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BrightSphere Reports Financial and Operating Results for the Fourth Quarter and Year Ended December 31, 2018

LONDON--(BUSINESS WIRE)--

  • U.S. GAAP earnings per share of $0.22 for the quarter, compared to $(0.45) for the 2017 period, and $1.26 for the year compared to $0.04 for full-year 2017
  • ENI earnings per share of $0.43 for the quarter, down (2.3)% compared to the 2017 period, and $1.86 for the year, up 14.8% compared to the 2017 period
  • AUM of $206.3 billion at December 31, 2018, down (15.1)% from December 31, 2017
  • Net client cash flows ("NCCF") for the quarter of $(5.7) billion with an annualized revenue impact of $(12.3) million; full year NCCF of $(10.5) billion with an annualized revenue impact of $(3.8) million

BrightSphere Investment Group plc (BSIG) today reports its results for the quarter and full year ended December 31, 2018.

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“BrightSphere produced solid financial and operating results for 2018, notwithstanding a challenging equity market environment at year-end, as our ENI per share of $0.43 for the fourth quarter and $1.86 for the year reflect a slight decrease of (2)% and an increase of 15% compared to the same periods of 2017,” said Guang Yang, BrightSphere’s President and Chief Executive Officer. “Volatility and dislocation in the equity markets challenged active equity investors across nearly every style, asset class and geography during the fourth quarter, resulting in a decrease in our near-term investment performance quarter-over-quarter. However, the strength and consistency of our Affiliates’ proprietary investment capabilities continued to produce strong long-term track records of outperformance. As of December 31, assets representing 31%, 68% and 75% of revenue outperformed their benchmarks on a one-, three- and five-year basis, respectively. Net client cash flows of $(5.7) billion resulted in a negative annualized revenue impact of $(12.3) million, as outflows across a range of strategies, including lower-fee subadvisory products, exceeded higher-fee gross inflows in managed volatility, domestic mid-cap equity and other strategies.”

Mr. Yang continued, “With an outstanding group of high quality Affiliates offering a diverse range of strong performing strategies and proven expertise in working with them to enhance and expand their product offerings and distribution capabilities, BrightSphere is well positioned to accelerate the organic growth potential of our business. We plan to work closely with Affiliates to further strengthen and expand our global presence, particularly in the Asia-Pacific region, a growing and underserved market where scale offers measurable advantages."

“As we look to this next phase of growth, we took a number of steps to streamline our business, with a focus on creating a more nimble, flexible organization. Our Center total compensation for 2018 was $20 million lower than 2017 as we linked Center variable compensation more closely to results and streamlined management positions in 2018. Additionally, headcount reduction of approximately 20% at the Center in Q1 2019 along with other cost measures we have taken will further lower total 2019 Center expenses by approximately $8-10 million. These steps are part of an overall, ongoing examination of areas where we and Affiliates can gain greater efficiency in our non-investment functions. In addition, given the recent valuation of our shares, we also maintained the stock buy-back program initiated earlier in 2018, and have repurchased 5.1 million shares from October 1 through February 6, 2019. We will continue to manage our capital to maximize value for shareholders through prudent share repurchases and continued investment in global expansion opportunities.” Mr. Yang concluded, “Finally, I am very pleased to welcome Suren Rana to BrightSphere. Suren will fill the open role of Chief Financial Officer, and brings many years of experience in corporate finance and asset management, as well as an understanding of BrightSphere's business from his previous service on our Board.”

   

Table 1: Key Performance Metrics (unaudited)

($ in millions, unless otherwise noted) Three Months Ended December 31,     Twelve Months Ended December 31,

U.S. GAAP Basis

2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Revenue $ 214.5 $ 249.2 (13.9 )% $ 928.2 $ 887.4 4.6 %
Pre-tax income from continuing operations attributable to controlling interests 39.1 82.5 (52.6 )% 141.3 137.1 3.1 %
Net income (loss) attributable to controlling interests 23.0 (48.8 ) n/m 136.4 4.2 n/m
Diluted earnings per share, $ $ 0.22 $ (0.45 ) n/m $ 1.26 $ 0.04 n/m
U.S. GAAP operating margin 14 % 11 % 325 bps 9 % 8 % 103 bps
 
