Market Overview

BrightSphere Reports Financial and Operating Results for the Second Quarter Ended June 30, 2018

Share:
  • U.S. GAAP EPS of $0.02 per share, down (81.8)% from Q2 2017; U.S.
    GAAP earnings of $2.1 million, down (83.7)%
  • Economic net income EPS of $0.47 per share, an increase of 11.9%
    from Q2 2017 and economic net income of $50.5 million, an increase of
    8.4% from Q2 2017
  • AUM of $234.3 billion at June 30, 2018, a decrease of (2.4)% from
    March 31, 2018 and a decrease of (9.5)% from June 30, 2017, including
    the divestiture of Heitman
  • Net client cash flows ("NCCF") for the quarter of $(4.1) billion
    yielding an annualized revenue impact of $(15.2) million and NCCF for
    the six-month period of $(2.2) billion yielding an annualized revenue
    impact of $3.8 million
  • Repurchase of 3,423,952 shares ($50 million) in 2018 through July 31

BrightSphere Investment Group plc (NYSE:BSIG) reports its results for
the second quarter ended June 30, 2018.

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"While this was a challenging quarter, BrightSphere's diversified,
global franchise produced solid earnings growth, with ENI per share up
12% year-over-year, to $0.47," said Steve Belgrad, BrightSphere's
President and Chief Executive Officer. "Our near-term investment
performance was impacted by macro and style challenges in emerging
markets, although long-term performance remains strong. As of June 30,
assets representing 43%, 71%, and 81% of revenue outperformed their
benchmarks on a one-, three- and five-year basis, respectively. Net
client cash flows were impacted by both reduced gross sales after an
unusually strong period of funding in the first quarter and increased
redemptions in U.S. subadvisory and select small-cap products.

"Looking ahead, we are confident in our ability to generate shareholder
value across market cycles. Our Affiliates are highly regarded boutique
asset managers with strong long-term track records, and our profit share
model provides structural variability to our expenses in difficult
market environments. We are committed to the ongoing diversification of
our business, and continue to expand our investment capabilities and
product reach. Strategies such as leveraged loans at Barrow Hanley and
multi-asset class at Acadian are gaining traction, while the upcoming
launch of our UCITS platform will broaden our offerings in Europe. Our
global pipeline is robust and diverse, as our team pursues opportunities
on behalf of our Affiliates."

Mr. Belgrad concluded, "We have been very active in cultivating
relationships with prospective new Affiliates, and remain focused on
generating incremental earnings growth through additional, diversifying
investments. We have ample capacity to execute new investments; at the
same time, given the valuation of our shares, we have maintained the
stock buy-back program initiated earlier this year, and have repurchased
over 3.4 million shares through July 31."

James J. Ritchie, BrightSphere's Chairman, added, "Finally, we are
grateful to Kyle Legg, who joined our Board of Directors at the time of
our IPO and retired in June. Kyle was a member of the Audit Committee
and the Chair of the Compensation Committee, and I personally will miss
her invaluable contributions and guidance. At the same time, I am
pleased to welcome Reginald Love to our Board. Reggie is a partner at
RON Transatlantic EG, where he focuses on financial services and energy
investments. We look forward to serving with him as BrightSphere
continues to grow."

 

Table 1: Key Performance Metrics

 

($ in millions, unless otherwise noted)   Three Months Ended June 30,   Six Months Ended June 30,

U.S. GAAP Basis

2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Revenue $ 233.9 $ 218.8 6.9 % $ 483.6 $ 415.0 16.5 %
Pre-tax income from cont. ops. attributable to controlling interests 5.7 13.9 (59.0 )% 91.7 41.0 123.7 %
Net income attributable to controlling interests 2.1 12.9 (83.7 )% 59.4 34.3 73.2 %
Diluted shares outstanding (in millions) 108.6 111.8 109.1 113.1
Diluted earnings per share, $ $ 0.02 $ 0.11 (81.8 )% $ 0.54 $ 0.30 80.0 %
U.S. GAAP operating margin 6.5 % 5.9 % 65 bps 8.5 % 8.8 % (31) bps
 

Economic Net Income Basis
(Non-GAAP measure used by management)

ENI revenue $ 230.7 $ 221.4 4.2 % $ 478.5 $ 420.2 13.9 %
Pre-tax economic net income 65.8 63.0 4.4 % 137.2 115.4 18.9 %
Economic net income 50.5 46.6 8.4 % 105.4 85.5 23.3 %
ENI diluted earnings per share, $ $ 0.47 $ 0.42 11.9 % $ 0.97 $ 0.76 27.6 %
Adjusted EBITDA 72.8 70.6 3.1 % 151.8 130.5 16.3 %
ENI operating margin 38.1 % 38.1 % 7 bps 39.1 % 37.3 % 188 bps
 

Other Operational Information(1)

Assets under management at period end ($ in billions) $ 234.3 $ 258.8 (9.5 )% $ 234.3 $ 258.8 (9.5 )%
Net client cash flows ($ in billions) (4.1 ) (0.3 ) n/m (2.2 ) (2.8 ) n/m
Annualized revenue impact of net flows ($ in millions) (15.2 ) 13.1 n/m 3.8 13.9 (72.7 )%

(1)

 

As previously disclosed, on January 5, 2018, BrightSphere
closed the sale of its stake in Heitman LLC to Heitman's
management. Excluding Heitman, AUM, NCCF, and annualized revenue
impact of net flows were $226.4 billion, $(0.8) billion, and $11.3
million, respectively, for the three months ended June 30, 2017
and were $226.4 billion, $(3.4) billion, and $11.9 million,
respectively, for the six months ended June 30, 2017.

Please see "Definitions and Additional Notes." Please see Table
7 for a reconciliation of U.S. GAAP net income attributable to
controlling interests to economic net income.

 

Assets Under Management and Flows

At June 30, 2018, BrightSphere's total assets under management ("AUM")
were $234.3 billion, down $(5.8) billion, or (2.4)%, compared to $240.1
billion at March 31, 2018. The decrease in AUM during the three months
ended June 30, 2018 primarily reflects net market depreciation of $(1.7)
billion and net outflows of $(4.1) billion. At June 30, 2018,
BrightSphere's AUM was down $(24.5) billion, or (9.5)%, compared to
$258.8 billion at June 30, 2017. The decrease in AUM compared to the
prior year reflects the removal of Heitman, which accounted for $32.4
billion of AUM at June 30, 2017, as well as net flows of $(5.4) billion
offset by net market appreciation of $13.3 billion.

For the three months ended June 30, 2018, BrightSphere's net client cash
flows were $(4.1) billion compared to $1.9 billion for the three months
ended March 31, 2018 and $(0.3) billion for the three months ended
June 30, 2017. Gross inflows in the three months ended June 30, 2018
were $6.1 billion (compared to $10.3 billion in the first quarter of
2018 and $8.1 billion in the second quarter of 2017) and gross outflows
and hard asset disposals were $(10.2) billion (compared to $(8.4)
billion in the first quarter of 2018 and $(8.4) billion in the second
quarter of 2017). The increase in outflows in the three months ended
June 30, 2018 was due to secular U.S. equity subadvisory withdrawals and
performance-related withdrawals in U.S. and non-U.S. small cap products.
Hard asset disposals of $(0.1) billion, $(0.1) billion, and $(0.2)
billion are reflected in the net client cash flows for the three months
ended June 30, 2018, March 31, 2018 and June 30, 2017, respectively. For
the three months ended June 30, 2018, the annualized revenue impact of
the net client cash flows was $(15.2) million, which compares to $19.0
million for the three months ended March 31, 2018 and $13.1 million for
the three months ended June 30, 2017 (see "Definitions and Additional
Notes"). Gross inflows of $6.1 billion yielded approximately 42 bps,
while gross outflows and hard asset disposals of $(10.2) billion in the
same period yielded approximately 40 bps.

For the six months ended June 30, 2018, BrightSphere's net client cash
flows were $(2.2) billion compared to $(2.8) billion for the six months
ended June 30, 2017. As previously disclosed, flow information in this
release includes flows from Heitman for the first half of 2017, but
excludes it thereafter. Excluding Heitman, net flows in the six months
ended June 30, 2017 were $(3.4) billion. The net flows in the six months
ended June 30, 2018 were impacted by strong sales in alternatives,
offset by higher global / non-U.S. equity outflows. For the six months
ended June 30, 2018, the annualized revenue impact of the net client
cash flows was $3.8 million compared to $13.9 million for the six months
ended June 30, 2017 which reflects a reduction in the spread between bps
on inflows and outflows. Gross inflows of $16.4 billion in the six
months ended June 30, 2018, compared to $16.3 billion in the prior year,
yielded an average of 46 bps compared to 48 bps in the year-ago period
while gross outflows and hard asset disposals of $(18.6) billion,
compared to $(19.1) billion in the prior year, yielded 39 bps in the six
months ended June 30, 2018 compared to 33 bps in the year-ago period.

