Q3 2022 Silvercrest Asset Management Group Inc Earnings Call

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Yeah.

Good morning, everyone and welcome to the Silvercrest asset Management Group incorporated third quarter 2022 earnings Conference call.

All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please also note today's 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. 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.

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 call over to 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 continued to affect silvercrest 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 of 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 in annualized adjusted EBITDA run rate of $32 8 million Silvercrest third quarter 2022, adjusted EBITDA margin was 28, 1% a healthy margin in light of declining AUM Andy associated revenue.

It progressed added relationships during the third quarter in new accounts, partially offset outflows for taxes and rebalancing.

Silvercrest 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 also launched a large cap value unit investment trust during the quarter Silvercrest repurchased approximately 286000 shares of class a common stock for approximately $5 2 million during the third quarter.

Market volatility and uncertainty create long term opportunities that have typically benefited the high quality of silvercrest capabilities, and we look forward to more stable markets in the future.

November 1st the company's board of <unk>.

Directors declared a quarterly dividend of <unk> 18 per share of class a common stock that dividend will be paid on or about December 16th to shareholders of record as of the close of business on December nine.

Scott will now go through the financial facts and then we will take questions great. Thanks, Robert and again. This is disclosed in our earnings release for the third quarter discretionary AUM as of September 30 into this year was $19 4 billion in total a U M. As in the same period was $27 4 billion revenue for the quarter.

<unk> 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 primarily by market depreciation and net client outflows.

Discretionary.

Expenses for the third quarter were $21 9 billion, representing approximately a 13% decrease from expenses at $25 3 million for the same period last year. This decrease was primarily attributable to decreases in compensation and benefits expense of $2 5 million.

General and administrative expenses of <unk> 9 million.

Compensation and benefits expense decreased by $2 5 million or approximately 13% to $16 3 million for three months ended September 30 of this year from $18 8 million for the three months ended the same period a year ago.

The decrease was primarily attributable.

Due 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 genera.

General and administrative expenses decreased $5 9 million to $5 7 billion for the three months ended September 30 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 core G&A acquisition of 1 million and a decrease in trade hours, partially offset by an increase in travel and entertainment expense.

Reported consolidated net income was $5 6 million per quarter as compared to $6 4 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 4 million or <unk> 35 per basic and diluted.

Class eight share.

Adjusted EBITDA, which we define as EBITDA without giving effect.

Equity based compensation expense and noncore and nonrecurring items was approximately $8 2 million or 21% of revenue for the quarter compared to $10 3 million or 39% 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 billion for the quarter or <unk> 35, 34 cents 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.

<unk> was approximately $94 7 million.

Which represented a 3% decrease over revenue of approximately $97 8 billion for the same period last year. This decrease was driven primarily by market depreciation partially offset by net client inflows and discretionary.

Expenses for the nine months ended September 30, this year were $63 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 at $14 3 million respectively.

Compensation expense decreased by $2 million or approximately 4% to $52 9 million for the nine months ended September 30 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 nonqualified 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.

$2014 3 million.

Approximately 66% to $7 4 million for the nine months ended September 30. This year from $21 7 billion for the same period last year. This was primarily attributable to decreases in the fair value of contingent consideration related to the <unk> acquisition of $15 five.

$5 billion occupancy related costs and trade areas, 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 30 of this year as compared to $16 4 million in 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.

Adjusted EBITDA was approximately $27 6 million or 29, 1% of revenue for the nine months ended September 30, 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 per adjusted basic and diluted EPS, respectively.

Quickly looking at the balance sheet total assets as of September 30 were.

$205 1 million compared to $229 3 billion as of the end of last year cash and cash equivalents were approximately $67 4 million at September 30, and this compared to $85 7 million at the end of last year as of September 30 of this year.

Borrowings were $6 3 million.

And total class a stockholders equity was approximately $87 1 billion as of September 30 of this year that concludes my remarks, I'll turn it over to Rick now for Q&A. Thanks, Scott look forward to your questions. Thank you.

Ladies and gentlemen at this time, we'll begin the question and answer session.

To ask a question you May press Star and then one using a touch tone telephone.

All your questions you May press star.

Two if.

If you are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again that is star and then one to join the question queue.

Our first question today comes from Moody's.

<unk> from Piper Sandler. Please go ahead with your question.

Hi, This is Brian or John just a couple of questions for you first.

Outflows continued higher than we expected at $5 7 million in the quarter. I know you got a lot of tax related outflows last quarter could you just tell us how much leaked into the third quarter and if there is an uptick in sort of your normal flow profile.

That the the data on our flows is pretty lumpy for the high net worth audience.

And is not all that predictable.

<unk>.

I can't characterize it is too short period of time, they were more tax payments in the third quarter for.

For those who who pay in the third quarter as you might expect.

<unk>.

It can't characterize that in terms of trends, though.

We did have an uptick as I said, a new relationships some of the outflows were rebalancing.

Yeah, So I really have no more color for you be beyond those that those 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 crude you're up 55% level or given the.

The revenue dynamics can we see that come in higher than that this quarter.