Economic Net Income Basis (Non-GAAP measure used by management)(1)
ENI revenue $ 212.0 $ 252.3 (16.0 )% $ 919.1 $ 900.7 2.0 %
Pre-tax economic net income 61.1 71.7 (14.8 )% 262.5 251.3 4.5 %
Economic net income 45.6 48.7 (6.4 )% 199.8 180.9 10.4 %
ENI diluted earnings per share, $ $ 0.43 $ 0.44 (2.3 )% $ 1.86 $ 1.62 14.8 %
Adjusted EBITDA 67.8 79.4 (14.6 )% 290.6 281.9 3.1 %
ENI operating margin 37 % 39 % (220) bps 38 % 38 % 27 bps
 
Other Operational Information(2)
Assets under management at period end ($ in billions) $ 206.3 $ 243.0 (15.1 )% $ 206.3 $ 243.0 (15.1 )%
Net client cash flows ($ in billions) (5.7 ) (3.7 ) n/m (10.5 ) (6.0 ) n/m
Annualized revenue impact of net flows ($ in millions) (12.3 ) 6.8 n/m (3.8 ) 32.9 n/m

(1) Please see Table 7 for a reconciliation of U.S. GAAP net income attributable to controlling interests to economic net income.
(2) Operational information (including AUM and flow data) excludes Heitman for the third and fourth quarters of 2017 (Heitman remains in operational information for the first half of 2017). Actual U.S. GAAP and ENI financial results continue to include Heitman through November 30, 2017.
Please see "Definitions and Additional Notes."

Assets Under Management and Flows

At December 31, 2018, BrightSphere’s total assets under management ("AUM") were $206.3 billion, down $(31.4) billion, or (13.2)%, compared to $237.7 billion at September 30, 2018, and down $(36.7) billion, or (15.1)%, compared to $243.0 billion at December 31, 2017. The decrease in AUM during the three months ended December 31, 2018 reflects net market depreciation of $(25.6) billion combined with net outflows of $(5.7) billion. The net flows in the three months ended December 31, 2018 were impacted primarily by outflows in lower-fee subadvisory products. For the three months ended December 31, 2018, the annualized revenue impact of the net flows was $(12.3) million, with gross inflows of $4.3 billion during the period into higher fee asset classes yielding approximately 46 bps, versus gross outflows and hard asset disposals in the same period of $(10.0) billion out of asset classes yielding approximately 32 bps.

For the twelve months ended December 31, 2018, BrightSphere's AUM reflected net market depreciation of $(24.6) billion and net outflows of $(10.5) billion. The net flows in the twelve months ended December 31, 2018 were impacted primarily by outflows attributable to subadvisory products and lumpy institutional re-balancing, along with hard asset disposals. For the twelve months ended December 31, 2018, the annualized revenue impact of the net flows was $(3.8) million with gross inflows of $27.6 billion during the period that yielded an average of approximately 48 bps, versus gross outflows and hard asset disposals in the same period of $(38.1) billion that yielded approximately 36 bps.

   

Table 2: Assets Under Management Rollforward Summary

($ in billions, unless otherwise noted)

 

    Three Months Ended, Twelve Months Ended,

December 31,
2018

 

September 30,
2018

 

December 31,
2017

December 31,
2018

December 31,
2017

Beginning AUM $ 237.7 $ 234.3 $ 235.9 $ 243.0 $ 240.4
Acquisition (removal) of Affiliates(1) (32.4 )
Gross inflows 4.3 6.9 7.4 27.6 31.0
Gross outflows (9.9 ) (7.9 ) (11.0 ) (36.2 ) (36.2 )
Net flows before hard asset disposals (5.6 ) (1.0 ) (3.6 ) (8.6 ) (5.2 )
Hard asset disposals (0.1 ) (1.6 ) (0.1 ) (1.9 ) (0.8 )
Net flows (5.7 ) (2.6 ) (3.7 ) (10.5 ) (6.0 )
Market appreciation (depreciation) (25.6 ) 6.0 10.8 (24.6 ) 41.0
Other(2) (0.1 )     (1.6 )  
Ending AUM $ 206.3   $ 237.7   $ 243.0   $ 206.3   $ 243.0  
 
