BrightSphere Investment Group Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38979
 | BRIGHTSPHERE Investment Group Inc. | |||||||
(Exact name of registrant as specified in its charter)
| Delaware | 47-1121020 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 200 Clarendon Street, 53rd Floor | 02116 | |||||||
| Boston, | Massachusetts | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(617)-369-7300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker Symbol | Name of each exchange on which registered | ||||||
| Common stock, par value $0.001 per share | BSIG | New York Stock Exchange | ||||||
| 4.800% Notes due 2026 | BSIG 26 | New York Stock Exchange | ||||||
| 5.125% Notes due 2031 | BSA | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The number of shares of the registrant’s common stock, $0.001 per share, outstanding as of May 5, 2021 was 79,354,560.
TABLE OF CONTENTS
| Page | ||||||||
| Part I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
BrightSphere Investment Group Inc.
Condensed Consolidated Balance Sheets
(in millions, except for share and per share data, unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 450.5 | $ | 391.3 | |||||||
| Restricted cash | 1.6 | 1.6 | |||||||||
| Investment advisory fees receivable | 120.7 | 112.6 | |||||||||
| Income taxes receivable | 0.9 | 9.3 | |||||||||
| Fixed assets, net | 62.6 | 64.7 | |||||||||
| Right of use assets | 80.1 | 82.3 | |||||||||
Investments (includes balances reported at fair value of $112.6 and $113.1) | 114.6 | 115.1 | |||||||||
| Acquired intangibles, net | 0.2 | 0.2 | |||||||||
| Goodwill | 34.0 | 34.0 | |||||||||
| Other assets | 31.4 | 33.8 | |||||||||
| Deferred tax assets | 167.8 | 170.3 | |||||||||
| Assets held for sale: | |||||||||||
| Affiliate assets held for sale | 241.6 | 249.7 | |||||||||
| Assets of consolidated Funds held for sale: | |||||||||||
| Consolidated Funds’ assets held for sale | 130.9 | 114.3 | |||||||||
| Total assets | $ | 1,436.9 | $ | 1,379.2 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Accounts payable and accrued expenses | $ | 23.0 | $ | 32.4 | |||||||
| Accrued incentive compensation | 34.6 | 94.1 | |||||||||
| Due to OM plc | 2.0 | 3.4 | |||||||||
| Other compensation liabilities | 145.1 | 139.2 | |||||||||
| Accrued income taxes | 4.2 | 4.1 | |||||||||
| Operating lease liabilities | 96.9 | 98.9 | |||||||||
| Other liabilities | 1.3 | 1.5 | |||||||||
| Debt: | |||||||||||
| Third party borrowings | 475.5 | 394.3 | |||||||||
| Liabilities held for sale: | |||||||||||
| Affiliate liabilities held for sale | 224.3 | 226.9 | |||||||||
| Total liabilities | 1,006.9 | 994.8 | |||||||||
| Commitments and contingencies | |||||||||||
| Equity: | |||||||||||
Common stock (par value $0.001; 79,354,810 and 79,387,961 shares, respectively, issued) | 0.1 | 0.1 | |||||||||
| Additional paid-in capital | 492.8 | 492.4 | |||||||||
| Retained deficit | (150.3) | (176.5) | |||||||||
| Accumulated other comprehensive loss | (11.9) | (13.6) | |||||||||
| Non-controlling interests | 5.6 | 1.7 | |||||||||
| Non-controlling interests in consolidated Funds | 93.7 | 80.3 | |||||||||
| Total equity and non-controlling interests in consolidated Funds | 430.0 | 384.4 | |||||||||
| Total liabilities and equity | $ | 1,436.9 | $ | 1,379.2 | |||||||
See Notes to Condensed Consolidated Financial Statements
3
BrightSphere Investment Group Inc.
Condensed Consolidated Statements of Operations
(in millions except for per share data, unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue: | |||||||||||
| Management fees | $ | 125.3 | $ | 142.6 | |||||||
| Performance fees | 4.6 | 1.0 | |||||||||
| Other revenue | 1.3 | 1.6 | |||||||||
| Consolidated Funds’ revenue | — | 1.5 | |||||||||
| Total revenue | 131.2 | 146.7 | |||||||||
| Operating expenses: | |||||||||||
| Compensation and benefits | 67.9 | 49.4 | |||||||||
| General and administrative expense | 20.6 | 24.3 | |||||||||
| Impairment of goodwill | — | 16.4 | |||||||||
| Depreciation and amortization | 5.6 | 5.1 | |||||||||
| Total operating expenses | 94.1 | 95.2 | |||||||||
| Operating income | 37.1 | 51.5 | |||||||||
| Non-operating income and (expense): | |||||||||||
| Investment income (loss) | 2.6 | (13.7) | |||||||||
| Interest income | — | 0.3 | |||||||||
| Interest expense | (6.2) | (7.8) | |||||||||
| Loss on sale of subsidiary | (1.3) | — | |||||||||
| Net consolidated Funds’ investment gains (losses) | — | (17.2) | |||||||||
| Total non-operating income (loss) | (4.9) | (38.4) | |||||||||
| Income from continuing operations before taxes | 32.2 | 13.1 | |||||||||
| Income tax expense | 10.3 | 6.4 | |||||||||
| Income from continuing operations | 21.9 | 6.7 | |||||||||
| Income from discontinued operations, net of tax | 18.5 | 15.4 | |||||||||
| Net income | 40.4 | 22.1 | |||||||||
| Net income (loss) attributable to non-controlling interests in consolidated Funds | 13.4 | (10.5) | |||||||||
| Net income attributable to controlling interests | $ | 27.0 | $ | 32.6 | |||||||
| Earnings per share (basic) attributable to controlling interests | $ | 0.34 | $ | 0.38 | |||||||
| Earnings per share (diluted) attributable to controlling interests | 0.33 | 0.38 | |||||||||
Continuing operations earnings per share (basic) attributable to controlling interests | 0.28 | 0.20 | |||||||||
Continuing operations earnings per share (diluted) attributable to controlling interests | 0.27 | 0.20 | |||||||||
| Weighted average common stock outstanding | 79.3 | 85.1 | |||||||||
| Weighted average diluted common stock outstanding | 82.3 | 85.1 | |||||||||
See Notes to Condensed Consolidated Financial Statements
4
BrightSphere Investment Group Inc.
Condensed Consolidated Statements of Comprehensive Income
(in millions, unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | 40.4 | $ | 22.1 | |||||||
| Other comprehensive income (loss): | |||||||||||
Amortization related to derivative securities, net of tax | 0.6 | 0.5 | |||||||||
| Foreign currency translation adjustment | 1.1 | (2.1) | |||||||||
| Total other comprehensive income (loss) | 1.7 | (1.6) | |||||||||
| Comprehensive income (loss) attributable to non-controlling interests in consolidated Funds | 13.4 | (10.5) | |||||||||
| Total comprehensive income attributable to controlling interests | $ | 28.7 | $ | 31.0 | |||||||
See Notes to Condensed Consolidated Financial Statements
5
BrightSphere Investment Group Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2021 and 2020
($ in millions except share data, unaudited)
| Common stock (millions) | Common stock, par value | Additional paid-in capital | Retained earnings (deficit) | Accumulated other comprehensive income (loss) | Total stockholders’ equity | Non- controlling interests | Non-controlling interests in consolidated Funds | Total equity | Redeemable non-controlling interests in consolidated Funds | Total equity and redeemable non-controlling interests in consolidated Funds | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | 85.9 | $ | 0.1 | $ | 534.3 | $ | (452.5) | $ | (17.5) | 64.4 | $ | 1.3 | $ | 48.8 | $ | 114.5 | $ | 83.9 | $ | 198.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | (0.2) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (3.2) | — | (19.2) | — | — | (19.2) | — | — | (19.2) | — | (19.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions | — | — | — | — | — | — | — | 0.2 | 0.2 | 1.2 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1.1 | — | — | 1.1 | — | — | 1.1 | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (2.1) | (2.1) | — | — | (2.1) | — | (2.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization related to derivatives securities, net of tax | — | — | — | — | 0.5 | 0.5 | — | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.10 per share) | — | — | — | (8.4) | — | (8.4) | — | — | (8.4) | — | (8.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 32.6 | — | 32.6 | — | 0.1 | 32.7 | (10.6) | 22.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2020 | 82.5 | $ | 0.1 | $ | 516.2 | $ | (428.3) | $ | (19.1) | $ | 68.9 | $ | 1.3 | $ | 49.1 | $ | 119.3 | $ | 74.5 | $ | 193.8 | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | 79.4 | $ | 0.1 | $ | 492.4 | $ | (176.5) | $ | (13.6) | $ | 302.4 | $ | 1.7 | $ | 80.3 | $ | 384.4 | $ | — | $ | 384.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions | — | — | — | — | — | — | 3.8 | — | 3.8 | — | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 0.4 | — | — | 0.4 | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 1.1 | 1.1 | — | — | 1.1 | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization related to derivative securities, net of tax | — | — | — | — | 0.6 | 0.6 | — | — | 0.6 | — | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other changes in non-controlling interests | — | — | — | — | — | — | 0.1 | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.01 per share) | — | — | — | (0.8) | — | (0.8) | — | — | (0.8) | — | (0.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 27.0 | — | 27.0 | — | 13.4 | 40.4 | — | 40.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | 79.4 | $ | 0.1 | $ | 492.8 | $ | (150.3) | $ | (11.9) | $ | 330.7 | $ | 5.6 | $ | 93.7 | $ | 430.0 | $ | — | $ | 430.0 | ||||||||||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
BrightSphere Investment Group Inc. Condensed Consolidated Statements of Cash Flows (in millions, unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 40.4 | $ | 22.1 | |||||||
| Less: Income from discontinued operations, net of tax | (18.5) | (15.4) | |||||||||
| Less: Net (income) loss attributable to non-controlling interests in consolidated Funds from continuing operations | — | 10.6 | |||||||||
Adjustments to reconcile net income to net cash flows from operating activities from continuing operations: | |||||||||||
| Impairment of goodwill | — | 16.4 | |||||||||
| Loss on sale of subsidiary | 1.3 | — | |||||||||
| Depreciation and other amortization | 5.6 | 5.1 | |||||||||
| Amortization of debt-related costs | 1.1 | 1.1 | |||||||||
| Amortization and revaluation of non-cash compensation awards | 5.3 | (23.7) | |||||||||
| Net earnings from Affiliate accounted for using the equity method | (1.1) | (0.6) | |||||||||
| Distributions received from equity method Affiliate | 1.1 | 0.2 | |||||||||
| Distributions from discontinued operations | 12.2 | 11.4 | |||||||||
| Deferred income taxes | 2.3 | 22.7 | |||||||||
| (Gains) losses on other investments | (4.3) | 22.9 | |||||||||
| Changes in operating assets and liabilities (excluding discontinued operations): | |||||||||||
| (Increase) decrease in investment advisory fees receivable | (8.1) | 17.1 | |||||||||
| (Increase) decrease in other receivables, prepayments, deposits and other assets | 10.9 | (17.8) | |||||||||
| Decrease in accrued incentive compensation, operating lease liabilities and other liabilities | (58.3) | (77.4) | |||||||||
| Decrease in accounts payable, accrued expenses and accrued income taxes | (10.1) | (22.0) | |||||||||
| Net cash flows from operating activities of continuing operations, excluding consolidated Funds | (20.2) | (27.3) | |||||||||
| Net income (loss) attributable to non-controlling interests in consolidated Funds from continuing operations | — | (10.6) | |||||||||
| Adjustments to reconcile net income (loss) attributable to non-controlling interests of consolidated Funds to net cash flows from operating activities from continuing operations of consolidated Funds: | |||||||||||
| Losses on other investments | — | 12.0 | |||||||||
| Purchase of investments | — | (25.1) | |||||||||
| Sale of investments | — | 22.0 | |||||||||
| (Increase) decrease in receivables and other assets | — | (4.4) | |||||||||
| Increase in accounts payable and other liabilities | — | 1.6 | |||||||||
| Net cash flows from operating activities of continuing operations of consolidated Funds | — | (4.5) | |||||||||
| Net cash flows from operating activities of continuing operations | (20.2) | (31.8) | |||||||||
| Net cash flows from operating activities of discontinued operations | (0.1) | (1.7) | |||||||||
| Total net cash flows from operating activities | (20.3) | (33.5) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions of fixed assets, excluding discontinued operations | (3.5) | (6.0) | |||||||||
| Purchase of investment securities | (2.7) | (4.8) | |||||||||
| Sale of investment securities | 7.2 | 12.2 | |||||||||
| Net cash flows from investing activities of continuing operations | 1.0 | 1.4 | |||||||||
| Net cash flows from investing activities of discontinued operations | 1.8 | (0.1) | |||||||||
| Total net cash flows from investing activities | 2.8 | 1.3 | |||||||||
See Notes to Condensed Consolidated Financial Statements
7
BrightSphere Investment Group Inc. Condensed Consolidated Statements of Cash Flows (in millions, unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from third party and non-recourse borrowings | 95.0 | 80.0 | |||||||||
| Repayment of third party and non-recourse borrowings | (14.0) | (13.3) | |||||||||
| Payment for debt issuance costs | (0.4) | — | |||||||||
| Payment to OM plc for co-investment redemptions | (1.3) | — | |||||||||
| Dividends paid to stockholders | (0.6) | (5.8) | |||||||||
| Dividends paid to related parties | (0.3) | (2.7) | |||||||||
| Repurchases of common stock | — | (17.1) | |||||||||
| Cash flows from financing activities of consolidated Funds | |||||||||||
| Redeemable non-controlling interest capital raised | — | 1.1 | |||||||||
| Net cash flows from financing activities of continuing operations | 78.4 | 42.2 | |||||||||
| Net cash flows from financing activities of discontinued operations | 0.4 | 0.2 | |||||||||
| Total net cash flows from financing activities | 78.8 | 42.4 | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | — | — | |||||||||
| Net increase in cash and cash equivalents | 61.3 | 10.2 | |||||||||
| Cash and cash equivalents at beginning of period (including restricted cash) | 392.9 | 105.3 | |||||||||
| Cash and cash equivalents at beginning of period classified within assets held for sale (Affiliate and consolidated funds) | $ | 11.2 | $ | 15.7 | |||||||
| Cash and cash equivalents at end of period | $ | 465.4 | $ | 131.2 | |||||||
| Less: cash and cash equivalents at end of period classified within assets held for sale (Affiliate and consolidated funds) | (13.3) | (14.1) | |||||||||
| Cash and cash equivalents at end of period from continuing operations (including restricted cash) | $ | 452.1 | 117.1 | ||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid (excluding consolidated Funds) | $ | 8.2 | $ | 10.1 | |||||||
| Income taxes paid | 0.3 | — | |||||||||
| Supplemental disclosure of non-cash investing and financing transactions: | |||||||||||
| Payable for securities purchased by a consolidated Fund | $ | — | $ | 1.1 | |||||||
See Notes to Condensed Consolidated Financial Statements
8
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1) Organization and Description of the Business
BrightSphere Investment Group Inc. (“BrightSphere”, “BSIG” or the “Company”), through its subsidiaries, is a global asset management company with interests in a diverse group of investment management firms (the “Affiliates”) individually headquartered in the United States. The Company provides investment management services globally to predominantly institutional investors, in asset classes that include U.S. and global equities, fixed income, alternative assets and forestry. Fees for services are largely asset-based and, as a result, the Company’s revenue fluctuates based on the performance of financial markets and investors’ asset flows in and out of the Company’s products.
The Company’s Affiliates are organized as limited liability companies. The Company generally utilizes a profit-sharing model in structuring its compensation and ownership arrangements with its Affiliates. The Affiliates’ variable compensation is generally based on each firm’s profitability. BSIG and Affiliate key employees share in profits after variable compensation according to their respective ownership interests. The profit-sharing model results in the alignment of BSIG and Affiliate key employee economic interests, which is critical to the Company’s talent management strategy and long-term growth of the business. The Company conducts its operations through the following two reportable segments(1):
•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.
•Liquid Alpha(2)—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S. and non-U.S. equities, as well as fixed income.
(1)Prior to March 31, 2021, the Company had an Alternatives reportable segment which was comprised of the Landmark Partners, LLC (“Landmark”) and Campbell Global, LLC (“Campbell Global”) operating segments. On March 30, 2021, the Company entered into an agreement to sell of all of the Company’s interests in Landmark. As a result of this transaction, Landmark has been reclassified to discontinued operations, and the Alternatives segment no longer constitutes a reportable segment of the Company. The reportable segments for all periods presented have been recast to reflect the reporting of Landmark within discontinued operations and the Campbell Global operating segment has been reclassified to “Other” within the Company’s segment reporting. See Note 3, Divestitures, Held for Sale and Discontinued Operations and Note 15, Segments for further discussion.
(2)On February 6, 2021, the Company announced the divestiture of all of the Company’s interests in Investment Counselors of Maryland (“ICM”), an equity-accounted Affiliate. See Note 3, Divestitures, Held for Sale and Discontinued Operations for further discussion.
Prior to 2014, the Company was a wholly-owned subsidiary of Old Mutual plc (“OM plc”), an international long-term savings, protection and investment group, listed on the London Stock Exchange. On October 15, 2014, the Company completed the initial public offering (the “Offering”) by OM plc pursuant to the Securities Act of 1933, as amended. Additionally, between the Offering and February 25, 2019, the Company, OM plc and/or HNA Capital U.S. (“HNA”) completed a series of transactions in the Company’s shares, including a two-step transaction announced on March 25, 2017 for a sale by OM plc of a 24.95% shareholding in the Company to HNA and a two-step transaction announced on November 19, 2018 for a sale of the substantial majority of the shares held by HNA of the Company to Paulson & Co. (“Paulson”). On February 25, 2019, this transaction was completed and Paulson
9
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1) Organization and Description of the Business (cont.)
held approximately 21.7% of the shares of the Company. The remaining shares held by HNA were bought back by the Company in the first quarter of 2019.
For the three months ended March 31, 2021, the Company did not repurchase any shares of common stock. For the three months ended March 31, 2020, the Company repurchased 3,230,262 shares of common stock at an average price of $5.93 per share, or approximately $19.2 million in total, including commissions.