Well, we accrue for 55% Theres no way to predict what's going to happen in the fourth quarter.

That's so heavily influenced by.

By markets a lot of our comp is directly.

Are determined on a formula basis, so it does trend down with revenue and end 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 performance fees potentially in the fourth quarter, which adds some volatility. So at this point in time there is no.

Good visibility until into.

How we will compare to the 55% when we ultimately true things up some years, we've been a little below.

We have a 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 last one for me we liked it and you got to take advantage of the dip with the solid level of buybacks in the quarter at over $5 million.

So how should we think about your appetite going forward and how you prioritize the repurchases is it more of a regular cadence claimed ahead or should we expect it to be more opportunistic depending on the market environment.

Yes.

Thank.

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 as 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, it is the use of shareholder capital.

But at current levels and below.

We've seen it is still having significant value for shareholders to accretive in this way.

Yes.

Great. Thank you.

Our next question comes from Sandy Mehta from evaluate research. Please go ahead with your question.

Yes, 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 are asking me.

What line.

The actionable pipeline.

Actual body line I'm, sorry, some of that some of the audio in fact, the last call or two is just a touch fuzzy for us in this room.

So I apologize.

We're just listening very hard.

So yes, no problem yeah. So the actionable pipeline is a 143 billion.

This quarter that is for U S value U S growth international as well as the CIL.

That has come down from what we announced last quarter.

The primary reason its come down is because of wins. So that's good.

Pipeline remains strong.

The wins that we had.

Recently half half have drawn that pipeline down a bit.

We would expect that.

As you know we define the pipeline very very tightly.

<unk>.

Invite only RFP invite only searches and where we're in the final. So we have a high hit rate on that on that pipeline.

And the second question is could you comment a little bit further on this the launching of the.

Our large cap value unit investment trusts.

What is the opportunity in that and also value as an asset class value has significantly outperformed the 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.

That pipeline for us value has actually come down just a touch but again, that's because of wins.

We are looking for long term partnerships and working with our consultants.

I don't I can't say that the environment of value outperforming growth has.

An increase in activity there recently.

Outperformance of growth versus value with show sustained and so long.

Well over a decade as you know.

That it takes a while I think for consultants and allocators to shift their attention.

Towards the thing that has been working lately.

Again, we don't necessarily want to be getting investors just because.

I've noticed the asset class starting to perform on a relative basis, we'd much rather than coming in for for the quality of what we're doing the risk management of what we're doing.

The preservation of capital that the outperformance on a relative basis, which we've always had.

I do think on the margins it will help if it is sustainable.

<unk>.

I can't say I've seen seen that yet with regards to the trust.

That's just a lot better format than setting up a mutual fund.

And when you have.

A capital that is pulled in that way a vehicle for investors, where that's a useful way to get exposure to our strategies.

It just provides another avenue for growth.

And we can open it up to of course other strategies, but we're starting with large cap value.

And I expect that we'll have.

Mandates in the in the fourth quarter.

To get that going and of course once you have capital that provide you more of an opportunity to grow it into the future.

Great. Thank you so much.

Uh huh.

Our next question comes from <unk> Strickland from Fig Partners. Please go ahead with your question.

Thanks, It's actually Danny they never asked the company, but anyway.

Hey, good morning, how are you.

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.

The <unk> business and just kind of.

What's going on there both domestic versus international I know you had some European clients clients on boarding.

It was also just curious if theres more of those in the pipeline.

Okay.

Sorry, you were on mute so we were listening.

So the the European Kaiser not OCI Oh, they are wealthy families.

We are talking to we've always had exposure to Europe .

In Switzerland, Netherlands, Germany.

This significantly I think youre, referring recently.

Talking to Polish families. As a result of Russia's invasion of Ukraine, but that's not a CIO and <unk>.

Yes, Hey, we're 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 U S dollar and U S markets and diversification.

Away from.

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 U S market, we've always kind of had a global footprint. It just happens to be growing which I do like and ultimately to any new client means the potential for new referrals, which is exactly what's happening in that particular case with regards to <unk> that is.

Largely a.

U S business, certainly where our focus is.

Within the pipeline right now.

The actionable pipeline for <unk>.

Is almost $700 million just shy of that I think it's $6 70 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 in.

AUM within the <unk> business has come down a bit with the market as you might expect so it's been it's been hovering just below a $1 billion, we're well over $1 billion before the markets came down.

So I hope that provides enough color.

We should expect to hear whether we've won.

Couple of mandates.

That are quite close or in the finals very soon so that should happen in.

In the fourth quarter.

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

Just curious to what Youre thinking.

With regards to the dividend or more dividend increase as possible or do you prefer to spend retained earnings elsewhere.

Are you are you more focused on the buyback right now.

The dividend increase possible I guess the question yeah. So.

Ultimately.

The amount of cash flow that goes does.

That goes out.

Pay ratios is important to us and we watch it when we're determining our dividend policy.