Basis points: inflows 45.9 52.5 56.8 47.8 51.3
Basis points: outflows 32.0 33.2 31.7 35.6 34.1
Difference between inflows and outflows 13.9 19.3 25.1 12.2 17.2
Annualized revenue impact of net flows ($ in millions) $ (12.3 ) $ 4.7 $ 6.8 $ (3.8 ) $ 32.9
Derived average weighted NCCF ($ in billions) (3.3 ) 1.2 1.7 (1.4 ) 8.5

(1) The Company has removed Heitman from its AUM and cash flow metrics as of the beginning of the third quarter, 2017.
(2) “Other” in 2018 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 December 31, 2018 and December 31, 2017 are provided in Table 3 below. As of December 31, 2018, the Company had $393.3 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 $0.0 million drawn on a non-recourse seed capital financing facility. Shareholders' equity (attributable to controlling interests) amounted to $103.3 million. As of December 31, 2018, the Company’s ratio of debt(3) to trailing twelve months Adjusted EBITDA was 2.1x. The Company expects to settle an acquisition agreement in the first quarter of 2019 utilizing a mix of cash on hand and external revolver capacity. At the completion of this settlement, the Company's ratio of debt(3) to trailing twelve months Adjusted EBITDA ratio is expected to be at the lower end of the Company's target range of 1.75-2.25x. Of the Company's cash and cash equivalents of $340.6 million at December 31, 2018, $133.7 million was held at Affiliates and $206.9 million was available at the Center.

As of December 31, 2018, the Company has total seed and co-investment holdings of $156.6 million. During the twelve months ended December 31, 2018, the Company has made investments of approximately $93.1 million to support Affiliate strategies and product capabilities. Amounts previously drawn on the non-recourse seed capital financing facility have been repaid, leaving $65.0 million available to be drawn down as of December 31, 2018.

In 2018, the Company purchased a total of 5,549,861 shares at a weighted average price of $13.35 per share, or approximately $74 million in total. As of February 6, 2019, the Company has purchased an additional 3.9 million shares in 2019 at a weighted average price of $11.85 per share.

     

Table 3: Condensed Consolidated Balance Sheets

($ in millions) December 31, 2018 December 31, 2017
Assets
Cash and cash equivalents $ 340.6 $ 186.3
Investment advisory fees receivable 159.1 208.3
Investments(1) 198.5 244.4
Other assets 710.9 698.8
Assets of consolidated Funds(2) 144.6   153.9  
Total assets $ 1,553.7   $ 1,491.7  
 
Liabilities and equity
Accounts payable and accrued expenses $ 225.3 $ 241.0
Due to OM plc 33.0 59.1
Non-recourse borrowings 33.5
Third party borrowings 393.3 392.8
Other liabilities 711.1 583.5
Liabilities of consolidated Funds(2) 14.9   10.5  
Total liabilities $ 1,377.6 $ 1,320.4
 
Shareholders’ equity 103.3 75.4
Non-controlling interests, including NCI of consolidated Funds(2) 72.8   95.9  
Total equity 176.1   171.3  
Total liabilities and equity $ 1,553.7   $ 1,491.7  
 
Debt / trailing twelve months Adjusted EBITDA(3) 2.1 x 1.4 x

(1) Includes investment in Heitman of $53.8 million at December 31, 2017.
(2) Consolidated Funds represent certain seed investments and co-investments.
(3) Calculated per terms of the Company’s external revolver and includes amounts owed under previously agreed acquisition agreement and excludes non-recourse borrowings.
Please see “Definitions and Additional Notes”

Investment Performance

Table 4 below presents a summary of the Company’s investment performance as of December 31, 2018, September 30, 2018, and December 31, 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
December 31, 2018   September 30, 2018   December 31, 2017
1-Year 31% 53% 65%
3-Year 68% 64% 72%
5-Year 75% 80% 83%
 
