Silvercrest Asset Management Group Inc. Q1 FY2022 Earnings Call

Thank you. Good morning and thanks for joining us for the first quarter of 2022 results and call. We concluded this quarter with the celebration of our 20th anniversary in business. We actually opened the first day of the second quarter in 2002. Despite the volatile economic conditions and markets, we're pleased with Silvercrest's continued stable progress over time. Our tenure has proven that the firm has the professional resources, ability, and strategy to execute through difficult periods, to build a sustainable and enduring business. Silvercrest discretionary assets under management, our AUM, which drives revenue, increased to $23.8 billion from the first quarter of 2021, which was a year-over-year increase of 8.7%. Primarily due to the volatile equity markets during the first quarter of 2022, Silvercrest discretionary AUM declined by 5.2% from December 31st, 2021, which also led to a quarterly decline in revenue and adjusted EBITDA. Along with the continued progress in growing AUM year-over-year, the firm's revenue increased 7.3% from Q1 2021 with $33.5 million in revenue for the quarter ended March 31st, 2022. The firm's quarterly adjusted EBITDA was approximately $10.3 million or an annualized adjusted EBITDA run rate of $41 million and grew year-over-year by 6.2%. Adjusted diluted earnings per share increased 7.1% year-over-year to $0.45 per adjusted diluted share, and the firm's first quarter of 2022 adjusted EBITDA margin was 30.6%, which is a consistently high number for Silvercrest. Silvercrest's high net-worth business grew its relationships during the first quarter and we're pleased with incoming opportunities. Our net flows were muted as compared with historical norms. Silvercrest Institutional Equity new business was solid during the first quarter and our opportunities remain excellent across Silvercrest's suite of proprietary equity capabilities. Our sub-advisory relationships continue to add assets during the first quarter of 2022. Market volatility and uncertainty have created long-term opportunities that typically benefit the high quality of Silvercrest's capabilities. We have a lot to accomplish to continue building the premier Wealth and Asset management boutique in the nation and we embrace those challenges that come our way. On May 3rd, the company's board of directors declared a quarterly dividend of $0.17 per share of Class A common stock and the dividend will be paid on or about June 17th to shareholders of record, as of the close of business on June 10th. With that, I'll turn it over to you, Scott, for the financials, and then we'll take questions. Thanks.

Thanks, Rick. Again, it's disclosed in our earnings release for the first quarter discretionary AUM as of March 31st of this year was $23.8 billion and total AUM as of March 31st of this year was $31.2 billion. Revenue for the quarter was $33.5 million and reported consolidated net income for the quarter was $12.4 million. Revenue for the first quarter was approximately $33.5 million, representing a 7% increase over revenue of approximately $31.2 million for the same period last year. This increase was driven primarily by market appreciation and net client inflows in discretionary AUM. Expenses for the first quarter were $18.1 million representing a 29% decrease from expenses of $25.5 million for the same period last year. This decrease was primarily attributable to a decrease in G&A expenses of $8.5 million partially offset by an increase in compensation expense of $1 million. Compensation and benefits expense increased by $1 million or approximately 6% to $18.7 million for the first quarter this year, from $17.6 million for the three months ended March 31st of last year. The increase is primarily attributable to an increase in the accrual for bonuses and benefits expense and salaries expense, primarily as a result of merit-based increases and newly hired staff, partially offset by a decrease in equity-based compensation expense due to a decrease in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses decreased by $8.5 million to negative $0.6 million for the three months ended March 31st of this year from $7.9 million for the three months ended March 31st of 2021. This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the Cortina acquisition of $8.8 million and occupancy and related costs, partially offset by increases in travel and entertainment expense, portfolio and systems expense, and sub-advisory and referral fee expense. Reported consolidated net income was $12.4 million for the quarter as compared to $4.3 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter of this year was approximately $7.6 million or 77% per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and non-core, non-recurring items was approximately $10.3 million or 30.6% of revenue for the quarter, compared to $9.7 million or 30.9% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core, non-recurring items and income tax expense, assuming a corporate rate of 26% was approximately $6.7 million for the quarter or $0.46 and $0.45 for adjusted basic and diluted earnings per share respectively. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Quickly looking at the balance sheet, total assets were approximately $197.9 million as of March 31st of this year, compared to $229.3 million as of the end of 2021. Cash and cash equivalents were approximately $57 million in March 31st of this year, compared to $85.7 million at the end of 2021. Total borrowings as of March 31st of this year were $8.1 million and total Class A stockholders’ equity was approximately $86.3 million at March 31st of this year. That concludes my remarks. I'll turn it over to Rick for Q&A.

