Q3 2020 Silvercrest Asset Management Group Inc Earnings Call
Good morning, and welcome to the Silvercrest asset asset Management Group Inc. Q3, 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions.
Please note. This event is being recorded before we begin let me remind you that during todays 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 the filings with the FCC under the caption risk factors for all such forward looking statements. We claim the protection provided by litigation Reform Act of 90 to 95.
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 like now to turn the conference over to Rick you Chairman and CEO Silvercrest. Please go ahead.
Hi. Thanks. This is Richard Hobbs, joining you I appreciate you joining us for our third quarter 2020 call. So.
Silvercrest discretionary assets under management, which drove our top line revenue grew approximately 4% during the quarter to 17.9 billion. That's up September 30, 2020, the growth in discretionary assets under management was supported by markets, increasing our asset values by 700 million along with $200 million in new client accounts.
These increases were offset by outflows of 200 million primarily for tax payments as a result of delayed tax deadlines juice. The CRADA bias crisis. The firm's total assets under management during the quarter increased approximately 3% and the border with 24.4 billion in total assets under management.
Due to this year's market recovery continued organic growth and our accretive acquisition in the second half of 2019, the firm's revenue our adjusted net income adjusted EBITDA and adjusted EBITDA margins for the nine months ended September 32020 have each grown year over year for the nine months ended September 30 2020.
Diluted earnings per share increased approximately 13% year over year.
Silvercrests outsourced chief investment officer, So CIO.
Initiative, which we began marketing heavily a year ago contributed meaningfully to new business development in the third quarter and is poised to cross important 80, when thresholds to be considered for new of CIO mandates. We continue to be proud of our progress in that business.
Democrats institutional asset management pipeline is rebuilding along with new initiatives and we expect the institutional business to improve it contribute new AOMT the firm.
Regardless of the environment Silvercrest will continue to opportunistically seek to effectively deploy capital to enhance and complement our good organic growth Silvercrest has successfully made investments to organically grow the business and we'll continue to make those investments with its cash flow reserves, we hired new high net worth portfolio management professionals in New York and will contain.
We need to add new talent to maintain a high level of client service and to grow the business on November 4th 2020, the company's board of directors declared a quarterly dividend of 16 cents per share class a common stock the dividend will be paid on or about December 18, 2020 to shareholders of record as of close of business on to.
December 11.
With that I'll turn it over to Scott to review our financials and then we'll open the line for questions. Thanks, Thanks, Rick as disclosed in our earnings release for the second for the third quarter, a discretionary UN hedged since September Thirtyth 2020, with 17.9 billion and totally you and as of September Thirtyth.
It was 24.4 billion revenue for the quarter was 27.2 million reported consolidated net income for the quarter was 3.5 million.
Revenue for the third quarter was approximately 27.2 million representing approximately a 2% decrease over revenue of approximately 27.8 million for the same period last year. This decrease was driven by the continued impact of COVID-19 on the financial markets that occurred during the first quarter 2020.
Which had the effect of reducing AIU and in addition to net client outflows and this was partially offset by market appreciation during the third quarter of this year. Most of our revenue is built in advance based on closing market values on the last day of the previous calendar quarter third quarter 2012 revenue is primarily based on.
At June Thirtyth 2020 market valleys.
Expenses for the third quarter were 22.2 million, representing approximately a 3% increase from expenses of 21.5 million for the same period last year. This increase was primarily attributable to an increase in general and administrative expenses of <unk> point Sixmillion compensation and.
Benefits expense was basically flat in the third quarter compared to the same period last year.
The increase of approximately 2.6 million in general and administrative expenses in the third quarter of this year was primarily attributable to increases in the fair value of contingent consideration related to the 14 acquisition and portfolio and systems expense, partially offset by decreases in professional fees.
Let's do the lower court T. acquisition related fees travel and entertainment and reduced office expenses due to cope in 19. Furthermore, there was a decrease in storage and moving expenses as a result of the completion of the renovation of our space in New York City.
Reported consolidated net income was 3.5 million for the quarter. This compared to 4.8 billion in the same period last year.
Reported net income attributable to silvercrest or the class a shareholders for the third quarter. This year was approximately 2.1 million or 22 cents 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 nonrecurring items was approximately $8.1 million or 29.9% of revenue for the quarter compared to 8.9 million or 32.1% of revenue for the same period last year.
Adjusted net income, which we defined as net income without giving effect to non core nonrecurring items and income tax expense, assuming a corporate rate of 26% was approximately $5.1 million for the quarter were 35 cents per adjusted basic earnings per share and adjusted diluted earnings per share.
