Silvercrest Asset Management Group - Q1 2023

Transcript

Operator (participant)

Good morning. Welcome to Silvercrest Asset Management Group Incorporated 1st quarter 2023 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions.

Please note that this event is being recorded. Before we begin, let me remind you that during today's call, certain statements made regarding our future performances are forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties.

Many factors could cause actual results to differ materially from the statements that are made. Those factors are disclosed in our filings with the SEC under caption Risk Factors. For all forward-looking statements, we claim the protection provided by the Litigation Reform Act of 1995.

All forward-looking statements made on this call are made of the date hereof. Silvercrest assumes no obligations to update them. Now I'd like to turn the conference over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead, sir.

Richard Hough (Chairman and CEO)

Thank you. Thanks for joining us for the first quarter results for Silvercrest. Despite volatility, markets were supportive during the first quarter of 2023, with Silvercrest concluding the quarter with total assets under management of $29.9 billion and discretionary AUM of $21.3 billion. Discretionary AUM, which primarily drives our revenue, increased 1.9% over the fourth quarter of 2022.

Nonetheless, our discretionary AUM has declined 10.5% year-over-year since the first quarter of 2022. Consequently, while business results have increased over fourth quarter results, they remain down on a year-over-year basis as markets recover. Our revenue fell 12.2% for the first quarter compared with 2022. This decline in revenue significantly affected Adjusted EBITDA and Adjusted Diluted Earnings per Share.

Our Adjusted EBITDA declined year-over-year to $8.2 million for the first quarter since the first quarter of 2022. Adjusted Diluted Earnings per Share also declined year-over-year to $0.35 for the first quarter since the first quarter of 2022. Silvercrest's Adjusted EBITDA margin of 27.8% remains historically healthy for the company.

Economic uncertainty and market volatility often create long-term opportunities that benefit the high quality of our capabilities. The pipeline of new business opportunities has also increased over the fourth quarter of 2022 and has increased substantially since the first quarter of 2022.

The firm's outsourced chief investment officer initiative also increased during the first quarter and now manages AUM of $1.52 billion. Silvercrest repurchased approximately 96,000 shares of Class A common stock for approximately $1.6 million during the first quarter.

On May second, 2023, the board of directors declared a quarterly dividend of $0.18 per Class A share of common stock. That dividend will be paid on or around June 16th to shareholders of record as of the close of business on June ninth. Scott, if you could go through the financials, and then we'll open up the call for questions.

Scott Gerard (CFO)

Sure. Thanks. As disclosed in our earnings release for the first quarter, again, discretionary AUM as of March 31st of this year was $21.3 billion. Total AUM as of March 31st of this year was $29.9 billion. Revenue for the quarter was $29.4 million. Reported consolidated net income for the quarter was $5.3 million.

Revenue decreased approximately 12% year-over-year from revenue of approximately $33.5 million in the first quarter of 2022. This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the first quarter of this year were $22.7 million, representing approximately a 26% increase from expenses of $18.1 million for the same period last year.

The increase was primarily attributable to an increase in G&A expense of $6.8 million, partially offset by a decrease in compensation and benefits expense of $2.2 million. Compensation and benefits expense again decreased by $2.2 million or approximately 12% to $16.5 million for the first quarter of this year from $18.7 million for the same period last year.

The decrease was primarily attributable to a decrease in the accrual for bonuses of $2.6 million, partially offset by an increase in salaries and benefits of $0.4 million, primarily as a result of merit-based increases and newly hired staff. G&A expenses increased by $6.8 million to $6.2 million for the first quarter of this year from -$0.6 million for the same period last year.

This was primarily attributable to an adjustment to the fair value of contingent consideration related to the Cortina acquisition of $6.5 million that was recorded during the first quarter of 2022, in addition to increases in professional fees, portfolio and systems expense, and travel and entertainment expense. Reported consolidated net income was $5.3 million for the quarter as compared to $12.4 million for the same period last year.

Reported net income attributable to Silvercrest or the Class A shareholders for the first quarter of this year was approximately $3.2 million, or $0.34 and $0.33 per basic and diluted Class A share, respectively. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation and expense and non-core and non-recurring items, was approximately $8.2 million or 27.8% of revenue for the first quarter of this year, compared to $10.3 million or 30.6% of revenue for the same period last year.

Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items and income tax expense, assuming a corporate rate of 26%, was approximately $5 million for the quarter or $0.36 and $0.35 per adjusted basic and diluted EPS, respectively.

Adjusted EPS is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reported period for basic adjusted EPS. 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.

Looking at the balance sheet, total assets were approximately $178.6 million as of March 31st of this year compared to $212.7 million as of the end of 2022. Cash and cash equivalents were approximately $41.6 million at March 31st of this year compared to $77.4 million at the end of last year.

Total borrowings as of March 31st of this year were $4.5 million, and total Class A stockholders' equity was approximately $84.4 million at March 31st of this year. That concludes my remarks. We'll now turn it over for Q&A.

Richard Hough (Chairman and CEO)

Thanks, Scott.

Scott Gerard (CFO)

Thanks.

Operator (participant)

Thank you. I'll begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question comes from Sumeet Mody of Piper Sandler. Please go ahead.

Richard Hough (Chairman and CEO)

Good morning to you.

Sumeet Mody (Investor Relations Specialist)

Hey, good morning, guys.

Richard Hough (Chairman and CEO)

Good morning.

Sumeet Mody (Investor Relations Specialist)

Good morning. Wanted to start with capital allocation. I know you guys last quarter, I believe, talked about wanting to put more capital to work, you know, towards your purchases. You know, it seems like the dip in March lets you guys repurchase pretty efficiently, but the magnitude was maybe a little lower than we were expecting.

I'm just wondering how should we think about your appetite for repurchases going forward? I mean, should we be looking at it as some kind of percentage of cash flows or net income? Any help there would be appreciated.

Richard Hough (Chairman and CEO)

Yeah. I'll start. I would not look at it as a percentage of net income or cash flows. I would look at it more as the opportunity of where we can get accretion. And if we're in discussions like we were, 3 years ago with a great potential partner, as with the Cortina purchase that, you know, may slow down my purchases because I've got great use of capital for return on invested capital.

Other opportunities in the marketplace that we're really evaluating. It's much, much more for me about the opportunity cost of using that capital for buybacks versus some other strategic alternative. The way I look at it is, if I've got cash to put to use, I think it can be accretive to buy back shares.

I'm gonna buy back one of the better asset management companies I know, which is Silvercrest. So much less about the percentage of a return on capital to investors. Similarly, I look at the dividends in terms of making sure I'm giving a nice, high, steady return to investors, but one that I can sustain over a very significant period of time, even in the wake of much more substantial market downdrafts, even much stronger than what we saw last year.

That's the general way of how we look at it. Keep in mind that while we were very efficient with buybacks, I would agree with that, the Q1 window is shorter for stock repurchases for us. That has a lot to do with the volume we were able to buy in the first quarter.

Sumeet Mody (Investor Relations Specialist)

Great. That's helpful. Thanks, Rick. kind of sticking with capital allocation a little bit on the, on the inorganic growth side, just as far as the M&A environment. I mean, it just seems like, you know, the industry-wide activity in the wealth management space has really picked up over the last, you know, say, 12-18 months, you know, particularly compared to alternative and traditional asset management. just kind of wondering if you can update us on.

Richard Hough (Chairman and CEO)

Sure

Sumeet Mody (Investor Relations Specialist)

... seen any shift in conversation between March and today on that side of the business, both.

Richard Hough (Chairman and CEO)

Yeah

Sumeet Mody (Investor Relations Specialist)

... an M&A perspective or maybe even team lift outs or individual hires within

Richard Hough (Chairman and CEO)

Yeah. Okay. Well, I'll start with the M&A front. It was very strong, I think, a year ago, it really fell off a cliff towards the end of last year. It has picked back up. As I've said before, keep in mind a huge amount of that activity is not with regards to assets or companies that would be of interest to Silvercrest.

A lot of them are, you know, regional retail, much smaller RIAs. They might have a accounting focus or something else. You know, we're looking for high-end firms with a high-end clientele in money center cities. Of the set of firms and all of the activity, there's a very small subset that would be of interest to Silvercrest for our M&A.

It absolutely has picked up. The other thing I would comment on is that, pricing seems to be moderating a bit. I like that. I've been pretty vocal on our past calls about what I've seen in the marketplace with how people have used capital.

If nominal prices have only come down a bit, a small amount, I think the implicit pricing has come down a fair bit, in terms of more money being used in earn-outs, much more scrutiny on the deals in terms of assets that come over when something is struck, et cetera. I think that's supportive.