   
Table 2: Assets Under Management Rollforward Summary(1)
 
($ in billions, unless otherwise noted) Three Months Ended Six Months Ended
June 30, 2018   March 31, 2018   June 30, 2017 June 30, 2018 June 30, 2017
Beginning AUM $ 240.1 $ 243.0 $ 249.7 $ 243.0 $ 240.4
Gross inflows 6.1 10.3 8.1 16.4 16.3
Gross outflows (10.1 ) (8.3 ) (8.2 ) (18.4 ) (18.8 )
Net flows before hard asset disposals (4.0 ) 2.0 (0.1 ) (2.0 ) (2.5 )
Hard asset disposals (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.3 )
Net flows (4.1 ) 1.9 (0.3 ) (2.2 ) (2.8 )
Market appreciation (depreciation) (1.7 ) (3.3 ) 9.4 (5.0 ) 21.2
Other(2)   (1.5 )   (1.5 )  
Ending AUM $ 234.3   $ 240.1   $ 258.8   $ 234.3   $ 258.8  
 
Basis points: inflows 42.3 48.9 52.8 46.4 47.7
Basis points: outflows 40.2 37.4 35.3 38.9 33.4
Annualized revenue impact of net flows ($ in millions) $ (15.2 ) $ 19.0 $ 13.1 $ 3.8 $ 13.9
Derived average weighted NCCF ($ in billions) (3.9 ) 4.6 3.4 0.7 3.6

(1)

 

As of the beginning of the third quarter, 2017, the Company
removed Heitman from its AUM and cash flow metrics. AUM and flows
shown here for 2017 include Heitman and AUM and flows for 2018
exclude Heitman.

(2)

"Other" in Q1'18 primarily relates to the decline in billable
AUM as a legacy alternative fund transitioned from billing based
on committed AUM to net asset value.

Please see "Definitions and Additional Notes"

 

Balance Sheet and Capital Management

Condensed Consolidated Balance Sheets as of June 30, 2018 and
December 31, 2017 are provided in Table 3 below. At June 30, 2018, the
Company had $393.0 million of long-term bonds ($400.0 million face
value, net of discount and fees), $0.0 million outstanding on its $350
million credit facility and $15.0 million drawn on a non-recourse seed
capital financing facility. Shareholders' equity (attributable to
controlling interests) amounted to $89.6 million. The Company's ratio of
third party borrowings (excluding non-recourse debt) to trailing twelve
months Adjusted EBITDA was 1.3x, significantly below the Company's
revolving credit facility covenant of 3.0x. Of the Company's cash and
cash equivalents of $234.7 million at June 30, 2018, $75.8 million was
held at Affiliates and $158.9 million was available at the Center.

As of June 30, 2018, the Company had total seed and co-investment
holdings of $160.1 million. During the six months ended June 30, 2018,
the Company has made investments of approximately $63 million to support
Affiliate strategies and product capabilities. During the quarter, the
Company drew down $15.0 million on the non-recourse seed capital
financing facility, leaving $50.0 million available to be drawn down as
of June 30, 2018.

On March 26, 2018, the Company announced that it was authorized by its
board of directors to resume its share repurchase program. As of July
31, on a year-to-date basis, the Company has purchased a total of
3,423,952 shares at a weighted average price of $14.59 per share, or
approximately $50 million in total.

 
Table 3: Condensed Consolidated Balance Sheets
   
($ in millions) June 30, 2018 December 31, 2017
Assets
Cash and cash equivalents $ 234.7 $ 186.3
Investment advisory fees receivable 198.6 208.3
Investments(1) 205.6 244.4
Other assets 707.8 698.8
Assets of consolidated Funds(2) 149.5   153.9  
Total assets $ 1,496.2   $ 1,491.7  
 
Liabilities and equity
Accounts payable and accrued expenses $ 183.8 $ 241.0
Due to OM plc 49.1 59.1
Non-recourse borrowings 15.0 33.5
Third party borrowings 393.0 392.8
Other liabilities 684.6 583.5
Liabilities of consolidated Funds(2) 15.6   10.5  
Total liabilities 1,341.1 1,320.4
 
Shareholders' equity 89.6 75.4
Non-controlling interests, including NCI of consolidated Funds(2) 65.5   95.9  
Total equity 155.1   171.3  
Total liabilities and equity $ 1,496.2   $ 1,491.7  
 
Third party borrowings / trailing twelve months Adjusted EBITDA(3) 1.3 x 1.4 x

(1)

 

Includes investment in Heitman of $53.8 million at December 31,
2017.

(2)

Consolidated Funds represent certain seed and co-investments.

(3)

Excludes non-recourse borrowings.

Please see "Definitions and Additional Notes"

 

Investment Performance

The Company's near-term investment performance was impacted by a
negative global equity environment in the second quarter of 2018. Table
4 below presents a summary of the Company's investment performance as of
June 30, 2018, March 31, 2018, December 31, 2017 and June 30, 2017.
Performance is shown on a revenue-weighted basis, an equal-weighted
basis and an asset-weighted basis. Please see "Definitions and
Additional Notes" for further information on the calculation of
performance.

 
Table 4: Investment Performance
 
(% outperformance vs. benchmark) Revenue-Weighted
June 30, 2018   March 31, 2018   December 31, 2017   June 30, 2017
1-Year 43% 62% 65% 74%
3-Year 71% 72% 72% 73%
5-Year 81% 79% 83% 78%
 
Equal-Weighted
June 30, 2018 March 31, 2018 December 31, 2017 June 30, 2017
1-Year 50% 59% 59% 63%
3-Year 68% 72% 69% 73%
5-Year 76% 75% 82% 77%
 
Asset-Weighted
June 30, 2018 March 31, 2018 December 31, 2017 June 30, 2017
1-Year 43% 57% 61% 70%
3-Year 67% 69% 71% 68%
5-Year 78% 74% 74% 66%

Investment performance is calculated gross of fees.

Please see "Definitions and Additional Notes"

 

As of June 30, 2018, assets representing 43%, 71% and 81% of revenue
were outperforming benchmarks on a 1-, 3- and 5- year basis,
respectively, compared to 62%, 72% and 79% at March 31, 2018; and 74%,
73% and 78% at June 30, 2017. Second quarter volatility contributed to
declines against benchmarks on a one-year basis for several strategies,
particularly in global / non-U.S. asset classes. One emerging markets
product represented 16% of the 19% 1-year decline from March 31, 2018
due to macro-related under performance in June.

Financial Results: U.S. GAAP

Table 5 below presents the Company's U.S. GAAP Statement of Operations.
For the three months ended June 30, 2018 and 2017, diluted earnings per
share were $0.02 and $0.11, respectively, a decrease of (81.8)%, and net
income attributable to controlling interests was $2.1 million and $12.9
million, respectively, a decrease of $(10.8) million, or (83.7)%.
Earnings per share calculations are impacted by the shares repurchased
in 2017 and 2018 which contributed to a decrease in average diluted
shares outstanding of (3.2) million, or (2.9)% for the three-month
period and (4.0) million, or (3.5)%, for the six-month period. For the
three months ended June 30, 2018, compared to the three months ended
June 30, 2017, U.S. GAAP revenue increased $15.1 million, or 6.9%, from
$218.8 million to $233.9 million, as a result of higher levels of
average assets under management, excluding equity-accounted Affiliates,
and the continued shift to higher fee rate products, offset by lower
performance fees. Operating expenses increased $12.7 million, or 6.2%,
from $205.9 million for the three months ended June 30, 2017, to $218.6
million for the three months ended June 30, 2018, primarily due to
increases in compensation and benefits expense, driven by higher
revaluations of Affiliate equity and profit interests offset by lower
variable compensation as the prior-year quarter included $9.3 million
related to CEO succession. Compensation expense also reflects the
amortization of contingent consideration and the portion of equity not
acquired by the Company at Landmark. Under U.S. GAAP, the fair value of
both the contingent consideration and the portion of equity not acquired
by the Company is recorded as compensation expense over the applicable
term because service requirements exist for holders of these units.
These units are also revalued each quarter, with any change recorded in
that period as an adjustment to compensation expense. Investment income
(loss) decreased $(5.4) million, from $5.0 million for the three months
ended June 30, 2017, to $(0.4) million for the three months ended
June 30, 2018, due to the removal of Heitman and the negative market
impact on seed capital investments. Income tax expense increased for the
quarter reflecting the decrease in the U.S. tax rate offset by an
increase in U.K. taxes due to tax law changes enacted in the fourth
quarter of 2017, along with additional tax charges relating to changes
in state tax law, vesting of employee share awards and reserves for
uncertain tax positions.