Thanks very much, Scott. We're welcoming questions at this time. Thanks.

Thank you. We will now begin the question-and-answer session. And the first question will come from Sumeet Mody with Piper Sandler, please go ahead.

Thanks. Morning. Rick, Scott, hope both of you are doing well. Wanted to start with your thoughts maybe around what you're seeing from your wealth management institutional clients through the volatile first four months of the year. We didn't see a material shift out flows in the quarter which was nice, but any update around what you're seeing, around demand for certain strategies, particularly growth. And are there any areas you think Silvercrest does particularly well during these types of more prolonged downturn, maybe contrasted against what we saw in the beginning of the pandemic in 2020?

Sure. I'll keep my remarks concise due to the open-ended nature of the question. I welcome any follow-up queries. We saw that overall flows were relatively muted this quarter, which I noted in my introduction. Considering the market volatility and the upcoming tax season, we actually had a decent quarter. However, the overall flows were indeed muted and mainly driven by market conditions. To provide some numbers, the existing net flows for the quarter were approximately $163 million out, which is quite minimal compared to our total base. Nevertheless, this figure conceals strong inflow from new clients, particularly in our institutional business and high net worth segment. While the negative outflow was $162 million, this amount is trivial in terms of our assets under management. It’s worth noting that just five clients accounted for nearly $400 million of the net outflows this quarter, mainly due to rebalancing and tax preparations. So, despite the overall muted flows, there are encouraging developments beneath the surface, including an increase in our number of relationships, which I find quite satisfying, especially considering the market volatility. Regarding demand for our capabilities on the institutional side, it's very client-specific as they seek to adjust their asset allocations. I haven't observed any significant shifts in the marketplace during this short time frame. Our growth equity strategies have performed exceptionally well despite the well-publicized volatility, particularly in certain growth sectors that are in a bear market. Our team has navigated this challenging environment exceptionally well, which bodes well for our business growth. The value side has faced some relative performance challenges, but our overall performance remains strong, as highlighted in your recent note. Such periods often allow us to demonstrate considerable relative performance, benefiting our clients both in the institutional and high net worth sectors. They rely on us to provide steady guidance through volatile times. Over the past 20 years, our firm has weathered significant volatility, including the global financial crisis, and this is when we truly excel. Our focus on high-quality portfolios and the fundamental strengths of our investments really stands out. Additionally, we may be witnessing the end of easy money, which has fueled excessive speculative investing. Much of the market resembles a casino, with people pursuing the latest trends. Gradually ending this trend—preferably without abrupt shifts to avoid economic repercussions—could be very beneficial for firms like ours, enhancing our investment capabilities and allowing us to utilize capital effectively for high returns for our shareholders. I aimed to keep this brief, but the topic is broad, so I had to cover various aspects. If you have any follow-up questions, I'd be happy to address them.

No, I appreciate it. That's exactly what I was looking for. Thanks, Rick. So just wanted to shift over to index inclusions. Is that something you guys are focused on in the future here? Are you thinking about any structural elements you can address, like dual-share class that help you get included in future indices? Or is that something that you're just focused on today?

Yes, it's not something I'm focused on. I think I've been really clear. My job is to execute a long-term strategy and continually, organically growing this business. Frankly, I don't get too caught up in doing a lot of mechanics to massage either the stock or where we look in terms of indexes and the rest. It looks like we'll be in the index according to the estimates, which is great. We've been in it before, it'll be good to be back. What really happened and what you saw in connection to my last comment, you saw a lot of companies that had zero revenue, SPACs, very speculative investments that were running away up in valuation with nothing to show for it. That arrow put into the index and what you saw fall out were a lot of small companies, especially financials. We've seen a reversion. We've seen a rotation towards value, which the biggest component of which is financials. We've seen a rotation towards companies with real cash flow, healthy balance sheets, which of course we're one of. We've seen a deflation of those more speculative investments. We're going to come back in on our own merits. So no, we're not doing anything, but obviously it's a good thing to go back into the index.

