Q4 2022 Silvercrest Asset Management Group Inc Earnings Call
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Speaker 2: Good morning and welcome to the Silver Crest Asset Management Group Inc. fourth quarter and full year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: Please note, this event is being recorded.
Speaker 2: Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward looking statements.
Speaker 2: They are based on current expectations and projections.
Speaker 2: 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.
Speaker 2: Those factors are disclosed and are filings with the SEC under the caption Risk Factors.
Speaker 2: For all such forward-looking statements, we claim the protections provided by the litigation reform act of 1995.
Speaker 2: All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update them.
Speaker 2: I would now like to turn the conference over to Rick Hoff, Chairman and CEO of Silvercrest. Please begin.
Speaker 3: Good morning, and thanks for joining us for the fourth quarter of 2022 and year-end 2022 results.
Speaker 3: Silvercrest finished a volatile fourth quarter in calendar year 2022 with total assets under management of 28.9 billion and discretionary AUM of 20.9 billion. Total AUM declined at 10.5 percent during the calendar year 2022. Discretionary AUM, which primarily drives our revenue, declined 16.7 percent during the year 2022.
Speaker 3: share. Adjusted EBITDA declined to $4.4 million and $32 million for the fourth quarter and full year 2022 respectively from 2021. Our adjusted diluted earnings per share also declined to $0.15 and $1.35 for the fourth quarter and full year 2022 respectively.
Speaker 3: Our adjusted EBITDA margin for the fourth quarter and full year 2022 was 15.6% and 26% respectively. While down from the firm's 33% adjusted EBITDA margin for the year end of 2021, Silvercrest's adjusted EBITDA margin remains historically healthy for the company, especially in light of the declining markets last year.
Speaker 3: The volatile market conditions of 2022 relaxed during the fourth quarter of the year and as a result 2022 year-end discretionary AUM increased by 1.5 billion or 7.7% over the third quarter to 20.9 billion.
Speaker 3: So far, cost also gained $220 million in new relationships during the fourth quarter, which is one of our better new relationship development quarters over the past couple of years.
Speaker 3: We've stated that market volatility and uncertainty create long-term opportunities that have typically benefited the high quality of SilverCrest's capabilities and SilverCrest's suite of asset management capabilities and maintain their solid relative performance.
Speaker 3: Our pipeline of new business opportunities also increased during the quarter. And finally, the firm's outsourced Chief Investment Officer initiative now manages AUM of $1.45 billion.
Speaker 3: SilverCrest repurchased approximately 190,000 shares of Class A common stock for approximately 3.5 million during the fourth quarter.
Speaker 3: Those conclude my preliminary remarks. We'll turn it over to Scott Girard, our CFO , and then we will take questions. Thank you. Great. Thanks, Rick. As we close our earnings release for the fourth quarter, discretionary AUM as of December 31, 2022 was $20.9 billion.
Speaker 3: and total AUM as of the end of 2022 was $28.9 billion. Revenue for the quarter was $28.5 million and reported consolidated net income for the quarter was $3.3 million.
Speaker 3: Looking further into the fourth quarter, 22. Again, revenue is approximately $28.5 million. This represented approximately a 16% decrease over revenue of $33.8 million for the same period last year.
Speaker 3: This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the fourth quarter were $24.4 million representing less than a 1% decrease from expenses of $24.5 million for the same period last year.
Speaker 3: Compensation and benefits increased by 1 million or approximately 6% to 18.7 million for the fourth quarter of 2022 from 17.7 million for the same period last year. The increase was primarily attributable to an increase in the accrual for bonuses.
Speaker 3: from $6.8 million for the same period in 2021.
Speaker 3: This was primarily attributable to a decrease in the adjustment to the fair value of contingent consideration related to the Cortina acquisition of $1.9 million, partially offset by an increase in travel and net 13-minute expenses and professional fees. Cort consolidated net income was $3.3 million for the quarter.
Speaker 3: This compared to $8.6 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the fourth quarter of 2022 was approximately $2.1 million or $0.22 per basic and diluted Class A share.
Speaker 3: Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core and non-recurring items, was approximately $4.4 million or 15.6% of revenue for the quarter compared to $13 million or 38.5% of revenue.
Speaker 3: for the same period in the prior year.
Speaker 3: adjusted net income, which we define as net income without giving effect to non-core and non-recurring items, and income tax expense assuming a corporate rate of 26% was approximately $2.2 million.