Equal-Weighted
December 31, 2018 September 30, 2018 December 31, 2017
1-Year 38% 57% 59%
3-Year 61% 58% 69%
5-Year 65% 74% 82%
 
Asset-Weighted
December 31, 2018 September 30, 2018 December 31, 2017
1-Year 34% 61% 61%
3-Year 65% 57% 71%
5-Year 70% 74% 74%

Investment performance is calculated gross of fees.
Please see “Definitions and Additional Notes”

As of December 31, 2018, assets representing 31%, 68% and 75% of revenue were outperforming benchmarks on a 1-, 3- and 5- year basis, respectively, compared to 53%, 64% and 80% at September 30, 2018; and 65%, 72% and 83% at December 31, 2017. The 1-year revenue-weighted number decreased to 31% due to declines experienced broadly across several strategies in both U.S. and international equities. The 3-year performance improved to 68%, particularly reflecting improved returns from two global managed volatility strategies and a mid-cap value strategy. The 5-year performance dropped to 75% with certain U.S. equity value strategies underperforming in the fourth quarter.

Financial Results: U.S. GAAP

Table 5 below presents the Company’s U.S. GAAP Statement of Operations. For the three months ended December 31, 2018 and 2017, diluted earnings (loss) per share were $0.22 and $(0.45), respectively and net income (loss) attributable to controlling interests was $23.0 million and $(48.8) million, respectively, an increase of $71.8 million. Earnings per share calculations are impacted by the shares repurchased in 2017 and 2018 which contributed to a year-over-year decrease in average diluted shares outstanding of (3.2) million, or (2.9)% between the three-month periods and (3.8) million, or (3.4)%, between the twelve-month periods. U.S. GAAP revenue decreased $(34.7) million, or (13.9)%, from $249.2 million for the three months ended December 31, 2017, to $214.5 million for the three months ended December 31, 2018, as a result of lower levels of average assets under management, excluding equity-accounted Affiliates, and lower net catch-up fees related to certain alternative products, combined with lower net performance fees in the three months ended December 31, 2018. Operating expenses decreased $(38.0) million, or (17.0)%, from $222.9 million for the three months ended December 31, 2017, to $184.9 million for the three months ended December 31, 2018, primarily due to decreases in compensation and benefits expense, driven by lower variable compensation and lower Affiliate equity revaluations, offset by increases in general and administrative expense. The Company recorded revaluations of its DTA deed with OM plc of $20.0 million in the three months ended December 31, 2018 which primarily reflects the agreement to terminate the DTA deed at a discount; and $51.8 million for the three months ended December 31, 2017, which reflected reductions in the deed payable as a result of the U.S. tax law change. Income tax expense decreased from $131.3 million for the three months ended December 31, 2017, to $16.1 million for the three months ended December 31, 2018, reflecting lower earnings in 2018, a lower U.S. corporate tax rate in 2018 and the significant deferred tax expense in 2017 as a result of the U.S. tax law change.

For the twelve months ended December 31, 2018 and 2017, diluted earnings per share were $1.26 and $0.04, respectively, an increase of $1.22, and net income attributable to controlling interests was $136.4 million and $4.2 million, respectively, an increase of $132.2 million. U.S. GAAP revenue increased $40.8 million, or 4.6%, from $887.4 million for the twelve months ended December 31, 2017, to $928.2 million for the twelve months ended December 31, 2018, primarily as a result of increases in management fees due to weighted-average increases in our AUM driven by market appreciation in the first three quarters of 2018 and shifts into higher fee rate products. Operating expenses increased $28.0 million, or 3.4%, from $816.4 million for the twelve months ended December 31, 2017, to $844.4 million for the twelve months ended December 31, 2018, primarily as a result of higher compensation and benefits (see Table 6) and increases in general and administrative expense. The increase in compensation and benefits is predominantly due to growth of investment teams combined with increases in the revaluation of Affiliate equity and profit interests offset by lower variable compensation due to a lower Center cost structure. 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. Total compensation expense related to the Landmark transaction was $203.8 million for the twelve months ended December 31, 2018 and $120.8 million for the twelve months ended December 31, 2017. The $39.1 million increase in investment income for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017 primarily reflects the Company’s gain recognized upon the sale of its investment in Heitman. Income tax expense decreased from $132.8 million for the twelve months ended December 31, 2017, to $5.0 million for the twelve months ended December 31, 2018 due to the impact of U.S. tax law changes recorded in 2017, the lower U.S. corporate tax rate in 2018 and the adjustment to liabilities for uncertain tax positions in 2018. These decreases were partially offset by a reduction to interest expense in the fourth quarter of 2017 due to U.K. tax law changes.