For the six months ended June 30, 2018 and 2017, diluted earnings per
share was $0.54 and $0.30, respectively, an increase of 80.0%, and net
income attributable to controlling interests was $59.4 million and $34.3
million, respectively, an increase of $25.1 million, or 73.2%. U.S. GAAP
revenue increased $68.6 million, or 16.5%, from $415.0 million for the
six months ended June 30, 2017, to $483.6 million for the six months
ended June 30, 2018, reflecting higher bps yield on higher levels of
average assets under management, excluding equity-accounted Affiliates,
including net catch-up fees related to certain alternative products,
offset by lower performance fees. The increase in other revenue for the
six months ended June 30, 2018 was primarily attributable to the
adoption of new accounting rules on January 1 related to revenue
recognition that require us to record as separate revenue and expense
certain Fund expenses paid by our Affiliates and subsequently reimbursed
by the Fund. These reimbursed costs, amounting to $5.0 million for the
six months ended June 30, 2018, were recorded on a net basis in prior
years. Operating expenses increased $64.1 million, or 16.9%, from $378.6
million for the six months ended June 30, 2017, to $442.7 million for
the six months ended June 30, 2018, primarily as a result of higher
compensation and benefits (see Table 6). The increase in compensation
and benefits is predominantly due to increases in the revaluation of
Affiliate equity and profits interests driven by the U.S. GAAP treatment
of the Landmark transaction and higher Affiliate key employee
distributions.

The $54.6 million increase in investment income for the six months ended
June 30, 2018 compared to the six months ended June 30, 2017 primarily
reflects the Company's gain recognized upon the sale of its investment
in Heitman. Income tax expense increased due to the impact of the sale
of Heitman in January 2018 and the net impact of U.S. and U.K. tax law
changes enacted in the fourth quarter of 2017.

 
Table 5: U.S. GAAP Statement of Operations
           
($ in millions, unless otherwise noted) Three Months Ended June 30, Six Months Ended June 30,
2018 2017

Increase
(Decrease)

2018 2017

Increase
(Decrease)

Management fees $ 226.4 $ 206.7 9.5 % $ 471.4 $ 402.4 17.1 %
Performance fees 3.0 11.2 (73.2 )% 5.0 11.4 (56.1 )%
Other revenue 3.3 0.4 n/m 5.8 0.5 n/m
Consolidated Funds' revenue 1.2   0.5   140.0 % 1.4   0.7   100.0 %
Total revenue 233.9   218.8   6.9 % 483.6   415.0   16.5 %
Compensation and benefits (see Table 6) 183.4 173.4 5.8 % 372.6 316.2 17.8 %
General and administrative 29.8 27.7 7.6 % 59.3 53.3 11.3 %
Amortization of acquired intangibles 1.7 1.7 % 3.3 3.3 %
Depreciation and amortization 3.5 2.8 25.0 % 6.9 5.3 30.2 %
Consolidated Funds' expense 0.2   0.3   (33.3 )% 0.6   0.5   20.0 %
Total operating expenses 218.6   205.9   6.2 % 442.7   378.6   16.9 %
Operating income 15.3 12.9 18.6 % 40.9 36.4 12.4 %
Investment income (loss) (0.4 ) 5.0 n/m 65.7 11.1 491.9 %
Interest income 0.6 0.3 100.0 % 1.1 0.4 175.0 %
Interest expense (6.1 ) (5.9 ) 3.4 % (12.4 ) (11.8 ) 5.1 %
Net consolidated Funds' investment gains (losses) (3.3 ) 2.3   n/m (5.7 ) 6.5   n/m
Income from continuing operations before taxes 6.1 14.6 (58.2 )% 89.6 42.6 110.3 %
Income tax expense 3.6   1.0   260.0 % 32.3   6.6   389.4 %
Income from continuing operations 2.5 13.6 (81.6 )% 57.3 36.0 59.2 %
Gain (loss) on disposal of discontinued operations, net of tax     n/m   (0.1 ) (100.0 )%
Net income 2.5 13.6 (81.6 )% 57.3 35.9 59.6 %
Net income (loss) attributable to non-controlling interests 0.4   0.7   (42.9 )% (2.1 ) 1.6   n/m
Net income attributable to controlling interests $ 2.1   $ 12.9   (83.7 )% $ 59.4   $ 34.3   73.2 %
Earnings per share, basic, $ $ 0.02 $ 0.12 (83.3 )% $ 0.54 $ 0.30 80.0 %
Earnings per share, diluted, $ 0.02 0.11 (81.8 )% 0.54 0.30 80.0 %
Basic shares outstanding (in millions) 108.4 111.3 108.9 112.4
Diluted shares outstanding (in millions) 108.6 111.8 109.1 113.1
 
U.S. GAAP operating margin 7 % 6 % 65 bps 8 % 9 % (31) bps
Pre-tax income from continuing operations attributable to
controlling interests
$ 5.7 $ 13.9 (59.0 )% $ 91.7 $ 41.0 123.7 %
Net income from continuing operations attributable to controlling
interests
2.1 12.9 (83.7 )% 59.4 34.4 72.7 %

Please see "Definitions and Additional Notes"

 
Table 6: Components of U.S. GAAP Compensation Expense
           
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017

Increase
(Decrease)

2018 2017

Increase
(Decrease)

Fixed compensation and benefits(1) $ 47.5 $ 41.5 14.5 % $ 96.7 $ 84.3 14.7 %
Sales-based compensation 4.2 4.5 (6.7 )% 9.1 8.9 2.2 %
Variable compensation(2) 61.3 69.9 (12.3 )% 125.2 121.1 3.4 %
Affiliate key employee distributions 18.7 16.5 13.3 % 42.4 31.4 35.0 %
Non-cash key employee-owned equity revaluations 34.0 23.3 45.9 % 63.9 35.2 81.5 %
Acquisition-related consideration and pre-acquisition employee equity(3) 17.7   17.7   % 35.3   35.3   %
Total U.S. GAAP compensation expense $ 183.4   $ 173.4   5.8 % $ 372.6   $ 316.2   17.8 %

(1)

 

For the three and six months ended June 30, 2018, $44.8 million
and $91.7 million, respectively, of fixed compensation and
benefits is included within economic net income, which excludes
Fund expenses initially paid by the Company's Affiliates on the
Fund's behalf and subsequently reimbursed. For the three and six
months ended June 30, 2017, $41.0 million and $83.8 million,
respectively, of fixed compensation and benefits (of the $41.5
million and $84.3 million above) is included within economic net
income, which excludes the compensation and benefits associated
with the CEO transition costs.

(2)

For the three and six months ended June 30, 2017, $61.1 million
and $112.3 million, respectively, of variable compensation expense
(of the $69.9 million and $121.1 million above) is included within
economic net income, which excludes the variable compensation
associated with the CEO transition costs.

(3)

Reflects amortization of contingent consideration and equity
owned by employees, both with a service requirement, associated
with the Landmark acquisition; revaluation of the Landmark
interests is included in "Non-cash key employee-owned equity
revaluations" above.

Please see "Definitions and Additional Notes"

 

Financial Results: Non-GAAP Economic Net Income

For the three months ended June 30, 2018 and 2017, diluted economic net
income per share was $0.47 and $0.42, respectively, up $0.05, or 11.9%,
on economic net income of $50.5 million and $46.6 million, respectively,
an increase of $3.9 million, or 8.4%. For the six months ended June 30,
2018 and 2017, diluted economic net income per share was $0.97 and
$0.76, respectively, up $0.21, or 27.6%, on economic net income of
$105.4 million and $85.5 million, respectively, an increase of $19.9
million, or 23.3%. Table 7 reconciles U.S. GAAP to economic net income
for the three and six months ended June 30, 2018 and June 30, 2017.
Per-share amounts are impacted by the shares repurchased in 2017 and
2018 which contributed to a decrease in weighted average diluted shares
outstanding of (3.2) million, or (2.9)% for the three-month period and
(4.0) million, or (3.5)%, for the six-month period.