2) Basis of Presentation and Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Basis of presentation
These unaudited Condensed Consolidated Financial Statements reflect the historical balance sheets, statements of operations and of comprehensive income, statements of changes in stockholders’ equity and statements of cash flows of the Company. Within these Condensed Consolidated Financial Statements, Paulson and its related entities, as defined above, are referred to as “related parties.”
The Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of the Company’s Condensed Consolidated Financial Statements have been included. All dollar amounts, except per-share data in the text and tables herein, are stated in millions unless otherwise indicated. Transactions between the Company and its related parties are included in the Condensed Consolidated Financial Statements, however, material intercompany balances and transactions among the Company, its consolidated Affiliates and consolidated Funds are eliminated in consolidation.
On February 6, 2021 the Company entered into a definitive agreement to sell all of the Company’s interests in ICM, an equity-accounted Affiliate within the Liquid Alpha reporting segment, in exchange for approximately $19 million of cash consideration, subject to certain customary closing and post-closing adjustments. As of March 31, 2021 the carrying value of the Company’s investment was approximately $2 million. The criteria for discontinued operations were not met for this pending divestiture. The transaction is expected to close during second quarter of 2021. See Note 3, Divestitures, Held for Sale and Discontinued Operations for additional information.
10
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2) Basis of Presentation and Significant Accounting Policies (cont.)
On March 30, 2021, the Company entered into an Equity Purchase Agreement with Ares Holdings L.P. (“Ares”), pursuant to which Ares agreed to purchase all of the Company’s interests in Landmark for $690 million of cash consideration, on a cash-free, debt-free basis subject to certain customary closing and post-closing adjustments. The Company also agreed to sell its carried interest and co-investments in Landmark funds on the date of closing for approximately $34 million, subject to adjustment for certain related cashflow. The pending divestiture of Landmark met the discontinued operations criteria as it represents a strategic shift that has a major effect on the Company’s operations and financial results. As a result, the Company has reclassified the financial results of Landmark and consolidated Landmark Funds to income from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and March 31, 2020. The assets and liabilities of Landmark and consolidated Landmark Funds have been reflected as assets and liabilities held for sale in the Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020. Cash flows from our discontinued operations are presented in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and March 31, 2020. The Notes to the Condensed Consolidated Financial Statements are presented on a continuing operations basis unless otherwise noted. See Note 3, Divestitures, Held for Sale and Discontinued Operations for additional information.
Certain disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (annual report on Form 10-K) are not required to be included on an interim basis in the Company’s quarterly reports on Form 10-Q. The Company has condensed or omitted these disclosures. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021. The Company’s significant accounting policies, which have been consistently applied, are summarized in those financial statements.
Use of estimates
The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The three months ended March 31, 2021 were characterized by continued uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. Actual results could differ from such estimates, and the differences may be material to the Condensed Consolidated Financial Statements.
Recently adopted accounting standards
In December 2019, the FASB issued Accounting Standard Update (“ASU”) 2019-12, ASC 740, “Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes.” ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for all public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. The Company adopted the standard on January 1, 2020. The Company has determined that the adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements and related disclosures.
New accounting standards not yet adopted
11
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2) Basis of Presentation and Significant Accounting Policies (cont.)
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued because of reference rate reform. This ASU is effective as of March 12, 2020 through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions as of March 31, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period to determine the impact on its Condensed Consolidated Financial Statements and related disclosures.
The Company has considered all other newly issued accounting guidance that is applicable to the Company’s operations and the preparation of the unaudited Condensed Consolidated Financial Statements, including those that have not yet been adopted. The Company does not believe that any such guidance has or will have a material effect on its Condensed Consolidated Financial Statements and related disclosures.
12
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
3) Divestitures, Held for Sale and Discontinued Operations
Investment Counselors of Maryland
On February 6, 2021, the Company entered into a definitive agreement to sell all of the Company’s interests in ICM, an equity-accounted Affiliate within the Liquid Alpha segment, in exchange for approximately $19 million of cash consideration, subject to certain customary closing and post-closing adjustments. The criteria for discontinued operations were not met for this pending divestiture. The transaction is expected to close in the second quarter of 2021.
Landmark Partners
On March 30, 2021, the Company entered into an Equity Purchase Agreement with Ares, pursuant to which Ares agreed to purchase all of the Company’s interests in Landmark for $690 million of cash consideration, on a cash-free, debt-free basis subject to certain customary closing and post-closing adjustments. The pending divestiture of Landmark met the discontinued operations criteria as it represents a strategic shift that has a major effect on the Company’s operations and financial results. The transaction is expected to close in the second quarter of 2021. The Company also agreed to sell its carried interest and co-investments in Landmark funds on the date of closing for approximately $34 million, subject to adjustment for certain related cashflow.
BrightSphere International Ltd.
On March 17, 2021, BrightSphere completed the sale of its subsidiary BrightSphere International Ltd. to Perpetual U.S. Holdings Company Inc. (“Perpetual”). The Company recognized a pre-tax loss of $(1.3) million within the Condensed Consolidated Statement of Operations for the three months ended March 31, 2021.
13
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
3) Divestitures, Held for Sale and Discontinued Operations (cont.)
Assets and Liabilities Held for Sale
The major classes of assets and liabilities of discontinued operations of Landmark classified as held for sale in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 are as follows (in millions):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 10.8 | $ | 10.6 | |||||||
| Investment advisory fees receivable | — | 0.2 | |||||||||
| Fixed assets, net | 6.9 | 6.9 | |||||||||
| Right of use assets | 8.0 | 8.4 | |||||||||
| Intangible assets, net | 56.6 | 58.2 | |||||||||
| Goodwill | 148.1 | 148.1 | |||||||||
| Other assets | 11.2 | 16.8 | |||||||||
| Deferred tax assets | — | 0.5 | |||||||||
| Affiliate assets held for sale | $ | 241.6 | $ | 249.7 | |||||||
| Accounts payable and accrued expenses | $ | 2.1 | $ | 1.1 | |||||||
| Accrued incentive compensation | 23.9 | 26.7 | |||||||||
| Other compensation liabilities | 188.4 | 188.8 | |||||||||
| Operating lease liabilities | 8.6 | 9.0 | |||||||||
| Other liabilities | $ | 1.3 | $ | 1.3 | |||||||
| Affiliate liabilities held for sale | $ | 224.3 | $ | 226.9 | |||||||
14
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
3) Divestitures, Held for Sale and Discontinued Operations (cont.)
The major classes of revenue and expenses constituting income from discontinued operations attributable to controlling interests for Landmark in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2021 and 2020 are as follows (in millions):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 36.7 | $ | 35.9 | |||||||
| Operating expenses: | |||||||||||
| Compensation and benefits | 28.5 | 8.0 | |||||||||
| General and administrative expenses | 2.9 | 3.4 | |||||||||
| Amortization of intangibles | 1.6 | 1.6 | |||||||||
| Depreciation and amortization | 0.2 | 0.2 | |||||||||
| Consolidated Funds other expense | 0.1 | 0.1 | |||||||||
| Total operating expenses | 33.3 | 13.3 | |||||||||
| Operating income | 3.4 | 22.6 | |||||||||
| Investment gains of consolidated Funds | 16.6 | — | |||||||||
| Income from discontinued operations before taxes | 20.0 | 22.6 | |||||||||
| Income tax expense | 1.5 | 7.2 | |||||||||
| Income from discontinued operations, net of tax | 18.5 | 15.4 | |||||||||
| Income from discontinued operations attributable to non-controlling interests | 13.4 | 0.1 | |||||||||
| Net income from discontinued operations attributable to controlling interests | $ | 5.1 | $ | 15.3 | |||||||
Consolidated Funds
The Landmark Equity Purchase agreement provides for the redemption of all of the Company’s carried interest and co-investments in Landmark funds on the date of closing for approximately $34 million, subject to adjustment for certain related cashflow. The redemption will result in the deconsolidation of consolidated Funds that are considered to be variable interest entities (“VIEs”). The assets and liabilities of the consolidated Funds have been classified as held for sale as the criteria for held for sale and discontinued operations accounting treatment were met and are therefore presented separately in the Company’s Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020. The transaction is expected to close in the second quarter of 2021. The consolidated Funds’ investments gains/(losses) from discontinued operations, net of tax, attributable to controlling interests was $3.1 million and $(0.2) million in the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2021 and 2020, respectively.
The major classes of assets comprising the consolidated Funds classified as held for sale are as follows at March 31, 2021 and December 31, 2020 (in millions):
15
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
3) Divestitures, Held for Sale and Discontinued Operations (cont.)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 2.5 | $ | 0.6 | |||||||
Equity-accounted investments(1) | 128.4 | 113.7 | |||||||||
| Consolidated Funds’ assets held for sale | $ | 130.9 | $ | 114.3 | |||||||
(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.
4) Investments
Investments are comprised of the following as of the dates indicated (in millions):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Other investments held at fair value | 37.6 | 40.1 | |||||||||
| Investments related to long-term incentive compensation plans held at fair value | 75.0 | 73.0 | |||||||||
| Total investments held at fair value | 112.6 | 113.1 | |||||||||
| Equity-accounted investment in Affiliate | 2.0 | 2.0 | |||||||||
| Total investments per Condensed Consolidated Balance Sheets | 114.6 | 115.1 | |||||||||
Investment income is comprised of the following for the three months ended March 31 (in millions):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Realized and unrealized gains (losses) on other investments held at fair value | $ | 1.5 | $ | (14.3) | |||||||
| Earnings from equity-accounted investment in Affiliate | 1.1 | 0.6 | |||||||||
Total investment income (loss) per Condensed Consolidated Statements of Operations | $ | 2.6 | $ | (13.7) | |||||||
16
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5) Fair Value Measurements
The following table summarizes the Company’s assets that are measured at fair value on a recurring basis at March 31, 2021 (in millions):
| Quoted prices in active markets (Level I) | Significant other observable inputs (Level II) | Significant unobservable inputs (Level III) | Uncategorized | Total value, March 31, 2021 | |||||||||||||||||||||||||
Assets of BSIG(1) | |||||||||||||||||||||||||||||
Investments in separate accounts(2) | 10.9 | 11.8 | — | — | 22.7 | ||||||||||||||||||||||||
Investments related to long-term incentive compensation plans(3) | 75.0 | — | — | — | 75.0 | ||||||||||||||||||||||||
Investments in unconsolidated Funds(4) | — | — | 2.6 | 12.3 | 14.9 | ||||||||||||||||||||||||
| Total fair value assets | $ | 85.9 | $ | 11.8 | $ | 2.6 | $ | 12.3 | $ | 112.6 | |||||||||||||||||||
The following table summarizes the Company’s assets that are measured at fair value on a recurring basis at December 31, 2020 (in millions):
| Quoted prices in active markets (Level I) | Significant other observable inputs (Level II) | Significant unobservable inputs (Level III) | Uncategorized | Total value December 31, 2020 | |||||||||||||||||||||||||
Assets of BSIG(1) | |||||||||||||||||||||||||||||
Investments in separate accounts(2) | 9.7 | 11.6 | — | — | 21.3 | ||||||||||||||||||||||||
Investments related to long-term incentive compensation plans(3) | 73.0 | — | — | — | 73.0 | ||||||||||||||||||||||||
Investments in unconsolidated Funds(4) | — | — | 2.6 | 16.2 | 18.8 | ||||||||||||||||||||||||
| Total fair value assets | $ | 82.7 | $ | 11.6 | $ | 2.6 | $ | 16.2 | $ | 113.1 | |||||||||||||||||||
(1)Assets measured at fair value are comprised of financial investments managed by the Company's Affiliates.
Equity securities, including common and preferred stock and short-term investment funds which are traded on a national securities exchange are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level I. The securities that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs obtained by the Company from independent pricing services are classified as Level II.
The Company obtains prices from independent pricing services that may utilize broker quotes, but generally the independent pricing services will use various other pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data. The Company has not made adjustments to the prices provided.
If the pricing services are only able to (a) obtain a single broker quote or (b) utilize a pricing model, such securities are classified as Level III. If the pricing services are unable to provide prices, the Company attempts to obtain one or more broker quotes directly from a dealer or values such securities at the last bid price obtained. In either case, such securities are classified as Level III. The Company performs due diligence
17
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5) Fair Value Measurements (cont.)
procedures over third party pricing vendors to understand their methodology and controls to support their use in the valuation process to ensure compliance with required accounting disclosures.
(2)Investments in separate accounts of $22.7 million at March 31, 2021 consist of approximately 1% of cash equivalents and 99% of equity securities, fixed income securities, and other investments. Investments in separate accounts of $21.3 million at December 31, 2020 consist of approximately 11% of cash equivalents and 89% 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 $75.0 million and $73.0 million at March 31, 2021 and December 31, 2020, 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 $12.3 million and $16.2 million at March 31, 2021 and December 31, 2020, 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.
The real estate investment Funds of $5.2 million and $6.2 million at March 31, 2021 and December 31, 2020, respectively, are subject to longer than quarterly redemption restrictions, and due to their nature, distributions are received only as cash flows are generated from underlying assets over the life of the Funds. The range of time over which the underlying assets are expected to be liquidated by the investees is approximately one year to ten years from March 31, 2021. The valuation process for the underlying real estate investments held by the real estate investment Funds begins with each property or loan being valued by the investment teams. The valuations are then reviewed and approved by the valuation committee, which consists of senior members of the portfolio management, acquisitions, and research teams. For certain properties and loans, the valuation process may also include a valuation by independent appraisers. In connection with this process, changes in fair value measurements from period to period are evaluated for reasonableness, considering items such as market rents, capitalization and discount rates, and general economic and market conditions.
Investments in unconsolidated Funds categorized as Level III of $2.6 million and $2.6 million at March 31, 2021 and December 31, 2020, respectively, related to investments in Forestry Funds advised by an Affiliate and are valued by the general partner of those Funds. Determination of estimated fair value involves subjective judgment because the actual fair value can be determined only through negotiation between parties in a sale transaction, and amounts ultimately realized may vary significantly from the fair value presented.
18
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5) Fair Value Measurements (cont.)
The following table reconciles the opening balances of Level III financial assets to closing balances at the end of the period (in millions):
| Three Months Ended March 31, | |||||||||||
| Investments in unconsolidated Funds | 2021 | 2020 | |||||||||
| Level III financial assets | |||||||||||
| At beginning of the period | $ | 2.6 | $ | 3.0 | |||||||
Transfers in (out) of Level III | — | — | |||||||||
Total net fair value gains/losses recognized in net income | — | — | |||||||||
Total Level III financial assets | $ | 2.6 | $ | 3.0 | |||||||
There were no significant transfers of financial assets or liabilities between Levels II or III during the three months ended March 31, 2021 and 2020, respectively.
19
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6) Variable Interest Entities
The Company, through its Affiliates, sponsors the formation of various entities considered to be variable interest entities (“VIEs”). These VIEs are primarily Funds managed by Affiliates and other partnership interests typically owned entirely by third party investors. Certain Funds may be capitalized with seed capital investments from the Company and may be owned partially by Affiliate key employees and/or individuals that own non-controlling interests in an Affiliate.
The Company’s determination of whether it is the primary beneficiary of a Fund that is a VIE is based in part on an assessment of whether or not the Company and its related parties are exposed to absorb more than an insignificant amount of the risks and rewards of the entity. Typically, the Fund’s investors are entitled to substantially all of the economics of these VIEs with the exception of the management fees and performance fees, if any, earned by the Company or any investment the Company has made into the Funds. The Company generally is not the primary beneficiary of Fund VIEs created to manage assets for clients unless the Company’s ownership interest, including interests of related parties, is substantial.
The following table presents the assets of Funds that are VIEs and consolidated by the Company (in millions):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Consolidated Funds’ assets held for sale (Note 3) | 130.9 | 114.3 | |||||||||
| Total Assets | $ | 130.9 | $ | 114.3 | |||||||
In connection with the pending divestiture of Landmark, the Company reclassified assets of consolidated Funds as “Consolidated Funds’ assets held for sale” in the Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020. See Note 3, Divestitures, Held for Sale and Discontinued Operations, in these Notes for additional information. To the extent the Company has consolidated Funds that are not VIEs, the assets and liabilities of those Funds are not included in the table above.
The assets of consolidated VIEs presented in the table above belong to the investors in those Funds, are available for use only by the Fund to which they belong, and are not available for use by the Company to the extent they are held by non-controlling interests.
The Company’s involvement with Funds that are VIEs and not consolidated by the Company is generally limited to that of an investment manager and its investment in the unconsolidated VIE, if any. The Company’s investment in any unconsolidated VIE generally represents an insignificant interest of the Fund’s net assets and assets under management, such that the majority of the VIEs results are attributable to third parties. The Company’s exposure to risk in these entities is generally limited to any capital contribution it has made or is required to make and any earned but uncollected management fees. The Company has not issued any investment performance guarantees to these VIEs or their investors.
20
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6) Variable Interest Entities (cont.)
The following information pertains to unconsolidated VIEs for which the Company holds a variable interest (in millions):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Unconsolidated VIE assets | $ | 6,380.1 | $ | 6,437.1 | |||||||
| Unconsolidated VIE liabilities | $ | 4,278.9 | $ | 4,332.1 | |||||||
| Equity interests on the Condensed Consolidated Balance Sheets | $ | 13.3 | $ | 14.3 | |||||||
Maximum risk of loss(1) | $ | 18.6 | $ | 19.3 | |||||||
(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.
21
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7) Borrowings and Debt
The Company’s borrowings and long-term debt was comprised of the following as of the dates indicated (in millions):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in millions) | Carrying Value | Fair Value | Fair Value Level | Carrying Value | Fair Value | Fair Value Level | |||||||||||||||||||||||||||||
| Third party borrowings: | |||||||||||||||||||||||||||||||||||
$125 million revolving credit facility expiring August 22, 2022(1)(2) | $ | 81.0 | $ | 81.0 | 2 | $ | — | $ | — | ||||||||||||||||||||||||||
$275 million 4.80% Senior Notes Due July 27, 2026(3) | 272.9 | 301.8 | 2 | 272.8 | 298.9 | 2 | |||||||||||||||||||||||||||||
$125 million 5.125% Senior Notes Due August 1, 2031(3) | 121.6 | 126.4 | 2 | 121.5 | 126.0 | 2 | |||||||||||||||||||||||||||||
| Total borrowings | $ | 475.5 | $ | 509.2 | $ | 394.3 | $ | 424.9 | |||||||||||||||||||||||||||
(1)Fair value approximates carrying value because the credit facility has variable interest rates based on selected short term market rates.