               

Table 5: U.S. GAAP Statement of Operations

($ in millions) Three Months Ended December 31, Twelve Months Ended December 31,
2018 2017

Increase
(decrease)

2018 2017

Increase
(decrease)

Management fees $ 204.0 $ 233.9 (12.8 )% $ 905.0 $ 858.0 5.5 %
Performance fees 6.9 14.4 (52.1 )% 9.8 26.5 (63.0 )%
Other revenue 2.4 0.6 300.0 % 9.6 1.2 n/m
Consolidated Funds’ revenue 1.2   0.3   300.0 % 3.8   1.7   123.5 %
Total revenue 214.5   249.2   (13.9 )% 928.2   887.4   4.6 %
Compensation and benefits (see Table 6) 143.6 184.4 (22.1 )% 696.4 682.8 2.0 %
General and administrative 35.7 32.0 11.6 % 126.0 112.9 11.6 %
Amortization of acquired intangibles 1.7 1.7 % 6.6 6.6 %
Depreciation and amortization 3.9 3.2 21.9 % 14.5 11.7 23.9 %
Consolidated Funds’ expense   1.6   n/m 0.9   2.4   (62.5 )%
Total operating expenses 184.9   222.9   (17.0 )% 844.4   816.4   3.4 %
Operating income 29.6 26.3 12.5 % 83.8 71.0 18.0 %
Investment income (3.1 ) 6.9 n/m 66.5 27.4 142.7 %
Interest income 1.2 0.3 300.0 % 3.2 0.8 300.0 %
Interest expense (6.2 ) (6.3 ) (1.6 )% (24.9 ) (24.5 ) 1.6 %
Revaluation of DTA deed 20.0 51.8 (61.4 )% 20.0 51.8 (61.4 )%
Net consolidated Funds’ investment gains (losses) (6.6 ) 5.6   n/m (13.4 ) 15.5   n/m
Income from continuing operations before taxes 34.9 84.6 (58.7 )% 135.2 142.0 (4.8 )%
Income tax expense 16.1   131.3   (87.7 )% 5.0   132.8   (96.2 )%
Income (loss) from continuing operations 18.8 (46.7 ) n/m 130.2 9.2 n/m
Gain (loss) on disposal of discontinued operations, net of tax     n/m 0.1   (0.1 ) n/m
Net income (loss) 18.8 (46.7 ) n/m 130.3 9.1 n/m
Net income (loss) attributable to non-controlling interests (4.2 ) 2.1   n/m (6.1 ) 4.9   n/m
Net income (loss) attributable to controlling interests $ 23.0   $ (48.8 ) n/m $ 136.4   $ 4.2   n/m
Earnings per share, basic $ $ 0.22 $ (0.45 ) n/m $ 1.27 $ 0.04 n/m
Earnings per share, diluted $ 0.22 (0.45 ) n/m 1.26 0.04 n/m
Basic shares outstanding (in millions) 105.6 109.0 107.4 110.7
Diluted shares outstanding (in millions) 105.8 109.0 107.6 111.4
 
U.S. GAAP operating margin 14 % 11 % 325 bps 9 % 8 % 103 bps
Pre-tax income from continuing operations attributable to controlling interests 39.1 82.5 (52.6 )% 141.3 137.1 3.1 %
Net income (loss) from continuing operations attributable to controlling interests 23.0 (48.8 ) n/m 136.3 4.3 n/m