Adjusted earnings per share is equal to adjusted net income divided by the actual class a and class B shares outstanding as of the ended 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 shares outstanding.
To compute diluted adjusted EPS.
Looking year to date revenue for the nine months ended September Thirtyth of this year was approximately 79.6 million representing approximately a 7% increase over revenue of approximately 74.3 million for the same period last year. This increase was driven primarily by net client inflows in describe.
Scenario UN including $1.7 billion in assets under management acquired on July Onest 2019 in connection with the 14 acquisition, partially offset by net client outflows and market depreciation in the first quarter of this year.
<unk> expenses for the nine months ended September Thirtyth were $60.6 million. This represented approximately a 2% increase from expenses of 59.6 million last year.
Comp and benefits expense increased approximately $1.7 million during the nine months ended September thirtyth of this year compared to the same period last year.
General and administrative expenses decreased approximately 2.7 billion during the nine months ended September thirtyth of this year when compared to the same period last year.
Looking at comp and benefits increased for the nine months ended September Thirtyth. This year, primarily because of an increase in salaries and benefits expense as a result, the merit based increases and newly hired staff, including the addition of Cortinas staff and an increase in the accrual for bonuses, partially offset by a decrease in equity based comp.
Station expenses due to a decrease in the number of Unvested restricted stock units and Unvested non qualified stock options outstanding.
The decrease in general and administrative expenses for the nine months ended September Thirtyth of this year was primarily because of year to date decreases in the fair value of contingent consideration contingent consideration related to the 14 to deal.
Travel and entertainment and reduced office expenses all related to cope in 19 professional fees were lower due to lower court T. acquisition related fees, and we also had reduced printing costs and storage and moving expenses.
Were increases in depreciation and amortization.
Expenses related mainly to the amortization of intangible assets related to the 14 acquisition entered a renovation of our office space in New York City occupancy and related expenses increased in addition to portfolio in systems expense and there were increases in the fair value of contingent consideration ration related.
Due to the Jamison cap is silly acquisitions.
Reported consolidated net income was approximately $14 million for nine months ended September thirtyth this compared to 11.2 million in the same period last year.
Reported net income attributable to silvercrest or the class a shareholders for the nine months ended September Thirtyth was approximately $8.1 million or 85 cents per basic and diluted class a share adjusted EBITDA was approximately $23 million or 20.9% of revenue for the nine months ended.
September of this year, this compared to $21.3 million or 28.6% of revenue for the same period last year.
Adjusted net income was approximately $14.1 million for nine months ended September this year or 98 cents per adjusted basic earnings per share and 97 cents per adjusted diluted EPS.
Total assets were approximately 201.2 million as of September Thirtyth this compared to to 14.2 million as of December 30, Onest last year cash and cash equivalents were approximately $48.2 million in September.
Compared to 52.8 billion at December 30, Onest of the end of last year.
Total borrowings as of September Thirtyth of this year were 13.5 million and total class a stockholders equity was approximately 69.5 million at September Thirtyth of this year.
That concludes my remarks ill turn the call over to Rick for acuity. Thanks, very much Scott you can open the lines now for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Sumit Modi with Piper Sandler. Please go ahead.
Hi, Thanks, Good morning, guys. Good morning. Good morning, just just wanted to start with the wholesale business a couple of questions here, but just wanted to get some color you know first around the size of the platform today and how big is that I think you mentioned 500 million last quarter and this quarter. You mentioned is starting to kind of reached that inflection point today. So can you talk about those levels that sort of.
Qualify for those new mandates yet and as you recall I believe it was about half our organic growth in the last quarter we.
We went into the fourth quarter.
Last year with an effectively and zero to grow. It you are correct. It was half a billion at our last report, it's now closer to three quarters of a billion and we have an actionable pipeline of new opportunities have.
Just over 275 million.
Actionable opportunities are ones, where we've been invited we've actively presented or are enough finals presentation and one key threshold that we're looking to cross is which was what I was referencing is a $1 billion in anyway.
Just makes us a lot more credible and really there in the business. Both in terms of the AUM to support that the team in the firm.
Continuing to to put resources into it as a meaningful business.
But secondly in the diversity and types of institutions were working with in addition, we now have cultivated and are actively working with.
Oh, the CIO search.
Firms not unlike firms that would.
Work with other institutions for equity or other mandates on their behalf like consultants. So we feel good about the business and were pleased again with the.