For the three months ended June 30, 2018 and 2017, ENI revenue (see
Table 8) increased $9.3 million or 4.2%, from $221.4 million to $230.7
million, including a 9.5% increase in management fees from $206.7
million to $226.4 million, as a result of higher levels of average
assets under management, excluding equity-accounted Affiliates, and the
continued shift to higher fee rate products. Average assets under
management excluding equity-accounted Affiliates in those respective
periods (see Table 12) increased 7.0% to $236.3 billion, while the bps
yield on these assets increased from 37.5 bps to 38.4 bps, due to
positive mix shifts related to markets and flows including the impact of
the higher yield on alternative assets over the past four quarters,
including inflows at Landmark. Net catch-up fees were not significant
for the three months ended June 30, 2018 or 2017. Performance fee
revenue was $3.0 million for the current quarter, compared to $11.2
million in the year-ago quarter, principally reflecting a performance
fee earned on an alternative product in the prior year that was not
repeated in 2018. Other income, including equity-accounted Affiliates,
decreased $(2.2) million, or (62.9)% from $3.5 million to $1.3 million
due to the fact that Heitman was included in the results for the three
months ended June 30, 2017 and is no longer included in the current
period. Total ENI operating expenses (see Table 9) grew 7.1%, to $81.4
million, from $76.0 million in the prior-year quarter reflecting the
continued growth and investment in the business. Total operating
expenses as a percentage of management fee revenue decreased (81) bps
from 36.8% to 36.0% as a result of increased scale in the business. Of
the $5.4 million increase in operating expense between the three months
ended June 30, 2018 and 2017, $3.8 million was due to higher fixed
compensation and benefits as a result of new hires and annual cost of
living increases. Total ENI variable compensation increased 0.3%
quarter-over-quarter from $61.1 million to $61.3 million, while the ENI
variable compensation ratio (variable compensation as a percentage of
ENI earnings before variable compensation) decreased from 42.0% to
41.1%, partially reflecting the lower cost structure at the Center. The
sum of operating expense and variable compensation increased $5.6
million, or 4.1% period-over-period, while revenue increased 4.2% over
this period and as a result, BSIG's ENI operating margin remained stable
at 38.1%. Affiliate key employee distributions increased 13.3%
quarter-over-quarter, from $16.5 million to $18.7 million, primarily due
to higher ENI operating earnings and the levered structure of
distributions at certain Affiliates. The ratio of Affiliate key employee
distributions over ENI operating earnings was 21.3%, compared to 19.6%
in the year-ago quarter, primarily due to higher earnings before
Affiliate key employee distributions at Affiliates with higher employee
ownership and leveraged equity plans which align incentives for growth.
Net interest expense was $3.5 million for the three months ended
June 30, 2018, compared to net interest expense of $4.8 million in the
prior-year period. The difference in net interest expense between U.S.
GAAP and economic net income primarily relates to the financing costs of
seed capital and co-investments held for the Company's benefit (see
Table 21). Tax on economic net income for the three months ended
June 30, 2018 and 2017 was $15.3 million and $16.4 million,
respectively, a decrease of $(1.1) million or (6.7)%, primarily
reflecting a decrease in the effective tax rate to 23.3% from 26.0% in
the prior-year period. This decrease is primarily due to the net impact
of U.S. and U.K. tax law changes enacted in the fourth quarter of 2017.

For the six months ended June 30, 2018 and 2017, ENI revenue (see Table
8) increased $58.3 million or 13.9%, from $420.2 million to $478.5
million, driven primarily by a 17.1% increase in management fees from
$402.4 million to $471.4 million. This growth was related to increases
in both average assets under management, excluding equity-accounted
Affiliates, and our weighted-average fee rate on average AUM, which also
benefited from net catch-up fees related to alternative assets in the
six months ended June 30, 2018. Average AUM excluding equity-accounted
Affiliates (see Table 12) increased 10.6% from the first six months of
2017 to $239.6 billion, and the bps yield on these assets rose from 37.5
bps to 39.7 bps. This increase in yield is primarily driven by net
catch-up fees related to alternative assets. Net catch-up fees represent
payment of fund management fees back to the initial closing date for
certain products with multiple closings, less placement fees paid to
third parties related to these funds. Performance fee revenue was $5.0
million for the current period, compared to $11.4 million in the
prior-year period, principally reflecting the variable nature of
performance fees and a performance fee earned on an alternative product
in the prior year that was not repeated in 2018. Other income, including
equity-accounted Affiliates, decreased $(4.3) million, or (67.2)% from
$6.4 million for the six months ended June 30, 2017 to $2.1 million for
the six months ended June 30, 2018 due to the fact that Heitman was
included in the results for the six months ended June 30, 2017 and is no
longer included in the current period. Total ENI operating expenses (see
Table 9) grew 9.7% to $166.0 million, from $151.3 million in the
prior-year period. Total operating expenses as a percentage of
management fee revenue decreased to 35.2% for the six months ended
June 30, 2018 from 37.6% in the prior year period, as management fee
growth of 17.1% outpaced the 9.7% increase in operating expenses,
partially reflecting the Company's higher level of net catch-up fees and
Center efficiencies. Of the $14.7 million increase in operating expenses
between the six months ended June 30, 2017 and 2018, $7.9 million was
due to higher fixed compensation and benefits, which was primarily
attributable to growth in the business and annual cost of living
increases. Total variable compensation increased 11.5%
period-over-period from $112.3 million to $125.2 million, however the
ENI variable compensation ratio (variable compensation as a percentage
of ENI earnings before variable compensation) decreased to 40.1%
compared to 41.8% in the prior-year period. The sum of operating expense
and variable compensation increased $27.6 million, or 10.5%
period-over-period, while revenue increased 13.9% over this period,
resulting in a 188 bps increase in BSIG's ENI operating margin to 39.1%
from 37.3%. Affiliate key employee distributions increased 35.0%
period-over-period, from $31.4 million to $42.4 million, primarily due
to higher ENI operating earnings and the levered structure of
distributions at certain Affiliates. The ratio of Affiliate key employee
distributions over ENI operating earnings was 22.6%, compared to 20.1%
in the year-ago period, primarily due to higher earnings before
Affiliate key employee distributions at Affiliates with higher employee
ownership and leveraged equity plans which align incentives for growth.
Net interest expense was $7.7 million for the six months ended June 30,
2018, compared to net interest expense of $9.8 million in the prior-year
period. Tax on economic net income for the six months ended June 30,
2018 and 2017 was $31.8 million and $29.9 million, respectively, an
increase of $1.9 million, or 6.4%, primarily reflecting higher pre-tax
ENI offset by a lower tax rate. The effective ENI income tax rate
decreased from 25.9% for the six months ended June 30, 2017 to 23.2% for
the six months ended June 30, 2018 primarily due to the net impact of
U.S. and U.K. tax law changes enacted in the fourth quarter of 2017.

For the three months ended June 30, 2018, Adjusted EBITDA was $72.8
million, up 3.1% compared to $70.6 million for the same period of 2017.
For the six months ended June 30, 2018, Adjusted EBITDA was $151.8
million, up 16.3% compared to $130.5 million for the same period of
2017. See Table 22 for a reconciliation of U.S. GAAP net income
attributable to controlling interests to EBITDA, Adjusted EBITDA and ENI.

Table 7: Reconciliation of U.S. GAAP Net Income to Economic
Net Income
 
($ in millions)   Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
U.S. GAAP net income attributable to controlling interests $ 2.1 $ 12.9 $ 59.4 $ 34.3
Adjustments to reflect the economic earnings of the Company:
i.   Non-cash key employee-owned equity and profit interest revaluations 34.0 23.3 63.9 35.2
ii. Amortization of acquired intangible assets, acquisition-related
consideration and pre-acquisition employee equity
19.4 19.4 38.6 38.6
iii. Capital transaction costs 0.1 0.1
iv. Seed/Co-investment (gains) losses and financings(1) 6.0 (2.9 ) 7.8 (8.7 )
v. Tax benefit of goodwill and acquired intangibles deductions 1.4 2.3 2.9 4.5
vi. Discontinued operations and restructuring(2) 0.8 9.3 (64.8 ) 9.4
vii. ENI tax normalization 3.1 2.1 9.9 2.2
Tax effect of above adjustments, as applicable(3) (16.4 ) (19.8 ) (12.4 ) (30.0 )
Economic net income $ 50.5   $ 46.6   $ 105.4   $ 85.5  

(1)

 

See Table 21 for the components of seed capital and
co-investment gains and losses, and financing costs.

(2)

The six months ended June 30, 2018 includes the gain on sale of
Heitman of $65.7 million. Included in restructuring in the three
and six months ended June 30, 2017 is $9.3 million related to CEO
transition costs, comprised of $0.5 million of fixed compensation
and benefits and $8.8 million of variable compensation.

(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 in 2018 (including state tax) and the 40.2%
U.S. statutory tax rate in 2017 (including state tax).

See Table 18 for a per-share presentation of the above
reconciliation.