With regards to hiring, for potential lift-outs, we usually don't participate in the normal lift-outs you see from the pushback at firms, wirehouses or others that are aggressively recruiting and buying broker books.

We work and look to hire people who are fiduciaries, and many of those serve in more of a private banking role. Just fit well in our culture and how we work with clients. The environment has changed significantly with regards to potential hiring. You may recall that I did quite a bit of hiring, starting five years ago, four years ago.

We hit COVID. Those portfolio managers are growing at the firm, which is great. As a result of the banking crisis and people questioning their work environment for their clients has resulted in me currently having probably more conversations with potential hires than I can recall over the past several years. It's very, very busy on that front for potential people to add value to the firm.

Because of the M&A environment, you never know what might happen. I certainly don't want to mislead anyone and suggest that we have mature conversations that are worth talking about. I'll just say that those discussions I've always said that we're holding, but it is very active in terms of the number of people we're speaking with.

Sumeet Mody (Investor Relations Specialist)

Great. Thanks for all that color. Then, last one, obviously on the, on the, on the pipeline. Six-month actionable between OCIO and equity asset classes. I know last quarter you mentioned OCIO at around $690 million, and the overall pipeline at, like, $1.65 billion. You know, kind of equates around $1 billion for equity. Just wondering if you could update us on those numbers.

Richard Hough (Chairman and CEO)

Sure. It's come up quite substantially again. Last quarter, as you point out, the total institutional actionable pipeline, very conservatively measured in a careful way, so it is true apples to apples, was $1.65 billion last quarter. It's now $1.95 billion. We've added another $300 million to the pipeline.

It should be pointed out that that includes us getting some wins in the quarter. You know, without additional potential things in the pipeline, the pipeline would have decreased and decreased for good reasons. It actually increased despite those wins. That's great news for the future of the business. However, I don't want to be overly optimistic.

I would characterize, or we would characterize the U.S. long-only institutional search environment as very slow. The, the working relationship with consultants and how they are dealing with firms like us is just on a different pace.

They are still a lot of them doing Zooms and not meeting in person. You know, we'll just have to see how long it takes a lot of these things to land on our behalf. I'm very happy about the pipeline. We've done a great job at harvesting that over the years. It just feels like the sales cycle related to it has slowed down and is much more difficult. I just wanna be careful about how my comments are interpreted.

Great pipeline, looking really good, especially compared with 2020 or a year ago, and certainly up nicely since last quarter. Again, the search environment itself feels. It just feels slow. With regards to OCIO, that pipeline is a little bigger.

It's $695 compared to $690 at the end of the fourth quarter. That also had some wins. We had approximately, I think, around a $30 million new OCIO client come on in the first quarter. The OCIO business, which is now almost $1.52 billion, some of that went up with the market of course, which was supportive in the first quarter, but also includes another new client, which is really important to us.

Expanding the number of our clients in OCIO at this stage, is really just as important as us getting a nice new AUM in the door, because it's important as we fill out RFPs and talk to people about the diversity of types of institutions that we're working with.

Sumeet Mody (Investor Relations Specialist)

Great. Thanks for taking the questions.

Operator (participant)

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

Sandeep Mehta (CEO)

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

Richard Hough (Chairman and CEO)

Sumeet, if you could just... I'm sorry. This is Sandy. Could you just comment on what new product I may have mentioned? I don't remember new product development.

Sandeep Mehta (CEO)

I did. There were some Earlier last year, there were some new products in growth. In the fourth quarter press release, you talked about a large cap value unit investment trust

Richard Hough (Chairman and CEO)

Okay. Got it.

Sandeep Mehta (CEO)

That was launched.

Richard Hough (Chairman and CEO)

I'm not sure what it was a year ago because we. Oh, I think I do know. When we acquired Cortina and built out the Milwaukee capability, that was small cap and micro craft cap. Growth, really fantastic team. We thought it was really important to build out large cap and multi-cap growth, and that's what I would've referenced a year ago.

The performance in multi-cap and large cap is quite good, doing really well, and has been attracting high net worth assets under management in that capability. That's all within the house, which is great. It's giving the large cap capability that we have here a kind of a ballast of AUM that makes it more and more viable product.

The unit trusts that you're referring to for large cap value is obviously institutional class, and it's just another vehicle to enable institutions as part of that institutional pipeline I mentioned to invest in our large cap value strategies. I don't foresee much in the way of product development this year.

