Silvercrest Asset Management Group Inc. Q3 FY2022 Earnings Call

Good morning, and welcome to the Silvercrest Asset Management Group, Inc. Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, this event is being recorded. Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward-looking statements. They are based on 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 the statements that are made. Those factors are disclosed in our 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 the date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference over to Mr. Rick Hough, Chairman and CEO of Silvercrest. Sir, please go ahead.

Thank you very much. And thanks for joining us today for our third quarter results. Volatile market conditions continue to affect Silvercrest’s assets under management in the third quarter of 2022. The firm’s discretionary AUM, which drives revenue, decreased to $19.4 billion as of the end of the third quarter from $22.5 billion as of the end of the same period in 2021. The firm’s third quarter 2022 revenue decreased year-over-year to $29 million from $33.5 million. Total AUM now stands at $27.4 billion. The firm’s quarterly adjusted EBITDA was approximately $8.2 million, and annualized adjusted EBITDA run-rate of $32.8 million. Silvercrest’s third quarter 2022 adjusted EBITDA margin was 28.1%, a healthy margin in light of declining AUM and the associated revenue. Silvercrest added relationships during the third quarter and new accounts partially offset outflows for taxes and rebalancing. Silvercrest’s suite of proprietary equity capabilities have maintained solid performance and our sub-advisory relationships continued to add assets during the third quarter of 2022. And Silvercrest launched a Large Cap Value Unit Investment Trust during the quarter. Silvercrest repurchased approximately 286,000 shares of Class A common stock for approximately $5.2 million during the third quarter. Market volatility and uncertainty create long-term opportunities that typically benefit the high quality of Silvercrest’s capabilities, and we look forward to more stable markets in the future. On November 1, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.18 per share of Class A common stock. The dividend will be paid on or about December 16, to shareholders of record as at the close of business on December 9. Scott will now go through the financial steps and then we'll take questions.

Great, thanks Rick. And again as disclosed in our earnings release for the third quarter, discretionary AUM as of September 30 of this year was $19.4 billion and total AUM as of the same period was $27.4 billion. Revenue for the quarter was $29 million and reported consolidated net income for the quarter was $5.6 million. More detail about the third quarter, again, revenue was approximately $29 million. That represented approximately a 13% decrease over revenue of approximately $33.5 million for the same period last year. This decrease was driven by market depreciation and net client outflows in discretionary AUM. Expenses for the third quarter were $21.9 million, representing approximately a 13% decrease from expenses of $25.3 million for the same period last year. This decrease was primarily attributable to decreases in compensation and benefits expense decreased of $2.5 million and general and administrative expenses of $0.9 million. Compensation benefits expense decreased by $2.5 million, or approximately 13% to $16.3 million for the three months ended September 30th of this year from $18.8 million for the three months ended the same period a year ago. The decrease was primarily attributable to a decrease in the accrual for bonuses partially offset by an increase in salaries and benefits expense as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by $0.9 million to 5.7 million for three months ended September 30th of this year from $6.5 million for the same period a year ago. This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the Cortina acquisition of $1 million and a decrease in trade errors partially offset by an increase in travel and entertainment expense. Reported consolidated net income was $5.6 million for the quarter as compared to $6.4 million in the same period last year. Reported net income attributable to Silvercrest for the Class A shareholders for the third quarter of this year was approximately $3.4 million or $0.35 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 $8.2 million or 20.1% of revenue for the quarter, compared to $10.3 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 and non-recurring items, and income tax expense, assuming a corporate rate of 26% was approximately $5 million for the quarter, or $0.35 cents and $0.34 cents 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 at 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. Looking at the nine months, revenue was approximately $94.7 million, which represented a 3% decrease over revenue of approximately $97.8 million for the same period last year. This decrease was driven primarily by market depreciation, partially offset by net client inflows in discretionary AUM. Expenses for the nine months ended September 30th of this year were $60.3 million, representing approximately a 21% decrease from expenses of $76.6 million for the same period last year. This decrease was primarily attributable to decreases in both compensation and benefits expense and general and administrative expenses of $2 million and $14.3 million respectively. Compensation expense decreased by $2 million or approximately 4% to $52.9 million for the nine months ended September 30th of this year, from $54.9 million for the same period last year. The decrease was primarily attributable to decreases in the accrual for bonuses and equity-based compensation expense due to a decrease in the number of unvested restricted stock units and unvested non-qualified stock options outstanding, partially offset by an increase in salaries and benefits expense as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by $14.3 million, or approximately 66% to $7.4 million for the nine months ended September 30th of this year, from $21.7 million for the same period last year. This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina acquisition of $15.5 million, occupancy and related costs and trade errors, partially offset by increases in travel and entertainment expense, professional fees, and portfolio and systems expense. Reported consolidated net income was $27.5 million for the nine months ended September 30th of this year. This compared to $16.4 million in the same period last year. Reported net income attributable to Silvercrest for the nine months ended this year was approximately $16.8 million or $1.70 per basic and diluted Class A share. Adjusted EBITDA was approximately $27.6 million, or 29.1% of revenue for the nine months ended September 30th of this year, compared to $30.4 million or 31.1% of revenue for the same period last year. Adjusted net income was approximately $17.5 million for the nine months ended this year or $1.22 and $1.19 for adjusted basic and diluted EPS respectively. Quickly looking at the balance sheet, total assets as of September 30th were $205.1 million, compared to $229.3 million as of the end of last year. Cash and cash equivalents were approximately $67.4 million at September 30. This compared to $85.7 million at the end of last year. As of September 30th of this year, total borrowings were $6.3 million and total Class A stockholder’s equity was approximately $87.1 million as of September 30th of this year. That concludes my remarks. I'll turn it over to Rick now for Q&A.