Please see the definition of Economic Net Income within
"Definitions and Additional Notes"

 

The following table identifies the components of ENI revenue:

Table 8: Components of ENI Revenue
         
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017

Increase
(Decrease)

2018 2017

Increase
(Decrease)

Management fees $ 226.4 $ 206.7 9.5 % $ 471.4 $ 402.4 17.1 %
Performance fees 3.0 11.2 (73.2 )% 5.0 11.4 (56.1 )%
Other income, including equity-accounted Affiliates(1) 1.3   3.5   (62.9 )% 2.1   6.4   (67.2 )%
ENI revenue $ 230.7   $ 221.4   4.2 % $ 478.5   $ 420.2   13.9 %

See Table 19 for a reconciliation from U.S. GAAP revenue to ENI
revenue.

(1)

 

Heitman represents $2.6 million and $4.3 million for the three
and six months ended June 30, 2017, respectively.

Please see "Definitions and Additional Notes"

 

The following table identifies the components of ENI operating expense:

Table 9: Components of ENI Operating Expense
         
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017

Increase
(Decrease)

2018 2017

Increase
(Decrease)

Fixed compensation & benefits $ 44.8 $ 41.0 9.3 % $ 91.7 $ 83.8 9.4 %
General and administrative expenses 33.1 32.2 2.8 % 67.4 62.2 8.4 %
Depreciation and amortization 3.5   2.8   25.0 % 6.9   5.3   30.2 %
ENI operating expense $ 81.4   $ 76.0   7.1 % $ 166.0   $ 151.3   9.7 %

See Table 20 for a reconciliation from U.S. GAAP operating
expense to ENI operating expense.

Please see "Definitions and Additional Notes"

 

The following table shows our key non-GAAP operating metrics for the
three and six months ended June 30, 2018 and 2017. 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 "Definitions and Additional Notes"
for an explanation of each ratio and its usefulness in measuring the
economics and operating performance of our business.

Table 10: Key ENI Operating Metrics
           
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017

Increase
(Decrease)

2018 2017

Increase
(Decrease)

Numerator: ENI operating earnings(1) $ 88.0 $ 84.3 4.4 % $ 187.3 $ 156.6 19.6 %
Denominator: ENI revenue $ 230.7 $ 221.4 4.2 % $ 478.5 $ 420.2 13.9 %
ENI operating margin 38.1 % 38.1 % 7 bps 39.1 % 37.3 % 188 bps
 
Numerator: ENI operating expense $ 81.4 $ 76.0 7.1 % $ 166.0 $ 151.3 9.7 %
Denominator: ENI management fee revenue $ 226.4 $ 206.7 9.5 % $ 471.4 $ 402.4 17.1 %
ENI operating expense ratio 36.0 % 36.8 % (81) bps 35.2 % 37.6 % (239) bps
 
Numerator: ENI variable compensation $ 61.3 $ 61.1 0.3 % $ 125.2 $ 112.3 11.5 %
Denominator: ENI earnings before variable compensation(2) $ 149.3 $ 145.4 2.7 % $ 312.5 $ 268.9 16.2 %
ENI variable compensation ratio 41.1 % 42.0 % (96) bps 40.1 % 41.8 % (170) bps
 
Numerator: Affiliate key employee distributions $ 18.7 $ 16.5 13.3 % $ 42.4 $ 31.4 35.0 %
Denominator: ENI operating earnings(1) $ 88.0 $ 84.3 4.4 % $ 187.3 $ 156.6 19.6 %
ENI Affiliate key employee distributions ratio 21.3 % 19.6 % 168 bps 22.6 % 20.1 % 259 bps
 
Numerator: Tax on economic net income $ 15.3 $ 16.4 (6.7 )% $ 31.8 $ 29.9 6.4 %
Denominator: Pre-tax economic net income $ 65.8 $ 63.0 4.4 % $ 137.2 $ 115.4 18.9 %
Economic net income effective tax rate 23.3 % 26.0 % (278) bps 23.2 % 25.9 % (273) bps

(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.

(2)

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

Please see "Definitions and Additional Notes"

Please refer to the Company's Quarterly Report on Form 10-Q for
comparable U.S. GAAP metrics.

 

Recent Events

On August 1, 2018, the Board of Directors of the Company elected
Reginald Love as an independent Director of the Company, effective as of
August 1, 2018. Mr. Love has served as a Partner at RON Transatlantic EG
(or "Transatlantic"), an international financial holding company with
private equity investments in the financial services, logistics, energy,
industrial and beer sectors in the United States, Latin America and
Europe. Mr. Love's work focuses on financial services and energy
investments at Transatlantic. Prior to joining Transatlantic, Mr. Love
served in the Executive Office of the President of the United States and
as a personal aide to President Obama from 2007-2011. Mr. Love graduated
from Duke University in 2005 and holds an MBA from The Wharton School at
the University of Pennsylvania. He serves on the Board of Directors of
Organize.org, Providence Day School, TeamWorks and the Center for
Environmental Farming System.

On August 1, 2018, Directors Guang Yang and Suren Rana, informed the
Company that they will be leaving HNA to work on a new business venture,
a move that had been approved by HNA and carefully planned for several
months. HNA and Dr. Yang and Mr. Rana have agreed that they will remain
HNA's representatives on BrightSphere's Board under the Shareholder
Agreement and will manage the BrightSphere investment for HNA to realize
value over time.

Dividend Declaration

The Company's Board of Directors approved a quarterly interim dividend
of $0.10 per share payable on September 28, 2018 to shareholders of
record as of the close of business on September 14, 2018.

About BrightSphere

BrightSphere is a global, multi-boutique asset management company with
$234.3 billion of assets under management as of June 30, 2018. Its
diverse Affiliates offer leading, alpha generating investment products
to investors around the world. BrightSphere's partnership approach,
which includes equity ownership at the Affiliate level and a profit
sharing relationship between BrightSphere and its Affiliates, aligns the
interests of the Company and its Affiliates to work collaboratively in
accelerating their growth. BrightSphere's business model combines the
investment talent, entrepreneurialism, focus and creativity of leading
asset management boutiques with the resources and capabilities of a
larger firm. For more information about BrightSphere, please visit the
Company's website at www.bsig.com.

Forward Looking Statements

This press release includes forward-looking statements, as that term is
used in the Private Securities Litigation Reform Act of 1995, including
information relating to anticipated growth in revenues, margins or
earnings, anticipated changes in the Company's business, anticipated
future performance of the Company's business, the impact of the Landmark
acquisition,anticipated future investment performance of the Company's
Affiliates, expected future net cash flows, anticipated expense levels,
changes in expense, the expected effects of acquisitions and
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 readers should be cautioned that
any forward-looking information provided by or on behalf of the Company
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 the
Company's control, including but not limited to those discussed above
and elsewhere in this press release and in the Company's most recent
Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on February 28, 2018. Due to such risks and uncertainties and
other factors, the Company cautions 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 press release and the Company undertakes no obligations
to update any forward looking statement to reflect events or
circumstances after the date of this press release or to reflect the
occurrence of unanticipated events.

Conference Call Dial-in

The Company will hold a conference call and simultaneous webcast to
discuss the results at 10:00 a.m. Eastern Time on August 2, 2018. The
Company has also released an earnings presentation that will be
discussed during the conference call. Please go to https://ir.bsig.com
to download the presentation. To listen to the call or view the webcast,
participants should:

Dial-in:

      Toll Free Dial-in Number:       (844) 579-6824
International Dial-in Number: (763) 488-9145
Conference ID: 8659069
 

Link to Webcast:

http://event.on24.com/r.htm?e=1773367&s=1&k=45099070563129A28597D328DB8144A0

Dial-in Replay:

A replay of the call will be available beginning approximately one hour
after its conclusion either on BrightSphere's website, at https://ir.bsig.com
or at:

      Toll Free Dial-in Number:       (855) 859-2056
International Dial-in Number: (404) 537-3406
Conference ID: 8659069
 
 
Table 11: Assets Under Management Rollforward by Asset Class
         
($ in billions, unless otherwise noted) Three Months Ended Six Months Ended
June 30, 2018 March 31, 2018 June 30, 2017 June 30, 2018 June 30, 2017
U.S. equity
Beginning balance $ 76.6 $ 81.2 $ 82.1 $ 81.2 $ 82.0
Gross inflows 0.7 1.5 0.8 2.2 2.5
Gross outflows (4.6 ) (3.1 ) (3.6 ) (7.7 ) (8.2 )
Net flows (3.9 ) (1.6 ) (2.8 ) (5.5 ) (5.7 )
Market appreciation (depreciation) 2.1   (3.0 ) 2.0   (0.9 ) 5.0  
Ending balance $ 74.8   $ 76.6   $ 81.3   $ 74.8   $ 81.3  
Average AUM $ 76.1 $ 80.2 $ 81.1 $ 78.4 $ 81.8
Average AUM of consolidated Affiliates $ 74.0 $ 78.1 $ 79.2 $ 76.3 $ 79.8
 
