Q3 2021 Silvercrest Asset Management Group Inc Earnings Call
Good morning, and welcome to the Silvercrest asset Management Group incorporated Q3, 2021 earnings conference call.
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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 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 these factors are disclosed in our filings with the FCC under the caption risk factors for.
All such 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 obligation to update them.
I would now like to turn the conference over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead.
Thank you very much and thanks for joining us for our third quarter update of 2021, we're pleased to report strong financial results for the third quarter, Despite the anemic markets and institutional rebalancing during the quarter.
The firm's discretionary assets under management, which drives revenue increased 25%.
Year over year commensurate with that increased silvercrest concluded the quarter with $33 5 million of revenue quarterly adjusted EBITDA of $10 3 million representing year over year increases of $23, one and 27, 4% respectively.
Our adjusted diluted earnings per share increased 25, 7% year over year to 44 per adjusted diluted earnings per share Silvercrest sought to achieve a 1 billion in AUM with its relatively new outsourced chief investment officer capability by the end of 2021. We are pleased today to report that the <unk> business.
<unk> now has $1 $1 billion in assets under management, we have a strong new business pipeline of opportunities and crossing this AUM threshold will be helpful to building that business.
Our new business opportunities continue to grow thanks to continued strong relative investment performance for high net worth and institutional clients alike.
During the third quarter Silvercrest repurchased approximately 27000 shares of class a common stock for approximately $400000 pursuant to its previously announced share repurchase program on July 28, 2021, and November 2nd the Companys Board of directors declared a quarterly dividend of <unk> 17 per share of class a common stock which represents.
And it's an annual yield of approximately four 1% based on the closing price of the company's class a common stock on November three 2020, the dividend will be paid on or about December 17 to shareholders of record as of the close of business on December 10, and with that I'll turn it over for Scott Gerard and then we look forward to conversation. Thank you Eric.
As disclosed in our earnings release for the third quarter discretionary AUM as of September 30 of this year was $22 5 billion and totally AUM as of the same date was $31 billion revenue for the quarter was $33 5 million and reported consolidated net income for the quarter.
With $6 4 million looking at the quarter, a little bit more detail revenue again was $33 5 million representing approximately a 23% increase over revenue of approximately $27 2 million for the same period last year. This increase was driven primarily by March.
Depreciation partially offset by net client outflows in discretionary AUM.
Expenses for the third quarter were $25 3 billion. This represented approximately a 14% increase from expenses of $22 2 million for the same period last year.
In Q2 was primarily attributable to an increasing comp and benefits expense of $3 6 million, partially offset by a decrease in G&A expense of $6 million looking further compensation again, it increased by $3 6 million or approximately 24% <unk>.
$9 8 million for three months ended September 30 of this year from $15 2 million for three months ended September 32020.
The increase.
It was primarily attributable to increases in the accrual for bonuses salaries and benefits expense, primarily as a result of merit based increases and newly hired staff and equity based compensation expense due to an increase in the number of unvested restricted stock units and Unvested nonqualified stock options.
<unk> outstanding.
G&A expense decreased by <unk> 6 million or approximately 8% to $6 5 million for the three months ended September 30 of this year.
From $7 1 million for the third quarter of 2020.
This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the <unk> acquisition of $1 billion and occupancy related costs, partially offset by increases in portfolio and systems expense and depreciation and amortization.
Yeah.
Reported consolidated net income was $6 4 million for the quarter as compared to $3 5 million in the same period last year.
Reported net income attributable to silvercrest or to class a shareholders for the third quarter of this year was approximately $3 7 million or <unk> 38 per basic and diluted class a share.
Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and noncore and nonrecurring items was approximately $10 3 million or 39% of revenue for the quarter compared to $8 $1 million or 29, 9% of revenue for the same period last year.
<unk>.
Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and the income tax expense, where we assume corporate rate.
Which has blended a 26% was approximately $6 6 million for the quarter or <unk> 46, 44 per 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 nonqualified stock options to the total shares outstanding to compute diluted adjusted EPS.
Looking at the nine months ended September 30 revenue was approximately $97 8 million and this represented approximately 23% increase over revenue of approximately $79 6 million for the same period last year again. This increase was driven primarily by market.
Appreciate.
Partially offset by net client outflows in discretionary AUM <unk>.
Expenses for the nine months ended September 30, this year were $76 6 million and this represented approximately 26% increase from expenses of $60 6 million for the same period last year. The increase was attributable to increasing comp and benefits expense of $10 <unk>.