With the progress during the third quarter of this year.
Okay. That's helpful. Thank you and just a follow up on that just can you remind us what the mechanics around how the OCI show growth impacts is that coming into discretionary Amis, Hey, you Emmis as new client assets and kind of how should we best track, yes, probably most growth yes sure. Most mostly it is we're taking in OCI.
Approach.
Where.
We are acting as the fiduciary as a discretionary manager, it's a bit differentiated from consultants and some of the other firms that are in OCI.
There will be assets for sure that go into non discretionary that happens with our wealth business as well.
I believe we have a mandate CIO that is non discretionary, but it's being fee.
At levels that are kind of in between non discretionary pure discretionary hopefully that converts over time, but most of it should be discretionary it's kind of hard to say what the mix will ultimately be.
Our non discretionary assets in general.
Oh CIO aside are flat fee type businesses, but we don't have discretion over the assets and.
To the to the extent, it's as high as it will be a little bit higher than what we would see on the on the wealth side for non discretionary so.
Mostly discretionary but hard to say what can happen.
Okay and is that fee around that the institutional rate like at 40 50 basis points that yes, that's right. It's more of an institutional rate business Thats correct.
Okay, and then just to follow up on kind of the first question. There on the six month actual pipeline just pivoting a little bit to the institutional side I.
I know a few months further past the heart of the pandemic answer, but any change in the kind of demand between value and growth I know performance has remained pretty strong across the board but is.
Has there been any noticeable interest in one direction or the other I wouldn't say that.
Our our excellent growth strategy, which has just put up terrific.
Numbers.
As you as you noted as have our value strategies, but importantly, our.
Our us small cap growth and in the opportunity capabilities are above the median for their peer group and had great performance last year.
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They are in a capacity constrained area in the in the small cap area of growth.
But as you know small cap has also been a bit out of favor as compared with.
Large cap and a lot of the attention that we've seen of course from institutions is in is in large cap growth, which is were not what were placed right now.
That said, we will be looking to eventually grow that capability.
And the pipeline for our small cap at opportunity growth has grown and is picking up as you know a lot of the pipelines froze our total opportunity.
For institutional business across the value and growth is is close to $1 billion now.
Whereas I Didnt report on it I believe two quarters ago, and mentioned last quarter that it was starting to open up and we're still seeing it beginning to opening open up both with the economy, but also as we get into fall and people are getting used to the situation of working.
Okay, great. Thanks.
I'll leave it there and hop back in the queue. Thank you.
So I just want to add I don't know if you're on the line I should have mentioned this is important.
Aside from the fact that we've got great performance across our capabilities, which is wonderful we've kept that up.
We also have come to agreement with.
Hi, Edmond de Rothschild and.
Europe.
For sub advising a new fund there, which they will be distributing.
That is awaiting final regulatory approval, but that should also lead to very meaningful institutional flows in time.
In Europe.
Okay, great. Thank you.
Yep.
Our next question comes from Sandy Mehta with evaluate research. Please go ahead.
One of the Sandy Hi, good morning Congrats.
Congrats Rick and Scott on a solid quarter I had two questions.
There's been a lot of M&A activity in the business, we have the Legg Mason deal the Eaton Vance deal.
Last month, the activist shareholder tree on he took they took stakes in invesco in Janice.
I don't know if that changed a little bit the valuation dynamics.
Looking at acquisition.
What are your thoughts on on those transactions and how do you view them.
Yes, I don't think they really have much of evaluation impact when you look at our business. When you look at those giant complexes.
A vast financial.
Supermarkets and capabilities assistance completely different world from the primarily wealth management, one with small.
Small asset management as you well know pure pure asset managers.
Especially boutiques have been quite out of favor as a result of struggling to maintain a AUM and grow a lab in the light of the of the competition from passive strategies and there has been tremendous feat.
The compression.
Those big organizations and how they work and their mutual fund complexes in all sorts of other means of making money just our apples to apples. So frankly, I don't pay a lot of attention to it I don't think Scott says.
Does either.
And of course, those big firms continuing to merge and create Giants supermarkets as.
Is one reason why there is a burgeoning growth in small boutiques across the country and entrepreneurs and that's how this this firm was founded as a result of those kinds of.
Those kinds of mergers so no I don't think it affects things.
Okay.
And the second question was a few weeks ago.
Silvercrest had a SEC filing related to a hedge fund offering of $11 million was that a routine.
Regulatory piling up does that represent some new initiative on the hedge fund side for Silvercrest.
Without specifics specifics I'm not I'm not sure what that might reference.