Thanks, Scott. Look forward to questions. Thank you.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. Our first question today comes from Sumeet Mody from Piper Sandler. Please go ahead with your question.

This is Brian on for Sumeet. Just a couple of questions for you, first, outflows continued higher than we expected at $507 million in the quarter. I know you had a lot of tax-related outflows last quarter. Could you just tell us how much have leaked into the third quarter and if there's any uptick in sort of your normal flow profile?

You know that the data on our flows is pretty lumpy for the high-net-worth audience and is not all that predictable. I can't characterize, it's too short a period of time. There were more tax payments in the third quarter, for those who pay in the third quarter, as you might expect. I can't characterize that in terms of trends, though, we did have an uptick, as I said in new relationships, some of the outflows were rebalancing. So I really have no more color for you beyond those observations.

Got it, got it, thanks. And then a question on modeling just for comp expenses. How should we think about the comp ratio for the full year and the true up you expect in the fourth quarter? Should we expect to see the full year accrue to that 55% level or given the revenue dynamics, can we see that come in higher than that this quarter?

Well, we accrue for 55%. There's no way to predict what's going to happen in the fourth quarter. That's so heavily influenced by markets. A lot of our comp is directly determined on a formula basis. So it does trend down with revenue and markets. The nine months of last year compared to the nine months of this year in terms of revenue is down, I think, 3%. So that's not a dramatic change. We can also end up with performances potentially, in the fourth quarter, which adds some volatility. So at this point in time, there's no good visibility into how we will compare to the 55% when we ultimately true things up. Some years, we've been a little below. We were quite a bit below last year. Some years, we've been spot on or just a bit above. We've always hovered around it. At this point in time, I don't see a material difference to what we've seen in past years.

Okay, great. That's helpful, thank you. And then yeah, last one for me. We like seeing you guys take advantage of the dip with a solid level of buybacks in the quarter at over $5 million. So how should we think about your appetite just going forward and how you prioritize the repurchases? Is it more of a regular cadence planned ahead? Or should we expect you to be more opportunistic, depending on the market environment? Thanks.

Yeah, I think given the amount that is left, that we have set aside for buybacks, we have stated very clearly that we wanted to get that money to work in repurchasing shares. Obviously, in an environment like this, it's more of an opportunity to do so. And since we're committed to it, you can expect to see more buybacks going forward. We've been active in the market as you saw, we are sensitive to price of course, in the use of shareholder capital, but at current levels and below, we've seen it as still having significant value for shareholders to treat them in this way.

Great, thank you.

Our next question comes from Sandy Mehta from Evaluate Research. Please go ahead with your question.

Yes, so good morning, a couple of questions. Do you have a pipeline or a flows number in terms of the actionable pipeline?

I'm not sure what you're asking to me. What line?

The actionable pipeline?

Oh, the actionable pipeline? I apologize. Some of the audio, in fact, the last one or two calls have been a bit unclear for us in this room. So I'm sorry if we're just focusing very intently. So yes, the actionable pipeline.

No, no problem.