Those were really expansions of or new flavors of what we already have as existing capabilities in order to help us grow them. We really have a lot of the what I'll call plain vanilla asset classes covered quite strongly at the firm now. We have value growth in international across the market cap spectrum and in both value and growth.

Our mandate now, I think, is to grow those capabilities and continue doing so in particular with the growth team, which has had just terrific performance. The value team, as you already know, had a mature institutional business.

It has room to grow as well, but we're quite focused on growth. I should mention, one of the key wins that we had in the first quarter was to the growth team. I don't see a lot in the way of new product development. I'd rather digest what we've got and grow what we've got in a prudent way.

Scott Gerard (CFO)

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

Richard Hough (Chairman and CEO)

I don't comment on forward quarters of the quarter that we're in. I usually report on that after I have all of the results. In truth, I don't have that kind of granularity at this stage for the business. The flows are quite lumpy in the high net worth business. They can be. They can occur for a huge variety of reasons.

However, you're right. Last year was quite exceptional with regards to capital gains and taxes. My expectation for exactly the reason you state, less deals, I think, that resulted in capital gains for our clients as well as down markets probably means there will be less outflows this year as a whole for taxes. Remember, a lot of our clients, file quarterly and have, multiple tax payments. That's my expectation. There's no way I actually know it at this stage.

Sandeep Mehta (CEO)

Great. Thank you so much.

Richard Hough (Chairman and CEO)

You're welcome.

Operator (participant)

Thank you. Next question will be from Christopher Marinac. Janney Montgomery Scott, please go ahead.

Christopher Marinac (Director of Research)

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

Richard Hough (Chairman and CEO)

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

Scott Gerard (CFO)

Basically, the balance, the liability related to the earn-out arrangement, which would've been the growth payment due after the second quarter, that's basically going to go down to zero as of June 30th. It's now at less than $2,000.

There won't be any future payment on that. That explains why our GAAP numbers, the G&A expense went up so much because we had a fair value adjustment related to that arrangement a year ago. From Adjusted EBITDA perspective, whether any earn-out fair value adjustments are either added back or deducted from GAAP numbers, so that non-GAAP numbers are apples to apples year-over-year in this context.

Christopher Marinac (Director of Research)

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

Scott Gerard (CFO)

Yes. I think that absolutely is. Just to remind those without the history, you know, that $27.8 million or $28 million in EBITDA margin is actually quite historically good for the company. When we went public 10 years ago and even several years after that, we were very happy with that EBITDA margin.

Richard Hough (Chairman and CEO)

I am today. When we were hitting, gosh, 32% EBITDA margin thereabout at the end of 2021, that was high. That was very high. It was, you know, we raced ahead of our investments. It grew faster than we expected.

We had performance fees that were contributing to that. You know, I felt that we would be making further investments that could well hit that EBITDA margin and bring it back down, perhaps closer to what we are today.

Yes, I would call this quite normal. If some of the things come to pass that I mentioned earlier in the call. It's possible I hit this a little bit, come down a bit in EBITDA because when you hire people, that immediately hits your cash flow in P&L. You don't have the tax advantages that you do with a with an acquisition.

You know, the simple answer is yes, this is, this is pretty normal and a big step up from the almost 16% or 15.6% EBITDA margin in the fourth quarter. Albeit that was, you know, related to a lot of adjustments for comp at the end of the year.

Christopher Marinac (Director of Research)

Great. Last question, just is back to your comment about having very busy conversations. I certainly can appreciate that. Do you think that this is sort of gonna be a 6, 9, even 12-month process in that there's a lot more of kind of slower moving where individuals may have gone to brand X kinda forced upon them, and then they ultimately do change gears within 1 year? Is there kind of more of a longer tail to this process?

Richard Hough (Chairman and CEO)

It's honestly a mix. I have no way of knowing. You don't see these environments very often. I would say... Look, there were those who were forced, and I had conversations with some of those people, still do. It depends on really their client base and the firm. We're going to be very, very careful, and compared to a lot of firms with regards to our culture and what we're building.

It's not just about grabbing assets here. There will be those, and we've been told that explicitly, "Hey, let me see what the new environment looks like, and then maybe we'll talk." There were those who were actively speaking with us, and we'll see if there's a match or not. I'm not sure I can characterize it generally.You know, we'll see.

