Silvercrest Asset Management Group Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to the Silvercrest Asset Management Group Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Before we begin, I'll remind you that during today's call, certain statements made regarding our future performances 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 caption Risk Factors. For all forward-looking statements, we claim the protection 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 obligations to update them. Now I'd like to turn the conference over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead, sir.

Thank you. Thanks for joining us for the first quarter results for Silvercrest. Despite volatility, markets were supportive during the first quarter of 2023, with Silvercrest concluding the quarter with total assets under management of $29.9 billion and discretionary AUM of $21.3 billion. Discretionary AUM, which primarily drives our revenue, increased 1.9% over the fourth quarter of 2022. Nonetheless, our discretionary AUM has declined 10.5% year-over-year since the first quarter of 2022. Consequently, while business results have increased over fourth quarter results, they remain down on a year-over-year basis as markets recover. Our revenue fell 12.2% for the first quarter compared with 2022. This decline in revenue significantly affected adjusted EBITDA and adjusted diluted earnings per share. Our adjusted EBITDA declined year-over-year to $8.2 million for the first quarter compared to the first quarter of 2022. Adjusted diluted earnings per share also declined year-over-year to $0.35 for the first quarter compared to the first quarter of 2022. Silvercrest adjusted EBITDA margin of 27.8% remains historically healthy for the company. Economic uncertainty and market volatility often create long-term opportunities that benefit the high quality of our capabilities. The pipeline of new business opportunities has also increased over the fourth quarter of 2022 and has increased substantially since the first quarter of 2022. The firm's outsourced Chief Investment Officer initiative also increased during the first quarter and now manages AUM of $1.52 billion. Silvercrest repurchased approximately 96,000 shares of Class A common stock for approximately $1.6 million during the first quarter. On May 2, 2023, the Board of Directors declared a quarterly dividend of $0.18 per Class A share of common stock. That dividend will be paid on or around June 16 to shareholders of record as of the close of business on June 9. Scott, if you could go through the financials, and then we'll open up the call for questions.

Sure. Thanks. As disclosed in our earnings release for the first quarter, again, discretionary AUM as of March 31 of this year was $21.3 billion and total AUM as of March 31 of this year was $29.9 billion. Revenue for the quarter was $29.4 million. Reported consolidated net income for the quarter was $5.3 million. Revenue decreased approximately 12% year-over-year from revenue of approximately $33.5 million in the first quarter of 2022. This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the first quarter of this year were $22.7 million, representing approximately a 26% increase from expenses of $18.1 million for the same period last year. The increase was primarily attributable to an increase in G&A expense of $6.8 million, partially offset by a decrease in compensation and benefits expense of $2.2 million. Compensation and benefits expense decreased by $2.2 million or approximately 12% to $16.5 million for the first quarter of this year from $18.7 million for the same period last year. The decrease is primarily attributable to a decrease in the accrual for bonuses of $2.6 million, partially offset by an increase in salaries and benefits of $0.4 million, primarily as a result of merit-based increases and newly hired staff. G&A expenses increased by $6.8 million to $6.2 million for the first quarter of this year from negative $0.6 million for the same period last year, which was primarily attributable to an adjustment to the fair value of contingent consideration related to the Cortina acquisition of $6.5 million that was recorded during the first quarter of 2022, in addition to increases in professional fees, portfolio and systems expense and travel and entertainment expense. Reported consolidated net income was $5.3 million for the quarter as compared to $12.4 million for the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of this year was approximately $3.2 million or $0.34 and $0.33 per basic and diluted Class A share, respectively. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore and nonrecurring items, was approximately $8.2 million or 27.8% of revenue for the first quarter of this year compared to $10.3 million or 30.6% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and income tax expense assuming a corporate rate of 26%, was approximately $5 million for the quarter or $0.36 and $0.35 per adjusted basic and diluted EPS, respectively. Adjusted EPS is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reported period for basic adjusted EPS. And to the extent dilutive, we add unvested restricted stock units and nonqualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at the balance sheet, total assets were approximately $178.6 million as of March 31 of this year compared to $212.7 million as of the end of 2022. Cash and cash equivalents were approximately $41.6 million at March 31 of this year compared to $77.4 million at the end of last year. Total borrowings as of March 31 of this year were $4.5 million and total Class A stockholders' equity was approximately $84.4 million at March 31 of this year. That concludes my remarks. We'll now turn it over for Q&A.