Yeah, so the actionable pipeline is $1.43 billion. This quarter, that is for US value, US growth, international as well as OCIO. That has come down from what we announced last quarter. The primary reason it's come down is because of wins. So that's good. The pipeline remains strong. But the wins that we had recently have drawn that pipeline down a bit. We would expect that, because as you know, we define the pipeline very, very tightly as invite-only RFP, invite-only searches. And we're in the final, so we have a high hit rate on that pipeline.

And the second question is, could you comment a little bit further on this, the launching of the Large Cap Value Unit Investment Trust? What is the opportunity in that? And also, value as an asset class, value has significantly outperformed growth this year and it's held up in a bear market as it should. It doesn't always but it has this year. Does that help you in terms of marketing or are you seeing more interest because of that? Thank you.

The pipeline for US value has slightly decreased, but this is due to our recent wins. We aim to establish long-term partnerships with our consultants. I can't definitively say that the recent environment, where value has outperformed growth, has led to increased activity. The dominance of growth over value lasted for more than a decade, so it takes time for consultants and allocators to shift their focus. We prefer attracting investors based on the quality of our work, risk management, and capital preservation rather than just because they see value performing well now. However, if this trend continues, it may be beneficial in the long run, though I haven't observed that yet. Regarding the Trust, it's a more advantageous structure than a mutual fund, providing a streamlined way for investors to gain exposure to our strategies. This opens up additional growth opportunities, starting with large cap value, and I anticipate we will receive mandates in the fourth quarter to initiate that. Access to this capital will certainly enhance our future growth prospects.

Great, thank you so much.

You're welcome.

Our next question comes from Feddie Strickland from Fig Partners. Please go ahead with your question.

Thanks. It's actually Danny, they never asked the company but anyways, good morning Rick, hi.

Hey, good morning. How are you?

Good. I'm good. I'm good. So I was just wondering, I know you talked about the overall actionable pipeline. Can you speak a little bit specifically to the OCIO business and just kind of what's going on there both domestic versus international? I know you have some European clients on-boarding and was also just curious if there's more of those in the pipeline?

Sorry, you were on mute, as we were listening. So the European and clients are not OCIO, they are wealthy families that we're talking to. We've always had exposure to Europe and Switzerland, Netherlands, Germany, significantly. I think you're referring, recently we were talking to Polish families as a result of Russia's invasion of Ukraine, but that's not OCIO unless they were just going to be an enormously large family office. So that's a traditional wealth management relationship where people are looking for exposure in the US dollar and US markets and diversification away from Europe for structural reasons. There's more to come there, we're talking to multiple families. But I don't tend to distinguish that a lot from the US market. We've always kind of had a global footprint. It just happens to be growing, which I do like, and ultimately, any new client means the potential for new referrals, which is exactly what's happening in that particular case. With regards to OCIO, that is largely a US business. It's certainly where our focus is within the pipeline right now. The actionable pipeline for OCIO is almost $700 million, just shy of that. I think its $670 million or thereabouts of that $1.43 billion total pipeline. So it's a substantial part of our total pipeline of potential new business. The amount of AUM within the OCIO business has come down a bit with the markets as you might expect, so it's been hovering just below a billion dollars. We were well over a billion dollars before the markets came down. So hope that provides enough color, we should expect to hear whether we've won a couple of mandates that were quite close or in the finals very soon. So that should happen in the fourth quarter.

Got it and appreciate the clarification on the European clients there.

Sure.

And was just curious to what you're thinking with regards to the dividend are more dividend increases possible or do you prefer to spend retained earnings elsewhere? You know, are you are you more focused on the buyback right now or is a dividend increase possible, I guess it was?

The amount of cash flow going out and the pay ratio are important to us and we monitor them when setting our dividend policy. We believe it’s essential to provide our shareholders with regular and meaningful dividends, increasing them over time in a sustainable manner, even during significant market downturns like we've seen this year. Our dividend is currently at a level that reflects this approach. As you know, we increased it last quarter, and we will continue to do so as long as the revenue and cash flow can support it. We don't have a specific dividend target, but I believe the current level is good. We will evaluate it next year, and historically, we have increased it annually. Whether we will do that next year depends on our situation, which I can't predict. The buyback plan was approved over a year ago, and it will be around two years by the second quarter or end of the first quarter next year. I haven't been actively adding to the buyback fund since we announced it, as we haven't even fully utilized what we have. However, we have been accumulating more cash since then. If our stock continues to represent good value and we lack other investment opportunities, we will re-evaluate the buyback depending on our current activities. In response to the first caller's question about our strategy for buying back shares, I am committed to using that capital, so you can expect us to remain active in the market. I have set aside the cash already, and I will consider this again next year around the same time we made our initial decision.

