Silvercrest Asset Management Group Inc. Q1 FY2021 Earnings Call

Good morning, and welcome to the Silvercrest Asset Management Group Inc. Quarter 1 2021 Earnings Conference Call. Please note, this event is being recorded. Before we begin, let me remind you that during today's call, certain statements regarding future performance are forward-looking statements. They are based on the current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from those statements. Those factors are disclosed in the filings with the SEC under the caption Risk Factors. For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of this date, and Silvercrest assumes no obligation to update them.

Great. Thanks very much for the introduction. Welcome to the first quarter results of 2021 for Silvercrest. Having been founded in the spring of 2002, Silvercrest has now begun its 20th year in business, which will culminate in our 20th anniversary celebration in April of 2022 next year. Silvercrest's founders and partners embarked on an entrepreneurial journey to create the foremost wealth and asset management boutique in the United States. We're very proud of having created an enduring firm founded on bedrock principles as well as a strong and proud culture. We remain dedicated to putting our clients first and creating a business that serves its clients with highly regarded institutional quality capabilities for generations. We concluded the first quarter of 2021 and began our 20th year in business with new highs in our asset management revenue and adjusted EBITDA. Silvercrest's discretionary AUM, which drives revenue, increased 6.3% from the fourth quarter of 2020 to reach $21.9 billion, which is an increase of 47% year-over-year from the first quarter of 2020. The firm's total AUM grew to $29 billion by the end of the first quarter of 2021. Silvercrest concluded the first quarter of this year with $31.2 million in revenue, and the firm's quarterly adjusted EBITDA was $9.7 million or an annualized adjusted EBITDA run rate of $38.8 million. Adjusted diluted earnings per share increased 16.7% year-over-year to $0.42 per adjusted diluted share. The firm's first quarter 2021 adjusted EBITDA margin was 30.9%. With strong relative performance, Silvercrest's institutional equity new business opportunities continue to grow across Silvercrest's suite of proprietary equity capabilities. Our new sub-advisory relationships added assets in the first quarter of 2021. We are optimistic about our growth prospects for this business with a robust new business pipeline. Silvercrest's organically built Outsourced Chief Investment Officer offering continues to grow, and its pipeline of opportunities has increased as well. That business more than doubled during 2020, and we hope to cross the important $1 billion AUM threshold during 2021. We've hired new high net worth portfolio management professionals for the wealth management business and will continue to add new talent, both to maintain a high level of client service and to grow the business. Silvercrest has a track record of developing new talent and will continue to do so. We believe our brand, culture, capabilities, and technological innovation make Silvercrest a premier partner for select businesses and professionals. Regardless of the environment, Silvercrest will continue to seek to effectively deploy capital to complement organic growth.

Thanks, Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2021, was $21.9 billion, and total AUM as of March 31, 2021, was $29 billion. Revenue for the quarter was $31.2 million, and reported consolidated net income for the quarter was $4.3 million. Looking more specifically at the year's quarters, again, the first quarter revenue was approximately $31.2 million. That represented a 10% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM. Expenses for the first quarter were $25.5 million. That represented approximately a 62% increase from expenses of $15.8 million for the same period last year. This increase was primarily attributable to increases in G&A expenses and compensation and benefits expense of $7.9 million and $1.9 million, respectively. Compensation and benefits expense increased by $1.9 million or approximately 12% to $17.6 million for the three months ended March 31 of this year. That was an increase from $15.7 million for the three months ended March 31 of last year. The increase was primarily due to increases in the accrual for bonuses, salaries and benefits expense, primarily as a result of merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding. G&A increased by $7.9 million to $7.9 million for the three months ended March 31 of this year from $43,000 for the three months ended March 31 of last year.

Thanks very much, Scott. We're now available to take questions at this time. Thanks.

Just wanted to maybe start with the institutional pipeline. Can you update us on that 6 months, the actionable pipeline today? How much of that is related to OCIO? And then can you update us on the current size of the OCIO platform and kind of your confidence level of reaching that $1 billion threshold this year as well?

Yes. We don't normally break out the pipeline for OCIO separately from the institutional business, but that pipeline has grown. And I don't want to get into this every quarter. I'd rather just talk about the institutional business as a whole. But we see $800 million in reach where it's climbing up towards that in terms of total AUM. And the pipeline has grown, and I have high confidence that we'll cross that $1 billion threshold. With regards to the rest of the institutional business, including OCIO, the actionable 6-month pipeline, which we very conservatively measure, includes invite-only searches and those where we're in semifinals or finals. Those have grown substantially. As of the beginning of the first quarter, the pipeline was $1.34 billion, as you may recall. And it now stands at $1.8 billion. That's grown completely across our product suite, OCIO, U.S. value, U.S. growth, and international.

That's great. I just wanted to touch on the organic growth in the quarter as well. Between the closed accounts and the net cash outflows, it looked like about $500,000 of outflows there. Can you unpack that a little bit? And how much was related to taxes at all? And should we expect the second quarter to see a more kind of normalized tax outflow in that quarter as well?

Yes. Right. So that gets complicated. It's very hard to get our arms around what the taxes may look like and when they actually flow. It tends to be something that we see more in the second quarter than the first. We actually had a very good business development quarter in terms of our new accounts and additional funds coming into the firm from our high-net-worth clients. In fact, it was pretty good on the institutional business. The negative outflow that we see this quarter is solely effectively due to the closing of the AMG mutual fund that we sub-advise. AMG, as you may well know from the news, decided to terminate all of its external managers. Despite our good performance, Silvercrest was among them, and I'm really not going to comment more on that beyond that it's in the hands of our outside counsel.