Thanks, Scott.

Thank you. Now I’ll begin the question-and-answer session. First question comes from Sumeet Mody of Piper Sandler. Please go ahead.

Good morning, Sumeet.

Hi. Good morning, guys. Wanted to start with capital allocation. I know you guys last quarter, I believe, talked about wanting to put more capital to work towards your purchases. It seems like the dip in March let you guys repurchase pretty efficiently, but the magnitude was maybe a little lower than we were expecting. I'm just wondering how should we think about your appetite for repurchases going forward? I mean, should we be looking at it as some kind of percentage of cash flows or net income? And any help there would be appreciated.

Yes. I'll start. I would not look at it as a percentage of net income or cash flows. I would look at it more as the opportunity of where we can get accretion. And if we're in discussions like we were three years ago with a great potential partner as with the Cortina purchase, that may slow down my purchases because I've got great use of capital or return on invested capital, other opportunities in the marketplace that we're really evaluating. It's much more about the opportunity cost of using that capital for buybacks versus some other strategic alternative. The way I look at it is, if I've got cash to put to use, I think it can be accretive to buy back shares. I'm going to buy back one of the better asset management companies, I know, which is Silvercrest. So much less about the percentage of a return on capital to investors. Similarly, I look at the dividends in terms of making sure I'm giving a nice, high, steady return to investors, but one that I can sustain over a very significant period of time even in the wake of much more substantial market down drafts even stronger than what we saw last year. So that's the general way of how we look at it. Keep in mind that while we were very efficient with buybacks, I would agree with that, the Q1 window is shorter for stock repurchases for us. So that has a lot to do with the volume we were able to buy in the first quarter.

Great. That's helpful. Thanks, Rick. And then kind of sticking with capital allocation a little bit on the inorganic growth side. As far as the M&A environment, I mean, it just seems like the industry-wide activity in the wealth management space has really picked up over the last, say, 12 to 18 months, particularly compared to alternative and traditional asset management. So just kind of wondering if you can update us on if you've seen any shift in conversations between March and today on that side of the business, both from an M&A perspective or maybe even team lift outs or individual hires would be helpful.

Yes. Okay. So on the – well, I'll start with the M&A front. It was very strong, I think, a year ago, and it really fell off a cliff towards the end of last year. It has picked back up. As I've said before, keep in mind, a huge amount of that activity is not with regards to assets or companies that would be of interest to Silvercrest. A lot of them are regional retail, much smaller RIAs. They might have an accounting focus or something else. We're looking for high-end firms with a high-end clientele in money center cities. So of the set of firms and all of the activity, there's a very small subset that would be of interest to Silvercrest for our M&A. It absolutely has picked up. The other thing I would comment on is that pricing seems to be moderating a bit. I'd like that. I've been pretty vocal on our past calls about what I've seen in the marketplace with how people have used capital. And if nominal prices have only come down a bit, a small amount, I think the implicit pricing has come down a fair bit in terms of more money being used in earn-outs, much more scrutiny on the deals in terms of assets that come over when something is struck, et cetera. So I think that's supportive. With regards to hiring or potential lift outs, we usually don't participate in the normal lift outs you see from the larger firms, wirehouses or others that are aggressively recruiting and buying broker books. We work and look to hire people who are fiduciaries. Many of those serve in more of a private banking role and just fit well into our culture and how we work with clients. The environment has changed significantly with regards to potential hiring. You may recall that I did quite a bit of hiring starting five years ago, four years ago. We hit COVID. Those portfolio managers are growing at the firm, which is great. As a result of the banking crisis and people questioning their work environment for their clients, has resulted in me currently having probably more conversations with potential hires than I can recall over the past several years. It's very, very busy on that front for more potential people to add value to the firm. Because of the M&A environment, you never know what might happen. I certainly don't want to mislead anyone and suggest that we have mature conversations that are worth talking about. I'll just say that those discussions I've always said that we're holding, but it is very active in terms of the number of people we're speaking with.