(2)On February 23, 2021, the Company’s $150 million revolving credit facility was assigned to Acadian Asset Management LLC (“Acadian”), an Affiliate within the Quant & Solutions segment, and amended to reduce the facility to $125 million.
(3)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.
Revolving Credit Facility
On September 3, 2020, the Company, Royal Bank of Canada, BMO Harris Bank, N.A., Bank of China, New York Branch, Wells Fargo Bank, National Association, Barclays Bank PLC, Morgan Stanley Bank, N.A., Bank of America N.A., the Bank of New York Mellon and Citibank, N.A., as an issuing bank and administrative agent (collectively, the “Lenders”), entered into an amendment (the “Amendment") to the Revolving Credit Agreement dated as of August 20, 2019 (the “Original Credit Agreement”, and as amended by the Amendment, the “Amended Credit Agreement”).
On February 23, 2021, the Company, along with the Lenders, entered into an assignment and assumption and amendment agreement (the “Assignment”) to the Amended Credit Agreement. Pursuant to the Assignment, the Amended Credit Agreement was assigned to and assumed by Acadian and the Amended Credit Agreement was amended (the Amended Credit Agreement, as amended by the Assignment, the “Acadian Credit Agreement”) to, among other things, reduce the Lenders’ commitments thereunder to $125 million. The Acadian Credit Agreement has a maturity date of August 22, 2022.
Borrowings under the Acadian Credit Agreement bear interest, at Acadian’s option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5% and (iii) the one month Adjusted LIBOR Rate plus 1.0%, plus, in each case an additional amount based on its credit rating or (b) the London interbank offered rate for a period, at the Company’s election equal to one, three or six months plus an additional amount ranging from 1.5% to 2.0%, with such additional amount based on Acadian’s Leverage Ratio (as defined
22
BrightSphere Investment Group Inc.
Notes to Consolidated Financial Statements
(unaudited)
6) Borrowings and Debt (cont.)
below). In addition, Acadian is charged a commitment fee based on the average daily unused portion of the revolving credit facility under the Acadian Credit Agreement at a per annum rate ranging from 0.25% to 0.375%, with such amount based on Acadian’s Leverage Ratio.
Under the Acadian Credit Agreement, the ratio of Acadian’s third-party borrowings to Acadian’s trailing twelve months Adjusted EBITDA, as defined by the Acadian Credit Agreement (the “Leverage Ratio”), cannot exceed 2.5x and the Acadian interest coverage ratio must not be less than 4.0x.
23
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8) Leases
The Company has operating leases for corporate offices, data centers, vehicles and certain equipment. The operating leases have remaining lease terms of 1 year to 13 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The following table summarizes information about the Company’s operating leases for the three months ended March 31, (in millions):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease cost | $ | 3.1 | $ | 3.4 | |||||||
| Variable lease cost | 0.1 | 0.1 | |||||||||
| Total operating lease expense | $ | 3.2 | $ | 3.5 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 2.8 | $ | 3.3 | |||||||
| Right of use assets obtained in exchange for new operating lease liabilities | — | 70.1 | |||||||||
In determining the incremental borrowing rate, the Company considered the interest rate yield for the specific interest rate environment and the Company’s credit spread at the inception of the lease. For the three months ended March 31, 2021 and 2020, the weighted average remaining lease term was 11.6 years and 12.3 years, respectively, and the weighted average discount rate was 3.34% and 3.38%, respectively.
Maturities of operating lease liabilities were as follows (in millions):
| Operating Leases | |||||
| Year Ending December 31, | |||||
2021 (excluding the three months ended March 31, 2021) | $ | 8.4 | |||
| 2022 | 7.2 | ||||
| 2023 | 9.8 | ||||
| 2024 | 9.1 | ||||
| 2025 | 9.2 | ||||
| Thereafter | 75.1 | ||||
| Total lease payments | $ | 118.8 | |||
| Less imputed interest | (21.9) | ||||
| Total | $ | 96.9 | |||
24
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
9) Goodwill and Intangible Assets
In connection with the pending divestiture of Landmark, the Company reclassified $148.1 million of goodwill to “Affiliate assets held for sale” in the Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020. The Company also reclassified $56.6 million and $58.2 million of net intangible assets to “Affiliate assets held for sale” in the Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020, respectively. See Note 3, Divestitures, Held for Sale and Discontinued Operations, in these Notes for additional information.
10) Commitments and Contingencies
Operational commitments
The Company had unfunded commitments to invest up to approximately $5 million in co-investments as of March 31, 2021. These commitments will be funded as required through the end of the respective investment periods ranging through fiscal 2022.
The Company also had unfunded commitments to invest up to approximately $29 million in co-investments for Landmark as of March 31, 2021. On March 30 2021, the Company announced the divestiture of all of the Company’s interest in Landmark. The pending divestiture of Landmark met the discontinued operations criteria. The commitments will be funded as required through the disposition date, which is expected to occur in the second quarter of 2021. See Note 3, Divestitures, Held for Sale and Discontinued Operations for additional information.
Certain Affiliates operate under regulatory authorities that require that they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the period.
Guaranty
The Company entered into a guaranty for an office space security deposit on behalf of an Affiliate in the amount of $2.5 million in January 2020. This represents the maximum potential amount of future (undiscounted) payments that the Company could be required to make under the guaranty in the event of default by the guaranteed parties. This guaranty expires in 2022. There are no liabilities recorded on the Condensed Consolidated Balance Sheet as of March 31, 2021 related to this guaranty.
Litigation
The Company and its Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is probable and can be reasonably estimated. If an insurance claim or other indemnification for a litigation accrual is available to the Company, the associated gain will not be recognized until all contingencies related to the gain have been resolved. As of March 31, 2021, there were no material accruals for claims, legal proceedings or other contingencies.
25
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10) Commitments and Contingencies (cont.)
Indemnifications
In the normal course of business, such as through agreements to enter into business combinations and divestitures of Affiliates, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred.
Foreign tax contingency
The Company has clients in non-U.S. jurisdictions which require entities that are conducting certain business activities in such jurisdictions to collect and remit tax assessed on certain fees paid for goods and services provided. The Company does not believe this requirement is applicable based on its limited business activities in these jurisdictions. However, given the fact that uncertainty exists around the requirement, the Company has chosen to evaluate its potential exposure related to non-collection and remittance of these taxes. At March 31, 2021, management of the Company has estimated the potential maximum exposure and concluded that it is not material. No accrual for the potential exposure has been recorded as the probability of incurring any potential liability relating to this exposure is not probable at March 31, 2021.
Considerations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and investments. The Company maintains cash and cash equivalents and short term investments with various financial institutions. These financial institutions are typically located in cities in which the Company and its Affiliates operate. For the Company and certain Affiliates, cash deposits at a financial institution may exceed Federal Deposit Insurance Corporation insurance limits. The majority of the Company’s cash equivalents consists of money market funds. At March 31, 2021, approximately $333 million of the Company’s cash and cash equivalents were invested in money market funds. Additionally, the Company holds insurance policies which cover historical and future tax benefits relating to certain of its deferred tax assets. The insurers of the policies are considered a significant counterparty to the Company.
26
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11) Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to controlling interests by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is similar to basic earnings per share, but is adjusted for the effect of potentially issuable common stock, except when inclusion is antidilutive.
The calculation of basic and diluted earnings per share of common stock is as follows (dollars in millions, except per share data):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Income from continuing operations attributable to controlling interests | $ | 21.9 | $ | 17.3 | |||||||
| Income from discontinued operations attributable to controlling interests (Note 3) | $ | 5.1 | $ | 15.3 | |||||||
| Net income attributable to common stock | $ | 27.0 | $ | 32.6 | |||||||
| Denominator: | |||||||||||
| Weighted-average shares of common stock outstanding—basic | 79,319,556 | 85,081,166 | |||||||||
| Potential shares of common stock: | |||||||||||
| Restricted stock units | 35,621 | 17,893 | |||||||||
| Employee stock options | 2,965,491 | — | |||||||||
| Weighted-average shares of common stock outstanding—diluted | 82,320,668 | 85,099,059 | |||||||||
| Earnings per share of common stock attributable to controlling interests: | |||||||||||
| Basic | |||||||||||
| Continuing operations | $ | 0.28 | $ | 0.20 | |||||||
| Discontinued operations | 0.06 | 0.18 | |||||||||
| Basic earnings per share of common stock attributable to controlling interests | $ | 0.34 | $ | 0.38 | |||||||
| Diluted | |||||||||||
| Continuing operations | $ | 0.27 | $ | 0.20 | |||||||
| Discontinued operations | 0.06 | 0.18 | |||||||||
| Diluted earnings per share of common stock attributable to controlling interests | $ | 0.33 | $ | 0.38 | |||||||
Employee options to purchase 9,330,000 shares were not included in the computation of diluted EPS for the three months ended March 31, 2020 because the assumed proceeds from exercising such options exceed the average price of the shares of common stock for the period and, therefore, the options are deemed antidilutive.
27
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
12) Revenue
Management fees
The Company’s management fees are a function of the fee rates the Affiliates charge to their clients, which are typically expressed in basis points, and the levels of the Company’s assets under management. The most significant driver of increases or decreases in this average fee rate is changes in the mix of the Company’s assets under management caused by net inflows or outflows in certain asset classes or disproportionate market movements.
Performance fees
The Company’s products subject to performance fees earn these fees upon exceeding high-water mark performance thresholds or outperforming a hurdle rate.
Other revenue
Included in other revenue are certain payroll and benefits costs and expenses paid on behalf of Funds by the Company’s Affiliates. In instances where a customer reimburses the Company for a cost paid on the customer’s behalf, the Company is acting as a principal and the reimbursement is accrued on a gross basis at cost as the corresponding reimbursable expenses are incurred. Revenue from expense reimbursements amounted to $1.0 million and $1.1 million for the three months ended March 31, 2021 and 2020, respectively, and is recorded in other revenue in the Company’s Condensed Consolidated Statements of Operations. Other revenue may also consist of other miscellaneous revenue, consisting primarily of administration and consulting services.
Disaggregation of management fee revenue
The Company classifies its revenue (including only consolidated Affiliates that are included in management fee revenue) among the following asset classes:
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 mainly comprised of forestry.
28
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
12) Revenue (cont.)
Management fee revenue by segment and asset class is comprised of the following for the three months ended March 31 (in millions):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Quant & Solutions | |||||||||||
| Global / non-U.S. equity | $ | 98.9 | $ | 85.2 | |||||||
| Liquid Alpha | |||||||||||
| Global / non-U.S. equity | 14.0 | 18.8 | |||||||||
| Fixed income | 1.2 | 6.3 | |||||||||
| U.S. equity | 6.3 | 26.8 | |||||||||
Other(1) | |||||||||||
| Alternatives | 4.9 | 5.5 | |||||||||
Management fee revenue | $ | 125.3 | $ | 142.6 | |||||||
(1)Prior to March 31, 2021, the Company had the Alternatives reportable segment which consisted of Landmark and Campbell Global operating segments. On March 30, 2021, the Company entered into an agreement to sell of all of the Company’s interests in Landmark. As a result of this transaction, Landmark has been reclassified to discontinued operations, and the Alternatives segment no longer constitutes a reportable segment of the Company. The reportable segments for all periods presented have been recast to reflect the reporting of Landmark within discontinued operations and the Campbell Global operating segment has been reclassified to “Other” within the Company’s segment reporting. See Note 3, Divestitures, Held for Sale and Discontinued Operations and Note 15, Segments for further discussion.
29
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
13) Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020 were as follows (in millions):
| Foreign currency translation adjustment | Valuation and amortization of derivative securities | Total | |||||||||||||||
| Balance, as of December 31, 2020 | $ | 4.4 | $ | (18.0) | $ | (13.6) | |||||||||||
| Foreign currency translation adjustment | 1.1 | — | 1.1 | ||||||||||||||
Amortization related to derivatives securities, before tax | — | 0.8 | 0.8 | ||||||||||||||
| Tax impact | — | (0.2) | (0.2) | ||||||||||||||
| Other comprehensive income | 1.1 | 0.6 | 1.7 | ||||||||||||||
Balance, as of March 31, 2021 | $ | 5.5 | $ | (17.4) | $ | (11.9) | |||||||||||
| Foreign currency translation adjustment | Valuation and amortization of derivative securities | Total | |||||||||||||||
| Balance, as of December 31, 2019 | $ | 2.8 | $ | (20.3) | $ | (17.5) | |||||||||||
| Foreign currency translation adjustment | (2.1) | — | (2.1) | ||||||||||||||
Amortization related to derivatives securities, before tax | — | 0.7 | 0.7 | ||||||||||||||
| Tax impact | — | (0.2) | (0.2) | ||||||||||||||
| Other comprehensive income (loss) | (2.1) | 0.5 | (1.6) | ||||||||||||||
Balance, as of March 31, 2020 | $ | 0.7 | $ | (19.8) | $ | (19.1) | |||||||||||
For the three months ended March 31, 2021 and 2020, the Company reclassified $0.8 million and $0.7 million, respectively, from accumulated other comprehensive income (loss) to interest expense on the Condensed Consolidated Statements of Operations.
14) Derivatives and Hedging
Cash flow hedge
In July 2015, the Company entered into a series of $300.0 million notional Treasury rate lock contracts which were designated and qualified as cash flow hedges. The Company documented its hedging strategy and risk management objective for this contract in anticipation of a future debt issuance. The Treasury rate lock contract eliminated the impact of fluctuations in the underlying benchmark interest rate for future forecasted debt issuances. The Company assessed the effectiveness of the hedging contract at inception and on a quarterly basis thereafter. The forecasted debt issuances occurred in July 2016 and the Treasury rate lock, which had an accumulated fair value of $(34.4) million, was settled. Refer to Note 7, Borrowings and Debt, for additional information on the debt issuances.
As of March 31, 2021, the balance recorded in accumulated other comprehensive income (loss) was $(17.4) million, net of tax. This balance will be reclassified to earnings through interest expense over the life of the issued debt. Amounts of $0.8 million and $0.7 million have been reclassified for the three months ended March 31, 2021 and
30
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14) Derivatives and Hedging (cont.)
2020, respectively. During the next twelve months the Company expects to reclassify approximately $3.4 million to interest expense.
31
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15) Segments
The Company has the following business segments(1)(2):
•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.
•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. and non-U.S. equities, as well as fixed income.
(1)Prior to March 31, 2021, the Company had an Alternatives reportable segment which was comprised of Landmark and Campbell Global operating segments. On March 30, 2021, the Company entered into an agreement to sell of all of the Company’s interests in Landmark. As a result of this transaction, Landmark has been reclassified to discontinued operations, and the Alternatives segment no longer constitutes a reportable segment of the Company. The reportable segments for all periods presented have been recast to reflect the reporting of Landmark within discontinued operations and the Campbell Global operating segment has been reclassified to “Other” within the Company’s segment reporting. See Note 3, Divestitures, Held for Sale and Discontinued Operations for further discussion.
(2)On February 6, 2021, the Company announced the divestiture of all of the Company’s interests in Investment Counselors of Maryland (“ICM”), an equity-accounted Affiliate. See Note 3, Divestitures, Held for Sale and Discontinued Operations for further discussion.
The Company also has a corporate head office that is included in “Other”. The corporate head office supports the segments by providing infrastructure and administrative support in the areas of accounting/finance, information technology, legal, compliance and human resources. The corporate head office expenses are not allocated to the Company’s two business segments but the Chief Operating Decision Maker (“CODM”) does consider the cost structure of the corporate head office when evaluating the financial performance of the segments.
Performance Measure
The primary measure used by the CODM in measuring performance and allocating resources to the segments is Economic Net Income (“ENI”). The Company defines ENI for the segments as ENI revenue less (i) ENI operating expenses, (ii) variable compensation and (iii) key employee distributions. The ENI adjustments to U.S. GAAP include both reclassifications of U.S. GAAP revenue and expense items, as well as adjustments to U.S. GAAP results, primarily to exclude non-cash, non-economic expenses, or to reflect cash benefits not recognized under U.S. GAAP. This measure supplements and should be considered in addition to, and not in lieu of, the Condensed Consolidated Statements of Operations prepared in accordance with U.S. GAAP. The Company does not disclose total asset information for its reportable segments as the information is not reviewed by the CODM.
ENI revenue includes management fees, performance fees and other revenue under U.S. GAAP, adjusted to include management fees paid to Affiliates by consolidated Funds and the Company’s share of earnings from equity-accounted Affiliate. ENI revenue is also adjusted to exclude the separate revenues recorded under U.S. GAAP for certain Fund expenses reimbursed to our Affiliates.
32
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15) Segments (cont.)
ENI operating expenses include compensation and benefits, general and administrative expense, and depreciation and amortization under U.S. GAAP, adjusted to exclude non-cash expenses representing changes in the value of Affiliate equity and profit interests held by Affiliate key employees, goodwill impairment and amortization of acquired intangible assets, capital transaction costs, restructuring costs, and the separate expenses recorded under U.S. GAAP for certain Fund expenses reimbursed to Affiliates. Additionally, variable compensation and Affiliate key employee distributions are segregated from ENI operating expenses.
ENI segment results are also adjusted to exclude the portion of consolidated Fund revenues, expenses and investment return recorded under U.S. GAAP.