Global / non-U.S. equity
Beginning balance $ 126.3 $ 126.2 $ 105.2 $ 126.2 $ 96.4
Gross inflows 4.4 4.8 4.6 9.2 9.1
Gross outflows (4.9 ) (4.7 ) (3.6 ) (9.6 ) (7.7 )
Net flows (0.5 ) 0.1 1.0 (0.4 ) 1.4
Market appreciation (depreciation) (3.5 )   6.7   (3.5 ) 15.1  
Ending balance $ 122.3   $ 126.3   $ 112.9   $ 122.3   $ 112.9  
Average AUM(1) $ 125.1 $ 128.3 $ 109.8 $ 126.8 $ 105.5
 
Fixed income
Beginning balance $ 13.9 $ 13.5 $ 13.2 $ 13.5 $ 13.9
Gross inflows 0.4 0.9 0.2 1.3 0.8
Gross outflows (0.3 ) (0.2 ) (0.6 ) (0.5 ) (2.1 )
Net flows 0.1 0.7 (0.4 ) 0.8 (1.3 )
Market appreciation (depreciation) (0.2 ) (0.3 ) 0.4   (0.5 ) 0.6  
Ending balance $ 13.8   $ 13.9   $ 13.2   $ 13.8   $ 13.2  
Average AUM(1) $ 13.9 $ 13.6 $ 13.3 $ 13.7 $ 13.4
 
Alternatives(3)
Beginning balance $ 23.3 $ 22.1 $ 49.2 $ 22.1 $ 48.1
Gross inflows 0.6 3.1 2.5 3.7 3.9
Gross outflows (0.3 ) (0.3 ) (0.4 ) (0.6 ) (0.8 )
Hard asset disposals (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.3 )
Net flows 0.2 2.7 1.9 2.9 2.8
Market appreciation (depreciation) (0.1 ) 0.3 (0.1 ) 0.5
Other(2)   (1.5 )   (1.5 )  
Ending balance $ 23.4   $ 23.3   $ 51.4   $ 23.4   $ 51.4  
Average AUM $ 23.3 $ 22.4 $ 50.5 $ 22.8 $ 49.6
Average AUM of consolidated Affiliates $ 23.3 $ 22.4 $ 18.5 $ 22.8 $ 18.0
 
Total(3)
Beginning balance $ 240.1 $ 243.0 $ 249.7 $ 243.0 $ 240.4
Gross inflows 6.1 10.3 8.1 16.4 16.3
Gross outflows (10.1 ) (8.3 ) (8.2 ) (18.4 ) (18.8 )
Hard asset disposals (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.3 )
Net flows (4.1 ) 1.9 (0.3 ) (2.2 ) (2.8 )
Market appreciation (depreciation) (1.7 ) (3.3 ) 9.4 (5.0 ) 21.2
Other(2)   (1.5 )   (1.5 )  
Ending balance $ 234.3   $ 240.1   $ 258.8   $ 234.3   $ 258.8  
Average AUM $ 238.4   $ 244.5   $ 254.7   $ 241.7   $ 250.3  
Average AUM of consolidated Affiliates $ 236.3   $ 242.4   $ 220.8   $ 239.6   $ 216.7  
 
Basis points: inflows(3) 42.3 48.9 52.8 46.4 47.7
Basis points: outflows(3) 40.2 37.4 35.3 38.9 33.4
Annualized revenue impact of net flows (in millions) $ (15.2 ) $ 19.0 $ 13.1 $ 3.8 $ 13.9
Derived average weighted NCCF (3.9 ) 4.6 3.4 0.7 3.6

(1)

 

Average AUM equals average AUM of consolidated Affiliates.

(2)

"Other" in Q1'18 primarily relates to the decline in billable
AUM as a legacy alternative fund transitioned from billing based
on committed AUM to net asset value.

(3)

Reflects removal of Heitman in the third quarter of 2017.

Please see "Definitions and Additional Notes"

 
Table 12: Management Fee Revenue and Average Fee Rates on
Assets Under Management
                 
($ in millions,

except AUM data in billions)

  Three Months Ended Six Months Ended
June 30, 2018 March 31, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Revenue Basis Pts Revenue Basis Pts Revenue Basis Pts Revenue Basis Pts Revenue Basis Pts
U.S. equity $ 45.5 25 $ 47.6 25 $ 48.1 24 $ 93.1 25 $ 97.7 25
Global/non-U.S. equity 126.2 40 128.6 41 114.1 42 254.8 41 217.8 42
Fixed income 6.8 20 6.8 20 6.8 21 13.6 20 13.9 21
Alternatives 47.9 82 62.0 112 37.7 82 109.9 97 73.0 82
Management fee revenue $ 226.4 38.4 $ 245.0 41.0 $ 206.7 37.5 $ 471.4 39.7 $ 402.4 37.5
Average AUM excluding equity-accounted Affiliates $ 236.3 $ 242.4 $ 220.8 $ 239.6 $ 216.7
Average AUM including equity-accounted Affiliates and weighted
average fee rate(1)
$ 238.4 38.6 $ 244.5 41.1 $ 254.7 38.1 $ 241.7 39.8 $ 250.3 37.9

(1)

 

As of the beginning of the third quarter, 2017, the Company
removed Heitman from its AUM metrics. AUM in 2017 includes Heitman
and AUM in 2018 excludes Heitman.

Amounts shown exclude equity-accounted Affiliates unless
otherwise noted.

Please see "Definitions and Additional Notes"

 
Table 13: Assets Under Management by Strategy
 
($ in billions)   June 30, 2018   March 31, 2018   December 31, 2017   June 30, 2017
U.S. equity, small/smid cap $ 6.8 $ 7.3 $ 7.6 $ 7.4
U.S. equity, mid cap value 12.0 12.3 13.0 12.5
U.S. equity, large cap value 53.0 54.2 57.8 57.9
U.S. equity, core/blend 3.0 2.8 2.8 3.5
Total U.S. equity 74.8 76.6 81.2 81.3
Global equity 40.1 40.5 40.3 36.4
International equity 53.4 54.5 55.5 50.7
Emerging markets equity 28.8 31.3 30.4 25.8
Total global/non-U.S. equity 122.3 126.3 126.2 112.9
Fixed income 13.8 13.9 13.5 13.2
Alternatives(1) 23.4 23.3 22.1 51.4
Total assets under management $ 234.3 $ 240.1 $ 243.0 $ 258.8

(1)

 

Reported AUM after June 30, 2017 removes Heitman. Heitman AUM
was $32.4 billion at June 30, 2017.

Please see "Definitions and Additional Notes"

 
Table 14: Assets Under Management by Affiliate
 
($ in billions)   June 30, 2018   March 31, 2018   December 31, 2017   June 30, 2017
Acadian Asset Management $ 96.9 $ 99.5 $ 97.7 $ 87.5
Barrow, Hanley, Mewhinney & Strauss 84.9 86.7 91.7 91.7
Campbell Global 5.2 5.2 5.3 5.2
Copper Rock Capital Partners 5.2 6.1 6.4 5.7
Investment Counselors of Maryland(1) 2.2 2.0 2.1 2.0
Landmark Partners 16.6 16.2 14.8 11.6
Thompson, Siegel & Walmsley 23.3 24.4 25.0 22.7
Total assets under management excluding Heitman(2) 234.3 240.1 243.0 226.4
Heitman(1) 32.4
Total assets under management $ 234.3 $ 240.1 $ 243.0 $ 258.8

(1)

 

Equity-accounted Affiliate. The Company has removed Heitman
from its AUM and cash flow metrics as of the beginning of the
third quarter, 2017.

(2)

Heitman stopped contributing to the Company's financial results
as of November 30, 2017, therefore Heitman's December 31, 2017 AUM
is not reflected in the table above.