Great. Thanks for all that color. And then last one, obviously, on the pipeline, so a 6-month actionable all between OCIO and equity asset classes. I know last quarter, you mentioned OCIO at around $690 million and the overall pipeline at like $1.65 billion. So it kind of equates to around $1 billion for equity. Just wondered if you could update us on those numbers.

It's come up quite substantially again. So last quarter, as you pointed out, the total institutional actionable pipeline very conservatively measured in a careful way, so it's true apples-to-apples, was $1.65 billion last quarter. It's now $1.95 billion. So we've added another $300 million to the pipeline. It should be pointed out that, that includes us getting some wins in the quarter. So without additional potential things in the pipeline, the pipeline would have decreased and decreased for good reasons, but it actually increased despite those wins. So that's great news for the future of the business. However, I don't want to be overly optimistic. I would characterize or we would characterize the U.S. long-only institutional search environment as very slow. The working relationship with consultants and how they are dealing with firms like us is just on a different pace. There are still a lot of them doing Zooms and not meeting in person. So we'll just have to see how long it takes for a lot of these things to land on our behalf. I'm very happy about the pipeline. We've done a great job at harvesting that over the years. It just feels like the sales cycle related to it has slowed down and is much more difficult. So I just want to be careful about how my comments are interpreted. Great pipeline, looking really good, especially compared with 2020 or a year ago, and certainly up nicely since last quarter. But again, the search environment itself feels – it just feels slow. With regards to OCIO, that pipeline is a little bigger. It's $695 million compared to $690 million at the end of the fourth quarter. But that also had some wins. We had approximately, I think, around a $30 million new OCIO client come on in the first quarter. So the OCIO business, which is now almost $1.52 billion, some of that went up with the market, of course, which was supportive in the first quarter, but it also includes another new client, which is really important to us, expanding the number of our clients in OCIO. At this stage, it's really just as important as us getting a nice new AUM in the door because it's important as we fill out RFPs and talk to people about the diversity and types of institutions that we're working with.

Great. Thanks for taking the questions.

Thank you. Next question will be from Sandy Mehta of Evaluate Research. Please go ahead.

Yes. Good morning. Last year was a very active year for new product launches. And any update on what progress you're seeing? I know it's still early days for these new products. And what are you likely to do this year in terms of new products?

Sandy asked Sumeet if he could comment on any new product she might have mentioned, as she did not recall details about new product development.

There were some new products experiencing growth earlier last year. In the fourth quarter press release, you mentioned a large cap value unit investment trust that was launched.

I'm not certain about last year, but when we acquired Cortina and enhanced our Milwaukee capabilities, we focused on small cap and micro-cap growth with a fantastic team. Our aim was to expand into large cap and multi-cap growth, which I referenced a year ago. The performance in multi-cap and large cap has been strong, attracting substantial high net worth assets under management. This is all managed internally, which is positive. Our large cap capability is gaining a solid foundation of assets under management that enhances its viability. The large cap value unit trust you mentioned is intended for institutional investors it adds to our options for institutions to invest in our large-cap value strategies. I don't anticipate significant product development this year; instead, we are looking to expand existing capabilities to foster growth. We have established a solid range of what I would consider standard asset classes at our firm, covering value, growth, and international across multiple market caps. Our focus now is to enhance these capabilities, especially within the growth team, which has delivered excellent results. The value team also has an established institutional business with potential for growth, but our primary focus will be on growth. One notable success in the first quarter came from the growth team. Therefore, I don’t expect much in terms of new product development; I prefer to consolidate and expand what we already have in a careful manner.