Segment Presentation
The following tables set forth summarized operating results for the Company's two segments and related adjustments necessary to reconcile the segment economic net income to arrive at the Company's consolidated U.S. GAAP net income (loss) for the three months ended March 31, 2021 (in millions):
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||
| Quant & Solutions | Liquid Alpha | Other | Reconciling Adjustments | Total U.S. GAAP(1) | |||||||||||||||||||||||||
| ENI revenue | $ | 103.5 | $ | 22.6 | $ | 5.2 | $ | (0.1) | (a) | $ | 131.2 | ||||||||||||||||||
| ENI operating expenses | 39.1 | 6.8 | 9.6 | 6.3 | (b) | 61.8 | |||||||||||||||||||||||
Earnings before variable compensation | 64.4 | 15.8 | (4.4) | (6.4) | 69.4 | ||||||||||||||||||||||||
| Variable compensation | 22.6 | 4.4 | 0.9 | 0.5 | (c) | 28.4 | |||||||||||||||||||||||
ENI operating earnings (after variable comp) | 41.8 | 11.4 | (5.3) | (6.9) | 41.0 | ||||||||||||||||||||||||
Affiliate key employee distributions | 1.5 | 2.6 | (0.2) | — | 3.9 | ||||||||||||||||||||||||
Earnings after Affiliate key employee distributions | 40.3 | 8.8 | (5.1) | (6.9) | 37.1 | ||||||||||||||||||||||||
| Net interest expense | — | — | (5.4) | (0.8) | (d) | (6.2) | |||||||||||||||||||||||
| Net investment income | — | — | — | 2.6 | (e) | 2.6 | |||||||||||||||||||||||
| Loss on sale of subsidiary | — | — | — | (1.3) | (e) | (1.3) | |||||||||||||||||||||||
| Net loss attributable to non-controlling interests in consolidated Funds | — | — | — | (13.4) | (e) | (13.4) | |||||||||||||||||||||||
| Income tax (expense) benefit | — | — | (10.4) | 0.1 | (f) | (10.3) | |||||||||||||||||||||||
| Income from discontinued operations, net of tax | — | — | — | 18.5 | (g) | 18.5 | |||||||||||||||||||||||
Economic net income | $ | 40.3 | $ | 8.8 | $ | (20.9) | $ | (1.2) | $ | 27.0 | |||||||||||||||||||
33
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15) Segments (cont.)
The following table presents the financial data for the Company’s two segments for the three months ended March 31, 2020 (in millions):
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||
| Quant & Solutions | Liquid Alpha | Other | Reconciling Adjustments | Total U.S. GAAP(1) | |||||||||||||||||||||||||
| ENI revenue | $ | 86.1 | $ | 52.5 | $ | 6.1 | $ | 2.0 | (a) | $ | 146.7 | ||||||||||||||||||
| ENI operating expenses | 37.1 | 19.8 | 12.9 | (9.9) | (b) | 59.9 | |||||||||||||||||||||||
Earnings before variable compensation | 49.0 | 32.7 | (6.8) | 11.9 | 86.8 | ||||||||||||||||||||||||
| Variable compensation | 17.0 | 12.5 | 1.4 | 0.4 | (c) | 31.3 | |||||||||||||||||||||||
ENI operating earnings (after variable comp) | 32.0 | 20.2 | (8.2) | 11.5 | 55.5 | ||||||||||||||||||||||||
Affiliate key employee distributions | 0.8 | 3.2 | — | — | 4.0 | ||||||||||||||||||||||||
Earnings after Affiliate key employee distributions | 31.2 | 17.0 | (8.2) | 11.5 | 51.5 | ||||||||||||||||||||||||
| Net interest expense | — | — | (5.6) | (1.9) | (d) | (7.5) | |||||||||||||||||||||||
| Net investment income (loss) | — | — | — | (30.9) | (e) | (30.9) | |||||||||||||||||||||||
Net income attributable to non-controlling interests in consolidated Funds | — | — | — | 10.5 | (e) | 10.5 | |||||||||||||||||||||||
| Income tax (expense) benefit | — | — | (8.5) | 2.1 | (f) | (6.4) | |||||||||||||||||||||||
| Income from discontinued operations, net of tax | — | — | — | 15.4 | (g) | 15.4 | |||||||||||||||||||||||
Economic net income | $ | 31.2 | $ | 17.0 | $ | (22.3) | $ | 6.7 | $ | 32.6 | |||||||||||||||||||
(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.
Reconciling Adjustments:
(a)Adjusted to exclude earnings from equity-accounted Affiliate, 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 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 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 loss on sale of subsidiary, all of which are included in U.S. GAAP net income attributable to controlling interests.
34
BrightSphere Investment Group Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15) Segments (cont.)
(f)Adjusted to include the impact of deferred tax attributable to the amortization of goodwill and acquired intangibles. Also adjusted to include the tax impact of certain ENI adjustments; exclude the tax expense or benefits relating to uncertain tax positions, and exclude the tax impact of other unusual items that are not related to current operating results for ENI purposes.
(g)Adjusted to include the results of discontinued operations, which is included in U.S. GAAP net income attributable to controlling interests.
Management fee revenue by principal geographic area is comprised of the following for the three months ended March 31 (in millions):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| U.S. | $ | 99.8 | $ | 107.3 | |||||||
| Non-U.S. | 25.5 | 35.3 | |||||||||
Management fee revenue | $ | 125.3 | $ | 142.6 | |||||||
16) Related Party Transactions
Landmark has provided loans to its employees. At March 31, 2021 and December 31, 2020, the balance of the loans to Affiliate employees was $3.9 million and $8.4 million, respectively. These loans will be repaid by 2022.
On March 30 2021, the Company announced the divestiture of all of the Company’s interest in Landmark. The pending divestiture of Landmark met the discontinued operations criteria. The balance of the loans to Affiliate employees will be deconsolidated on disposition date, which is expected to occur in the second quarter of 2021. See Note 3, Divestitures, Held for Sale and Discontinued Operations for additional information.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless we state otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q to “BrightSphere” or “BSIG” refer to BrightSphere Investment Group Inc., references to the “Company” refer to BSIG, and references to “we,” “our” and “us” refer to BSIG and its consolidated subsidiaries and equity-accounted Affiliate, excluding discontinued operations. References to the holding company or “Center” excluding the Affiliates refer to BrightSphere Inc., or “BSUS,” a Delaware corporation and wholly owned subsidiary of BSIG. Unless we state otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Affiliates” or an “Affiliate” refer to the asset management firms in which we have an ownership interest. References in this Quarterly Report on Form 10-Q to “OM plc” refer to Old Mutual plc, our former parent. None of the information in this Quarterly Report on Form 10-Q constitutes either an offer or a solicitation to buy or sell any of our Affiliates’ products or services, nor is any such information a recommendation for any of our Affiliates’ products or services.
The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes which appear elsewhere in this Quarterly Report on Form 10-Q.
This discussion contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” at the end of this Item 2 for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.
Our MD&A is presented in five sections:
•Overview provides a brief description of our segments and underlying 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, 2021 and 2020 includes an explanation of changes in our U.S. GAAP revenue, expense and other items for the three months ended March 31, 2021 and 2020, 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, 2021 and 2020 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.
36
Overview
We are a diversified, global asset management company headquartered in Boston, Massachusetts. We operate our business through the following business segments(1):
•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., and emerging markets equities, as well as multi-asset products.
•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. and non-U.S. equities, as well as fixed income.
Within our segments, we have three affiliate firms(2) to whom we refer in this Quarterly Report as our Affiliates. Through our Affiliates, we offer a diverse range of actively-managed investment strategies and products to institutional investors around the globe. While our Affiliates maintain autonomy in the investment process and the day-to-day management of their businesses, our strategy is to work with them to accelerate the growth and profitability of their firms.
Under U.S. GAAP, our Affiliates may be consolidated into our operations or may be accounted for under the equity method of accounting. We may also be required to consolidate certain of our Affiliates’ sponsored investment entities, or Funds, due to the nature of our decision-making rights, our economic interests in these Funds or the rights of third party clients in those Funds.
Our Affiliates(2) and their principal strategies include:
•Acadian Asset Management LLC (“Acadian”)—a leading quantitatively-oriented manager of active global and international equity, and alternative strategies. Acadian is included within the Quant & Solutions segment.
•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. Campbell Global is included within the Other segment.
•Thompson, Siegel & Walmsley LLC (“TSW”)—a value-oriented investment manager focused on small- and mid-cap U.S. equity, international equity and fixed income strategies. TSW is included within the Liquid Alpha segment.
(1)In March 2021, we announced the divestiture of Landmark Partners, LLC (“Landmark”), which is expected to close in the second quarter of 2021. As a result, Landmark is reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment. The remaining portion of the Alternatives segment, including Campbell Global, has been reclassified to “Other”. See “Recent Developments” herein.
(2)In the first quarter of 2021, BrightSphere announced the divestitures of Investment Counselors of Maryland (“ICM”) and Landmark. These transactions are expected to close in the second quarter of 2021. This information gives effect to these divestitures. See “Recent Developments” herein.
37
Recent Developments
Divestiture of Landmark Partners and Investment Counselors of Maryland
On March 30, 2021, we entered into an agreement to sell all of our equity interests in Landmark, an Affiliate formerly included in the Alternatives segment, to Ares Management Corporation in exchange for approximately $690 million in cash. Ares has also agreed to acquire our co-investments in Landmark’s funds for approximately $34 million, subject to adjustment for certain related cashflow. As a result, Landmark is reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment. The transaction is expected to close during the second quarter of 2021.
On February 6, 2021, we entered into a definitive agreement to sell all of our interests in ICM, an equity-accounted Affiliate within the Liquid Alpha segment, in exchange for approximately $19 million of cash consideration, subject to certain customary closing and post-closing adjustments. The transaction is expected to close during the second quarter of 2021.
COVID-19 Impact
Beginning in the first quarter of 2020, the outbreak of COVID-19 had a significant impact on the global economy and the financial and securities markets, which will likely to continue for months to come. The overall extent and duration of COVID-19 on businesses and economic activity generally remains unclear. We continue to monitor the economic uncertainty and market volatility related to COVID-19, which has impacted the investment management industry in which we and our Affiliates operate. The extent of the impact on our business operations and financial results will depend on a number of factors and future developments, which are uncertain and cannot be predicted. See Item 1A to our Quarterly Report on Form 10-Q filed with the Securities Exchange Commission on May 11, 2020.
The Economics of Our Business
Our profitability is affected by a variety of factors including the level and composition of our average assets under management, or AUM, fee rates charged on AUM and our expense structure. Our Affiliates earn management fees based on assets under management. Approximately 80% of our management fees for the three months ended March 31, 2021 are calculated based on average AUM (calculated on either a daily or monthly basis) with the remainder of our management fees calculated based on period-end AUM or other measuring methods. Changes in the levels of our AUM are driven by our investment performance and net client cash flows. Our Affiliates may also earn performance fees, or adjust management fees, when certain accounts differ in relation to relevant benchmarks or exceed or fail to exceed required returns. Approximately $18.3 billion, or 13%, of our AUM in consolidated Affiliates, are in accounts with incentive fee in which we participate in the performance fee. The majority of these incentive fees are calculated based on value added over the relevant benchmarks on a rolling one-year and three-year basis.
Our largest expense item is compensation and benefits paid to our and our Affiliates’ employees, which consists of both fixed and variable components. Fixed compensation and benefits represents base salaries and wages, payroll taxes and the costs of our employee benefit programs. Variable compensation, calculated as described below, may be awarded in cash, equity or profit interests.
The arrangements in place with our Affiliates result in the sharing of economics between BSUS and each Affiliate’s key management personnel using a profit-sharing model, except for ICM, which uses a revenue share model as a result of a legacy economic arrangement that has not been restructured. Profit sharing affects two elements within our earnings: (i) the calculation of variable compensation and (ii) the level of each Affiliate’s equity or profit interests distribution to its employees. Variable compensation is the portion of earnings that is contractually
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allocated to Affiliate employees as a bonus pool, typically representing a fixed percentage of earnings before variable compensation, which is measured as revenues less fixed compensation and benefits and other operating and administrative expenses. Profits after variable compensation are shared between us and Affiliate key employee equity holders according to our respective equity or profit interests ownership. The sharing of profits in this manner ensures that the economic interests of Affiliate key employees and those of BSUS are aligned, both in terms of generating strong annual earnings as well as investing those earnings back into the business in order to generate growth over the long term. We view profit sharing as an attractive operating model, as it allows us to share in the benefits of operating leverage as the business grows, and ensures all equity and profit interests holders are incentivized to achieve that growth.
Equity or profit interests owned by Affiliate key employees are either awarded as part of their variable compensation arrangements, or alternatively, may have originally resulted from BSUS acquiring less than 100% of the Affiliate. Over time, Affiliate key employee-owned equity or profit interests are recycled from one generation of employee-owners to the next, either by the next generation purchasing equity or profit interests directly from retiring principals, or by Affiliate key employees forgoing cash bonuses in exchange for the equivalent value in Affiliate equity or profit interests. The recycling of equity or profit interests is often facilitated by BSUS; see “—U.S. GAAP Results of Operations—U.S. GAAP Expenses—Compensation and Benefits Expense” for a further discussion.
How We Measure Performance
We manage our business based on two business segments, reflecting how our management assesses the performance of our business.
In measuring and monitoring the key components of our earnings, our management uses a non-GAAP financial measure, ENI, to evaluate the financial performance of, and to make operational decisions for, our business. We also use ENI to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is an important measure in evaluating our financial performance because we believe it most accurately represents our operating performance and cash generation capability.
ENI differs from net income determined in accordance with U.S. GAAP as a result of both the reclassification of certain income statement items and the exclusion of certain non-cash or non-recurring income statement items. In particular, ENI excludes non-cash charges representing the changes in the value of Affiliate equity and profit interests held by Affiliate key employees, the results of discontinued operations which are no longer part of our business, restructuring costs, capital transaction costs, seed capital and co-investment gains, losses and related financing costs and that portion of consolidated Funds which are not attributable to our stockholders.
ENI revenue is primarily comprised of the fee revenues paid to us by our clients for our advisory services and earnings from our equity-accounted Affiliate. Revenue included within ENI differs from U.S. GAAP revenue in that it excludes amounts from consolidated Funds which are not attributable to our stockholders, it excludes reimbursement of certain costs we paid on behalf of our customers and includes our share of earnings from our equity-accounted Affiliate.
ENI expenses are calculated to reflect all usual expenses from ongoing continuing operations attributable to our stockholders. Expenses included within ENI differ from U.S. GAAP expenses in that they exclude amounts from consolidated Funds which are not attributable to our stockholders, revaluations of Affiliate key employee owned equity and profit interests, amortization and impairment of acquired intangibles and other acquisition-related items, costs we paid on behalf of our customers which were subsequently reimbursed and certain other non-cash expenses.
“Non-controlling interests” is a concept under U.S. GAAP that identifies net components of revenues and expenses that are not attributable to our stockholders. For example, the portion of the net income (loss) of any consolidated Fund that is attributable to the outside investors or clients of the consolidated Fund is included in “Non-controlling interests” in our Condensed Consolidated Financial Statements. Conversely, “controlling interests” is the portion of revenue or expense that is attributable to our stockholders.
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For a more detailed discussion of the differences between U.S. GAAP net income and economic net income, see “—Non-GAAP Supplemental Performance Measure — Economic Net Income and Segment Analysis.”
Summary Results of Operations
The following table summarizes our unaudited results of operations for the three months ended March 31, 2021 and 2020:
| ($ in millions, unless otherwise noted) | Three Months Ended March 31, | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| U.S. GAAP Basis | |||||||||||||||||
| Revenue | $ | 131.2 | $ | 146.7 | $ | (15.5) | |||||||||||
Pre-tax income from continuing operations attributable to controlling interests | 32.2 | 23.7 | 8.5 | ||||||||||||||
Net income from continuing operations attributable to controlling interests | 21.9 | 17.3 | 4.6 | ||||||||||||||
| Net income attributable to controlling interests | 27.0 | 32.6 | (5.6) | ||||||||||||||
U.S. GAAP operating margin(1) | 28.3 | % | 35.1 | % | (683) bps | ||||||||||||
| Earnings per share, basic ($) | $ | 0.34 | $ | 0.38 | $ | (0.04) | |||||||||||
| Earnings per share, diluted ($) | $ | 0.33 | $ | 0.38 | $ | (0.05) | |||||||||||
| Basic shares outstanding (in millions) | 79.3 | 85.1 | (5.8) | ||||||||||||||
| Diluted shares outstanding (in millions) | 82.3 | 85.1 | (2.8) | ||||||||||||||
Economic Net Income Basis(2)(3) | |||||||||||||||||
| (Non-GAAP measure used by management) | |||||||||||||||||
ENI revenue(4) | $ | 131.3 | $ | 144.7 | $ | (13.4) | |||||||||||
Pre-tax economic net income(5) | 38.6 | 34.4 | 4.2 | ||||||||||||||
| Adjusted EBITDA | 50.0 | 46.1 | 3.9 | ||||||||||||||
ENI operating margin(6) | 36.5 | % | 30.4 | % | 607 bps | ||||||||||||
Economic net income(7) | 28.2 | 25.9 | 2.3 | ||||||||||||||
ENI diluted EPS ($) | $ | 0.34 | $ | 0.30 | $ | 0.04 | |||||||||||
| Other Operational Information | |||||||||||||||||
Assets under management (AUM) at period end (in billions) | $ | 145.1 | $ | 143.3 | $ | 1.8 | |||||||||||
| Net client cash flows (in billions) | (2.4) | 0.7 | (3.1) | ||||||||||||||
Annualized revenue impact of net flows(8) | (4.6) | (2.9) | (1.7) | ||||||||||||||
(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 income from discontinued operations, as well as restructuring costs at the Center and Affiliates of $1.5 million, costs associated with the transfer of an insurance policy from our former parent of $0.3 million, and the loss on sale of subsidiary of $1.3 million for the three months ended March 31, 2021. Excludes income from discontinued operations, as well as restructuring costs at the Center of $0.4 million and costs associated with the transfer of an insurance policy from our former parent of $0.3 million for the three months ended March 31, 2020.
(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.
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(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)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 our equity-accounted Affiliate. 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.
Assets Under Management
In March 2021, we announced the divestiture of Landmark. As a result, Landmark is reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment. AUM and flow information from Landmark is excluded from all periods presented.
The following table presents our assets under management by Affiliate as of each of the dates indicated:
| ($ in billions) | March 31, 2021 | December 31, 2020 | ||||||||||||
| Acadian Asset Management | $ | 111.5 | $ | 108.1 | ||||||||||
| Campbell Global | 4.7 | 4.7 | ||||||||||||
Investment Counselors of Maryland(1) | 4.0 | 3.2 | ||||||||||||
| Thompson, Siegel & Walmsley | 24.9 | 22.3 | ||||||||||||
| Total assets under management excluding discontinued operations | 145.1 | * | 138.3 | |||||||||||
Landmark Partners(2) | 18.2 | 18.4 | ||||||||||||
| Total assets under management including discontinued operations | $ | 163.3 | $ | 156.7 | * | |||||||||
*Reported AUM.