Please see "Definitions and Additional Notes"

Table 15: Assets Under Management by Client Type
 
($ in billions)   June 30, 2018   March 31, 2018   December 31, 2017   June 30, 2017
AUM   % of total AUM   % of total AUM   % of total AUM   % of total
Sub-advisory $ 74.6 31.8 % $ 76.7 32.0 % $ 80.1 33.0 % $ 80.7 31.2 %
Corporate / Union 41.7 17.8 % 43.6 18.2 % 45.1 18.5 % 47.6 18.4 %
Public / Government 70.0 29.9 % 70.7 29.4 % 70.2 28.9 % 87.2 33.7 %
Endowment / Foundation 4.9 2.1 % 5.0 2.1 % 4.9 2.0 % 5.0 1.9 %
Old Mutual Group 2.6 1.1 % 2.5 1.0 % 2.6 1.1 % 3.5 1.4 %
Commingled Trust/UCITS 29.6 12.6 % 30.5 12.7 % 29.1 12.0 % 23.8 9.2 %
Mutual Fund 2.1 0.9 % 2.1 0.9 % 2.0 0.8 % 1.9 0.7 %
Other 8.8   3.8 % 9.0   3.7 % 9.0   3.7 % 9.1   3.5 %
Total assets under management $ 234.3   $ 240.1   $ 243.0   $ 258.8  

Please see "Definitions and Additional Notes"

 
Table 16: AUM by Client Location
 
($ in billions)   June 30, 2018   March 31, 2018   December 31, 2017   June 30, 2017
AUM   % of total AUM   % of total AUM   % of total AUM   % of total
U.S. $ 180.4 77.0 % $ 186.7 77.8 % $ 190.1 78.2 % $ 205.2 79.3 %
Europe 19.3 8.2 % 20.0 8.3 % 19.5 8.0 % 18.8 7.3 %
Asia 10.7 4.6 % 10.4 4.3 % 10.4 4.3 % 13.5 5.2 %
Middle East 0.2 0.1 % 0.2 0.1 % 0.2 0.1 % 0.2 0.1 %
Australia 9.8 4.2 % 8.7 3.6 % 8.8 3.6 % 8.8 3.4 %
Other 13.9   5.9 % 14.1   5.9 % 14.0   5.8 % 12.3   4.7 %
Total assets under management $ 234.3   $ 240.1   $ 243.0   $ 258.8  

Please see "Definitions and Additional Notes"

 
Table 17: AUM NCCF, Annualized Revenue Impact of NCCF, Fee
Rates and Derived Average Weighted NCCF
       
   

AUM NCCF
($ billions)

 

Annualized Revenue
Impact of NCCF
($
millions)

Weighted Average Fee
Rate on Total Average
AUM
(bps)

Derived Average
Weighted NCCF
($
billions)

2015 Q1 $ (0.2 ) $ 11.3 34.0 $ 3.3
Q2 0.8 13.5 34.3 3.9
Q3 (2.5 ) 0.7 34.5 0.2
Q4 (3.2 ) (6.6 ) 34.7 (1.9 )
2016 Q1 2.4 7.3 34.7 2.1
Q2 (2.9 ) (3.4 ) 35.0 (1.0 )
Q3 (2.6 ) (7.5 ) 35.7 (2.1 )
Q4 1.5 14.6 36.1 4.0
2017 Q1 (2.5 ) 0.8 37.7 0.2
Q2 (0.3 ) 13.1 38.1 3.4
Q3 (1) 0.5 12.2 38.6 3.2
Q4 (1) (3.7 ) 6.8 39.3 1.7
2018 Q1 1.9 19.0 41.1 4.6
Q2 (4.1 ) (15.2 ) 38.6 (3.9 )

(1)

 

Reflects removal of Heitman.

Please see "Definitions and Additional Notes"

 
Table 18: Reconciliation of per-share U.S. GAAP Net Income to
Economic Net Income
 
($)   Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
U.S. GAAP net income per share $ 0.02 $ 0.11 $ 0.54 $ 0.30
Adjustments to reflect the economic earnings of the Company:
i.   Non-cash key employee-owned equity and profit interest revaluations 0.31 0.21 0.59 0.31
ii. Amortization of acquired intangible assets, acquisition-related
consideration and pre-acquisition employee equity
0.18 0.17 0.35 0.34
iii. Capital transaction costs
iv. Seed/Co-investment (gains) losses and financing 0.06 (0.02 ) 0.07 (0.07 )
v. Tax benefit of goodwill and acquired intangibles deductions 0.01 0.02 0.03 0.04
vi. Discontinued operations and restructuring 0.01 0.08 (0.59 ) 0.08
vii. ENI tax normalization 0.03 0.02 0.09 0.02
Tax effect of above adjustments, as applicable (0.15 ) (0.17 ) (0.11 ) (0.26 )
Economic net income per share $ 0.47   $ 0.42   $ 0.97   $ 0.76  

Please see "Definitions and Additional Notes"

 
Table 19: Reconciliation of U.S. GAAP Revenue to ENI Revenue
       
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
U.S. GAAP revenue $ 233.9 $ 218.8 $ 483.6 $ 415.0
Include investment return on equity-accounted Affiliates(1) 0.7 3.1 1.3 5.5
Exclude revenue from consolidated Funds (1.2 ) (0.5 ) (1.4 ) (0.7 )
Exclude fixed compensation reimbursed by customers (2.7 ) (5.0 )
Other       0.4  
ENI revenue $ 230.7   $ 221.4   $ 478.5   $ 420.2  

(1)

 

Includes $2.6 million and $4.3 million related to Heitman for
the three and six months ended June 30, 2017, respectively.

Please see "Definitions and Additional Notes"

 
Table 20: Reconciliation of U.S. GAAP Operating Expense to ENI
Operating Expense
       
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
U.S. GAAP operating expense $ 218.6 $ 205.9 $ 442.7 $ 378.6
Less: items excluded from ENI
Acquisition-related consideration and pre-acquisition employee equity(1) (17.7 ) (17.7 ) (35.3 ) (35.3 )
Non-cash key employee-owned equity and profit interest revaluations (34.0 ) (23.3 ) (63.9 ) (35.2 )
Amortization of acquired intangible assets (1.7 ) (1.7 ) (3.3 ) (3.3 )
Capital transaction and restructuring costs (0.9 ) (9.3 ) (1.0 ) (9.3 )
Exclude fixed compensation reimbursed by customers (2.7 ) (5.0 )
Funds' operating expense (0.2 ) (0.3 ) (0.6 ) (0.5 )
Less: items segregated out of U.S. GAAP operating expense
Variable compensation (61.3 ) (61.1 ) (125.2 ) (112.3 )
Affiliate key employee distributions (18.7 ) (16.5 ) (42.4 ) (31.4 )
ENI operating expense $ 81.4   $ 76.0   $ 166.0   $ 151.3  
(1)  

Reflects amortization of contingent consideration and equity
owned by employees, both with a service requirement, associated
with the Landmark acquisition; revaluation of the Landmark
interests is included in "Non-cash key employee-owned equity and
profit interest revaluations."

Please see "Definitions and Additional Notes"

 
Table 21: Components of Seed/Co-investment Gains (Losses) and
Financing
       
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Seed/Co-investment gains (losses) $ (3.9 ) $ 3.6   $ (4.1 ) $ 10.3  
Financing costs:
Seed/Co-investment average balance 130.5 51.0 120.0 56.1
Blended interest rate(1) 6.5 % 6.2 % 6.2 % 6.2 %
Financing costs (2.1 ) (0.7 ) (3.7 ) (1.6 )
Net seed/co-investment gains (losses) and financing $ (6.0 ) $ 2.9   $ (7.8 ) $ 8.7  

(1)

 

The blended rate is based first on the interest rate paid on
the Company's non-recourse seed capital facility up to the average
amount drawn, and thereafter on the weighted average rate of the
long-term debt.

Please see "Definitions and Additional Notes"

 
Table 22: Reconciliation of Net Income to EBITDA, Adjusted
EBITDA and Economic Net Income
 
($ in millions)   Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
Net income attributable to controlling interests $ 2.1 $ 12.9 $ 59.4 $ 34.3
Net interest expense 5.5 5.6 11.3 11.4
Income tax expense (including tax expenses related to discontinued
operations)
3.6 1.0 32.3 6.6
Depreciation and amortization (including intangible assets) 5.2   4.4   10.2   8.6  
EBITDA $ 16.4 $ 23.9 $ 113.2 $ 60.9
Non-cash compensation costs associated with revaluation of Affiliate
key employee-owned equity and profit-sharing interests
34.0 23.3 63.9 35.2
Amortization of acquisition-related consideration and
pre-acquisition employee equity
17.7 17.7 35.3 35.3
EBITDA of discontinued operations 0.1
(Gain) loss on seed and co-investments 3.9 (3.6 ) 4.1 (10.3 )
Restructuring(1) 0.8 9.3 (64.8 ) 9.3
Capital transaction costs 0.1 0.1
Other (0.1 )      
Adjusted EBITDA $ 72.8 $ 70.6 $ 151.8 $ 130.5
ENI net interest expense to third parties (3.5 ) (4.8 ) (7.7 ) (9.8 )
Depreciation and amortization (3.5 ) (2.8 ) (6.9 ) (5.3 )
Tax on economic net income (15.3 ) (16.4 ) (31.8 ) (29.9 )
Economic net income $ 50.5   $ 46.6   $ 105.4   $ 85.5  

(1)

 

The six months ended June 30, 2018 includes the gain on sale of
Heitman of $65.7 million. The three and six months ended June 30,
2017 include costs associated with the CEO transition.