Okay. And given that markets were down last year in terms of equities as well as bonds, are you seeing less tax-related redemptions from clients this year, for example, in Q2? Are you seeing less of redemptions for that reason? Thank you.

I don't comment on forward quarters, the quarter that we're in. I usually report on that after I have all of the results. But in truth, I don't have that kind of granularity at this stage for the business. The flows are quite lumpy in the high net worth business. They can occur for a huge variety of reasons. However, you're right, last year was quite exceptional with regards to capital gains and taxes. And my expectation for exactly the reason you state, less deals, I think, that resulted in capital gains for our clients as well as down markets probably means that there will be less outflows this year as a whole for taxes. Remember, a lot of our clients file quarterly and have multiple tax payments. But that's my expectation. There's no way I actually know it at this stage.

Great. Thank you so much.

You’re welcome.

Thank you. Next question will be from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Thanks. Good morning. I just wanted to ask if Rick or Scott can remind us about the incentive payments and the final kind of finality here in midyear from your prior acquisition. And does that have any impact on the EBITDA margin going forward?

Yes. Great. Thanks, Chris. Scott will take that.

The liability associated with the earn-out arrangement, which was the growth payment due after the second quarter, will effectively decrease to zero as of June 30. It is currently less than $2,000, so there will be no future payment on that. This is why our GAAP numbers showed a significant increase in G&A expense, due to a fair value adjustment related to that arrangement from a year ago. However, from an adjusted EBITDA standpoint, any fair value adjustments related to the earn-out are either added back or deducted from GAAP numbers, ensuring that non-GAAP numbers are comparable year-over-year in this context.

Got it. Great. And then, I guess, just holistically, the EBITDA margin seemed to be somewhat normal, if I could use that word this quarter and kind of what you had thought. Is that a good impression?

Yes, I believe that is indeed the case. Just to provide some historical context, an EBITDA margin of around $27.8 million, or $28 million, is quite strong for the company. When we went public a decade ago and in the years that followed, we were pleased with that EBITDA margin. I still feel positively about it today. Back at the end of 2021, we achieved an EBITDA margin of about 32%, which was exceptionally high. It exceeded our expectations as we outpaced our investments. The performance fees also contributed to that surge. I anticipated that we would make further investments that might bring that EBITDA margin down, perhaps closer to our current levels. So, I would consider this situation quite normal. If some of the factors I mentioned earlier are realized, it’s possible our EBITDA might drop a bit. Hiring new staff impacts cash flow and the income statement directly, and you do not benefit from tax advantages as you would with an acquisition. However, the straightforward answer is that this is a normal situation and a significant improvement from the nearly 16% or 15.6% EBITDA margin we had in the fourth quarter, which was influenced by numerous year-end compensation adjustments.

Great. Then last question, just as back to your comment about having very busy conversations. I certainly can appreciate that. Do you think that this is sort of going to be a six, nine, even 12-month process and that there's a lot more of kind of slower moving where individuals may have gone to brand X, kind of forced upon them, and then they ultimately do change gears within a year? Is there kind of more of a longer tail to this process?

It's honestly a mix. I have no way of knowing you don't see these environments very often. I would say, look, there were those who were forced on add conversations, which some of those people still do. It depends on really their client base and the firm. We're going to be very, very careful compared to a lot of firms with regards to our culture and what we're building. It's not just about grabbing assets here. And there will be those, and we've been told that explicitly, hey, let me see what the new environment looks like and then maybe we'll talk. And then there were those who were actively speaking with us, and we'll see if there's a match or not. I'm not sure I can characterize it generally. So we'll see.

