Description

Summary 

BrightSphere is an event-driven special situation with an imminent tender offer pending for $1 billion of stock representing 42% of the outstanding shares. The company’s business is essentially the holding company ownership of Acadian, a highly regarded $100+ billion quantitative international asset manager which Brightsphere refers to as their "crown jewel." Brightsphere is in the process of liquidating, having sold 6 other asset managers recently. Acadian is currently valued via Brightsphere at 7x EBITDA, while fair value according to the company and comparables is more than 10x EBITDA. 

Valuation Overview

Price $29.82

Shares 83.2M

Market Cap 2.48B

Cash 1.4B

Debt 0.428B

Enterprise Value 1.51B

Quarterly EBITDA is estimated at 50-53M excluding overhead (more on this later), or 200-212M EBITDA per year, resulting in a 7.1-7.5x unleveraged 2021 EV/EBITDA multiple at the current price.

Tender Offer and Pro Forma Valuation

The company announced on last week's Q3 quarterly call that they anticipate buying $1bn of stock in a buyback before year end. I expect a tender offer with a range of $32-35. Proforma for a tender offer at the high end of my range, a valuation of 10x EBITDA would result in a $35 stock price. If they are able to repurchase $1bn of stock at $32, then 10x EBITDA on the pro forma share count results in a $38.5 stock price.

Acadian

In the company's words, Acadian is a leading, at-scale investment manager with a track record of over 35 years and $113.7 billion in AUM as of September 30,

2021. The firm is a Quant-focused investment platform with strength across team, technology and data, offering unique capabilities in long only active, multi-asset class, ESG, managed volatility and long-short. The firm has strong investment performance with more than 80% of strategies outperforming the benchmarks over short and long-term horizons. Acadian has diversified offerings with more than 70 strategies across developed and emerging markets and approximately 80% of AUM invested outside the U.S. The firm has long-standing blue-chip institutional client relationships (average client relationship of 8 years) and an experienced management team with an average tenure of 20 years at Acadian. As of September 30, 2021, 88%, 81%, 85% and 88% of Acadian’s strategies by revenue beat their respective benchmarks over the prior 1-, 3-, 5-, and 10-year periods. I refer readers to the recent investor slide deck which shows highlights of the Acadian platform:

 https://s24.q4cdn.com/475726427/files/doc_presentations/2021/10/BSIG-Earnings-Presentation-Q3'21-_-Ex.-99.1-FINAL.pdf 

Holding Company Overhead 

There is currently $20 million of holding/public company overhead which management anticipates will be reduced to $10 million shortly. Here’s what management said about the overhead on the recent call: “We think now that with just one business, simplified business, we can probably maybe bring down the $20 million to $10 million pretty quickly. And then maybe because the business is pretty scaled, the remaining $10 million can also, over time -- we can whittle that down. Now in the context of another scaled player who leads these capabilities taking on the business, then, of course, the entire $20 million is not needed because most of it is in support of public company reporting. So there is -- yes, there is a little bit of overhead, which we view as an opportunity. So we really view the operating EBITDA, which I touched on as $50-ish million -- $50 million to $53 million per quarter, we really view that as a core EBITDA.”

Tender Offer Rationale 

On the call, the CEO explained the reason for the tender offer: “And yes, we got attractive valuations for most of those businesses, including some businesses that, at the time, were seeing a lot of outflows. In most cases, we've got more than 8 to -- more than 8x EBITDA. In some cases, double-digit EBIT to EBITDA. And then we ended up with a lot of cash on our balance sheet. So as we look at using this cash on the balance sheet, we have been in the M&A game, of course, having been a multi boutique in the past, and we've continued to look at various targets. Most of the time, the valuation was really high. Even for half decent platforms, it was 9 or 10x EV to EBITDA. And for the ones that had growth, it was in double-digit EV to EBITDA. So as you look at where to use the capital, we are trading our own business at an EBIT to EBITDA with a 6 handle. And our business is very well positioned, as I touched on earlier, in terms of being a unique, differentiated business and having all the growth opportunities ahead of it. So rather than paying 9 or 10x EBITDA for a business and take on execution risk, we would rather just buy-in our own stock. It's just much smarter and lower risk investment for us as a part of the proceeds that still de-lever and just manage an optimal leverage.”

Brightsphere asset sale history

Brightsphere sold the following assets in the past couple of years: Campbell Global (forestland investment manager) $4.7bn in AUM sold Q3 2021, Investors Counselors Maryland (value equities/smid cap) $3.2bn AUM, sold July 2021, Landmark Partners (secondary private equity investments) $18.4bn AUM for 16.4x EBITDA in June 2021, TSW $22bn AUM in June 2021, CopperRock (international growth equities) $3.9bn AUM in July 2020, Barrow Hanley (value equities) $52bn AUM, sold July 2020. 

Comparables

A recent sell side report lists 20 comparables that are on average 10.8x EBITDA, with a median of 10.4x EBITDA. The comps with similar AUM include Lyxor ($147bn AUM, 15x EBITDA, April 2021), Oaktree ($120B AUM, 9.7x EBITDA, March 2019), OppenheimerFunds ($250B AUM, 10.2x EBITDA, October 2018), USAA Asset Management ($69B AUM, 8.1x EBITDA, November 2018), Waddell & Reed ($66B AUM, 6.5x EBITDA, December 2020), Barrow Hanley ($44B AUM, 8x EBITDA, July 2020), Aberdeen ($382B AUM, 11x EBITDA, March 2017), RidgeWorth Holdings ($40B AUM, 10.8x EBITDA, December 2016).  Waddell & Reed and Barrow Hanley have far less defined niches in comparison to Acadian. 

Ownership

John Paulson owns 25% of the company, and will maintain this percentage stake proforma for the tender offer. Other insiders own an additional 3% of the shares. Paulson’s basis is less than half the current price as he bought his position from HNA Group three years ago.

Target Price

Ultimately, I think $35-38 per share is where this stock is headed--one way (tender offer) or the other (proforma for tender offer/ultimate sale of Acadian), as this approximates fair value. Acadian generates $200-$212 million in EBITDA per year. This cash flow accrues to investors who buy the company at the current enterprise value of $1.4bn. At the current purchase price we are being paid a mid single digit return ($200 million EBITDA, net of overhead and taxes) while we wait for the value to be maximized through a sale.

Summary

What I like about the investment is that it’s event-driven with a high likelihood of realizing a meaningful premium to the current price in the tender offer and/or the ultimate sale of Acadian. Given how rapidly the other businesses have been sold off, and the fact that this is the last business being sold by a motivated and intelligent seller, I do not think investors will be waiting very long for value maximization. 

Catalyst

Tender offer in the short term, and sale of Acadian and liquidation of the company in the not too distant future.