Please see "Definitions and Additional Notes"

 
Table 23: Calculation of ENI Effective Tax Rate
       
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Pre-tax economic net income(1) $ 65.8 $ 63.0 $ 137.2 $ 115.4
Intercompany interest expense deductible for U.S. tax purposes (19.6 ) (19.6 ) (38.9 ) (38.9 )
Taxable economic net income 46.2   43.4   98.3   76.5  
Taxes at the U.S. federal and state statutory rates(2) (12.7 ) (17.5 ) (26.9 ) (30.8 )
Other reconciling tax adjustments (2.6 ) 1.1   (4.9 ) 0.9  
Tax on economic net income (15.3 ) (16.4 ) (31.8 ) (29.9 )
Add back intercompany interest expense previously excluded 19.6   19.6   38.9   38.9  
Economic net income $ 50.5   $ 46.6   $ 105.4   $ 85.5  
Economic net income effective tax rate(3) 23.3 % 26.0 % 23.2 % 25.9 %

(1)

 

Pre-tax economic net income is shown before intercompany
interest and tax expenses.

(2)

Taxed at U.S. Federal and State statutory rate of 27.3% in 2018
and 40.2% in 2017.

(3)

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

Please see "Definitions and Additional Notes"

 

Definitions and Additional Notes

References to "BrightSphere" "BSIG" or the "Company" refer to
BrightSphere Investment Group plc; references to "OM plc" refer to Old
Mutual plc, the Company's former parent; references to "BSUS" or the
"Center" refer to the holding company excluding the Affiliates;
references to "Landmark" refer to Landmark Partners, LLC, acquired by
the Company in August 2016.
BrightSphere operates its business
through seven boutique asset management firms (the "Affiliates").
BrightSphere's
distribution activities are conducted in various jurisdictions through
affiliated companies in accordance with local regulatory requirements.

Economic net income

The Company uses a non-GAAP performance measure referred to as economic
net income ("ENI") to represent its view of the underlying economic
earnings of the business. ENI is used 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. The
Company's 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.

The Company re-categorizes certain line items on the income statement to:

  • exclude the effect of Fund consolidation by removing the portion of
    Fund revenues, expenses and investment return which is not
    attributable to its shareholders;
  • include within management fee revenue any fees paid to Affiliates by
    consolidated Funds, which are viewed as investment income under U.S.
    GAAP;
  • include the Company's share of earnings from equity-accounted
    Affiliates within other income, rather than investment income;
  • treat sales-based compensation as a general and administrative
    expense, rather than part of fixed compensation and benefits;
  • identify separately from operating expenses, variable compensation and
    Affiliate key employee distributions, which represent Affiliate
    earnings shared with Affiliate key employees; and
  • net the separate revenues and expenses recorded under U.S. GAAP for
    certain Fund expenses initially paid by its Affiliates on the Fund's
    behalf and subsequently reimbursed, to better reflect the actual
    economics of the Company's business.

The Company also makes the following adjustments to U.S. GAAP results to
more closely reflect its economic results by:

  i.   excluding 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 BrightSphere at a value based on a pre-determined
fixed multiple of trailing earnings and as such this value is
carried on the Company's 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 BrightSphere 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.
ii. excluding 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. It also excludes the amortization of
acquisition-related contingent consideration, as well as the value
of employee equity owned pre-acquisition, as occurred as a result of
the Landmark transaction, where such items have been included in
compensation expense as a result of ongoing service requirements for
certain employees. Please note that the revaluations related to
these acquisition-related items are included in (i) above.
iii. excluding 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. excluding 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 the Company's earnings from managing client assets, which
therefore differs from earnings generated by its investments in
Affiliate products, which can be variable from period to period.
v. including 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. excluding the results of discontinued operations attributable to
controlling interests since they are not part of the Company's
ongoing business, and restructuring costs incurred in continuing
operations which represent an exit from a distinct product or line
of business.
vii. excluding 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.
 

The Company adjusts its income tax expense to reflect any tax impact of
its ENI adjustments. Please see Table 7 for a reconciliation of U.S.
GAAP net income attributable to controlling interests to economic net
income.

Adjusted EBITDA

Adjusted EBITDA is defined as economic net income before interest,
income taxes, depreciation and amortization. The Company notes that its
calculation of Adjusted EBITDA may not be consistent with Adjusted
EBITDA as calculated by other companies. The Company believes Adjusted
EBITDA is a useful liquidity metric because it indicates the Company's
ability to make further investments in its business, service debt and
meet working capital requirements. Please see Table 22 for a
reconciliation of U.S. GAAP net income attributable to controlling
interests to EBITDA, Adjusted EBITDA and ENI.

Methodologies for calculating investment
performance
(1):

Revenue-weighted investment performance
measures the percentage of management fee revenue generated by Affiliate
strategies which are beating benchmarks. It calculates each strategy's
percentage weight by taking its estimated composite revenue over total
composite revenues in each period, then sums the total percentage of
revenue for strategies outperforming.

Equal-weighted investment performance
measures the percentage of Affiliates' scale strategies (defined as
strategies with greater than $100 million of AUM) beating benchmarks.
Each outperforming strategy over $100 million has the same weight; the
calculation sums the number of strategies outperforming relative to the
total number of composites over $100 million.

Asset-weighted investment performance
measures the percentage of AUM in strategies beating benchmarks. It
calculates each strategy's percentage weight by taking its composite AUM
over total composite AUM in each period, then sums the total percentage
of AUM for strategies outperforming.

______________________

(1) Barrow Hanley's Windsor II Large Cap Value account AUM and return
are separated from Barrow Hanley's Large Cap Value composite in
revenue-weighted, equal-weighted and asset-weighted outperformance
percentage calculations.

ENI operating earnings

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.

ENI operating margin

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. ENI operating
margin is a non-GAAP efficiency measure, calculated based on ENI
operating earnings divided by ENI revenue. The ENI operating margin is
most comparable to our U.S. GAAP operating margin.

ENI management fee revenue

ENI Management fee revenue corresponds to U.S. GAAP management fee
revenue.

Net catch-up fees

Net catch-up fees represent payment of fund management fees back to the
initial closing date for certain products with multiple closings, less
placement fees paid to third parties related to these funds.

ENI operating expense ratio

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 & 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 at BrightSphere because in our profit sharing economic model,
scale benefits both the Affiliate employees and BrightSphere
shareholders.

ENI earnings before variable compensation

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

ENI variable compensation ratio

The ENI variable compensation ratio is calculated as variable
compensation divided by ENI earnings before variable compensation. It 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 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 BrightSphere 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 will typically be between 25% and 35%.

ENI Affiliate key employee distribution ratio

The Affiliate key employee distribution ratio is calculated as Affiliate
key employee distributions divided by ENI operating earnings. 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. At
certain Affiliates, BSUS is entitled to an initial preference over
profits after variable compensation, structured such that before a
preference threshold is reached, there would be no required key employee
distributions, whereas for profits above the threshold the key employee
distribution amount would be calculated based on the key employee
economic percentages, which range from approximately 20% to 40% at our
consolidated Affiliates.

U.S. GAAP operating margin

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

Consolidated Funds

Financial information presented in accordance with U.S. GAAP may include
the results of consolidated pooled investment vehicles, or Funds,
managed by our Affiliates, where it has been determined that these
entities are controlled by the Company. Financial results which are
"attributable to controlling interests" exclude the impact of Funds to
the extent it is not attributable to our shareholders.

Annualized revenue impact of net flows ("NCCF")

Annualized revenue impact of net flows represents the difference between
annualized management fees expected to be earned on new accounts and net
assets contributed to existing accounts, less the annualized management
fees lost on terminated accounts or net assets withdrawn from existing
accounts, including equity-accounted Affiliates. Annualized revenue is
calculated by multiplying the annual gross fee rate for the relevant
account by the net assets gained in the account in the event of a
positive flow or the net assets lost in the account in the event of an
outflow and is designed to provide investors with a better indication of
the potential financial impact of net client cash flows.

Hard asset disposals

Net flows in Table 1, Table 2 and Table 11 include hard asset disposals
and fund distributions made by BrightSphere's Affiliates. This category
is made up of investment-driven asset dispositions by Landmark,
investing in real estate funds and secondary private equity; Heitman, a
real estate manager; or Campbell, a timber manager.

Derived average weighted NCCF

Derived average weighted NCCF reflects the implied NCCF if annualized
revenue impact of net flows represents asset flows at the weighted fee
rate for BrightSphere overall (i.e. 38.6 bps in Q2'18). For example,
NCCF annualized revenue impact of $(15.2) million divided by the average
weighted fee rate of BrightSphere's overall AUM of 38.6 bps equals the
derived average weighted NCCF of $(3.9) billion.

n/m

"Not meaningful."

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