$7 million and G&A expense of $5 3 million.
Comp and benefits increased by $10 7 million or 24% to $54 9 million for the nine months ended September this year.
Compared to $44 2 million for the same period last year. The increase was attributable again to increases in the accrual for bonuses salaries and benefits expense, primarily as a result of <unk>.
Mark based increases and newly hired staff and increased equity base compensation.
General and administrative expenses increased by $5 3 million or approximately 32% to $21 7 million for the nine months ended September 30 of this year from $16 4 million for the same period last year. This was primarily attributable to increases in the fair value of <unk>.
Contingent consider relation.
To the <unk> acquisition of $5 1 million trade errors professional fees sub advisory and referral fees and insurance expense, partially offset by decreases in travel and entertainment expense portfolio and systems and depreciation and amortization.
<unk> consolidated net income was $16 4 million for the nine months ended September 30 of this year compared to 14 million for the same period last year.
Reported net income attributable to silvercrest for the nine months ended this year was approximately $9 6 million or <unk> 99 per basic and diluted class a share adjusted.
Adjusted EBITDA was approximately $30 4 million or 31, 1% of revenue for the nine months ended September 30, this year compared to $23 million or 29% of revenue for the same period last year.
Adjusted net income was approximately $19 5 million for the nine months ended September 30 of 'twenty, one or $1 35, and $1 31 per adjusted basic and diluted earnings per share respectively.
Looking quickly at the balance sheet total assets were approximately $212 9 million as of September 30, this year compared to $213 8 million as of the end of last year cash and cash equivalents were approximately $65 9 million at September 30, and as <unk>.
Impaired to $62 5 million at the end of last year.
Total borrowings as of September 30 of this year were $9 9 million total class a stockholders equity was approximately $75 5 million at September 30 of this year as well that concludes my remarks, I'll now turn the call over to Rick for Q&A.
Thanks very much.
We're now available to have a discussion to answer some questions. Thanks.
Yes.
We will now begin the question and answer session to ask a question you May Press Star then one you touched on phone.
Youre 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.
<unk> with Piper Sandler.
Go ahead.
Hey, Thanks, Good morning, guys good morning.
Good good I just wanted to start on the <unk> business, it's really great to see that AUM has kind of crossed over that $1 billion threshold, maybe at a high level could you just give us some color around what size. This business could reach over the next couple of years now that you've reached an inflection point with the current infrastructure in place whats just trying to get to.
Where the capacity for growth is with kind of what you have and then when do you consider adding more heads or.
More and more hires in that area to accelerate growth even more right right. Good question. Thank you.
It is a more leverages <unk> business in some respects than the high net worth business.
It kind of sits in between pure institutional equity mandates, where there is a substantial amount of leverage inherent in those capabilities versus high net worth which is a very client service.
Driven business.
The <unk> business.
In between because we are taking an approach where we partner with the organizations that we are managing money for and are doing a lot more on a discretionary basis than many other consultants.
You may have a single model and endowment like model that they are distributing to their own clients. So so our capability as a lift a little bit more on personnel and heavy that said, we built out the team and there's a lot of capacity there to answer your question I'd like that business to be a few billion dollars.
I can I think you can do that if we added.
Any personnel there.
It would likely to be.
Pretty low level support type roles not expensive portfolio management roles I feel that we've got.
Plenty of room to grow on the portfolio manager need sort of pm side.
That business.
Theres also occasionally the situation where the high net worth portfolio manager will serve as a lead on behalf of an OCI O clients. So there is other capacity at the firm.
To deal with those clients. So long story short lots of capacity I would like to see it be a few billion dollar business over the next couple of years.
Yes.
Okay, great. Thanks that was helpful.
Just wanted to kind of shift gears towards the kind of international expansion as well through Neosho I know.
They have a small cap international strategy that was kind of expected to reach a few billion in AUM over over a few years. So now that we're a couple of years into that can you just maybe update us on how things are going there and the progression.
I've never given a target for that team at all so I don't know where the confusion is there.
It is a strategy that we.
We said that we had to incubate for two to three years.
The market's familiarize people with it that effort is going very strong we've built out the marketing team.
It's still quite a small effort.
I haven't given any targets there and won't be for some time they did have.
Some nice new inflows in the third quarter.
And their performance has been it has been picking up so that's really all the color I can give you at this time.
Okay, great. Thanks, and then last one.
For me on the discretionary AUM flows in the quarter can you just break down that $234 million net cash outflow number for us. So it was there any tax related impacts or was that kind of that institutional rebalancing mentioned, yes. So of course, that's a net number.