Speaker 3: for the quarter or 16 cents and 15 cents for adjusted basic and diluted EPS respectively.
Speaker 3: 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 reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS.
Speaker 3: Looking at the full year, revenue for 2022 was approximately $123.2 million, representing approximately a 6% decrease over revenue of $131.6 million for the same period last year. This decrease was driven primarily by market depreciation, partially offset by net client inflows in discretionary AUM.
Speaker 3: general and administrative expenses of $1 million and $15.5 million respectively.
Speaker 3: The compensation and benefits decrease was approximately 1% to $71.6 million for the year, compared to $72.6 million for the same period last year. The decrease was primarily attributable to decreases in the accrual for bonuses.
Speaker 3: and equity based compensation expense due to a decrease in the number of unvested restricted stock units and unvested non-qualified stock options outstanding partially offset by an increase in salaries and benefits expense primarily as a result of merit based increases in newly hired staff. General and administrative expenses decreased by $15.5 million.
Speaker 3: or approximately 54% to $13 million for 2022 from $28.5 million for the same period in the prior year.
Speaker 3: This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina acquisition of $17.5 million.
Speaker 3: occupancy and related costs, and trade errors partially offset by increases in travel and entertainment expense, professional fees and special dollars, which significantly keyboard- nineteenth financial tax curvies.
Speaker 3: and portfolio and systems expense.
Speaker 3: Reported consolidated that income for a year was 30.8 million compared to 24.9 million in the same period in the prior year.
Speaker 3: reported net income attributable to SilverCrest for the year ended.
Speaker 3: December 31st, 2022 was approximately $18.8 million or $1.92 per basic and diluted Class A share.
Speaker 3: Adjusted EBITDA was approximately $32 million or 26% of revenue for 2022 compared to $43.4 million or 33% of revenue for 2021. The net income was approximately $19.7 million.
Speaker 3: for 2022 or $1.40 and $1.35 cents per basic adjusted and diluted EPS respectively. Quickly looking at the balance sheet, total assets at the end of 2022 were approximately $212.7 million compared to $229.3 million as of the end of 2021.
Speaker 3: At the end of 2022, cash and cash equivalents were approximately $77.4 million compared to $85.7 million at the end of 2021. Total borrowings as of the end of 2022 were $6.3 million and total Class A stockholders' equity.
Speaker 3: was approximately $84.6 million at the end of 2022.
Speaker 3: That concludes my financial remarks. I'll now turn it over to Rick for Q&A. Great. Thanks, Scott. I'm going to hold for questions about the fourth quarter of the year.
Speaker 2: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker 2: To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
Speaker 2: The first question comes from Sumit Modi with Piper Sandler. Please go ahead.
Speaker 4: Thanks, guys. Good morning, guys. Good morning. So, I just wanted to start with the institutional pipeline. Specifically, OCIO, I know last quarter you mentioned, you were on 700 million in the pipe and AUM was below a billion. And now that you're at 1.45 on AUM, I just wanted to see what the update there was.
Speaker 3: Some of that effect is going to be the increase that we saw in the fourth quarter in the markets. I think the S&P was up on the order of 7%, which helps. But we also have one new business into the OCIO platform, so a meaningful part of that includes those wins, which is great. As I've said before, the bid, the proportion, is really an international banks.
Speaker 3: getting over the billion dollar threshold was really important for us being a player in the market. We were right up against it as you know before the market declined in 2022 and I have projected that this will be a few to several billion dollar business for the firm. So I feel really good
Speaker 3: that we're almost at a billion and a half, not quite there, just a couple more wins. The pipeline is, for that capability, is looking really solid. It has picked up as well and I think it's on the order of...
Speaker 3: 700 million just under that probably 690 or something something like that That has increased as well. So you know, we feel good about the business opportunities there Um, I might as well get ahead of the general pipeline question since I usually get asked it, but the total
Speaker 3: pipeline for all of our capabilities on the institutional side of the business, including OCIO, is 1.65 billion now and that is up from 1.43 billion at the end of the third quarter.
Speaker 4: Your second question had to do with international value. That pipeline has increased. It's very small.
Speaker 3: But most importantly, the performance in that capability has picked up very nicely in the current environment. They are definitely a value-oriented strategy, and so the risk-off and the volatility and return to fundamentals in some parts of the market has definitely helped.
Speaker 3: their strategy, so that's great. And we've also seen some more allocations internally from our weld clients into that strategy.