Christopher Marinac (Director of Research)

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

Richard Hough (Chairman and CEO)

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

Christopher Marinac (Director of Research)

Great, Rick. Thank you and Scott very much.

Richard Hough (Chairman and CEO)

Thank you, Chris. Thanks.

Operator (participant)

Thank you. Again, if you have a question, please press star then 1. Next question will be from Chris Sakai of Singular Research. Please go ahead.

Chris Sakai (Research Analyst)

Hi, good morning.

Richard Hough (Chairman and CEO)

Good morning.

Chris Sakai (Research Analyst)

Just had a question. Could you shed some light on, if Silvercrest is doing anything on the marketing front, you know, what's Silvercrest doing to really drive growth client inflows?

Richard Hough (Chairman and CEO)

Well, there's really three key organic growth areas of the firm. One is the institutional business, the institutional pipeline that I was talking about. That is primarily done through consultant and intermediary relationships with institutions. We have dedicated marketing professionals associated with each of our institutional capabilities, so they're product specific.

Yet the consultant relationships are coordinated and shared across the firm. The second would be the other pipeline I mentioned as part of that, the OCIO chief investment officer capability, of $695 million.

That business kind of sits in between pure institutional type cultivation of consultants and intermediaries and RFP processes. We have marketing devoted to that. A lot of nonprofit foundation endowment boards have high net worth individuals that sit on them.

Often those processes are driven by the fiduciary board itself or the investment committee on a foundation itself, and it's very relationship oriented and looks a lot more like the high net worth business.

The third is the high net worth business in general, the 70% of our discretionary AUM. That is a function of our brand, supporting our brand with advertising, event sponsorship, visibility, appearance on CNBC and other venues or marketing materials, and is a referral relationship business. That is up to the existing portfolio managers working with our clients to get those referrals, ask for those referrals to network to be involved in their communities. That is one aspect of it.

It's very lumpy, hard to predict, and something I've never given a pipeline to because you just can't measure a pipeline with the kind of accuracy and comparison that we can on the institutional side.

I would say it's quite busy, just looking at our marketing output, which I can tell, and quite a bit of the first quarter was related to the high net worth business. I personally work on prospects probably have more than I usually do, a lot of that due to the banking disruption.

The final piece of growing that business is the potential for high quality professionals with the right kind of business who fit our culture to join the firm, which we've talked about already on this call, and we're very active about pursuing.

Chris Sakai (Research Analyst)

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

Richard Hough (Chairman and CEO)

It doesn't in three different ways. One, qualitatively, in terms of working with our clients. Even if they have bank deposits, things on-demand deposits at banks, and we're not getting a fee for that as their high touch wealth management firm, they expect us to have a view and to give them advice about what to do about their banking, and to help navigate the issues that they face at their institutions, especially regional banks.

It would be no surprise for you to learn that we have a fair number of clients who are clients of First Republic. Very busy. Lots of questions around that and what happens and how to navigate things. At the time, there was concern about First Republic, how to organize accounts to protect them, et cetera.

It was quite, just quite busy, handholding clients. The second has to do with our business and just looking overall at our broker-dealer relationships and how our assets are held on behalf of clients and what we're doing to make sure that we're prudent fiduciaries on their behalf. I feel much better about that.

You know, there's lots of discussion, and you wanna make sure you are well aware of the environment and how best to protect your clients. The third has to do with really the conversations I'm having. In periods of like this, when there's a lot of disruption, there's an opportunity. I mentioned that in my opening comments.

Both clients who may be at banks for their wealth management or institutions start wondering whether or not they ought to be combining their deposit banking needs with their wealth management.

Maybe they should be separating those two functions and have a pure fiduciary like Silvercrest being paid for advice while keeping a banking relationship separate. I have no doubt that that is occurring.

Likewise, professionals who may be at those institutions serving clients who are getting lots of questions may be facing, you know, professional issues and questions that have them potentially talking to a firm like Silvercrest. I think that really covers how it affects the firm from our business model to the opportunity in the marketplace.

Chris Sakai (Research Analyst)

Okay, great. Thanks for the answer.

Richard Hough (Chairman and CEO)

You're very welcome. Thank you.

Operator (participant)

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

Richard Hough (Chairman and CEO)

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

Operator (participant)

Conference now concluded. Thank you for attending today's presentation. You may now disconnect.