And the total rebalancing.
That you saw.
And does that.
Created outflows in that number across the institutional.
Product base was approximately $300 million.
So.
That was a pretty pretty heavy headwind.
On the other hand, it was primarily rebalancing.
Was one of lost account not not huge.
<unk> heard a bit.
It was also in a very high good performing strategy.
That said $300 million and rebalancing.
Tough to overcome.
That's just the nature of the business its not something where we were.
We feel we need to pay a lot of attention to when people upgrade gains they're going to rebalancing their portfolios. So.
Not an issue there there was also some tax outflows.
For estimated cash taxes that were coming up in October.
But I think the big story, there is just rebalancing and we're going to see that from time to time with strong performance.
We'll make it up with with new mandates over time as we've proven to do in the past. So there is you want more color maybe I can provide it but thats the best I can do.
Perfect all right. Thank you and I'll hop back in the queue.
Youre welcome.
Our next question comes from Sandy Mehta with evaluate research you May go ahead.
Yes, good morning, Scott.
Sure.
Just following up on the prior question about rebalancing.
Perhaps if you could comment a little bit further.
The markets have gone up are you seeing rebalancing.
Away from equities and is it rebalancing within other fixed income products.
Are there still request a fixed income strategies or.
Is it money thats moving away any for the comments.
Rebalancing is really the institutional clients rebalancing their own asset allocation, so as we grow and they have.
A certain percentage slot for the strategies, we may be running.
They're just they're just bringing it back in line with what their what their desired targets are we don't have much institutional fixed income that's more driven by the high net worth business.
Is it really worth commenting on at least with regards to this this is purely a phenomenon that you see from time to time in the institutional business as a result of as a result of growth, where those institutional players or or or.
Rebalancing to I don't have a lot of insight into.
Okay.
And one final question any further color you talked about the <unk> pipeline and the outlook any further.
Color on the international pipeline in terms of finals or hype.
Our high value prospects. Thank you.
Youre welcome, Yes, I didn't mention the pipeline in OCI.
Approximately $600 million.
Right now, we're really proud that we crossed that $1 billion threshold because.
Larger clients want to see that you have a critical mass of assets under management that's of significance.
That so it's nice to be a bit ahead of schedule than what we had planned.
Also have a significant number of assets that are just outside that action on the pipeline and CIO very warm opportunities, but we're not confident enough yet to counting the pipeline with regards to the institutional equity pipeline.
That has increased.
It's about 116, almost $1 2 billion.
And.
That pipeline has been increasing throughout the year.
It's up from the end of the second quarter.
Honestly I would have hoped that a little bit more of it.
Yes.
Came into our hands during the third quarter, but.
But the fact that that pipeline is intact and growing speaks pretty well the future growth and it's been a great indicator because it's a very conservatively measured pipeline final piece is of course, our businesses is very significantly high net worth.
And.
There's no question that there were disruptions to organically building that business through the Covid period.
Seeing the activity there picking up.
Tms that we've hired just before COVID-19 are getting some great opportunities.
And so we expect that to.
Art looking a bit better as well, we don't have a pipeline in there it's not a business that is easily measurable, but I do look at marketing activity and I feel pretty good about where that business sits.
Great. Thank you.
Youre welcome to me so that was not significant with Andy standing alright, Thanks, and thanks Andy.
Yep.
Sure.
Sure.
Our next question comes from Christopher Merrimack with Janney Montgomery, Scott You May go ahead.
Thanks, Good morning, and I appreciate you hosting the call for all of US wanted to add.
Ask just leveraging your comments Rick on the Covid era, and reopening does that have an impact on the EBITDA margin going forward and then one of your general thoughts for the EBITDA margin.
Looking out to next year, yes, because we have been it has been increasing it's been helped.
A bit by that of course, because <unk> is down and has been has been down and as we're investing in the business, we tend to come back down under under 30%.
My own we don't give guidance, but my own sense I'll. Just say this is that that margin is going to be relatively maintains over the near term.
And some of those related things are slowly ramping up but not to the extent that all of a sudden we're going to drop down to 29.
<unk> or 'twenty seven or something.
<unk>.
We will see I want the TNA right. So I don't mind doing that and of course.
As things open up more and we see more high net worth business development.
Well be investing in another PM are too, which would which would have an effect as well.
But right now I see.
I see marginal effects as we slowly reopened and you can expect to still expect a fairly elevated.
<unk> margin, whether that's 30 or.