Speaker 4: Thanks so much for that. It's helpful. Sure. Just to round out the institutional growth strategy overall, on the value and growth sides, it seems like the focus is organic growth, maybe some small team list outs. I know from a product perspective, you talked about being comfortable where you are today, but I agree here.cheers.
Speaker 4: Are there any regions across the US you find most interesting today that maybe you haven't penetrated into yet or is it more scaling within where you're at?
Speaker 3: Yeah, so with regards to the overall institutional strategy, I'm very happy with where we are. We've got plenty of capacity to build in both value and growth. The growth performance with our Milwaukee professionals has absolutely been outstanding through this environment. The relative outperformance is really great.
Speaker 3: So, you know, I expect good things there, but we're really focused on building those strategies. We've got the main pieces that we need as an asset management company for now. I am not necessarily looking for other lift-outs or strategies to enhance the institutional business at this time. You know, with the change in the interest rate environment, there's possibility we look at more credit. Let's just say there's too many good ones available for analyzing that potential transmission as it relates to business participation.
Speaker 4: that has been of less interest to many clients and allocators as you might expect given the low interest rates.
Speaker 3: And there's more and more attention being paid to different types of credit strategy, whether that's distressed or other capabilities, even more so than what we were seeing in PEE only a few years ago. So there may be an opportunity there, but I can't say I'm aggressively looking or trying to add that. We've got enough to try.
Speaker 3: We work well with Midwesterners. It was a great cultural fit, but that's just a circumstance of them being really excellent. They could have been in another city entirely.
Speaker 3: Geography is much more important for us when we think about the high net worth business. And I'm, as you know, always looking for opportunities to find the right partners in different regions of the country.
Speaker 4: All right, thanks. And then maybe just one last one for Scott. On the G&A costs, I know you guys run pretty much just under $6 million a quarter on average in 2021, maybe just over that in 2022.
Speaker 4: for 10% growth rate year over year. Is that a fair growth rate to assume for 23? You know, what are some of the impacts we should think about for GNA for this year?
Speaker 3: Yeah, I think one of the noteworthy lines is related to, you know, travel and entertainment expense. That's certainly going to be us.
Speaker 3: has started normalizing. So that, you know, as you can imagine, because of the pandemic, that expense, you know, in 2021, even welcome to 22, is you know, lower than historical levels. And, you know, other things such as, you know, professional things, some of the research services that we use.
Speaker 3: We're in an inflationary environment as much as we do our best to negotiate either nominal built-in increases in our agreements or more common now various services are...
Speaker 3: you know, hyping up their fees. And we try and do our best to negotiate that down to a reasonable level. But I would say that pretty much covers, you know, some of the, some of what you've seen in G&A and what I would expect to continue. Great. Thanks for taking my questions, guys. Sure. Thank you.
Speaker 2: The next question comes from Christopher Maranac with Jenny Montgomery Scott. Please go ahead.
Speaker 3: Hey, good morning. Scott and Rick, can you talk about the EBITDA margin and kind of what's realistic in this environment? I know there's some noise and unique factors in Q4, but just thinking of going forward, it's going to help how you see the business unfold in there.
Speaker 4: Yeah, thanks Chris. I'll start but Scott may be able to fill in some detail. First of all, where we sit in the fourth quarter, and I think you may have noted this in your your note this morning at what are we 26 27% EBITDA for the fourth quarter is actually
Speaker 4: right in line with historical EBITDA for the company if you go prior to some of our recent growth spurts. So we feel really good about that considering the year and...
Speaker 3: compared to some peers even looks quite good. As I said, a year ago, 2021, when we were hitting 32, 33% EBITDA, that was really kind of historically high. In part that was driven by performance fees, which we saw in multiple years leading up to that. Obviously last year was not a good year.
Speaker 3: or performance fees. So you're kind of looking at the true business.
Speaker 3: So it's quite sustainable and will only look better as the markets recover. There's another important point here which I talked about in several calls which is that we would be making investments.
Speaker 3: in personnel and strategy, intellectual capital to grow the company. We've done that. It was hidden a bit in our EBITDA margins because we were growing. We were growing faster than we were even making those investments. Well, you know, with the decline of markets, they've become a little more obvious. They're paying off, but that sort of investment takes a long time to pay off in a business like ours, especially on the high net war side.