Got it. But the culture and your long-term principles, obviously, override the growth aspect. So thank you for pointing that out.

Yes, very clearly. It's just absolutely critical if you're building a sustainable growing business that doesn't get disrupted.

Great, Rick. Thank you and Scott very much.

Thank you, Chris.

Thank you. The next question will be from Chris Sakai of Singular Research. Please go ahead.

Hi. Good morning.

Good morning.

I have a question. Can you provide insight into what Silvercrest is doing in terms of marketing and how it plans to drive gross client inflows?

Yes. Well, there's really three key organic growth areas of the firm. One is the institutional business, the institutional pipeline that I was talking about. That is primarily done through consultant and intermediary relationships with institutions. We have dedicated marketing professionals associated with each of our institutional capabilities. So they're product-specific. But yet, the consultant relationships are coordinated and shared across the firm. The second would be the other pipeline I mentioned as part of that, the OCIO Chief Investment Officer capability of $695 million. That business kind of sits in between pure institutional type cultivation of consultants and intermediaries and RFP processes. We have marketing devoted to that. But a lot of nonprofit foundation endowment boards have high net worth individuals that sit on them, often those processes are driven by the fiduciary Board itself or the investment committee on a foundation itself and is very relationship-oriented and looks a lot more like the high net worth business. The third is the high net worth business in general, the 70% of our discretionary AUM. That is a function of our brand, supporting our brand with advertising, event sponsorship, visibility, appearance on CNBC and other venues or marketing materials and is a referral relationship business. That is up to the existing portfolio managers working with our clients to get those referrals, ask for those referrals to network to be involved in their communities. That is one aspect of it. It's very lumpy, hard to predict, and something I've never given a pipeline to because you just can't measure a pipeline with the kind of accuracy and comparison that we can on the institutional side. I would say it's quite busy. Just looking at our marketing output, which I can tell, quite a bit of the first quarter was related to the high net worth business. I personally work on prospects, probably have more than I usually do, a lot of that due to the banking disruption. And then the final piece of growing that business is the potential for high-quality professionals with the right kind of business who fit our culture to join the firm, which we've talked about already on this call, and we're very active about pursuing.

Okay. Thanks for that. And can you talk about the banking crisis? How might that possibly affect Silvercrest if at all?

It occurs in three main ways. First, on a qualitative level, we engage closely with our clients, even when they have demand deposits at banks, without any fees involved. Being a high-touch wealth management firm, they expect our guidance on banking matters and support in addressing the challenges they encounter with their institutions, particularly regional banks. Many of our clients are associated with First Republic, so we have been quite occupied addressing their concerns and helping them manage their accounts for protection, especially during the uncertain period regarding First Republic. The second aspect pertains to our business and our broker-dealer relationships, where we focus on how our clients' assets are managed and ensuring that we act as prudent fiduciaries. I feel more positive about that, but it necessitates ongoing discussions to remain informed about the environment and best practices for client protection. The third aspect involves the conversations I am having during this disruptive period, which presents opportunities. As I mentioned earlier, clients might reconsider whether to consolidate their banking and wealth management services or to maintain them separately, opting for a pure fiduciary like Silvercrest for advice while managing their banking needs independently. I am confident that this trend is developing. Additionally, professionals at these institutions who receive many inquiries from clients may also be experiencing challenges that could lead them to consider firms like Silvercrest. This summarizes how the disruption influences our firm, from our business model to the emerging opportunities in the market.

Okay. Great. Thanks for the answers.

You’re very welcome. Thank you.

Thank you. This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Rick Hough for closing remarks.

Thanks. I really don't have any closing remarks. It was a constructive quarter. I think there's a lot of opportunity. It's nice to see that our business development pipeline has grown and that we have any number of conversations to progress the business. As always, I really appreciate our shareholders and the questions that we get from analysts. We look forward to giving you another report soon. Thanks so much for joining us.

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