Got it. Okay. And the last one for me. I'll hop back in the queue. I noticed you did not increase the dividend this year.

Thank you for your question. You're right that we did not increase the dividend this year. We’ve reached a stock yield that we consider quite favorable, and we feel it might not be wise to continue raising the dividend and distributions at this time. Historically, we have consistently increased the dividend while being judicious about the cash we allocate for it. Although our cash flows are strong and reaching record highs, we believe the current dividend payout is attractive, and we have other capital priorities at the moment. We are actively discussing potential mergers and acquisitions, which has always been part of our strategy. There are no specific predictions, but looking back at 2019, we suddenly had a significant amount of cash for investment when we partnered with our colleagues in Milwaukee. Opportunities like that can arise unexpectedly, and they are crucial for a company of our scale. Additionally, while hiring affects our cash flow, it doesn't significantly impact our substantial cash reserves. We are actively exploring various alternatives for using our cash, which might include returning capital to shareholders through stock buybacks in addition to dividends. This is a regular topic of discussion for the Board as part of our capital allocation strategy.

Our next question is going to come from Sandy Mehta with Evaluate Research.

Congratulations on the strong results. You mentioned that new portfolio management professionals were hired. Could you provide more details about whether they focus more on client relationships, marketing, or new strategies and potential products?

Yes. Thanks, Sandy. So it's actually on both fronts. You may recall that we launched a new large-cap and multi-cap growth strategy with our great colleagues in Milwaukee. We felt that they have a robust analyst team that has been proven to provide really great results, and we see the opportunity to go up in the market cap spectrum.

So the hiring of Andy Young and the other people in Milwaukee, you mentioned large cap growth. Would that be a new strategy then?

So the Milwaukee hiring was basically Andy Young because we already have the analyst team to support the effort. But yes, it's a new strategy. We launched it on January 1 of this year.

And the next question comes from Christopher Marinac of Janney Montgomery Scott.

Rick and Scott, just wanted to cover the EBITDA margin. And to what extent there were any external factors that just made it so strong this quarter?

Yes. I'll let Scott take that. We've been consistently bumping up or maybe at our best going just over 30%, but I'll let Scott address the seasonality, and then I may address it more broadly afterwards.

Yes. For the first quarter of this year, there are certain expense benefits that we've had, such as travel and entertainment expense and other client-related expenses, that have continued to be superficially low due to the pandemic. So on an incremental basis, those definitely help the margin. Sometimes, there is some other seasonality regarding our audit expense because it's based on the level of provision of service. The lion's share of our annual audit peaks during the first quarter. So that will definitely have an impact to some extent. But this year, and it was consistent through 2020 as well, there are a lot of client-related expenses and travel expenses that just are at really low levels because of the environment. Just generally speaking about our EBITDA margin. If you look historically, our best margins tend to just go over 30%, often driven by performance fees in the fourth quarter because that's just a great guinea with no associated expenses. I have long said that in this business, if you're reinvesting and growing the business, it's hard to maintain much above 30% or 30% on an ongoing basis. And that if you're really investing in the business, you might not get down a few clicks. I used to say in the past, hey, maybe we have to have a 24%, 25% EBITDA margin as we make investments in future growth that pays for itself. Given the growth of the company over time, since I first started saying that, it's probably not 4 or 5 basis points. It may be only a couple now because just the size of the cash flow is that much larger. So I would consider this trending towards the high side for us, and I wouldn't be surprised to see that cycle down just a bit as we make investments, especially in personnel.

Yes. And just to state the obvious, as the country opens up more and we have greater access to meet with clients and once more travel commences, those types of expenses, I would expect to increase to more normalized levels.

And that, too, leads to growth. It's very important that we get out there and see new prospects. I did mention the high net worth pipeline, but we've seen more and more activity toward the end of this first quarter, leading into the second quarter. And I think it's partly a reflection of people opening up and thinking about things as their lives change with the rest of the country.

Great. That's super helpful. And I guess one other question I had is, given sort of recent events in the general asset management industry in the first quarter, is there a greater focus on compliance when some external events happen, and therefore, that actually supports the OCIO business that you're trying to do?

I think there may not be a significant shift in compliance driving this, but there is a clear long-term trend where board members are increasingly acting as fiduciaries for institutions like endowments, nonprofits, and pension funds. They are becoming more aware of their fiduciary responsibilities and are opting to outsource investment functions to professionals, wanting someone accountable for the performance and actions related to the investment pool or clients. This trend has been present for quite some time, and I believe it's gaining momentum. Part of this acceleration is due to technological advancements, which enhance the sophistication of these portfolios. More boards are realizing they can't manage this alone or find the necessary professionals internally to stay competitive and are thus turning to external experts with proven success. As for compliance challenges within our business, distinct from the OCIO sector, we've always had a framework to manage that effectively. We are fortunate to have the critical mass and professional team to address these needs, and while we don't want a competitive edge based on compliance, it does give us an advantage in the boutique RIA space because we can navigate it more easily than others. We are monitoring closely how changes in administration might impact the landscape. As a member of the Executive Committee of the Investment Adviser Association, which represents RIAs, I can say it plays a vital role in our operations. However, I wouldn't claim that these factors are directly influencing our business significantly. They might marginally drive some smaller firms to look towards larger ones like Silvercrest, but that's not a newly emerging trend either.

This concludes our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks.

Great. Thanks very much for joining us today and for the good questions. Overall, the business was quite strong in the first quarter, of course, bolstered by very strong markets as well. And as we see the country open back up and our ability to get back into the field, meeting with either consultants or families about our business, we're pretty optimistic about the pipeline we see this year as we begin our 20th year in business. Thanks so much for joining us.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.