Speaker 3: I view it as a good level. It's in line with history. It's very good compared to the competitors and if we get performance fees or you see growth from some of those investments, I see increases from there. Anything to add to that Scott? Yeah, the only thing I'll add is the fourth quarter trend that you typically see, you know, with us is that we true up our compensation.
Speaker 3: tools at the end of the year. A lot of it is based on full year results. That's why you may see atypical margin levels, even on margin levels in the fourth quarter. A year ago,
Speaker 3: Our fourth quarter adjusted either down margin was 38.5% and then it was a little bit north of 15% fourth quarter this year. So this all reflects what Rick said, investment in new staff that takes time to develop their business.
Speaker 3: in a year where revenue levels and markets were down. So just to provide that color that it's not unusual in the fourth quarter of each year for Silvercrest to see some movement in EBITDA related markets. Yeah, I figured we'd get there as well. That's a great point. I would just add that even on.
Speaker 3: that because of the good year we had in 2021. 2022 we went above it and you kind of average it out and you look at the long-term trends of this business, not even that long term, a year trend, not quarter over quarter, one year quarter over quarter, but you look at calendar years and we're hanging right in there around.
Speaker 3: 55 or just below which we've done historically and managed very well. And to Scott's point you just made on the EBITDA margin, you may have hit the fourth quarter 38% last year and more like 15% this year for the fourth quarter. We average that you're right at 27, 26 and a half which is exactly where we would expect to sit. So...
Speaker 3: I think you need to be careful about where we're, what comparison period we're comparing here. Nope, that's all very helpful, I appreciate that. And then, could you just continue a little bit down on the sort of the revenue side at the core from sort of the basis points you can charge. I know some of this gets influenced by mix as you continue to be successful in other parts of the business, but is there any- Give me.
Speaker 3: have lower fees.
Speaker 3: on discretionary assets, but that business, as you know, has a lot more leverage in it. So, just looking at the fee basis, you sort of miss the enhanced fee-by-stop margin that you get with those wins.
Speaker 3: The high net worth side of the business has been very very steady with from a fee basis. I pointed out in the past that the very largest high net worth clients have always asked for institutional pricing plus full service.
Speaker 3: and have aggressively negotiated fees for years. At the very top end, they don't look that different from the institutional business. So as we have one more of the really large families, that has lower the fee basis a bit as well. That's a high class problem. I'd rather have that the aura and...
Speaker 3: reputation of the firm really benefits from associating from that level of wealth. The institutional side I would say has been you know about the same pressure on fees that we've experienced for the past decade. Nothing, nothing changing dramatically one way or the other. So there's noise in there of course.
Speaker 3: depending where people allocate and when we get cash flows in and then where they go with their funds. But I don't discern a significant trend or I haven't noticed anything across the firm that's going to move around but it's been pretty stable.
Speaker 3: Thank you very much for that background. I appreciate it. Yeah, you're welcome. Thanks, Chris.
Speaker 2: The next question comes from Chris Suttai with Singular Research. Please go ahead.
Speaker 5: Yes, hi, good morning. Good morning. Can you talk about
Speaker 5: the acquisition environment, how are you seeing valuations out there?
Speaker 3: Yeah, so valuations have definitely come down a bit. I've observed a couple of things. Obviously with the higher interest rate environment.
Speaker 3: For those who have had to reset debt and have highly levered balance sheets unlike Silvercrest, it's constrained their ability to continue rolling up and participating in very high in my view very high pricing in the industry for some mediocre businesses.
Speaker 3: And the higher interest rate is just going to be a hurdle to that. So it's coming down a bit. What I'm seeing more is much more careful scrutiny of deals in the terms of those deals. Much more emphasis on...
Speaker 3: on how much AUM comes over with the deal and projecting that much more emphasis on earn outs.
Speaker 3: etc. So you could view the restrictions in terms of the deal getting tighter as a form of price reduction as well. So yes, it's coming down a bit. And I've also seen some players
Speaker 3: who had been very active kind of stepping out of the market. So that's an indicator potentially of where it's going. The number of deals has definitely come down substantially as well. So that's about all the color I can give. I haven't seen a lot else.
Speaker 5: Okay, thanks for that. And then, can you talk about what were the main drivers for client outflows this quarter?
Speaker 5: that and then can you talk about what were the main drivers for client outflows this quarter?
Speaker 3: normal, expensive and life. There's always a leak in the bucket in this business. Some of the outflows were due to pension funds that may be winding down. And so you kind of see a drip out for that. Some of it's the normal high net worth.