Great. Thanks. And just last one for me here. Just Cortina, obviously, has been performing really well since that deal was closed and considered a great contributor. Just wondering how conversations are going with potential M&A targets today. Can you talk about how pricing looks for the opportunities you're gauging that maybe you think fit well with Silvercrest? And then secondly, how those private valuations are being impacted today? Is it similar to what we're seeing on the public side or does it still not flow-through yet?

You might expect a relationship between large markets that are regularly valued and what's occurring in private markets. It may be a bit early to determine if there's a noticeable effect. However, it's worth mentioning that some significant players in the private sector appear to be looking to sell certain assets, which surprised me. If that's true, it indicates that some investors believe their current holdings are somewhat overpriced. Of course, every seller has a buyer, so there are others who disagree. Yet, it's still too early to predict the direction this will take. We've been in discussions, and I can say that in the first quarter, despite the underlying volatility—much of which intensified towards the end of the quarter—valuations still seemed high. Honestly, this volatility may lead to some changes, and I believe it's healthy; there's been a lot fueling the speculation. Historically, we haven't experienced a prolonged downturn or rising interest rates that would challenge the current situation. Perhaps now is the time for that to occur, so stay tuned. This could present an opportunity for those who manage their capital wisely and aim to maximize shareholder value, and I consider our firm among them. Regarding asset management acquisitions, as I've mentioned before, we're not actively seeking additional institutional capabilities or asset management firms. The team from Cortina brought unique skills that we greatly value, but we're not trying to pursue every possible strategy. We aim to excel in our core strategies, which we already have in place. Our primary focus now is to grow those capabilities organically, not to expand the company by adding more strategies at this moment. Therefore, any future mergers or acquisitions are likely to be strategic, targeting high net worth segments in key cities or in cultures that align well with our firm.

Great, thanks for taking my questions, Rick.

My pleasure. I'm sorry. Scott and I both have allergies of some sort this morning.

The next question will come from Sandy Mehta with Evaluate Research. Please go ahead.

Yes. Good morning, Rick and Scott. Can you give us an update on the OCIO assets AUM and also, I was wondering if you have a number for your actionable pipeline?

Good morning, Sandy. Thanks. The OCIO has come down in AUM entirely as a result of the markets. So it's just under a billion dollars right now, or about a billion. No news there other than market exposure as you would expect and as seen with regards to this quarter. That's the news, really. In terms of the pipeline for that business, it remains nice and strong. It's close to $600 million, and that's a nice conservative number. I think we're going to do quite well over the next quarter. One thing to keep in mind, I think is that the volatility in the markets really highlights for fiduciaries, that is board members running investment committees, what guidance and help they really need to navigate. When everything is running up in the environment that we've had for a sustained period of time, it makes the job look easy. So this is another reason to welcome this disruption that we're seeing right now. It's why in my opening comments I referred to the fact that the uncertainty creates long-term opportunities that typically benefit the high quality of this firm. It's specifically because it is now when people start to realize maybe they need more help than they otherwise would have thought. And that really affects the dynamics of an investment committee sitting on the board of an endowment or foundation. So I'm quite optimistic about what we're going to do without pipeline and the conversations we're having. On the institutional equity side, the pipeline is a little smaller. I think I reported close to $1.8 billion last quarter or may just been shy of that. We're right around $1.6 billion on the actual pipeline. And for those who don't tune in regularly, that pipeline is invite only RFPs, semi-finals and finals. So it's a very strong concrete pipeline that we can measure with confidence and it has a pretty high realization rate. We win a significant portion of the pipeline and the pipeline coming down from $1.8 billion to $1.6 billion is a good example of that, it's largely because we have wins. So during the quarter, as I said, underlying those kind of muted net flows, and frankly very good with regards to close counts this quarter, we're excellent, it was very small. Underlying that was some significant inflows since the institutional business. So the pipeline just reflects that, it remains very strong, and I'm very happy about it.

Okay. And Silvercrest stock is up 25% year-to-date, while the market is down nearly 20%. Any updated thoughts on the buyback? At least in my view, the stock is still very undervalued. What are your thoughts currently on the buybacks?