(1)In February 2021, we announced the divestiture of ICM, which is expected to close in the second quarter of 2021, see “Recent Developments” herein.
(2)In March 2021, we announced the divestiture of Landmark, which is expected to close in the second quarter of 2021, see “Recent Developments” herein.
Our strategies include:
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 forestry, as well as a growing suite of liquid alternative capabilities in areas such as long/short, market neutral and absolute return.
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The following table presents our assets under management by strategy as of each of the dates indicated:
| ($ in billions) | March 31, 2021 | December 31, 2020 | ||||||||||||
| U.S. equity, small/smid cap value | $ | 5.3 | $ | 4.4 | ||||||||||
| U.S. equity, mid cap value | 4.5 | 4.0 | ||||||||||||
| U.S. equity, large cap value | 0.2 | 0.2 | ||||||||||||
| U.S. equity, core/blend | 3.3 | 2.9 | ||||||||||||
| Total U.S. equity | 13.3 | 11.5 | ||||||||||||
| Global equity | 31.5 | 32.1 | ||||||||||||
| International equity | 64.8 | 59.9 | ||||||||||||
| Emerging markets equity | 27.7 | 27.0 | ||||||||||||
| Total global / non-U.S. equity | 124.0 | 119.0 | ||||||||||||
| Fixed income | 1.8 | 1.9 | ||||||||||||
| Alternatives | 6.0 | 5.9 | ||||||||||||
| Total assets under management | $ | 145.1 | $ | 138.3 | ||||||||||
The following table shows assets under management by client type as of each of the dates indicated:
| ($ in billions) | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| AUM | % of total | AUM | % of total | ||||||||||||||||||||
| Sub-advisory | $ | 25.3 | 17.4 | % | $ | 23.6 | 17.1 | % | |||||||||||||||
| Corporate/Union | 18.5 | 12.7 | % | 18.6 | 13.4 | % | |||||||||||||||||
| Public/Government | 59.5 | 41.1 | % | 57.8 | 41.8 | % | |||||||||||||||||
| Endowment/Foundation | 2.4 | 1.7 | % | 2.6 | 1.9 | % | |||||||||||||||||
| OM plc Group | 1.7 | 1.2 | % | 1.6 | 1.2 | % | |||||||||||||||||
| Commingled Trust/UCITS | 27.2 | 18.7 | % | 24.8 | 17.9 | % | |||||||||||||||||
| Mutual Fund | 3.1 | 2.1 | % | 2.8 | 2.0 | % | |||||||||||||||||
| Other | 7.4 | 5.1 | % | 6.5 | 4.7 | % | |||||||||||||||||
| Total assets under management | $ | 145.1 | $ | 138.3 | |||||||||||||||||||
The following table shows assets under management by client location as of each of the dates indicated:
| ($ in billions) | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| AUM | % of total | AUM | % of total | ||||||||||||||||||||
| U.S. | $ | 107.5 | 74.1 | % | $ | 101.1 | 73.1 | % | |||||||||||||||
| Europe | 15.7 | 10.8 | % | 16.3 | 11.8 | % | |||||||||||||||||
| Asia | 6.1 | 4.2 | % | 5.7 | 4.1 | % | |||||||||||||||||
| Australia | 8.4 | 5.8 | % | 8.1 | 5.9 | % | |||||||||||||||||
| Other | 7.4 | 5.1 | % | 7.1 | 5.1 | % | |||||||||||||||||
| Total assets under management | $ | 145.1 | $ | 138.3 | |||||||||||||||||||
AUM flows and the annualized revenue impact of net flows
Net client cash flows and revenue impact of net client cash flows for all periods include reinvested income and distributions, and exclude realizations. Reinvested income and distributions represent investment yield that is reinvested back into the portfolios as opposed to distributed as cash.
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In the following table, we present our asset flows and market appreciation (depreciation) by segment. We also present a key metric used to better understand our asset flows, the annualized revenue impact of net client cash flows. 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 distributions. 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 our equity-accounted Affiliate. In addition, reinvested income and distributions for each segment is multiplied by average fee rate for the respective segment to compute the revenue impact.
The annualized revenue impact of net flows metric is designed to provide investors with a better indication of the potential financial impact of net client cash flows, however it has certain limitations. For instance, it does not include assumptions for the next twelve months' market appreciation or depreciation and investment performance associated with the assets gained or lost. Nor does it account for factors such as future client terminations or additional contributions or withdrawals over the next twelve months. Additionally, the basis points reported are fee rates based on the asset levels at the time of the transactions and do not consider the fact that client fee rates may change over the next twelve months.
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The following table summarizes our asset flows and market appreciation (depreciation) by segment for each of the periods indicated:
| Three Months Ended March 31, | |||||||||||
| ($ in billions, unless otherwise noted) | 2021 | 2020 | |||||||||
| Quant & Solutions | |||||||||||
| Beginning balance | $ | 107.4 | $ | 101.9 | |||||||
| Gross inflows | 2.2 | 3.7 | |||||||||
| Gross outflows | (6.4) | (3.1) | |||||||||
| Reinvested income and distributions | 0.6 | 0.9 | |||||||||
| Net flows | (3.6) | 1.5 | |||||||||
| Market appreciation (depreciation) | 7.0 | (24.4) | |||||||||
Other(1) | 0.7 | — | |||||||||
| Ending balance | $ | 111.5 | $ | 79.0 | |||||||
Average AUM(2) | $ | 109.3 | $ | 92.9 | |||||||
| Liquid Alpha | |||||||||||
| Beginning balance | $ | 25.1 | $ | 78.7 | |||||||
| Gross inflows | 1.7 | 2.8 | |||||||||
| Gross outflows | (0.6) | (4.3) | |||||||||
| Reinvested income and distributions | 0.1 | 0.4 | |||||||||
| Net flows | 1.2 | (1.1) | |||||||||
| Market appreciation (depreciation) | 2.2 | (19.1) | |||||||||
Other(1) | 0.4 | — | |||||||||
| Ending balance | $ | 28.9 | $ | 58.5 | |||||||
| Average AUM | $ | 27.1 | $ | 71.1 | |||||||
| Average AUM of consolidated Affiliates | $ | 23.6 | $ | 69.0 | |||||||
Other(3) | |||||||||||
| Beginning balance | $ | 5.8 | $ | 5.4 | |||||||
| Gross inflows | — | 0.4 | |||||||||
| Gross outflows | — | (0.1) | |||||||||
| Net flows | — | 0.3 | |||||||||
| Market appreciation | — | 0.1 | |||||||||
Other(1) | (1.1) | — | |||||||||
| Ending balance | $ | 4.7 | $ | 5.8 | |||||||
Average AUM(2) | $ | 4.7 | $ | 5.6 | |||||||
| Total | |||||||||||
| Beginning balance | $ | 138.3 | $ | 186.0 | |||||||
| Gross inflows | 3.9 | 6.9 | |||||||||
| Gross outflows | (7.0) | (7.5) | |||||||||
| Reinvested income and distributions | 0.7 | 1.3 | |||||||||
| Net flows | (2.4) | 0.7 | |||||||||
| Market appreciation (depreciation) | 9.2 | (43.4) | |||||||||
| Ending balance excluding discontinued operations | $ | 145.1 | $ | 143.3 | |||||||
Discontinued operations(3) | $ | 18.2 | $ | 18.5 | |||||||
| Ending balance including discontinued operations | $ | 163.3 | $ | 161.8 | |||||||
| Average AUM | $ | 141.1 | $ | 169.6 | |||||||
| Average AUM of consolidated Affiliates | $ | 137.6 | $ | 167.5 | |||||||
| Annualized basis points: inflows | 43.6 | 34.2 | |||||||||
| Annualized basis points: outflows | 34.7 | 41.4 | |||||||||
| Annualized revenue impact of net flows ($ in millions) | $ | (4.6) | $ | (2.9) | |||||||
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(1)AUM representing liquid alternative and solution strategies previously excluded from the Quant & Solutions segment have been reclassified in the three months ended March 31, 2021.
(2)Average AUM equals average AUM of consolidated Affiliates.
(3)Our reportable segments reflect the announced divestiture of Landmark. As a result of this divestiture, Landmark, previously included in the Alternatives segment, is now reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment. The remaining portion of the Alternatives segment, including Campbell Global, has been reclassified to “Other.”
We also analyze our asset flows by client type and client location. Our client types include:
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.
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The following table summarizes our asset flows by client type for each of the periods indicated:
| ($ in billions) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Sub-advisory | |||||||||||
| Beginning balance | $ | 23.6 | $ | 40.5 | |||||||
| Gross inflows | 0.9 | 2.1 | |||||||||
| Gross outflows | (0.8) | (2.4) | |||||||||
| Reinvested income and distributions | 0.1 | 0.2 | |||||||||
| Net flows | 0.2 | (0.1) | |||||||||
| Market appreciation (depreciation) | 1.5 | (10.1) | |||||||||
| Ending balance | $ | 25.3 | $ | 30.3 | |||||||
| Institutional | |||||||||||
| Beginning balance | $ | 105.4 | $ | 134.0 | |||||||
| Gross inflows | 2.4 | 4.3 | |||||||||
| Gross outflows | (5.8) | (4.6) | |||||||||
| Reinvested income and distributions | 0.6 | 1.0 | |||||||||
| Net flows | (2.8) | 0.7 | |||||||||
| Market appreciation (depreciation) | 6.7 | (30.2) | |||||||||
| Ending balance | $ | 109.3 | $ | 104.5 | |||||||
| Retail/Other | |||||||||||
| Beginning balance | $ | 9.3 | $ | 11.5 | |||||||
| Gross inflows | 0.6 | 0.5 | |||||||||
| Gross outflows | (0.4) | (0.5) | |||||||||
| Reinvested income and distributions | — | 0.1 | |||||||||
| Net flows | 0.2 | 0.1 | |||||||||
| Market appreciation (depreciation) | 1.0 | (3.1) | |||||||||
| Ending balance | $ | 10.5 | $ | 8.5 | |||||||
| Total | |||||||||||
| Beginning balance | $ | 138.3 | $ | 186.0 | |||||||
| Gross inflows | 3.9 | 6.9 | |||||||||
| Gross outflows | (7.0) | (7.5) | |||||||||
| Reinvested income and distributions | 0.7 | 1.3 | |||||||||
| Net flows | (2.4) | 0.7 | |||||||||
| Market appreciation (depreciation) | 9.2 | (43.4) | |||||||||
| Ending balance excluding discontinued operations | 145.1 | 143.3 | |||||||||
Discontinued operations(1) | 18.2 | 18.5 | |||||||||
| Ending balance including discontinued operations | $ | 163.3 | $ | 161.8 | |||||||
(1)Reflects the announced divestiture of Landmark. As a result of this divestiture, Landmark is reported within discontinued operations.
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It is a strategic objective to increase our percentage of assets under management sourced from non-U.S. clients. Our categorization by client location includes:
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.
The following table summarizes asset flows by client location for each of the periods indicated:
| ($ in billions) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| U.S. | |||||||||||
| Beginning balance | $ | 101.1 | $ | 135.1 | |||||||
| Gross inflows | 3.3 | 5.1 | |||||||||
| Gross outflows | (4.5) | (4.8) | |||||||||
| Reinvested income and distributions | 0.5 | 0.9 | |||||||||
| Net flows | (0.7) | 1.2 | |||||||||
| Market appreciation (depreciation) | 7.1 | (31.5) | |||||||||
| Ending balance | $ | 107.5 | $ | 104.8 | |||||||
| Non-U.S. | |||||||||||
| Beginning balance | $ | 37.2 | $ | 50.9 | |||||||
| Gross inflows | 0.6 | 1.8 | |||||||||
| Gross outflows | (2.5) | (2.7) | |||||||||
| Reinvested income and distributions | 0.2 | 0.4 | |||||||||
| Net flows | (1.7) | (0.5) | |||||||||
| Market appreciation (depreciation) | 2.1 | (11.9) | |||||||||
| Ending balance | $ | 37.6 | $ | 38.5 | |||||||
| Total | |||||||||||
| Beginning balance | $ | 138.3 | $ | 186.0 | |||||||
| Gross inflows | 3.9 | 6.9 | |||||||||
| Gross outflows | (7.0) | (7.5) | |||||||||
| Reinvested income and distributions | 0.7 | 1.3 | |||||||||
| Net flows | (2.4) | 0.7 | |||||||||
| Market appreciation (depreciation) | 9.2 | (43.4) | |||||||||
| Ending balance excluding discontinued operations | 145.1 | 143.3 | |||||||||
Discontinued operations(1) | 18.2 | 18.5 | |||||||||
| Adjusted ending balance including discontinued operations | $ | 163.3 | $ | 161.8 | |||||||
(1)Reflects the announced divestiture of Landmark. As a result, Landmark is included in discontinued operations.
At March 31, 2021, our total assets under management were $145.1 billion, an increase of $6.8 billion, or 4.9%, compared to $138.3 billion at December 31, 2020 and an increase of $1.8 billion, or 1.3%, compared to $143.3 billion at March 31, 2020. The change in assets under management during the three months ended March 31, 2021 reflects net market appreciation of $9.2 billion from continued market recovery, partially offset by net outflows of $(2.4) billion.
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For the three months ended March 31, 2021, our net flows were $(2.4) billion compared to $0.7 billion for the three months ended March 31, 2020. The change in net flows during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to re-balancing and asset reallocation in select Quant & Solutions strategies. Reinvested income and distributions of $0.7 billion and $1.3 billion are reflected in the net flows for the three months ended March 31, 2021 and March 31, 2020, respectively. For the three months ended March 31, 2021, the annualized revenue impact of the net flows was $(4.6) million compared to $(2.9) million for the three months ended March 31, 2020 due to an increase in Quant & Solutions net outflows in select strategies. Gross inflows of $3.9 billion in the three months ended March 31, 2021 yielded approximately 44 bps compared to $6.9 billion yielding approximately 34 bps in the year-ago period. Gross outflows of $(7.0) billion yielded approximately 35 bps in the three months ended March 31, 2021 compared to $(7.5) billion yielding approximately 41 bps in the year-ago period.
U.S. GAAP Results of Operations for the Three Months Ended March 31, 2021 and 2020
Our U.S. GAAP results of operations were as follows for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||||||||
| ($ in millions, unless otherwise noted) | 2021 | 2020 | Increase (Decrease) | ||||||||||||||
| U.S. GAAP Statement of Operations | |||||||||||||||||
| Management fees | $ | 125.3 | $ | 142.6 | $ | (17.3) | |||||||||||
| Performance fees | 4.6 | 1.0 | 3.6 | ||||||||||||||
| Other revenue | 1.3 | 1.6 | (0.3) | ||||||||||||||
| Consolidated Funds’ revenue | — | 1.5 | (1.5) | ||||||||||||||
| Total revenue | 131.2 | 146.7 | (15.5) | ||||||||||||||
| Compensation and benefits | 67.9 | 49.4 | 18.5 | ||||||||||||||
| General and administrative expense | 20.6 | 24.3 | (3.7) | ||||||||||||||
Impairment of goodwill | — | 16.4 | (16.4) | ||||||||||||||
| Depreciation and amortization | 5.6 | 5.1 | 0.5 | ||||||||||||||
| Total operating expenses | 94.1 | 95.2 | (1.1) | ||||||||||||||
| Operating income | 37.1 | 51.5 | (14.4) | ||||||||||||||
| Investment income (loss) | 2.6 | (13.7) | 16.3 | ||||||||||||||
| Interest income | — | 0.3 | (0.3) | ||||||||||||||
| Interest expense | (6.2) | (7.8) | 1.6 | ||||||||||||||
| Loss on sale of Affiliate | (1.3) | — | (1.3) | ||||||||||||||
| Net consolidated Funds’ investment gains (losses) | — | (17.2) | 17.2 | ||||||||||||||
Income from continuing operations before taxes | 32.2 | 13.1 | 19.1 | ||||||||||||||
| Income tax expense | 10.3 | 6.4 | 3.9 | ||||||||||||||
| Income from continuing operations | 21.9 | 6.7 | 15.2 | ||||||||||||||
| Income from discontinued operations, net of tax | 18.5 | 15.4 | 3.1 | ||||||||||||||
Net income | 40.4 | 22.1 | 18.3 | ||||||||||||||
| Net income (loss) attributable to non-controlling interests in consolidated Funds | 13.4 | (10.5) | 23.9 | ||||||||||||||
Net income attributable to controlling interests | $ | 27.0 | $ | 32.6 | $ | (5.6) | |||||||||||
| Basic earnings per share ($) | $ | 0.34 | $ | 0.38 | $ | (0.04) | |||||||||||
| Diluted earnings per share ($) | 0.33 | 0.38 | (0.05) | ||||||||||||||
Weighted average shares of common stock outstanding—basic | 79.3 | 85.1 | (5.8) | ||||||||||||||
Weighted average shares of common stock outstanding—diluted | 82.3 | 85.1 | (2.8) | ||||||||||||||
U.S. GAAP operating margin(1) | 28.3 | % | 35.1 | % | |||||||||||||
(1) The U.S. GAAP operating margin equals operating income from continuing operations divided by total revenue.
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The following table reconciles our net income attributable to controlling interests to our pre-tax income from continuing operations attributable to controlling interests:
| ($ in millions) | Three Months Ended March 31, | ||||||||||
| U.S. GAAP Statement of Operations | 2021 | 2020 | |||||||||
| Net income attributable to controlling interests | $ | 27.0 | $ | 32.6 | |||||||
| Exclude: (Income) loss on discontinued operations attributable to controlling interests, net of tax | (5.1) | (15.3) | |||||||||
Net income from continuing operations attributable to controlling interests | 21.9 | 17.3 | |||||||||
| Add: Income tax expense | 10.3 | 6.4 | |||||||||
Pre-tax income from continuing operations attributable to controlling interests | $ | 32.2 | $ | 23.7 | |||||||
U.S. GAAP Revenues
Our U.S. GAAP revenues principally consist of:
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 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.
Management Fees
Our management fees are a function of the fee rates our Affiliates charge to their clients, which are typically expressed in basis points, and the levels of our assets under management.