Please see "Definitions and Additional Notes"

 

Table 6: Components of U.S. GAAP Compensation and Benefits Expense

($ in millions)     Three Months Ended December 31,     Twelve Months Ended December 31,
2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Fixed compensation and benefits(1) $ 45.9 $ 45.8 0.2 % $ 188.7 $ 172.9 9.1 %
Sales-based compensation 4.1 5.1 (19.6 )% 17.4 18.6 (6.5 )%
Variable compensation(2) 53.5 69.6 (23.1 )% 235.9 252.2 (6.5 )%
Affiliate key employee distributions 13.7 21.8 (37.2 )% 76.6 73.1 4.8 %
Non-cash key employee-owned equity revaluations 8.7 24.4 (64.3 )% 107.2 95.4 12.4 %
Acquisition-related consideration and pre-acquisition employee equity(3) 17.7   17.7   % 70.6   70.6   %
Total U.S. GAAP compensation and benefits expense $ 143.6   $ 184.4   (22.1 )% $ 696.4   $ 682.8   2.0 %

(1) For the three and twelve months, respectively, ended December 31, 2018, $44.7 million and $181.4 million of fixed compensation and benefits (of the $45.9 million and $188.7 million above) is included within economic net income, which excludes compensation and benefits associated with the 2018 CEO transition and fixed compensation paid by our Affiliates on behalf of their customers that is subsequently reimbursed. For the twelve months ended December 31, 2017, $172.4 million of fixed compensation and benefits (of the $172.9 million above) is included within economic net income, which excludes the compensation and benefits associated with the 2017 CEO transition costs.
(2) For the three and twelve months, respectively, ended December 31, 2018, $48.3 million and $230.7 million of variable compensation (of the $53.5 million and $235.9 million above) is included within economic net income, which excludes variable compensation associated with the 2018 CEO transition and variable compensation paid by our Affiliates on behalf of their customers that is subsequently reimbursed. For the twelve months ended December 31, 2017, $243.4 million of variable compensation expense (of the $252.2 million above) is included within economic net income, which excludes the variable compensation associated with the 2017 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 December 31, 2018 and 2017, diluted economic net income per share was $0.43 and $0.44, respectively, a decrease of (2.3)%. For the three months ended December 31, 2018 and 2017, economic net income was $45.6 million and $48.7 million, respectively, a decrease of $(3.1) million, or (6.4)%.

For the three months ended December 31, 2018, compared to the three months ended December 31, 2017, ENI Revenue (see Table 8) decreased $(40.3) million, or (16.0)%, from $252.3 million to $212.0 million, including decreases in management fees from $233.9 million to $204.0 million driven by negative market movements and net outflows. Average assets under management, excluding equity-accounted Affiliates, in those respective periods (see Table 12) decreased $(17.4) billion, or (7.3)%, to $219.4 billion, while the bps yield on these assets decreased from 39.2 bps to 36.9 bps as net catch-up fees in the three months ended December 31, 2017 contributed to the higher net yield. Performance fee revenue was $6.9 million for the current quarter, compared to $14.4 million in the year-ago quarter. The current quarter performance fees were principally attributable to net performance fees from global / non-U.S. equity products and alternative investments. Total ENI operating expenses (see Table 9) increased 1.5% to $86.1 million, from $84.8 million in the prior-year quarter as a result of ongoing investments in the business offset by cost control initiatives, however total ENI operating expenses as a percentage of management fee revenue increased 595 bps from 36.3% to 42.2% primarily as a result of the negative market impact on management fees. Total variable compensation decreased (30.6)% quarter-over-quarter to $48.3 million, reflecting lower earnings before variable compensation and the ENI variable compensation ratio (variable compensation as a percentage of ENI earnings before variable compensation) decreased (319) bps from 41.6% to 38.4%. Affiliate key employee distributions decreased (37.2)% from the year-ago quarter from $21.8 million to $13.7 million, primarily due to lower ENI operating earnings and the levered structure of distributions at certain Affiliates. The ratio of Affiliate key employee distributions over ENI operating earnings decreased from 22.3% to 17.7% due to lower earnings before Affiliate key employee distributions at Affiliates with higher employee ownership and leveraged equity plans which align incentives for growth. Tax on economic net income for the three months ended December 31, 2018 and 2017 was $15.5 million and $23.0 million, respectively, a decrease of $(7.5) million or (32.6)%. This decrease is primarily due to the lower U.S. corporate tax rate in 2018 and lower earnings.