Got it. And then just one more question. Just thinking about the pricing for investment firms under your longer term radar, how much has volatility benefactor there for those companies? And do you think that that's changed their calculus at all on whether or not they would want to look for partners?

I do think the market is changing a bit in two different ways, that's a great question. I don't get to talk about this very much. But I do think it's been clear how I felt about the acquisition market as well as the number of firms that would be compatible fit well with Silvercrest and its smaller than one might think when you're looking for an ultra high net worth business. That's run well, that we feel we can organically grow, that is culturally compatible and is in geographic area that would be desirable for our brand. I'm noticing two things. One is that the deals that are getting done in the wealth management space are undergoing more scrutiny by buyers for a couple of different reasons. One, obviously, the tailwinds of low interest rates, and a bull market have changed the dynamics. It's a lot harder to make the financial engineering work or to be confident in that financial engineering over a sustained period of time, especially when some buyers are using meaningful leverage against EBITDA, which I never thought was all that prudent in this business at the level some buyers were going. So that's number one. So we're seeing more earn-outs which we've always done in those deals. We're seeing a much closer scrutiny of the true organic growth of companies, which is much lower than I think many market observers understand in this business. And I'm seeing a bit more prudence around whether a company can organically grow in the future. On the selling side, the same thing is happening, but it does put more strain on businesses. A lot of smaller companies we look at are eating a lot of their economics if not all of it. Lowering revenue puts constraints on the business and raises into question the sustainability of being able to invest for future growth, which in this business, at least on the wealth side means more bodies. So at the margins, I think that could help. I haven't seen it yet though, to be honest. Again, part of that is how selective we're going to be about the right fit for this company in order to grow into the future. I am having conversations as I always have said I have and there were opportunities for us. I do get the sense that might be a bit moving our way but it's a sense, it's something I can't put my finger on it in a really firm way. Certainly asset management, which comparatively has been a bit out of favor, certainly has come down even more so as compared to wealth. For obvious reasons, it's just much more leveraged to the market and much more sensitive to performance. Thankfully, as you look at our company, our equity performance across the board, whether you're looking at growth or value, has done extremely well.

Got it. That's really helpful, I appreciate all the color. Thanks for taking your question.

Absolutely.

Our next question comes from Chris Sakai from Singular Research. Please go ahead with your question.

Hi, good morning.

Good morning.

You mentioned you had an uptick in new relationships. Can you comment on how many you added?

Yeah, I normally don't comment, Chris on how many, I'll just say it was several.

Okay. And then can you provide some color on the environment out there for adding new relationships? What do you guys see?

For us, it's a business built on referrals, and it can be unpredictable. I've never provided a pipeline for wealth management because it's very challenging to gauge a pipeline that we feel confident will translate into business. This process takes a long time. Conversations with families can continue for years before any results materialize. Simply engaging with a family isn't sufficient for me to establish a pipeline, which is different from the institutional equity business where we have a structured process driven by consultants or RFPs, allowing us to clearly assess our position and the chances of acquiring new business. Wealth management is much harder to define. Generally, during periods of market disruption and volatility, wealthy clients tend to discuss their situations with friends who might refer business to us. Our high level of client service, proactive communication, and ability to help clients understand their allocations, as well as our positioning and portfolio performance, set us apart from larger banks, brokerages, or even competitors who might not provide the same care. These factors are crucial for high-net-worth clients. Volatile markets present us with an opportunity not just to perform well but to assist our clients with important relational aspects of the business. From our experience, especially following the global financial crisis and other disruptions, we see clients reflecting on their wealth management. This often results in increased business, although it doesn't usually materialize during the volatility itself; rather, it tends to occur when markets stabilize and the economy shows signs of recovery. Speculating on this, it seems we need time to see how things unfold. Ultimately, our business is unpredictable and lacks a pipeline, making it difficult to characterize.

Okay, thanks for that.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the conference back over to Richard Hough for any closing remarks.

Thanks. I just want to show my appreciation here and thank everyone for joining us for our third quarter call. I appreciated the questions. I was able to give some pretty good color as compared to some other calls. And look forward to talking to you all at the end of the fourth quarter. Thanks.

And with that, we will conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.