We had vehicles for our investors that we start from time to time, we had.
Some fund to funds for putting together alternative investments.
On behalf of our our clients, whether that's for a specific strategy or in alternatives or to make it possible for.
Clients to diversify across a number of different types of alternative investments without specifics I'm not I'm not sure what that might be.
It could be any number of filings that we made that are related to either what we have here.
Or reorganizing something that we've done but there are no new meaningful initiatives that we would announce at this time.
Great. Thank you so much.
Youre welcome.
Our next question comes from Christopher Marinac with Janney. Please go ahead.
Hey, Thanks, Good morning, I wanted to ask about the seasonality of EBITDA margin is that at all something that would involve this next couple of quarters.
All off is that what you said.
Yes, the sea with the seasonality of EBITDA margin, yeah. So there's not a lot of seasonality to it this a bit I'll, let Scott address it a bit after I answered.
Your question.
If you look over the history. The firm, we're kind of running on our high levels of EBITDA margins right now I have said in prior calls.
That as we make investments in the business to grow which we should all be in favor of we could be pushing that margin down even to the mid twentys I never actually had to done that we've grown fast enough to make the investments we want to grow the business without meaningfully hitting or EBITDA, but it's certainly a possibility in the fourth quarter.
After we often see bump in our in our EBITDA margin because we sometimes have.
Performance fees from alternative investments that that basically just pop everything up with no associated costs.
But aside from that I don't think there is a serious pattern to it Scott yes, no just a couple of things that occur in the fourth quarter.
From an expense standpoint, there there is some seasonality to expenses related to year end, whether from a client perspective or.
Increased audit fees because of interim water procedures that are done so that leads to.
Higher expense in the fourth quarter than say, the second third fourth or second or third quarters.
So and then we get in the fourth quarter, we will also.
Finalize our compensation for the year and beyond in some years.
We've.
Coming under compensation goals and in other years, we've come out a little bit above it. So there there could be some movement in either direction incrementally on our EBITDA margin, which which is why I say the fourth quarter is not predictable. We may have those additional expenses, but we also have the performance fees and we sometimes.
On the another comp that we recruited the rest of the year. So.
There is no real serious pattern in fact last year pumped up in the fourth quarter, if I recall.
Got it Thats very helpful. Thanks, and then just a follow up and you mentioned about the large cap capability expanding over time would you prefer to do that organically through your own initiatives or would you do something external or could it be a combination of both.
When you say doing something externally, you mean like purchasing or acquiring a large cap growth to Andrew no were much more likely to do that organically so our strategy.
And I don't know we've spoken on a previous call. So it's great to take your questions. Thanks.
The.
Turning to strategy when we joined together with Fortinet was to acquire a highly culturally compatible group of equity analysts and professionals, where we had extremely high confidence and their strategy and they checked all the their boxes. The second key thing to them was that.
They specialize in smaller cap issues as a team and as you know thats often that can pass capacity constrained capability.
So that was enticing to try to grow the business by looking at that but the but the next piece that we were looking at is that would also give us a solid team to then bring in a large cap specialists with great experience building, a large cap capability and growth.
Two joined with the infrastructure and analyst team, we are already have in place.
So that it would mirror in many respects a look at what we've done here at silvercrest already with our value capabilities, we have six analyst there Joe.
They are generalists they cover a universe of let's call it 110 stocks or thereabouts.
And you can split what they're following up into the various market caps, so an organic growth.
Initiative by hiring into an infrastructure it with credibility is a great way for us to go and that's what we will be looking to do.
Great. That's good background. Thank you very much for sharing that yep. Thanks for the question I appreciate it let's hear from you.
Our next question comes from Chris Sockeye with singular research. Please go ahead.
Good morning.
Hi, Hi, good morning.
Just if you could help me understand why.
I guess with this quarter.
Hey, you and was higher than a year ago, but.
A year ago revenue and earnings was higher so if you could help me understand what's going on there that'd be great.
Scott do you want to take that in terms of revenue and eight yes. So on.
Yes, so hi.
Happened is that there's been despite the fact that markets have been up.
Subsequent to the first quarter of this year, there is still a bit of a residual effect in that year throughout the year were.
Sure we're steadily getting back.
Two asset levels and revenue levels to where they were a year ago. So.
So absent the pandemic the markets.
Had.
Potentially yes.
The more normalized there would have been you would have seen that more disparity there by dot, but that that's really what's occurred from a revenue standpoint.
I'll add to that that if you if you take out.