Excluding assets managed by our equity-accounted Affiliate, average basis points earned on average assets under management were 36.9 bps for the three months ended March 31, 2021, and 34.3 bps for the three months ended March 31, 2020. The most significant driver of increases or decreases in this average fee rate is changes in the mix of our assets under management caused by net inflows or outflows in certain segments, disproportionate market movements, and dispositions of Affiliates.
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Our average basis points by segment (including only consolidated Affiliates that are included in management fee revenue, unless indicated) over each of the periods indicated were:
| ($ in millions, except AUM data in billions) | Three Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Revenue | Basis Pts | Revenue | Basis Pts | ||||||||||||||||||||
| Quant & Solutions | $ | 98.9 | 37 | $ | 85.2 | 37 | |||||||||||||||||
| Liquid Alpha | 21.5 | 37 | 51.9 | 30 | |||||||||||||||||||
| Other | 4.9 | 42 | 5.5 | 40 | |||||||||||||||||||
U.S. GAAP management fee revenue & weighted average fee rate on average AUM of consolidated Affiliates(1) | $ | 125.3 | 36.9 | $ | 142.6 | 34.3 | |||||||||||||||||
| Average AUM excluding equity-accounted Affiliate | $ | 137.6 | $ | 167.5 | |||||||||||||||||||
| Average AUM including equity-accounted Affiliate & weighted average fee rate | $ | 141.1 | 37.5 | $ | 169.6 | 34.5 | |||||||||||||||||
(1)Amounts shown are equivalent to ENI management fee revenue. (See “ENI Revenues”)
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Management fees decreased $(17.3) million, or (12.1)%, from $142.6 million for the three months ended March 31, 2020 to $125.3 million for the three months ended March 31, 2021. The decrease was primarily attributable to a decrease in average assets under management, partially offset by positive market returns. Average assets under management excluding equity-accounted Affiliate decreased (17.9)%, from $167.5 billion for the three months ended March 31, 2020 to $137.6 billion for the three months ended March 31, 2021, mainly due to the dispositions of Barrow Hanley and Copper Rock in the second half of 2020.
Performance Fees
Approximately $18.3 billion, or 13% of our AUM in consolidated Affiliates, were in accounts with incentive fee features in which we participate. Performance fees are typically shared with our Affiliate key employees through various contractual compensation and profit-sharing arrangements.
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Performance fees improved $3.6 million, from $1.0 million for the three months ended March 31, 2020 to $4.6 million for the three months ended March 31, 2021 due to out-performance in certain non-U.S. strategies. Performance fees are variable and are contractually triggered based on investment performance results over agreed upon time periods.
The liquidation of an alternative product may result in the recognition of a performance fee. With respect to liquidations likely to occur in the near term, we do not expect to receive any net performance fees that would be material to our operating results. These projections are based on market conditions and investment performance as of March 31, 2021.
Other Revenue
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Other revenue decreased $(0.3) million, from $1.6 million for the three months ended March 31, 2020 to $1.3 million for the three months ended March 31, 2021. The decrease was primarily attributable to the decrease in revenue recorded for certain Fund expenses paid by our Affiliates and subsequently reimbursed by the Fund for the three months ended March 31, 2021.
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U.S. GAAP Expenses
Our U.S. GAAP expenses principally consist of:
i.compensation paid to our investment professionals and other employees, including base salary, benefits, sales-based compensation, variable compensation, Affiliate distributions, and revaluation of key employee owned Affiliate equity and profit interests;
ii.general and administrative expenses;
iii.impairment of goodwill; and
iv.depreciation and amortization charges.
Compensation and Benefits Expense
Our most significant category of expense is compensation and benefits awarded to our and our Affiliates’ employees. The following table presents the components of U.S. GAAP compensation expense for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Fixed compensation and benefits(1) | $ | 29.8 | $ | 39.8 | |||||||
Sales-based compensation(2) | 2.2 | 2.1 | |||||||||
Variable compensation(3) | 28.4 | 31.3 | |||||||||
Affiliate key employee distributions(4) | 3.9 | 4.0 | |||||||||
Non-cash Affiliate key employee equity revaluations(5) | 3.6 | (27.8) | |||||||||
Total U.S. GAAP compensation and benefits expense | $ | 67.9 | $ | 49.4 | |||||||
(1)Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. For the three months ended March 31, 2021, $28.8 million of fixed compensation and benefits (of the $29.8 million above) are 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, 2020, $38.8 million of fixed compensation and benefits (of the $39.8 million above) are included within economic net income, which excludes Fund expenses initially paid by our Affiliates on the Fund’s behalf and subsequently reimbursed.
(2)Sales-based compensation is paid to our Affiliates’ sales and distribution teams and represents compensation earned by our sales professionals, paid over a multi-year period, related to revenue earned on new sales. Its variability is based upon the structure of sales-based compensation due on inflows of assets under management and market-based movement in both current and prior periods.
(3)Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses and compensation paid by our Affiliates on behalf of their Funds that are subsequently reimbursed. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI profits before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. In Affiliates with an agreed split of performance fees between Affiliate employees and BSUS, the Affiliates’ share of performance fees is allocated entirely to variable compensation. Center variable compensation includes cash and our equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between 25% and 35%.
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| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| Cash variable compensation | $ | 26.8 | $ | 27.1 | |||||||
Non-cash equity-based award amortization | 1.6 | 4.2 | |||||||||
Total variable compensation(a) | $ | 28.4 | $ | 31.3 | |||||||
(a)For the three months ended March 31, 2021, $27.9 million of variable compensation expense (of the $28.4 million above) are included within economic net income, which excludes $0.5 million of variable compensation associated with restructuring at the Affiliates. For the three months ended March 31, 2020, $30.9 million of variable compensation expense (of the $31.3 million above) are included within economic net income, which excludes $0.4 million of variable compensation associated with restructuring at an Affiliate.
(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 30% 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.
Fluctuations in compensation and benefits expense for the periods presented are discussed below.
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Three months ended March 31, 2021 compared to three months ended March 31, 2020: Compensation and benefits expense increased $18.5 million, or 37.4%, from $49.4 million for the three months ended March 31, 2020 to $67.9 million for the three months ended March 31, 2021. Fixed compensation and benefits decreased $(10.0) million, or (25.1)%, from $39.8 million for the three months ended March 31, 2020 to $29.8 million for the three months ended March 31, 2021, primarily reflecting disposition of Affiliates and cost savings from the restructuring at the Center and Affiliates. Variable compensation decreased $(2.9) million, or (9.3)%, from $31.3 million for the three months ended March 31, 2020 to $28.4 million for the three months ended March 31, 2021. The decrease was attributable to lower pre-variable compensation earnings, which in turn was primarily attributable to the decrease in management fee revenue, as well as a lower cost structure at the Center and Affiliates. Sales-based compensation increased $0.1 million, or 4.8%, from $2.1 million for the three months ended March 31, 2020 to $2.2 million for the three months ended March 31, 2021, as a result of the structure of sales-based compensation programs, driven by the timing of asset inflows which trigger sales-based compensation in both current and prior periods. Affiliate key employee distributions decreased $(0.1) million, or (2.5)%, from $4.0 million for the three months ended March 31, 2020 to $3.9 million for the three months ended March 31, 2021, primarily as a result of lower earnings before Affiliate key employee distributions at the consolidated Affiliates. Revaluations of Affiliate equity reflect the revaluations of key employee ownership interests at our consolidated Affiliates, as the value of Affiliate equity decreased $(27.8) million for the three months ended March 31, 2020 and increased $3.6 million for the three months ended March 31, 2021.
General and Administrative Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: General and administrative expense decreased $(3.7) million, or (15.2)%, from $24.3 million for the three months ended March 31, 2020 to $20.6 million for the three months ended March 31, 2021. The decrease was primarily due to cost saving initiatives at the Center and Affiliates and the dispositions of Barrow Hanley and Copper Rock in 2020.
Impairment of Goodwill
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Impairment of goodwill was $16.4 million for the three months ended March 31, 2020. No goodwill impairment charge was recorded in the three months ended March 31, 2021. The change was the result of the impairment charge recorded in the first quarter of 2020 for the Copper Rock reporting unit which was included within the Liquid Alpha segment prior to its disposition in the third quarter of 2020.
Depreciation and Amortization Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Depreciation and amortization expense increased $0.5 million, or 9.8%, from $5.1 million for the three months ended March 31, 2020 to $5.6 million for the three months ended March 31, 2021. The increase was primarily due to additional software and technology investments in the business.
U.S. GAAP Other Non-Operating Items of Income and Expense
Other non-operating items of income and expense consist of:
i.investment income;
ii.interest income;
iii.interest expense; and
iv.gain (loss) on sale of subsidiary.
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Investment Income
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Investment income increased $16.3 million, from $(13.7) million for the three months ended March 31, 2020 to $2.6 million for the three months ended March 31, 2021. The increase is primarily due to an increase in returns generated by seed capital investments driven by continued market recovery in 2021 compared to the market decline in the three months ended March 31, 2020.
Interest Income
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Interest income decreased $(0.3) million, from $0.3 million for the three months ended March 31, 2020 to $0.0 million for the three months ended March 31, 2021. The decrease was due to decreases in short-term investment returns in 2021.
Interest Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Interest expense decreased $(1.6) million, or (20.5)%, from $7.8 million for the three months ended March 31, 2020 to $6.2 million for the three months ended March 31, 2021, primarily reflecting a lower balance drawn on the revolving credit facility in 2021 and the pay down of the non-recourse seed capital facility during the third quarter of 2020.
Loss on Sale of Subsidiary
Three months ended March 31, 2021 compared to three months ended March 31, 2020: No loss on sale of a subsidiary was recorded in the three months ended March 31, 2020. Loss on sale of a subsidiary was $(1.3) million for the three months ended March 31, 2021, representing the loss on disposition of a business unit during the three months ended March 31, 2021.
U.S. GAAP Income Tax Expense (Benefit)
Our effective tax rate has been impacted by changes in liabilities for uncertain tax positions, tax effects of stock-based compensation, limitations on executive compensation, the mix of income earned in the United States versus lower-taxed foreign jurisdictions. Our effective tax rate could be impacted in the future by these items as well as further changes in tax laws and regulations in jurisdictions in which we operate.
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Income tax expense increased $3.9 million, from $6.4 million for the three months ended March 31, 2020 to $10.3 million for the three months ended March 31, 2021. The increase in income tax expense relates to an increase in income from continuing operations during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 as well as an increase in state tax obligations.
U.S. GAAP Consolidated Funds
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Consolidated Funds’ revenue was $1.5 million for the three months ended March 31, 2020. There was no consolidated Funds’ revenue for the three months ended March 31, 2021. Net consolidated Funds’ investment loss was $(17.2) million for the three months ended March 31, 2020. There was no net consolidated Funds’ investment loss for the three months ended March 31, 2021. The net income or loss of all consolidated Funds, excluding any income or loss attributable to seed capital or co-investments we make in the Funds, is included in non-controlling interests in our Condensed Consolidated Financial Statements and is not included in net income attributable to controlling interests or in management fees. As a result of the announced divestiture of Landmark during the three months ended March 31, 2021, consolidated Funds of Landmark are included in discontinued operations for the three months ended March 31, 2021 and 2020.
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Discontinued Operations
On March 30, 2021, we entered into an agreement with Landmark to sell all our equity interest in Landmark to Ares Management Corporation. The transaction is expected to close in the second quarter of 2021. As a result, Landmark is reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment.
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Income from discontinued operations was $15.4 million for the three months ended March 31, 2020 representing the income from Landmark including consolidated Landmark Funds. Income from discontinued operations was $18.5 million for the three months ended March 31, 2021, representing the income from Landmark including consolidated Landmark Funds. The increase is driven by the increase in investment gains from the consolidated Landmark Funds in the current year.
Key U.S. GAAP Operating Metrics
The following table shows our key U.S. GAAP operating metrics for the three months ended March 31, 2021 and 2020. The second, third and fourth metrics below have each been adjusted to eliminate the effect of consolidated Funds to more accurately reflect the economics of our Company.
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Numerator: Operating income | $ | 37.1 | $ | 51.5 | |||||||
Denominator: Total revenue | $ | 131.2 | $ | 146.7 | |||||||
U.S. GAAP operating margin(1) | 28.3 | % | 35.1 | % | |||||||
| Numerator: Total operating expenses | $ | 94.1 | $ | 95.2 | |||||||
Denominator: Management fee revenue | $ | 125.3 | $ | 142.6 | |||||||
U.S. GAAP operating expense / management fee revenue(2) | 75.1 | % | 66.8 | % | |||||||
Numerator: Variable compensation | $ | 28.4 | $ | 31.3 | |||||||
Denominator: Operating income before variable compensation and Affiliate key employee distributions(3)(4) | $ | 69.4 | $ | 85.3 | |||||||
U.S. GAAP variable compensation ratio(2) | 40.9 | % | 36.7 | % | |||||||
Numerator: Affiliate key employee distributions | $ | 3.9 | $ | 4.0 | |||||||
Denominator: Operating income before Affiliate key employee distributions(3)(4) | $ | 41.0 | $ | 54.0 | |||||||
U.S. GAAP Affiliate key employee distributions ratio(2) | 9.5 | % | 7.4 | % | |||||||
(1)Excluding the effect of Funds consolidation in the applicable periods, the U.S. GAAP operating margin is 28.3% for the three months ended March 31, 2021 and 34.4% for the three months ended March 31, 2020.
(2)Excludes the effect of Funds consolidation for the three months ended March 31, 2021 and 2020.
(3)Excludes consolidated Funds’ revenue of $1.5 million for the three months ended March 31, 2020.
(4)The following table identifies the components of operating income before variable compensation and Affiliate key employee distributions, as well as operating income before Affiliate key employee distributions:
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| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Operating income | $ | 37.1 | $ | 51.5 | |||||||
Affiliate key employee distributions | 3.9 | 4.0 | |||||||||
| Operating (income) loss of consolidated Funds | — | (1.5) | |||||||||
Operating income before Affiliate key employee distributions | 41.0 | 54.0 | |||||||||
| Variable compensation | 28.4 | 31.3 | |||||||||
Operating income before variable compensation and Affiliate key employee distributions | $ | 69.4 | $ | 85.3 | |||||||
Effects of Inflation
For the three months ended March 31, 2021 and 2020, inflation did not have a material effect on our consolidated results of operations.
Non-GAAP Supplemental Performance Measure — Economic Net Income and Segment Analysis
As supplemental information, we provide a non-GAAP performance measure that we refer to as economic net income, or ENI, which represents our management’s view of the underlying economic earnings generated by us. We define economic net income as ENI revenue less (i) ENI operating expenses, (ii) variable compensation, (iii) key employee distributions, (iv) net interest and (v) taxes, each as further discussed in this section. ENI adjustments to U.S. GAAP include both reclassifications of U.S. GAAP revenue and expense items, as well as adjustments to U.S. GAAP results, primarily to exclude non-cash, non-economic expenses, or to reflect cash benefits not recognized under U.S. GAAP.
ENI is an important measure to investors because it is used by us to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is also an important measure because it assists management in evaluating our operating performance and is presented in a way that most closely reflects the key elements of our profit share operating model with our Affiliates. For a further discussion of how we use ENI and why ENI is useful to investors, see “—Overview—How We Measure Performance.”
To calculate economic net income, we re-categorize certain line items on our Condensed Consolidated Statements of Operations to reflect the following:
•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 our equity-accounted Affiliate 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.
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We also make the following adjustments to U.S. GAAP results to more closely reflect our economic results:
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.
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 and restructuring costs incurred in continuing operations.
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.
We also adjust our income tax expense to reflect any tax impact of our ENI adjustments.
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Reconciliation of U.S. GAAP Net Income to Economic Net Income for the Three Months Ended March 31, 2021 and 2020
The following table reconciles net income attributable to controlling interests to economic net income for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||
| ($ in millions) | 2021 | 2020 | ||||||||||||
| U.S. GAAP net income attributable to controlling interests | $ | 27.0 | $ | 32.6 | ||||||||||
| Adjustments to reflect the economic earnings of the Company: | ||||||||||||||
| i. | Non-cash key employee-owned equity and profit interest revaluations | 3.6 | (27.8) | |||||||||||
| ii. | Goodwill impairment and amortization of acquired intangible assets and pre-acquisition employee equity | — | 16.5 | |||||||||||
| iii. | Capital transaction costs | 0.5 | 0.2 | |||||||||||
| iv. | Seed/Co-investment (gains) losses and financings(1) | (3.9) | 21.3 | |||||||||||
| v. | Tax benefit of goodwill and acquired intangibles deductions | 0.3 | 0.4 | |||||||||||
| vi. | Discontinued operations and restructuring(2) | 1.1 | (14.8) | |||||||||||
| vii. | ENI tax normalization | — | (3.8) | |||||||||||
Tax effect of above adjustments, as applicable(3) | (0.4) | 1.3 | ||||||||||||
Economic net income | $ | 28.2 | $ | 25.9 | ||||||||||
(1)The net return on seed/co-investment (gains) losses and financings for the three months ended March 31, 2021 and 2020 is shown in the following table:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| Seed/Co-investment (gains) losses | $ | (4.6) | $ | 19.6 | |||||||
| Financing costs: | |||||||||||
| Seed/Co-investment average balance | 44.5 | 123.3 | |||||||||
| Blended interest rate* | 6.1 | % | 5.7 | % | |||||||
| Financing costs | 0.7 | 1.7 | |||||||||
| Net seed/co-investment (gains) losses and financing | $ | (3.9) | $ | 21.3 | |||||||
* The blended rate is based first on the interest rate paid on our non-recourse seed capital facility up to the average amount drawn, and thereafter on the weighted average rate of the long-term debt.
(2)The three months ended March 31, 2021 includes income from discontinued operations attributable to controlling interests of $(2.0) million, as well as $1.5 million of restructuring costs at the Center and Affiliates, $0.3 million costs associated with the transfer of an insurance policy from our former parent, and the loss on sale of subsidiary of $1.3 million. The three months ended March 31, 2020 includes income from discontinued operations attributable to controlling interests of $(15.5) million, as well as $0.4 million of restructuring costs at the Center and $0.3 million costs associated with the transfer of an insurance policy from our former parent. Seed/Co-investment (gains) losses from discontinued operations are included in item iv. above for all periods.