Look, we're strongly in favor of buying back our company as I've said. It's been difficult primarily because of volume limitations. We have not revealed or talked about what our pricing strategy is around our stock. We're just going to let our results speak for themselves. It's really nice to see investors realize the value in this company. Part of this has to do with the rotation towards companies that are stable, able to deliver over the long-term, have strong cash flows, a conservative balance sheet, etc. And given the M&A market and what I had to say about it earlier, and its relative expense and cost, if we were to engage in some of the prices that are in the marketplace, I just don't think it's a good use of capital. So we're going to buy back what I think is the best firm in our business, which is Silvercrest. But I have nothing more to say about the relative price versus the market or our fundamentals.

And one last question. You mentioned the growth strategies did remarkably well even in this down-market. So, very strong numbers in up and down markets. Can you talk specifically about what flows you're seeing in that? And the underlying stocks tend to have a lot more liquidity. You use growth stocks versus say, value stocks. So is there potential for more flows there, perhaps a new product? Anything specifically on Cortina, please. Thank you.

Sure. So on the product side, we are incubating multi-cap growth and large-cap growth. And those are important asset classes for our high net worth group. We have a super talented team. We have and will expand the intellectual capital in Milwaukee to support those capabilities, the flagship products there, opportunity in small-cap growth with the strong relative performance that you referenced, and just have a tremendous opportunity. They should really stick out compared to what's happening in small-cap technology and other small-cap issues. I mentioned, obviously, technology in particular because of the great volatility there. And the pipeline there is pretty strong. It's part of the total institutional pipeline I gave you. I usually don't break it out. I'm happy to do so right now. I think that's close to $400 million. And for very niche products and capabilities, I think that's good. I think one thing we have to get over is for the marketplace to be more aware of those capabilities. We're constantly in touch with consultants and working to introduce that for the long-term. I also think that given the volatility in technology and small-cap issues, there are a lot of institutional investors and others amidst what's going on right now that have a bit of a wait-and-see attitude only because they may be shy of the asset class given what's occurred and what's happening to the other capital in their asset class. But I think this is going to shake out really well in our favor behind a pretty good pipeline.

Great. Thank you so much.

You're welcome, Sandy.

The next question will come from Christopher Marinac with Janney Montgomery, Scott, please go ahead.

Hey, thanks. Good morning, Rick and Scott. Can you just remind us on the lag of revenues as you go quarter-to-quarter, and do you see anything shifting on the EBITDA margin as a result of that?

So I'm not sure what you mean by the lag of revenues because most of our revenue is billed quarterly in advance. The stub period revenue or things that we might do in arrears at the end of the quarter are due to new flows into the business, so that's the major lag I can think of. Most of it is quarterly in advance, which is nice, it gives everyone a lot of visibility into what's going to happen and helps us manage the business. But you can respond in a second, if I didn't address your question. With regards to EBITDA, this is as I noted, in my introductory remarks being over 30% of EBITDA is still pretty historically high for the firm. I'm just a normal quarter basis that is to say a quarter that doesn't have performance fees, which we crystallized at the end of the year, it can always bump up significantly as we did last year. I've said this before, I'll say it again. We want to invest in the business, we want to hire new intellectual capital and portfolio managers to organically grow the business. When I do that, there's a lag towards new revenue, that's the other form of lag you get as people build businesses at this firm, and that can hit EBITDA. We've made those hires over the past two, three, four years. It's just that we've been able to grow faster than we've been making the investments, which is great. We're going to continue to try to do that. It may become more apparent when I do those hires and spend that capital on growing this business organically on EBITDA during volatile markets, but hasn't come to pass yet. But I think you can expect us not to be consistently this high, I said that repeatedly. It's just nice that we are. The other lag that's possible and again, please respond after I'm done, is flows into our growth strategies in Milwaukee. The billing there does tend to be more in arrears. It's just smaller compared to the size of the entire firm.

Right, Chris, also with great performance in Milwaukee, certainly the hope and expectation is that you will end up with additional flows. But again, those types of flows will lag performance and it is challenging to predict when those may come in.

All right, great. I think you've addressed my revenue questions. Thank you for that. From the standpoint, some of the global dislocations, do you think you'll see some benefit from that as future core play out? I know, Rick, you touched on that a little bit on your earlier remarks.