Market effect that the organic growth in the business.
Since then has been quite good even even compared to past years. In fact, this year alone in our new account.
New client acquisition, we're already running ahead of total year assets in 2017 and 2018 and.
Ex acquisitions were on track to match 2019, and we've actually had lower outflows from our accounts.
Over the past.
Over the past.
Uh huh.
Call It four quarters I'm, including Q4 of 2019. So so you are looking at almost only a market that keep in mind with bill quarterly in advance so the market downturn that we saw.
In the first quarter effectively crushed our second quarter revenue et cetera. So it's almost entirely that affect the other thing is keep in mind for the third quarter.
Which was primarily based on June thirtyth.
Asset values of this year, we had a bit of a different.
Mix.
HM.
Compared to June Thirtyth of a year ago, so that that coupled with the other items contributed to that delta.
Okay, all right well thanks for that.
Well I'm sure.
Again, if you have a question. Please press Star then one our next question comes from Sumit Modi with Piper Sandler. Please go ahead.
Hi, Thanks, guys. Just just following up on kind of the M&A side of things just wanted to get your.
Point of view on on the conversations you guidance of had on from from the acquirer side have you gotten any interest also secondarily on on.
Buyers looking at Silvercrest as well.
Yes, so on the on the first side.
We're always talking and looking at the different businesses.
I had actually despite the effect of the market downturn on our revenue since it is all things being equal if it hits stayed steady.
We would be even more substantially up but due to other growth in that business.
But from an M&A perspective actually the down markets.
Wouldn't have.
Created an opportunity I think for firms like silvercrest split substantial dry powder and a high quality operation culture and brand to take more advantage versus.
Companies that are using a lot of leverage.
To to enter the wealth market, everyone thinks that that roll up strategy is something that potentially successful.
With these boutiques.
As you know I'm.
Im a bit of contrarian on that.
Strategy in the marketplace and we haven't seen.
I think in many cases reasonable levels, where a lot of businesses that are not growing or growing very very slowly without enough scale.
For succession planning among among other issues.
There are boutiques that want a very special culture that are investment oriented the way silvercrest is.
That desire a lot more from a transaction than a check.
And we continue to have regular conversations as a well known player in the business, but again, we're not going to do a deal that isn't going to be meaningfully accretive.
To shareholders or progressed the organization as a whole which is to say, we're not going to do a deal for the sake of doing a deal that was what was one of the special things about fortinet. It checked several strategic boxes for us with absolutely terrific people.
And that deal was accretive right out of the gate.
And that's what we strive to achieve not necessarily out of the gate, but in a short period of time.
On the other side of the table should we talk to firms all the time about.
Opportunities at Silvercrest.
Is this is a premier brand and company and.
We are always looking at our options with the board.
And I think thats been true when we were a private company over the past 20 years history of being a public company nothing unusual about that.
Okay.
Okay, great. Thank you and then just a last one for me kind of a clean up here, but.
Around the $151 million of new client assets and discretionary can you give us maybe a breakout what those assets are comprised though.
Yes so.
Close to half of that was.
No.
We also had half from existing accounts net cash flows in and out so the 150 in new client accounts.
Is is when the accounts opened but during the quarter or subsequent orders that can be cash flows in from a new account and that's that's counted in our net cash in and out of accounts. So very often that number is understated from.
The reality of what is slowing in with new business, but it's the best way for us to capture it and to keep our numbers clean and to be able to compare apples to apples over time, but if you just take that number approximately half of that is the other half is stanley well.
New business in the institutional space was quite low during the past two quarters, we've reported that its not surprising given what we've said about action from consultants and what's happening in the pipeline. It should be noted as well that of course with the the V shaped rebound in the mob.
It gets means theres less shake out.
Changing of managers, we saw that in the financial crisis 12 years ago.
It takes a while for that opportunity come to light had the markets created greater dispersion. Among some managers that would also create more opportunities, but certainly the tandabs damages unusual so again on on the net organic flows into the business primarily family wealth and OCI.
Okay, great. Thank you guys.
With me.
This.
Next our question and answer session I would like to turn the conference back over to retro tough for any closing remarks.
Thanks, I appreciate you joining us for the third quarter of 2020, we look forward to reporting to you at the end of the year.
Given the pandemic environment were pleased in particular that we have been able to organically grow the business and.
Sustain that despite the working environment that we have and the new opportunities that we see in the institutional business as well as a new thresholds in the CIO business. We think look good for the business going forward and we'll talk to you in another quarter. Thanks, so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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