(3)Reflects the sum of lines (i), (ii), (iii), (iv) and the restructuring component of line (vi) multiplied by the 27.3% U.S. statutory tax rate (including state tax).
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Limitations of Economic Net Income
Economic net income is the key measure our management uses to evaluate the financial performance of, and make operational decisions for, our business. Economic net income is not audited and is not a substitute for net income or other performance measures that are derived in accordance with U.S. GAAP. Furthermore, our calculation of economic net income may differ from similarly titled measures provided by other companies.
Because the calculation of economic net income excludes certain ongoing expenses, including amortization expense and certain compensation costs, it has certain material limitations and should not be viewed in isolation or as a substitute for U.S. GAAP measures of earnings.
ENI Revenues
The following table reconciles U.S. GAAP revenue to ENI revenue for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| U.S. GAAP revenue | $ | 131.2 | $ | 146.7 | |||||||
Include investment return on equity-accounted Affiliate | 1.1 | 0.6 | |||||||||
Exclude revenue from consolidated Funds attributable to non-controlling interests | — | (1.5) | |||||||||
Exclude Fund expenses reimbursed by customers | (1.0) | (1.1) | |||||||||
| ENI revenue | $ | 131.3 | $ | 144.7 | |||||||
The following table identifies the components of ENI revenue:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Management fees(1) | $ | 125.3 | $ | 142.6 | |||||||
Performance fees(2) | 4.6 | 1.0 | |||||||||
Other income, including equity-accounted Affiliate(3) | 1.4 | 1.1 | |||||||||
| ENI revenue | $ | 131.3 | $ | 144.7 | |||||||
(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 our equity-accounted Affiliate of $1.1 million and $0.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively. As further described in “—Non-GAAP Supplemental Performance Measure—Economic Net Income and Segment Analysis,” ENI other income also excludes certain Fund expenses initially paid by our Affiliates on the Funds’ behalf and subsequently reimbursed.
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| U.S. GAAP other revenue | $ | 1.3 | $ | 1.6 | |||||||
| Earnings from equity-accounted Affiliate | 1.1 | 0.6 | |||||||||
Exclude Fund expenses reimbursed by customers | (1.0) | (1.1) | |||||||||
| ENI other income | $ | 1.4 | $ | 1.1 | |||||||
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ENI Operating Expenses
The largest difference between U.S. GAAP operating expense and ENI operating expense relates to compensation. As shown in the following reconciliation, we exclude the impact of key employee equity revaluations. Variable compensation and Affiliate key employee distributions are also segregated out of U.S. GAAP operating expense in order to align with the manner in which these items are contractually calculated at the Affiliate level.
The following table reconciles U.S. GAAP operating expense to ENI operating expense for the three months ended March 31, 2021 and 2020.
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| U.S. GAAP operating expense | $ | 94.1 | $ | 95.2 | |||||||
| Less: items excluded from economic net income | |||||||||||
Non-cash key employee equity and profit interest revaluations | (3.6) | 27.8 | |||||||||
| Goodwill impairment and amortization of acquired intangible assets | — | (16.4) | |||||||||
| Capital transaction costs | (0.4) | — | |||||||||
Restructuring costs(1) | (1.8) | (0.7) | |||||||||
| Fund expenses reimbursed by customers | (1.0) | (1.1) | |||||||||
| Funds’ operating expense | — | (0.1) | |||||||||
| Less: items segregated out of U.S. GAAP operating expense | |||||||||||
| Variable compensation | (27.9) | (30.9) | |||||||||
| Affiliate key employee distributions | (3.9) | (4.0) | |||||||||
| ENI operating expense | $ | 55.5 | $ | 69.8 | |||||||
(1)The three months ended March 31, 2021 includes $1.5 million of restructuring costs at the Center and Affiliates, and $0.3 million costs associated with the transfer of an insurance policy from our former parent. The three months ended March 31, 2020 includes $0.4 million of restructuring costs and costs associated with the transfer of an insurance policy from our former parent of $0.3 million.
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The following table identifies the components of ENI operating expense:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Fixed compensation & benefits(1) | $ | 28.8 | $ | 38.8 | |||||||
General and administrative expenses(2) | 21.1 | 25.9 | |||||||||
| Depreciation and amortization | 5.6 | 5.1 | |||||||||
| ENI operating expense | $ | 55.5 | $ | 69.8 | |||||||
(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, 2021 and 2020 to ENI fixed compensation and benefits expense:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Total U.S. GAAP compensation and benefits expense | $ | 67.9 | $ | 49.4 | |||||||
Non-cash key employee equity and profit interest revaluations excluded from ENI | (3.6) | 27.8 | |||||||||
Sales-based compensation reclassified to ENI general & administrative expenses | (2.2) | (2.1) | |||||||||
Affiliate key employee distributions | (3.9) | (4.0) | |||||||||
Restructuring expenses(a) | (0.5) | (0.3) | |||||||||
Variable compensation | (27.9) | (30.9) | |||||||||
Fund expenses reimbursed by customers | (1.0) | (1.1) | |||||||||
| ENI fixed compensation and benefits | $ | 28.8 | $ | 38.8 | |||||||
(a)The three months ended March 31, 2021 includes $0.5 million of restructuring costs at the Affiliates. The three months ended March 31, 2020 includes $0.4 million of restructuring costs at the Center and Affiliates.
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(2)The following table reconciles U.S. GAAP general and administrative expense to ENI general and administrative expense:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
U.S. GAAP general and administrative expense | $ | 20.6 | $ | 24.3 | |||||||
| Sales-based compensation | 2.2 | 2.1 | |||||||||
| Capital transaction costs | (0.4) | — | |||||||||
| Restructuring costs | (1.3) | (0.5) | |||||||||
| ENI general and administrative expense | $ | 21.1 | $ | 25.9 | |||||||
Key Non-GAAP Operating Metrics
The following table shows our key non-GAAP operating metrics for the three months ended March 31, 2021 and 2020. We present these metrics because they are the measures our management uses to evaluate the profitability of our business and are useful to investors because they represent the key drivers and measures of economic performance within our business model. Please see the footnotes below for an explanation of each ratio, its usefulness in measuring the economics and operating performance of our business, and a reference to the most closely related U.S. GAAP measure:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Numerator: ENI operating earnings(1) | $ | 47.9 | $ | 44.0 | |||||||
Denominator: ENI revenue | $ | 131.3 | $ | 144.7 | |||||||
ENI operating margin(2) | 36.5 | % | 30.4 | % | |||||||
Numerator: ENI operating expense | $ | 55.5 | $ | 69.8 | |||||||
Denominator: ENI management fee revenue(3) | $ | 125.3 | $ | 142.6 | |||||||
ENI operating expense ratio(4) | 44.3 | % | 48.9 | % | |||||||
Numerator: ENI variable compensation | $ | 27.9 | $ | 30.9 | |||||||
Denominator: ENI earnings before variable compensation(1)(5) | $ | 75.8 | $ | 74.9 | |||||||
ENI variable compensation ratio(6) | 36.8 | % | 41.3 | % | |||||||
Numerator: Affiliate key employee distributions | $ | 3.9 | $ | 4.0 | |||||||
Denominator: ENI operating earnings(1) | $ | 47.9 | $ | 44.0 | |||||||
ENI Affiliate key employee distributions ratio(7) | 8.1 | % | 9.1 | % | |||||||
(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.
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The following table reconciles U.S. GAAP operating income to ENI operating earnings:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| U.S. GAAP operating income | $ | 37.1 | $ | 51.5 | |||||||
Include earnings from equity-accounted Affiliate | 1.1 | 0.6 | |||||||||
Exclude the impact of: | |||||||||||
Affiliate key employee-owned equity and profit interest revaluations | 3.6 | (27.8) | |||||||||
Goodwill impairment and amortization of acquired intangible assets and pre-acquisition employee equity | — | 16.5 | |||||||||
| Capital transaction costs | 0.4 | — | |||||||||
Restructuring costs(a) | 1.8 | 0.7 | |||||||||
| Affiliate key employee distributions | 3.9 | 4.0 | |||||||||
Variable compensation | 27.9 | 30.9 | |||||||||
| Funds’ operating (income) loss | — | (1.5) | |||||||||
ENI earnings before variable compensation | 75.8 | 74.9 | |||||||||
| Less: ENI variable compensation | (27.9) | (30.9) | |||||||||
| ENI operating earnings | 47.9 | 44.0 | |||||||||
Less: ENI Affiliate key employee distributions | (3.9) | (4.0) | |||||||||
ENI earnings after Affiliate key employee distributions | $ | 44.0 | $ | 40.0 | |||||||
(a)The three months ended March 31, 2021 includes $1.5 million of restructuring costs at the Center and Affiliates, $0.3 million costs associated with the transfer of an insurance policy from our former parent. The three months ended March 31, 2020 includes $0.4 million of restructuring costs and costs associated with the transfer of an insurance policy from our former parent of $0.3 million.
(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 28.3% for the three months ended March 31, 2021, and 34.4% for the three months ended March 31, 2020.
The ENI operating margin is important because it gives investors an understanding of the profitability of the total business relative to revenue, irrespective of the ownership position which we have in each of our Affiliates. Management and investors use this ratio when comparing our profitability relative to our peer group and evaluating our ability to manage the cost structure and profitability of our business under different operating environments.
(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 and our stockholders. The ENI operating expense ratio is most comparable to the U.S. GAAP operating expense / management fee revenue ratio.
(5)ENI earnings before variable compensation is calculated as ENI revenue, less ENI operating expense.
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(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 30% 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.
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Tax on Economic Net Income
The following table reconciles the United States statutory tax to tax on economic net income:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Pre-tax economic net income(1) | $ | 38.6 | $ | 34.4 | |||||||
Intercompany interest expense deductible for U.S. tax purposes | — | — | |||||||||
| Taxable economic net income | 38.6 | 34.4 | |||||||||
Taxes at the U.S. federal and state statutory rates(2) | (10.5) | (10.6) | |||||||||
| Other reconciling tax adjustments | 0.1 | 2.1 | |||||||||
| Tax on economic net income | (10.4) | (8.5) | |||||||||
Add back intercompany interest expense previously excluded | — | — | |||||||||
Economic net income | $ | 28.2 | $ | 25.9 | |||||||
Economic net income effective tax rate(3) | 26.9 | % | 24.7 | % | |||||||
(1)Includes interest income and third party ENI interest expense, as shown in the following table:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| U.S. GAAP interest income | $ | — | $ | 0.3 | |||||||
| U.S. GAAP interest expense | (6.2) | (7.8) | |||||||||
| U.S. GAAP net interest expense | (6.2) | (7.5) | |||||||||
Other ENI interest expense exclusions(a) | 0.8 | 1.9 | |||||||||
| ENI net interest expense | (5.4) | (5.6) | |||||||||
ENI earnings after Affiliate key employee distributions(b) | 44.0 | 40.0 | |||||||||
Pre-tax economic net income | $ | 38.6 | $ | 34.4 | |||||||
(a)Other ENI interest expense exclusions represent cost of financing on seed capital and co-investments and amortization of debt issuance costs.
(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.
Segment Analysis
We conduct our operations through two(1) business segments:
•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., and emerging markets equities, as well as multi-asset products.
•Liquid Alpha(2)—comprised of specialized investment strategies with a focus on alpha-generation across market cycles in long-only small-, mid-, and large-cap U.S. and non-U.S. equities, as well as fixed income.
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(1)In March 2021, we announced the divestiture of Landmark, expected to close in the second quarter of 2021. As a result, Landmark is reported within discontinued operations and the Alternatives segment no longer constitutes a reportable segment. The remaining portion of the Alternatives segment, including Campbell Global, has been reclassified to “Other.” See “Recent Developments” herein.
(2)In February 2021 we entered into a definitive agreement to sell all of our interests in ICM, an equity-accounted Affiliate within the Liquid Alpha segment. The transaction is expected to close during second quarter of 2021. See “Recent Developments” herein.
We also have a corporate head office that is included in “Other”. The corporate head office supports the segments by providing infrastructure and administrative support in the areas of accounting/finance, operations, information technology, strategy and relationship management, legal, compliance and human resources. The corporate head office expenses are not allocated to our two reportable segments but the CODM does consider the cost structure of the corporate head office when evaluating the financial performance of the segments
The primary measure used by the CODM in measuring performance and allocating resources to the segments is Economic Net Income (“ENI”). We define economic net income for the segments as ENI revenue less (i) ENI operating expenses, (ii) variable compensation and (iii) key employee distributions. The ENI adjustments to U.S. GAAP include both reclassifications of U.S. GAAP revenue and expense items, as well as adjustments to U.S. GAAP results, primarily to exclude non-cash, non-economic expenses, or to reflect cash benefits not recognized under U.S. GAAP.
ENI revenue includes management fees, performance fees and other revenue under U.S. GAAP, adjusted to include management fees paid to Affiliates by consolidated Funds and our share of earnings from our equity-accounted Affiliate. ENI revenue is also adjusted to exclude the separate revenues recorded under U.S. GAAP for certain Fund expenses reimbursed to our Affiliates.
ENI operating expenses include compensation and benefits, general and administrative expense, and depreciation and amortization under U.S. GAAP, adjusted to exclude non-cash expenses representing changes in the value of Affiliate equity and profit interests held by Affiliate key employees, impairment of goodwill, and the separate expenses recorded under U.S. GAAP for certain Fund expenses reimbursed to our Affiliates. Additionally, variable compensation and Affiliate key employee distributions are segregated from ENI operating expenses.
ENI segment results are also adjusted to exclude the portion of consolidated Funds’ revenues, expenses and investment return recorded under U.S. GAAP.
Refer to the reconciliations of U.S. GAAP revenue to ENI revenue, U.S. GAAP Operating expense to ENI Operating expense, variable compensation and Affiliate key employee distributions disclosed previously within this section.
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Segment ENI Revenue
The following table identifies the components of segment ENI revenue for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Quant & Solutions | Liquid Alpha | Other | Total | Quant & Solutions | Liquid Alpha | Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Management fees | $ | 98.9 | $ | 21.5 | $ | 4.9 | $ | 125.3 | $ | 85.2 | $ | 51.9 | $ | 5.5 | $ | 142.6 | |||||||||||||||||||||||||||||||
Performance fees | 4.6 | — | — | 4.6 | 1.0 | — | — | 1.0 | |||||||||||||||||||||||||||||||||||||||
| Other income, including equity-accounted subsidiary | — | 1.1 | 0.3 | 1.4 | (0.1) | 0.6 | 0.6 | 1.1 | |||||||||||||||||||||||||||||||||||||||
| ENI revenue | $ | 103.5 | $ | 22.6 | $ | 5.2 | $ | 131.3 | $ | 86.1 | $ | 52.5 | $ | 6.1 | $ | 144.7 | |||||||||||||||||||||||||||||||
Quant & Solutions Segment ENI Revenue
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Quant & Solutions ENI revenue increased $17.4 million, or 20.2%, from $86.1 million for the three months ended March 31, 2020 to $103.5 million for the three months ended March 31, 2021. The increase was attributable to 16.1% higher management fees, driven by higher average AUM primarily resulting from the equity market increase over the last twelve months.
Liquid Alpha Segment ENI Revenue
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Liquid Alpha ENI revenue decreased $(29.9) million, or (57.0)%, from $52.5 million for the three months ended March 31, 2020 to $22.6 million for the three months ended March 31, 2021. The decrease was attributable to (58.6)% lower management fees, driven by lower average AUM caused by the disposition of Barrow Hanley in the fourth quarter of 2020.
Other ENI Revenue
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Other ENI revenue decreased $(0.9) million, or (14.8)%, from $6.1 million for the three months ended March 31, 2020 to $5.2 million for the three months ended March 31, 2021. The decrease was driven by (10.9)% lower management fees.
Segment ENI Expense
The following table identifies the components of segment ENI expense for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Quant & Solutions | Liquid Alpha | Other | Total | Quant & Solutions | Liquid Alpha | Other | Total | ||||||||||||||||||||||||||||||||||||||||
Fixed compensation & benefits | $ | 18.6 | $ | 4.6 | $ | 5.6 | $ | 28.8 | $ | 18.3 | $ | 13.1 | $ | 7.4 | $ | 38.8 | |||||||||||||||||||||||||||||||
| General and administrative expense | 15.3 | 2.1 | 3.7 | 21.1 | 14.1 | 6.6 | 5.2 | 25.9 | |||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 5.2 | 0.1 | 0.3 | 5.6 | 4.7 | 0.1 | 0.3 | 5.1 | |||||||||||||||||||||||||||||||||||||||
Total ENI Operating Expenses | $ | 39.1 | $ | 6.8 | $ | 9.6 | $ | 55.5 | $ | 37.1 | $ | 19.8 | $ | 12.9 | $ | 69.8 | |||||||||||||||||||||||||||||||
Variable compensation | 22.6 | 4.4 | 0.9 | 27.9 | 17.0 | 12.5 | 1.4 | 30.9 | |||||||||||||||||||||||||||||||||||||||
Affiliate key employee distributions | 1.5 | 2.6 | (0.2) | 3.9 | 0.8 | 3.2 | — | 4.0 | |||||||||||||||||||||||||||||||||||||||
| Total Expenses | $ | 63.2 | $ | 13.8 | $ | 10.3 | $ | 87.3 | $ | 54.9 | $ | 35.5 | $ | 14.3 | $ | 104.7 | |||||||||||||||||||||||||||||||
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Quant & Solutions Segment ENI Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Quant & Solutions ENI operating expense increased $2.0 million, or 5.4%, from $37.1 million for the three months ended March 31, 2020 to $39.1 million for the three months ended March 31, 2021. The increase was driven by 1.6% higher ENI fixed compensation and benefits expense driven by higher costs related to employee benefits and 8.5% higher ENI general and administrative expense primarily resulting from increased portfolio administrative and foreign currency exchange impact. Quant & Solutions ENI variable compensation expense, which is based on contractual arrangements, increased 32.9%, as a result of higher earnings before variable compensation. Affiliate key employee distributions attributable to Quant & Solutions increased 87.5%, primarily due to higher Quant & Solutions ENI earnings after variable compensation.