For the three months ended December 31, 2018, Adjusted EBITDA was $67.8 million, a decrease of (14.6)% compared to $79.4 million for the same period in 2017. See Table 17 for a reconciliation of U.S. GAAP net income attributable to controlling interests to EBITDA, Adjusted EBITDA and economic net income.

For the twelve months ended December 31, 2018 and 2017, diluted economic net income per share, was $1.86 and $1.62, respectively, an increase of 14.8%. For the twelve months ended December 31, 2018 and 2017, economic net income was $199.8 million and $180.9 million, respectively, an increase of $18.9 million, or 10.4%.

For the twelve months ended December 31, 2018, compared to the twelve months ended December 31, 2017, ENI Revenue increased $18.4 million or 2.0%, from $900.7 million to $919.1 million, driven by a $47.0 million, or 5.5%, increase in management fees from $858.0 million to $905.0 million. This growth was related to year-over-year increases in both average assets under management, excluding equity-accounted Affiliates, and the Company’s weighted-average fee rate on average AUM, which also benefited from higher net catch-up fees related to alternative assets in the twelve months ended December 31, 2018 over 2017. Average AUM excluding equity-accounted Affiliates increased 3.6% from $224.8 billion for the twelve months ended December 31, 2017 to $232.8 billion for the twelve months ended December 31, 2018, and the bps yield on these assets rose from 38.2 bps to 38.9 bps primarily due to a greater proportion of AUM coming from global / non-U.S. and alternative products (see Table 12). Performance fee revenue was $9.8 million for the current period, compared to $26.5 million in the prior period, primarily reflecting a performance fee earned on an alternative product in 2017 that was not repeated in 2018. Total ENI operating expenses (see Table 9) grew 6.9% to $335.7 million, from $314.1 million for the twelve months ended December 31, 2017. Total operating expenses as a percentage of management fee revenue increased to 37.1% from 36.6% for the twelve months ended December 31, 2017, as management fee growth of 5.5% lagged the 6.9% increase in operating expenses, primarily reflecting the 2018 negative market impact and net outflows on management fees. Total variable compensation decreased $(12.7) million, or (5.2)%, period-over-period to $230.7 million and the ENI variable compensation ratio (variable compensation as a percentage of ENI earnings before variable compensation) decreased to 39.5% for the twelve months ended December 31, 2018 compared to 41.5% for the twelve months ended December 31, 2017. Affiliate key employee distributions increased 4.8% period-over-period from $73.1 million to $76.6 million, primarily due to the levered structure of distributions at certain Affiliates and higher ENI operating earnings. The ratio of Affiliate key employee distributions over ENI operating earnings increased from 21.3% to 21.7% due to the leveraged structure of certain equity plans in a rising profit environment. The effective tax rate of 23.9% for the period was lower than the prior year period of 28.0% primarily due to a lower U.S. corporate tax rate in 2018. This decrease was partially offset by an increase in earnings and the reduction to interest expense in the U.K. due to tax law changes in 2017.