Or <unk> 31, and a half or just just above 29, I can't tell you I don't know.
But but certainly higher than if you look across the history of the firm I hope that's enough color.
No that's great I appreciate that and I guess my next question was kind of from a high level pricing.
Pricing seems to have really got even stronger in recent quarters for the business and I am sure Youre seeing that on any M&A discussions I'm curious kind of where you think we are from a secular standpoint on pricing and does that impact kind of where you see the company in the future.
Yes, yes.
<unk> talked about this theme.
We're making really good use of shareholder capital to do accretive deals.
Sure.
These these cash heavy businesses, often with a slow growing organic capabilities and.
Potentially declining revenue stream it is.
Still very expensive out there.
I as interest rates potentially normalize it's hard to choose the term normalized when you got interest rates this low.
So long but.
As that occurs.
I do see more opportunities long term, but keep in mind as well this has never been a roll up company.
And the kind of additions that we're looking to make are going to be people, who have a lot of priorities. In addition to the absolute value of their business.
So we're always in conversations we don't know when one of them might come to pass.
Obviously, given the opportunity set that's one reason why we pivoted towards buying what we think is the best.
Asset management group in this space out there, which is ourselves and.
So we're going to pay attention to being able to buy ourselves back with that buyback.
As we wait for use of <unk>.
Our capital and we will invest in the business organically, which is why I was talking about hitting EBITDA I may have been a bit slow in doing that over what was planned because of COVID-19 right I want to make sure that we're firing on all cylinders as we get out and travel more and we give an opportunity for the investments that we've made whether thats OCI.
Our new high net worth managers.
Two organically grow the business.
And so.
You put those things in the mix and acquisitions are going to be additive but.
But long term, yes, if things do regress to the mean and we'll just wait for our opportunities.
Great. Thank you and Scott This morning I appreciate it thank.
Thank you. Thank you appreciate it.
Again, if you have a question. Please press Star then one our next question comes from Chris Sakai with singular Research you May go ahead.
Hi, good morning.
Good morning.
I've just got a question.
A broad question approximately.
Do you have a breakdown as far as their AUM as far as.
How much of it.
What's the breakdown for AAM for composite and or small or large mid and small do you have a breakdown along those lines.
Yes.
So we're all separately managed accounts, which means each of our strategies.
Have a composite that we can.
Market.
<unk>.
I don't have that right in front of me, it's in all of our filings I'm sorry, it's not a question I usually get.
<unk>.
I'd have to dive into the footnotes here, where we show the composite across.
The board, but generally speaking.
Yeah. This business as is.
70, some odd percent 70%.
Net worth 30% institutional with our largest composite being in small cap value, but I don't want to give you a ballpark sits in our files.
Yes.
Okay.
Great.
Let's see and then.
The other question I had I guess.
I guess people have already asked but what's sort of driving the net client outflows was it the rebalancing youre, saying.
Yes, the net client.
A client outflow because it was just some assets of clients that we have.
We kept our clients. It's just people rebalancing away from the strategies. They are invested in here as part of their total portfolio often let's say they had a target of just going to make up a number of 10% and in particular kind of strategy. If it grows to 12 or 13 or whatever it is theyre going to withdraw some money to get back to their torrey.
Allocation for their own pool of funds.
Okay.
Okay.
I know this is kind of a high level question.
On your accounts are they would you say, they're really performance based.
The reason why I ask is who say youre composites.
Don't meet.
The index performance or are you going to see more of a.
Asset outflow because of that.
Well, we don't have performance based.
Fees for any of our capabilities, we see on assets under management for our advisory services as with any institutional manager working with clients, let alone the high net worth if you underperform for a sustained period of time, you will lose clients no doubt, it's a very competitive market.
Which most people on this call understand well and are also in the business up but our strategies have.
Very strong sustained long term performance, so I don't see that as a high risk right now.
Okay, great well thanks Youre.
Youre welcome.
We will now take a moment for any lasting or follow up questions. Please press Star then one to join the queue.
Okay.
Okay, well, thank you very much for joining us.
Like there arent any other questions at the moment.
<unk> hearing about our results for the third quarter of 2021.
Despite some rebalancing out of the accounts, we have very strong financial results and certainly its very strong growth over the past trailing 12 months and but most importantly, we have a very strong pipeline of new business potential opportunities across high net worth institutional business and as we.
Previously discussed across the very important $1 billion threshold and the <unk> business ahead of schedule. Thanks, So much for joining US we look forward to talking to you all soon.
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