Liquid Alpha Segment ENI Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Liquid Alpha ENI operating expense decreased $(13.0) million, or (65.7)%, from $19.8 million for the three months ended March 31, 2020 to $6.8 million for the three months ended March 31, 2021. The decrease was driven by (64.9)% lower ENI fixed compensation and benefits and (68.2)% lower ENI general and administrative expense resulting from the Barrow Hanley and Copper Rock dispositions in the second half of 2020. Liquid Alpha ENI variable compensation expense, which is based on contractual arrangements, decreased (64.8)%, as a result of lower pre-variable compensation earnings due to dispositions. Affiliate key employee distributions attributable to Liquid Alpha decreased (18.8)%, primarily driven by lower Liquid Alpha ENI earnings after variable compensation due to dispositions.
Other ENI Expense
Three months ended March 31, 2021 compared to three months ended March 31, 2020: Other ENI operating expense decreased $(3.3) million, or (25.6)%, from $12.9 million for the three months ended March 31, 2020 to $9.6 million for the three months ended March 31, 2021. The decrease was driven by (24.3)% lower fixed compensation and benefit expense and (28.8)% lower general and administrative expense resulting from adjustments. Other ENI variable compensation expense decreased (35.7)% due to lower pre-variable compensation earnings.
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Capital Resources and Liquidity
Cash Flows
The following table summarizes certain key financial data relating to cash flows. All amounts presented exclude consolidated Funds:
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
Cash provided by (used in)(1)(2) | |||||||||||
| Operating activities | $ | (20.2) | $ | (27.3) | |||||||
| Investing activities | 1.0 | 1.4 | |||||||||
| Financing activities | 78.4 | 41.1 | |||||||||
(1)Excludes consolidated Funds.
(2)Cash flow data shown only includes cash flows from continuing operations.
Comparison for the three months ended March 31, 2021 and 2020
Net cash from operating activities from continuing operations increased $7.1 million, from net cash used of $27.3 million for the three months ended March 31, 2020 to net cash used of $20.2 million for the three months ended March 31, 2021, driven by net income offset by changes in operating assets and liabilities period over period. The payout of annual accrued incentive compensation balances in the first quarter of each year is the driver of the cash used in operating activities for both years. In the three months ended March 31, 2021, net cash provided by investing activities of continuing operations decreased $(0.4) million, from $1.4 million provided in the three months ended March 31, 2020 to $1.0 million provided in the three months ended March 31, 2021, driven primarily by decreased sales of investment securities in the three months ended March 31, 2021. Net cash provided by financing activities of continuing operations increased $37.3 million, from $41.1 million provided in the three months ended March 31, 2020 to $78.4 million provided in the three months ended March 31, 2021, primarily due to a higher drawdown on the revolving credit facility and fewer share repurchases in the three months ended March 31, 2021 compared to 2020.
Supplemental Liquidity Measure — Adjusted EBITDA
As supplemental information, we provide information regarding Adjusted EBITDA, which we define as economic net income before net interest, income taxes, depreciation and amortization. Adjusted EBITDA is a non-GAAP liquidity measure that we provide in addition to, but not as a substitute for, cash flows from operating activities. It should be noted that our calculation of Adjusted EBITDA may not be consistent with Adjusted EBITDA as calculated by other companies. We believe Adjusted EBITDA is a useful liquidity metric because it indicates our ability to make further investments in our business, service debt and meet working capital requirements.
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The following table reconciles our U.S. GAAP net income attributable to controlling interests to EBITDA to Adjusted EBITDA to economic net income for the three months ended March 31, 2021 and 2020.
| Three Months Ended March 31, | |||||||||||
| ($ in millions) | 2021 | 2020 | |||||||||
| Net income attributable to controlling interests | $ | 27.0 | $ | 32.6 | |||||||
| Net interest expense to third parties | 6.2 | 7.5 | |||||||||
Income tax expense (including tax expenses related to discontinued operations) | 11.7 | 13.6 | |||||||||
| Depreciation and amortization (including intangible assets and discontinued operations) and goodwill impairment | 7.5 | 23.3 | |||||||||
| EBITDA | $ | 52.4 | $ | 77.0 | |||||||
Non-cash compensation costs, including revaluation of Affiliate key employee-owned equity and profit interests | 4.0 | (26.8) | |||||||||
| EBITDA of discontinued operations attributable to controlling interests | (5.3) | (24.4) | |||||||||
| (Gain) loss on seed and co-investments | (4.6) | 19.6 | |||||||||
Restructuring expenses(1) | 3.1 | 0.7 | |||||||||
| Capital transaction costs | 0.4 | — | |||||||||
Adjusted EBITDA | $ | 50.0 | $ | 46.1 | |||||||
| ENI net interest expense to third parties | (5.4) | (5.6) | |||||||||
Depreciation and amortization(2) | (6.0) | (6.1) | |||||||||
| Tax on economic net income | (10.4) | (8.5) | |||||||||
Economic net income | $ | 28.2 | $ | 25.9 | |||||||
(1)The three months ended March 31, 2021 includes $1.5 million of restructuring costs at the Center and Affiliates, $0.3 million costs associated with the transfer of an insurance policy from our former parent, and the loss on sale of subsidiary of $1.3 million. The three months ended March 31, 2020 includes $0.4 million of restructuring costs and costs associated with the transfer of an insurance policy from our former parent of $0.3 million.
(2)Includes non-cash equity-based award amortization expense.
Limitations of Adjusted EBITDA
As a non-GAAP, unaudited liquidity measure and derivation of EBITDA, Adjusted EBITDA has certain material limitations. It does not include cash costs associated with capital transactions and excludes certain U.S. GAAP expenses that fall outside the definition of EBITDA. Each of these categories of expense represents costs to us of doing business, and therefore any measure that excludes any or all of these categories of expense has material limitations.
Future Capital Needs
We believe that our available cash and cash equivalents to be generated from operations, supplemented by short-term and long-term financing, as necessary, will be sufficient to fund current operations and capital requirements for at least the next twelve months, as well as our day-to-day operations and future investment requirements. We also expect to realize future proceeds from the sale of our equity interests in Landmark and ICM during the second quarter of 2021. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, our relative levels of debt and equity and the overall condition of the credit markets.
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Borrowings and Long-Term Debt
The following table summarizes our financing arrangements as of the dates indicated:
| ($ in millions) | March 31, 2021 | December 31, 2020 | Interest rate | Maturity | ||||||||||||||||||||||
| Third party borrowings: | ||||||||||||||||||||||||||
Revolving credit facility(1) | $ | 81.0 | $ | — | LIBOR + 1.0% plus 0.25% commitment fee | August 22, 2022 | ||||||||||||||||||||
| 4.80% Senior Notes Due 2026 | 272.9 | 272.8 | 4.80% | July 27, 2026 | ||||||||||||||||||||||
| 5.125% Senior Notes Due 2031 | 121.6 | 121.5 | 5.125% | August 1, 2031 | ||||||||||||||||||||||
| Total borrowings | $ | 475.5 | $ | 394.3 | ||||||||||||||||||||||
(1)On February 23, 2021, the Company’s $150 million revolving credit facility was assigned to Acadian and amended to reduce the facility to $125 million.
Revolving Credit Facility
On September 3, 2020, the Company, Royal Bank of Canada, BMO Harris Bank, N.A., Bank of China, New York Branch, Wells Fargo Bank, National Association, Barclays Bank PLC, Morgan Stanley Bank, N.A., Bank of America N.A., the Bank of New York Mellon and Citibank, N.A., as an issuing bank and administrative agent (collectively, the “Lenders”), entered into an amendment (the “Amendment”) to the Revolving Credit Agreement dated as of August 20, 2019 (the “Original Credit Agreement”, and as amended by the Amendment, the “Amended Credit Agreement”).
On February 23, 2021, we along with the Lenders, entered into an assignment and assumption and amendment agreement (the “Assignment”) to the Amended Credit Agreement. Pursuant to the Assignment, the Amended Credit Agreement was assigned to and assumed by Acadian and the Amended Credit Agreement was amended (the Amended Credit Agreement, as amended by the Assignment, the “Acadian Credit Agreement”) to, among other things, reduce the Lenders’ commitments thereunder to $125 million. The Acadian Credit Agreement has a maturity date of August 22, 2022.
Borrowings under the Acadian Credit Agreement bear interest, at Acadian’s option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5% and (iii) the one month Adjusted LIBO Rate plus 1.0%, plus, in each case, an additional amount based on its credit rating or (b) the London interbank offered rate for a period, at our election equal to one, three or six months plus an additional amount ranging from 1.5% to 2.0%, with such additional amount based on Acadian’s Leverage Ratio (as defined below). In addition, Acadian is charged a commitment fee based on the average daily unused portion of the revolving credit facility under the Acadian Credit Agreement at a per annum rate ranging from 0.25% to 0.375%, with such amount based on Acadian’s Leverage Ratio.
Under the Acadian Credit Agreement, the ratio of Acadian’s third-party borrowings to Acadian’s trailing twelve months Adjusted EBITDA, as defined by the Acadian Credit Agreement (the “Leverage Ratio”), cannot exceed 2.5x and the ratio of Acadian’s trailing twelve months Adjusted EBITDA to Acadian’s interest expense (the “Interest Coverage Ratio”) must be not less than 4.0x. At March 31, 2021, Acadian’s Leverage Ratio was 0.6x and Acadian’s Interest Coverage Ratio was 184.2x.
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Other Compensation Liabilities
Other compensation liabilities principally consist of cash-settled Affiliate equity and profit interests liabilities held by certain Affiliate key employees, and voluntary deferred compensation plans. The following table summarizes our other long-term liabilities:
| March 31, 2021 | December 31, 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Share-based payments liability | $ | 20.7 | $ | 25.0 | |||||||
| Affiliate profit interests liability | 49.7 | 41.4 | |||||||||
| Employee equity | 70.4 | 66.4 | |||||||||
| Voluntary deferral plan liability | 74.7 | 72.8 | |||||||||
Total(1) | $ | 145.1 | $ | 139.2 | |||||||
(1)Total other compensation liabilities excludes balance of Affiliate other compensation liabilities classified as held for sale on the Condensed Consolidated Balance Sheet. See discussion of Divestitures, Held for Sale and Discontinued Operations in Note 3 of the accompanying Condensed Consolidated Financial Statements.
Share-based payments liability represents the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is considered an equity award under U.S. GAAP based on the terms and conditions attached to these interests. Affiliate profit interests liability represents the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is not considered an equity award under U.S. GAAP, but rather a form of compensation arrangement, based on the terms and conditions attached to these interests. Our obligation in any given period in respect of funding these potential repurchases of Affiliate equity is limited to only that portion that may be put to us by Affiliate key employees, which is typically capped annually under the terms of these arrangements such that we are not required to repurchase more than we can reasonably recycle by re-granting the interests in lieu of cash variable compensation owed to Affiliate key employees.
Certain of our and our Affiliates’ key employees are eligible to participate in our voluntary deferral plan, or VDP, which provides our senior personnel the opportunity to voluntarily defer a portion of their compensation. There is a voluntary deferral plan investment balance included in investments on the Consolidated Balance Sheets that corresponds to this deferral liability.
Critical Accounting Policies and Estimates
There have been no significant changes to the critical accounting policies and estimates disclosed in our most recent Form 10-K for the year ended December 31, 2020. Critical accounting policies and estimates are those that require management’s most difficult, subjective or complex judgments and would therefore be deemed the most critical to an understanding of our results of operations and financial condition.
Recent Accounting Developments
See discussion of Recent Accounting Developments in Note 2 of the accompanying Condensed Consolidated Financial Statements.
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Forward Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements, including information relating to our pending divestitures of Landmark Partners and Investment Counselors of Maryland, including the expected timing for the closing of the divestitures, anticipated revenues, margins, cash flows or earnings, anticipated future performance of our business and our Affiliates or particular segments, our expected future net cash flows, our anticipated expense levels, capital management, expected impact of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows,and/or expectations regarding market conditions. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “can be,” “may be,” “aim to,” “may affect,” “may depend,” “intends,” “expects,” “believes,” “estimate,” “project,” and other similar expressions are intended to identify such forward-looking statements. Such statements are subject to various known and unknown risks and uncertainties and we caution readers that any forward-looking information provided by or on behalf of us is not a guarantee of future performance.
Actual results may differ materially from those in forward-looking information as a result of various factors, some of which are beyond our control, including but not limited to those discussed above and elsewhere in this Quarterly Report on Form 10-Q, in our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 1, 2021, and subsequent SEC filings. Due to such risks and uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements. Further, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and we undertake no obligations to update any forward looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Our exposure to market risk is directly related to the role of our Affiliates as asset managers. Substantially all of our investment management revenues are derived from our Affiliates’ agreements with their clients. Under these agreements, the revenues we receive are based on the value of our assets under management or the investment performance on client accounts for which we earn performance fees. Accordingly, our revenues and net income may decline as a result of our assets under management decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenues and net income to decline further.
Our model for assessing the impact of market risk on our results uses March 31, 2021 ending AUM and management fee rates as the basis for management fee revenue calculations. In February 2021 we announced the divestiture of ICM, expected to close during second quarter of 2021. ICM will be included in our AUM until the transaction closes. In March 2021, we announced the divestiture of Landmark, expected to close in the second quarter of 2021. As a result, Landmark is reported within discontinued operations and excluded from AUM. With respect to performance fee revenue, we assume that relative investment performance is the same as in the past four quarters ended March 31, 2021. Therefore, market-driven changes in performance fees, which are typically based on relative performance versus market indices, reflect changes in the underlying AUM used in the calculation rather than differences in relative performance as a result of a changed market environment. The basis for the analysis is performance fees earned for the twelve months ended March 31, 2021.
Our profit sharing economic structure results in a sharing of market risk between us and our employees. Approximately 40% of our ENI cost structure is variable, representing variable compensation and key employee distributions for the Affiliates. These variable expenses generally are linked in a formulaic manner to the profitability of the business after covering operating expenses, which include base compensation and benefits, general and administrative expenses, and depreciation and amortization. In modeling the impact of market risk, we assume that these operating expenses remain unchanged, but the resulting impact on profit driven by increases or decreases in revenue will change variable compensation and Affiliate key employee distributions in line with their formulaic calculations. Any change in pre-tax profit is tax-affected at our statutory combined state and federal rate of approximately 27% to calculate profit after tax.
The value of our assets under management was $145.1 billion as of March 31, 2021. A 10% increase or decrease in the value of our assets under management, if proportionally distributed over all of our investment strategies, asset classes and client relationships, would cause an annualized increase or decrease in our gross management fee revenues of approximately $54.4 million based on our current weighted average fee rate of approximately 38 basis points, including our equity-accounted Affiliate. Approximately $19.0 billion, or 12%, of our AUM, including our equity-accounted Affiliate, are in accounts subject to performance fees. Of these assets, approximately 70% 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% increase or decrease in AUM would have a $1.1 million impact to our gross performance fees based on our trailing twelve month performance fees of $11.4 million as of March 31, 2021. The combined impact on our management fees and performance fees would have a direct impact on our earnings and result in an annual change of approximately $21.4 million in our post-tax economic net income, given our current cost structure and operating model.
Equity market risk, interest rate risk, and foreign currency risk are the market risks that could have the greatest impact on our management fees, performance fees and our business profitability. Impacts on our management and performance fees can be calculated based on the percentage of AUM constituting equity investments, fixed income investments, or foreign currency denominated investments, respectively, multiplied by the relevant weighted average management fee and performance fee attributable to that asset class.
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•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 $137.3 billion of equity assets under management to increase or decrease by $13.7 billion, resulting in a change in annualized management fee revenue of $52.0 million and an annual change in post-tax economic net income of approximately $19.6 million, given our current cost structure, operating model, and weighted average fee rate of 38 basis points at the mix of strategies as of March 31, 2021. Approximately $14.0 billion, or 10%, of our equity markets-based AUM are in accounts subject to performance fees. Of these assets, approximately 99% 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 equity markets would not have a material impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.
•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 $104.8 billion of foreign currency denominated AUM to increase or decrease by $10.5 billion, resulting in a change in annualized management fee revenue of $41.7 million and an annual change in post-tax economic net income of $16.2 million, based on weighted average fees earned on our foreign currency denominated AUM of 39 basis points at the mix of strategies as of March 31, 2021. Approximately $13.0 billion, or 12%, 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 not have a material 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 $1.8 billion, would cause AUM to rise or fall by approximately $0.2 billion. Based on our fixed income weighted average fee rates of 27 basis points, annualized management fees would change by $0.5 million and post-tax economic net income would change by $0.2 million annually. There are currently no material fixed income assets earning performance fees as of March 31, 2021.
While the analysis above assumes that market changes occur in a uniform manner across the relevant portfolio, because of our declining fee rates for larger relationships and differences in our fee rates across asset classes, a change in the composition of our assets under management, in particular an increase in the proportion of our total assets under management attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted average fee rate.
As is customary in the asset management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of such asset classes. We have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall assets under management and related revenues. Any reduction in the value of our assets under management would result in a reduction in our revenues.
Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under the Acadian Credit Facility. Interest on borrowings under the Acadian Credit Facility is based upon variable interest rates. Borrowings under the Credit Facility were $81.0 million as of March 31, 2021. We currently do not hedge against interest rate risk. As of March 31, 2021, a hypothetical 10% change in interest rates would have resulted in no change to our interest expense during the three months ended March 31, 2021.
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Item 4. Controls and Procedures.
Controls and Procedures
Our management, including our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at March 31, 2021. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective.
Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we and our Affiliates may be parties to various claims, suits and complaints in the ordinary course of our business. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.
Item 1A. Risk Factors
There have been no material changes in the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Item 6. Exhibits.
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101* | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020, (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, and (vi) the Notes to Financial Statements. | |||||||
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| Exhibit No. | Description | |||||||
| 104* | The cover page of this Quarterly Report on Form 10-Q, formatted in Inline eXtensible Business Reporting Language | |||||||
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BrightSphere Investment Group Inc. | |||||||||||
| Dated: | May 7, 2021 | ||||||||||
| By: | /s/ Suren Rana | ||||||||||
| Suren Rana President and Chief Executive Officer (principal executive officer) | |||||||||||
| /s/ Christina Wiater | |||||||||||
| Christina Wiater Senior Vice President and Principal Financial Officer (principal financial officer and principal accounting officer) | |||||||||||
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