For the twelve months ended December 31, 2018, Adjusted EBITDA was $290.6 million, up 3.1% compared to $281.9 million in 2017. See Table 17 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 December 31,     Twelve Months Ended December 31,
2018   2017 2018   2017
U.S. GAAP net income (loss) attributable to controlling interests $ 23.0 $ (48.8 ) $ 136.4 $ 4.2
Adjustments to reflect the economic earnings of the Company:
i. Non-cash key employee-owned equity and profit interest revaluations 8.7 24.4 107.2 95.4
ii. Amortization of acquired intangible assets, acquisition-related consideration and pre-acquisition employee equity 19.4 19.4 77.2 77.2
iii. Capital transaction costs 1.5 1.6
iv. Seed/Co-investment (gains) losses and financings 7.2 (3.9 ) 14.5 (17.3 )
v. Tax benefit of goodwill and acquired intangibles deductions 1.3 2.0 5.7 8.7
vi. Discontinued operations and restructuring(1) (14.7 ) 1.3 (79.4 ) 11.0
vii. ENI tax normalization(2) 5.3 70.9 (30.3 ) 68.6
Tax effect of above adjustments, as applicable(3) (6.1 ) (16.6 ) (33.1 ) (66.9 )
Economic net income $ 45.6   $ 48.7   $ 199.8   $ 180.9  

(1) Restructuring in 2018 is primarily comprised of the gain related to the Company’s agreement to terminate its deferred tax asset deed with OM plc, CEO transition costs, costs associated with its planned redomicile to the U.S. and the gain on sale of Heitman. The revaluation of the DTA deed amounted to $(20.0) million and CEO transition costs amounted to $4.8 million in the three months ended December 31, 2018. Restructuring in 2017 is primarily comprised of costs related to the Heitman sale and CEO transition costs.
(2) Includes $51.8 million in the three and twelve months ended December 31, 2017 related to the revaluation of the deferred tax asset deed with OM plc, offset by the $122.7 million impact of the Tax Act.
(3) Reflects the sum of lines i., ii., iii. and iv. and the restructuring part of vi. multiplied by the 27.3% U.S. statutory tax rate (including state tax) in 2018 and the 40.2% U.S. statutory tax rate (including state tax) in 2017.
See Table 14 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 December 31,     Twelve Months Ended December 31,
2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Management fees $ 204.0 $ 233.9 (12.8 )% $ 905.0 $ 858.0 5.5 %
Performance fees 6.9 14.4 (52.1 )% 9.8 26.5 (63.0 )%
Other income, including equity-accounted Affiliates(1) 1.1   4.0   (72.5 )% 4.3   16.2   (73.5 )%
ENI revenue $ 212.0   $ 252.3   (16.0 )% $ 919.1   $ 900.7   2.0 %

See Table 15 for a reconciliation from U.S. GAAP revenue to ENI revenue
(1) Heitman represents $2.7 million and $12.0 million for the three and twelve months ended December 31, 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 December 31,     Twelve Months Ended December 31,
2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Fixed compensation & benefits $ 44.7 $ 45.8 (2.4 )% $ 181.4 $ 172.4 5.2 %
General and administrative expenses 37.5 35.7 5.0 % 139.8 129.9 7.6 %
Depreciation and amortization 3.9   3.3   18.2 % 14.5   11.8   22.9 %
ENI operating expense $ 86.1   $ 84.8   1.5 % $ 335.7   $ 314.1   6.9 %

See Table 16 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 twelve months ended December 31, 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.

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Table 10: Key ENI operating metrics

($ in millions)     Three Months Ended December 31,     Twelve Months Ended December 31,
2018   2017  

Increase
(Decrease)

2018   2017  

Increase
(Decrease)

Numerator: ENI operating earnings(1) $ 77.6 $ 97.9 (20.7 )% $ 352.7 $ 343.2 2.8 %
Denominator: ENI revenue $ 212.0 $ 252.3 (16.0 )% $ 919.1 $ 900.7 2.0 %
ENI operating margin 36.6 % 38.8 % (220) bps 38.4 % 38.1 % 27 bps
 
Numerator: ENI operating expense $ 86.1 $ 84.8 1.5 % $ 335.7 $ 314.1 6.9 %
Denominator: ENI management fee revenue $ 204.0 $ 233.9 (12.8 )% $ 905.0 $ 858.0 5.5 %
ENI operating expense ratio 42.2 % 36.3 % 595 bps 37.1 % 36.6 % 49 bps
 
Numerator: ENI variable compensation $ 48.3 $ 69.6 (30.6 )% $ 230.7 $ 243.4 (5.2 )%
Denominator: ENI earnings before variable compensation(2) $ 125.9 $ 167.5 (24.8