We've long said, we think it's important to pay our shareholders holding the stock on a very regular basis with a meaningful dividend and to prudently increase it in a way over time that can be sustained even with much more dramatic pullback in markets and we've had this year and our dividend is sitting at <unk>.

Level, where that is in fact, the case as you know we increased it last quarter, we will continue to do so assuming.

The revenue and.

And the cash flow this firm.

Ken continue to support it we don't have a dividend target per se I think it's at a good level right now.

Page quite well and so we'll just assess that next year.

The pattern if you've looked at it is basically an annual increase whether we do that or not next year. It kind of depends where we said I can't predict that of course the buyback.

<unk> was approved.

Well over a year ago.

It will be I think two years come.

Second quarter or end of the first quarter I can't remember, which next.

Next year.

And.

So I haven't been necessarily.

Refilling the Kitty since we announced that we haven't even spent what we what we have.

But obviously, we've been accruing more cash since we did that.

If our stock.

Continues to be a relative value, which it is and we don't have a use for cash on appropriate acquisition or other investment.

We will reassess that depending where we are with the current buybacks that we've been executing.

As the first caller asked.

What are we going to just steadily buyback what's the plan.

Committed to getting that money to work. So you can expect we will continue to be active in the markets.

But I haven't necessarily I've set aside the cash already did that.

So that is another thing I will look at.

Next year around the same time that we made the decision originally.

Yes.

Got it.

And then just one more question just thinking about the pricing for investment firms on your longer term radar.

How much.

As volatility been a factor there for those companies and do you think.

That's changed their calculus at all on whether or not.

I would want to want to look for a partner.

I do think the market is changing a bit in two different ways. So 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 in silvercrest and its smaller than one might think when youre looking for an ultra high net worth business.

That's run well that we feel we can organically grow that is culturally compatible and isn't in geographic areas that would be desirable for our brand.

I am noticing two things one is that the deals that are getting done and the wealth management space.

Are undergoing more scrutiny.

Buyers.

For a couple of different reasons, one obviously, the tailwind 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 levels some buyers.

We're going so that's number one so.

So we're seeing more earn outs, which we've always done in those deals where 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.

Im seeing a bit more.

Prudence around.

Whether a company cannot organically grow in the future on the selling side.

Yeah.

The same thing is happening, but it does put more strain on businesses.

A lot of smaller companies, we look at our 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.

It for future growth, which in this business at least on the wealth side means more bodies.

So the margins I think that could help I haven't seen it yet so to be honest again part of that is how selective we are going to be.

About the right fit for this company in order to grow into the into the future.

I am having conversations as I always have said I have.

And there are opportunities for us I didn't get the sense that might be a bit moving moving our way but.

It's a SaaS, it's something I can't put my finger on it a really firm way certainly asset management, which compare comparatively it's been a bit out of favor.

Certainly has come down even 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 youre looking at growth for value has done extremely well.

Got it.

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

Once again, if you would like to ask a question. Please press star and then one so withdraw your question you May Press Star two.

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

Hi, good morning good.

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 that.

The environment out there for adding new relationships what are you guys seeing.

So.

For us, it's a referral relationship business and its lumpy.

It's I've never reported a pipeline for example for the wealth management business as a result for one thing it's extremely hard for us to measure a pipeline.

That we have a lot of confidence in terms of it ultimately resulting in business. It's a much longer tail in the conversations with most families. We can be talking even to some relationships.

For a couple of years or more.

Until something is realized so just the fact, we're talking to family is not really enough for me to build a pipeline. Unlike the institutional equity business.

Where we have that.

There is a process driven by consultants or rfps by professional allocators, and we can very clearly measure where we stand.

And the likelihood of us ultimately.

Ultimately gaining business, we just can't do that with wealth.

And it's extremely hard to characterize I can tell you that.

That generally speaking periods of disruption and volatility in the markets do have wealthy clients starting to talk to their friends that is to say people, who could refer business to us about what's happening and what's happening in their portfolios and high levels of client service, our ability to talk to our clients reach out to them.

To help them understand their allocations why we're positioned the way. We are what is happening is the performance of their portfolios in a proactive way.

Helps distinguish the relationship as compared perhaps with a large bank or brokerage or maybe even a competitor who's not doing that those are very important things to high net worth clients. So these these volatile markets as an opportunity not just for us to perform well, but for us too.

To help our clients with regards to the softer things in the business that really do matter in our relationship.

And our experience at least coming out of the global financial crisis and periodic disruptions is that.

These do have people looking around and thinking about.

How their wealth is being managed and ultimately it does lead to an increase in business it doesn't necessarily happen at the time of the volatility.

It tends to be once the markets come back are on an upswing, there's more comfort in the economy et cetera. So.

If I'm going to speculate about that Chris, which I would say that.

We've got to work through this for a while before it really really see that happen, but again, it's a lumpy business without a pipeline so pretty hard to characterize.

Okay. Thanks for that.

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

Thanks, I just wanted to.

Show My appreciation here and thank everyone for joining us for our third quarter call I appreciated the questions that was able to give some pretty good color as compared to some other calls and look forward to talking to you at the end of the fourth quarter.

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

Okay.