month period.

ii.

We exclude non-cash amortization or impairment expenses related to acquired goodwill and other intangibles as these are non-cash charges that do not result in an outflow of tangible economic benefits from the business. We also exclude the amortization of acquisition-related contingent consideration, as well as the value of employee equity owned pre-acquisition, as occurred as a result of the Landmark transaction, where such items have been included in compensation expense as a result of ongoing service requirements for certain employees. Please note that the revaluations related to these acquisition-related items are included in (i) above.

iii.	We exclude capital transaction costs, including the costs of raising debt or equity, gains or losses realized as a result of redeeming debt or equity and direct incremental costs associated with acquisitions of businesses or assets.

iv.	We exclude seed capital and co-investment gains, losses and related financing costs. The net returns on these investments are considered and presented separately from ENI because ENI is primarily a measure of our earnings from managing client assets, which therefore differs from earnings generated by our investments in Affiliate products, which can be variable from period to period.

v.	We include cash tax benefits associated with deductions allowed for acquired intangibles and goodwill that may not be recognized or have timing differences compared to U.S. GAAP.

vi.	We exclude the results of discontinued operations attributable to controlling interests since they are not part of our ongoing business, restructuring costs incurred in continuing operations, and the impact of a one-time compensation arrangement entered into that includes advances against future contractual compensation payments.

vii.	We exclude deferred tax resulting from changes in tax law and expiration of statutes, adjustments for uncertain tax positions, deferred tax attributable to intangible assets and other unusual items not related to current operating results to reflect ENI tax normalization.

---

(1)	The net return on seed/co-investment (gains) losses and financings for the three months ended March 31, 2020 and 2019 is shown in the following table:

(2)

The three months ended March 31, 2020 includes restructuring costs of $0.4 million, costs associated with the transfer of an insurance policy from our former Parent of $0.3 million and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments. The three months ended March 31, 2019 includes restructuring costs at the Center of $4.0 million and costs associated with the redomicile to the U.S. of $0.3 million.

(3)	Reflects the sum of lines (i), (ii), (iii), (iv) and the restructuring component of line (vi) multiplied by the 27.3% U.S. statutory tax rate (including state tax).

---

---

(1)	ENI management fees correspond to U.S. GAAP management fees.

(2)	ENI performance fees correspond to U.S. GAAP performance fees.

(3)

ENI other income is comprised primarily of other revenue under U.S. GAAP, plus our earnings from equity-accounted Affiliates of $0.6 million and $0.6 million for the three months ended March 31, 2020 and March 31, 2019, respectively. As further described in “—Non-GAAP Supplemental Performance Measure—Economic Net Income and Segment Analysis,” ENI other income also excludes certain Fund expenses initially paid by our Affiliates on the Funds’ behalf and subsequently reimbursed.

---

(1)

Included for the three months ended March 31, 2020 are restructuring costs of $0.4 million, costs associated with the transfer of an insurance policy from our former Parent of $0.3 million and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments. Included for the three months ended March 31, 2019 are restructuring costs at the Center of $4.0 million and costs associated with the redomicile to the U.S. of $0.3 million.

---

(1)	Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. The following table reconciles U.S. GAAP compensation and benefits expense for the three months ended March 31, 2020 and 2019 to ENI fixed compensation and benefits expense:

(a)	Includes costs related to restructuring and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments for the three months ended March 31, 2020. Includes $4.0 million related to restructuring at the Center for the three months ended March 31, 2019.

---

(2)	The following table reconciles U.S. GAAP general and administrative expense to ENI general and administrative expense:

(1)	ENI operating earnings represents ENI earnings before Affiliate key employee distributions and is calculated as ENI revenue, less ENI operating expense, less ENI variable compensation. It differs from economic net income because it does not include the effects of Affiliate key employee distributions, net interest expense or income tax expense.

---

(a)

Includes restructuring costs of $0.4 million, costs associated with the transfer of an insurance policy from our former Parent of $0.3 million and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments for the three months ended March 31, 2020. Includes restructuring costs at the Center of $4.0 million and costs associated with the redomicile to the U.S. of $0.3 million for the three months ended March 31, 2019.

(2)

The ENI operating margin, which is calculated before Affiliate key employee distributions, is used by management and is useful to investors to evaluate the overall operating margin of the business without regard to our various ownership levels at each of the Affiliates. The ENI operating margin is most comparable to our U.S. GAAP operating margin. Our U.S. GAAP operating margin, excluding the effect of consolidated Funds, is 40.1% for the three months ended March 31, 2020 and 32.6% for the three months ended March 31, 2019.

(3)	ENI management fee revenue corresponds to U.S. GAAP management fee revenue.

(4)

The ENI operating expense ratio is used by management and is useful to investors to evaluate the level of operating expense as measured against our recurring management fee revenue. We have provided this ratio since many operating expenses, including fixed compensation and benefits and general and administrative expense, are generally linked to the overall size of the business. We track this ratio as a key measure of scale economies because in our profit sharing economic model, scale benefits both the Affiliate employees

---

(5)	ENI earnings before variable compensation is calculated as ENI revenue, less ENI operating expense.