Speaker 3: living. This is why it's in this business you've always got kind of two steps forwards one back. Obviously early in the year both in the in the third quarter and in the second quarter we saw very large outflows primarily for taxes, right? There were some events that caused significant tax outflows.
Speaker 3: Outflows this quarter were pretty moderate. It wasn't unusual one way or the other.
Speaker 3: It's sometimes we have a little positive there Very often it's it's a low negative, which is what you know this this quarter was so Can't give you much color beyond that on the closed account Basis it was very low. In fact, it was quite low this entire year.
Speaker 3: It was one of the lowest years that we've had for closed accounts since 2017 and 2014 so we did really well on that basis in terms of the number of accounts that we've maintained or relationships we've maintained one of our best years in the past five and Since we're talking about flows. It was a very good new business.
Speaker 3: was actually better than 2017 or 2018 or 2019. 2019 looks a bit distorted because that was the year of the Cortina merger. If you take out acquired assets from that, the 2022 was actually better for new relationships than all of those years. So I would argue pretty solid, especially in the environment.
Speaker 5: Okay, thanks for the answers.
Speaker 2: You're welcome. The next question comes from Timothy Call with VTHE Capital Management Corporation. Please go ahead. The next question comes from
Speaker 6: Yeah, that's the Capital Management Corporation. So.
Speaker 6: Your balance sheet is very clean. Your cash and receivables almost equal all of your liabilities combined. And with your cash being more than ten times your draw on your credit line, I was wondering why you're not interest income, net interest income positive.
Speaker 6: I would have expected that versus rising net interest expense.
Speaker 3: Yeah, I mean we do have some of our cash invested to get some yield on it. We don't typically tie up our cash too long when we have strategic initiatives and uses for the cash. We also neighborhood our relative
Speaker 3: We also do receive meaningful income credits from our bank which helps reduce any banking fees that we need for our transactions. But strategically that is definitely something that we look at and we weigh based on our strategic needs for our cash.
Speaker 6: Maybe putting half the cash in a money market would make you net interest income positive.
Speaker 6: It looks great, good balance sheet. Can you comment on what factors go in your decision making for when you buy back stock?
Speaker 3: Yeah, I talked about this a bit in the past, appreciate the question. It's primarily weighing...
Speaker 3: the discussions that we're having in the marketplace and opportunities where significant cash may be needed against our ability or desire to purchase, you know, one of the highest quality asset managers we can, which would be ourselves.
Speaker 3: you never know when one of those things are going to hit. I think the acquisition we made in 2019 when we joined forces with Cortina is a great example. That was a good, prolonged discussion. It takes us a while to get to know teams we want to join with. The cultural aspect is very important, so we're very happy with that.
Speaker 3: careful about those conversations. And it was, you know, the biggest merger in our history and required significant cash for us to step up and do all of a sudden. And so keeping some of that powder dry is a big reason that we're way against.
Speaker 3: As you know, it's also not always easy to buy the stock factor that we'd like to. We put quite a bit to work last year. We've still got more to go as we've revealed in this.
Speaker 3: latest latest filing I think Scott we've got another 5 million? Yeah about 5.7 million 5.7 million or so in potential 5 acts
Speaker 3: And as everyone knows, we've been transparent about it. We've been active in the market. As we work through that, we will again, reassess what we might do on that front for the reasons I stated. Thank you. You're welcome.
Speaker 3: we've been transparent about it, we've been active in the market. As we work through that, we will, again, reassess what we might do on that front for the reasons I stated. Thank you. You're welcome. Thank you.
Speaker 2: Again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Rick Huff for any closing remarks. Great. Thanks so much for joining us for both the fourth quarter and year end 22 results. It's nice to have a little reprieve in the fourth quarter and continuing on the first quarter.
Speaker 3: This year, I feel quite good about the margins and control of expenses that we were able to maintain throughout 2022, while we also returned very good performance and built our pipelines. Notable was progress in our OCIO business, as I mentioned, and the opportunities we have elsewhere.
Speaker 3: It was a nice reversal to see and I think really important to keep into context what we've been able to do year over year, calendar year over calendar year, and not just quarter to quarter or a distorted quarter compared to another quarter. Feel free to reach out to us at any time. Look forward to talking to you at the end of next quarter. Thanks so much for joining us.
Speaker 2: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker 1: I have we che.