Yes, I do. One reason is the fundamental strength of this firm, not just in its people and culture, but also in how we manage the business. Additionally, those experiencing disruptions are recognizing they may need assistance, which is particularly relevant for fiduciaries on investment committees, as well as larger families facing similar challenges this year. We anticipate benefiting from this trend. Moreover, our investment approach thrives in this type of market, and we have demonstrated strong relative performance. While I may not refer to the same disruptions, it's important to recognize that the U.S. economy remains robust, even during tough times; if we enter a recession, we will still stand out positively. I've noticed opportunities in Europe that are quite promising. We already have substantial relationships there, including strong sub-advisory connections, and we're experiencing encouraging inflows, which began even during the pandemic when travel to Europe was restricted. Additionally, regardless of economic disruptions or geopolitical issues, we're observing an increasing interest from foreign investors in the U.S. and in the services provided by firms like ours. This is a genuine opportunity, and I'm feeling optimistic about it.

Great, Rick. Thank you very much for the insight this morning.

You're very welcome. Thanks. Always good to hear from you, Chris.

The next question will come from Christopher Sakai with Singular Research. Please go ahead.

Good morning.

Good morning.

Can you talk about new hires and how that's looking in the volatile market?

I am always on the lookout for exceptional talent. The challenge lies in finding individuals who will integrate well into our strong culture, manage finances in alignment with our philosophy, and possess the capability to attract assets and clients. Ultimately, that is the essence of our business, along with having a long-term outlook regarding their workplace. We have been quite successful in this endeavor and in nurturing the next generation here. We have made significant investments in people to develop future leaders and are diligently focusing on our third generation. Not surprisingly, as we celebrate our 20th anniversary, this is crucial for our firm and the sustainability of our strategy. It is not easy, and we want to ensure the people we bring on board are set up for success before we take on too much. We increased our hiring before the pandemic and have continued to do so during it; those hires are performing well. However, the nature of this business requires time to succeed, and there is an extensive apprenticeship involved in cultivating the next generation who have recently become partners. I am becoming more proactive about hiring and considering our options in this area due to the current expenses in the M&A market. The individuals I recruit are fiduciaries rather than brokers, which represents a stark difference from our business model. We will proceed with caution in these hiring decisions. I haven't made many significant high-level hires recently, but I am actively seeking talent. This relates to my previous comments regarding our EBITDA margin, which I have discussed consistently over the past few years. As noted earlier, we have managed to grow at a pace faster than the compensation expenses.

Great. And then can we talk about your dividend, and when or would you see an increase there?

Well, I've never given any future guidance of any kind really, other than to give color around our pipelines and how we feel about the environment of the business generally, in the context of our four-pronged strategy, which we talked about a fair bit. So I'm not going to speculate on that. I will say that just to state our basic policy, we think it's very important to return capital to shareholders on a very regular basis and on a meaningful basis, given the size of the company in the markets. We want to reward shareholders on a regular basis for holding this stock and return capital on that form, amongst other things that we're doing. It's an important component. The yield is an important component, that distribution. We have a policy, if we can afford to do so, of increasing it on a regular basis, which if you look at the history of this firm, we have done on a very regular basis. It has been an important part of the compounding return to our shareholders and we continue to believe that. We do not have a yield target per se, it's more about making sure that we're doing it at a meaningful level. You can interpret that as you wish. We have the cash, both in the C-Corp and from the business, to sustain whatever dividend we put in place for a prolonged period of time despite market disruptions. We want to avoid cutting it, if we can. We're in a very solid position to sustain where we are. But that said, the company is doing really well and we have increases on a regular basis. So we'll see what happens in future quarters. But that's about as much as I can say about it.

Chris, just for your reference, we last increased the dividend in the latter part of last year, just to remind you of that.

Great. Thanks for that.

You're welcome.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Richard R. Hough III for any closing remarks. Please go ahead, sir.

Great. Thank you so much for joining us for our first quarter results. Really appreciate the good questions this morning. As I mentioned, despite volatile markets and global news and the economy, I'm very pleased with where we stand as a company. Our progress looks good. The opportunities are strong. I just want to reiterate, it's environments like this where Silvercrest can shine. We may have to take a step back or two, that's normal in this business. I don't view the past quarter as a step back. That's just looking at the market. This is normal stuff. Whatever it may be economically or in the markets, this firm is well poised to continue executing our strategy on behalf of our clients, as well as shareholders. It's frankly something that has some side benefits that we welcome over the long-term. So thanks very much for tuning in and look forward to talking to you next quarter. Thanks.

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