(6)

The ENI variable compensation ratio is used by management and is useful to investors to evaluate consolidated variable compensation as measured against our ENI earnings before variable compensation. Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI earnings before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. Center variable compensation includes cash and our equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between 25% and 35%. The ENI variable compensation ratio is most comparable to the U.S. GAAP variable compensation ratio.

(7)

The ENI Affiliate key employee distribution ratio is used by management and is useful to investors to evaluate Affiliate key employee distributions as measured against our ENI operating earnings. Affiliate key employee distributions represent the share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equity and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates, with tiered equity structures, BSUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately 20% to 40% of marginal ENI operating earnings at each of our consolidated Affiliates. The ENI Affiliate key employee distributions ratio is most comparable to the U.S. GAAP Affiliate key employee distributions ratio.

---

(1)	Includes interest income and third party ENI interest expense, as shown in the following table:

(a)	Other ENI interest expense exclusions represent cost of financing on seed capital and co-investments.

(b)	ENI earnings after Affiliate key employee distributions is calculated as ENI operating income (ENI revenue, less ENI operating expense, less ENI variable compensation), less Affiliate key employee distributions. Refer to “—Key Non-GAAP Operating Metrics” for a reconciliation from U.S. GAAP operating income (loss) to ENI earnings after Affiliate key employee distributions.

(2)	Taxed at U.S. Federal and State statutory rate of 27.3%.

(3)	The economic net income effective tax rate is calculated by dividing the tax on economic net income by pre-tax economic net income.

---

•	Quant & Solutions—comprised of versatile, often highly-tailored strategies that leverage data and technology in a computational, factor based investment process across a range of asset classes and geographies, including Global, non-U.S., emerging markets and managed volatility equities, as well as multi-asset products.

•	Alternatives—comprised of illiquid and differentiated liquid investment strategies that include private equity, real estate and real assets, including forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.

•	Liquid Alpha—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S., global, non-U.S. and emerging markets equities, as well as fixed income.

---

---

---

(1)	Excludes consolidated Funds.

(2)	Cash flow data shown only includes cash flows from continuing operations.

---

(1)

The three months ended March 31, 2020 includes restructuring costs of $0.4 million, costs associated with the transfer of an insurance policy from our former Parent of $0.3 million and $6.0 million relating to the impact of a one-time compensation arrangement entered into that includes advances against future compensation payments. Included in the three months ended March 31, 2019 are restructuring costs at the Center of $4.0 million and costs associated with the redomicile to the U.S. of $0.3 million.

(2)	The three months ended March 31, 2020 includes non-cash equity-based award amortization expense.

---

---

---

---

•

Our equity markets-based AUM includes U.S. equities (including small cap through large cap securities and substantially value or blended investment styles) and global/non-U.S. equities (including global, non-U.S. and emerging markets securities). A 10% increase or decrease in equity markets would cause our $124.6 billion of equity assets under management to increase or decrease by $12.5 billion, resulting in a change in annualized

---

•

Foreign currency AUM includes equity and alternative assets denominated in foreign currencies. A 10% increase or decrease in foreign exchange rates against the U.S. dollar would cause our $75.2 billion of foreign currency denominated AUM to increase or decrease by $7.5 billion, resulting in a change in annualized management fee revenue of $31.5 million and an annual change in post-tax economic net income of $12.2 million, based on weighted average fees earned on our foreign currency denominated AUM of 42 basis points at the mix of strategies as of March 31, 2020. Approximately $9.7 billion, or 13%, of our foreign currency denominated AUM are in accounts subject to performance fees. Of these assets, approximately 85% are in accounts for which performance fees, or management fee adjustments, are calculated based on investment return that differs from the relative benchmark returns. Assuming the market change does not impact our relative performance, a 10% change in foreign currency exchange rates would have a $0.2 million impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.

•

Fixed income AUM includes instruments in government bonds, corporate bonds and other fixed income investments in the United States. A change in interest rates, resulting in a 10% increase or decrease in the value of our total fixed income AUM of $12.9 billion, would cause AUM to rise or fall by approximately $1.3 billion. Based on our fixed income weighted average fee rates of 19 basis points, annualized management fees would change by $2.4 million and post-tax economic net income would change by $0.9 million annually. There are currently no material fixed income assets earning performance fees as of March 31, 2020.

---

---

---

(1)

On February 3, 2016, our Board of Directors authorized a $150.0 million open market share repurchase program, which was approved by shareholders on March 15, 2016. On April 18, 2018, our Board of Directors approved an amendment to the existing repurchase contract, to permit us to repurchase our common stock, from time to time, up to an aggregate limit of $600.0 million of common stock. This amendment was subsequently approved by our shareholders on June 19, 2018. We repurchased 3,230,262 shares of common stock under this program during the three months ended March 31, 2020. As of March 31, 2020, $259.4 million remained available to repurchase shares under the February 2016 program.

---

---

---

---