Silvercrest Asset Management Group Q1 2023 Earnings Call Transcript

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May 5, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Silvercrest Asset Management Group Incorporated First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Before we begin, I remind you that during today's call, certain statements made regarding our future performances are forward looking statements.

Operator

They are based on current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause Actual results to differ materially from the statements that are made. Those factors are disclosed in 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, and Silvercrest assumes no obligations to update them. Now Now I'd like to turn the conference over to Rick Huff, Cheahren and CEO of Silvercrest.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Thanks for joining us for 1st quarter results for Silvercrest. Despite volatility, markets were supportive during the Q1 of 2023, With Silvercrest concluding the quarter with total assets under management of $29,900,000,000 and discretionary AUM of $21,300,000,000 Discretionary AUM, which primarily drives our revenue, increased 1.9% over the Q4 of 2022. Nonetheless, our discretionary AUM has declined 10.5% year over year since the Q1 of 2022. Consequently, while business results have increased over 4th quarter results, they remain down on a year over year basis as markets recover.

Speaker 1

Our revenue fell 12.2% for the Q1 compared with 2022. This decline in revenue significantly affected adjusted EBITDA and Our adjusted EBITDA declined year over year to $8,200,000 for the Q1 since the Q1 of 2022. Adjusted diluted earnings per share also declined year over year to $0.35 for the first quarter since the Q1 of 2022. Silvercrest 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.

Speaker 1

The pipeline of new business opportunities has also increased over the Q4 of 2022 and has increased substantially since the Q1 of 2022. The firm's outsourced Chief Investment Officer initiative also increased during the Q1 and now manages AUM of 1,520,000,000 Silvercrest repurchased approximately 96,000 shares of Class A common stock for approximately $1,600,000 during the And on May 2, 2023, the Board of Directors declared a quarterly dividend of $0.18 per Class A share of That dividend will be paid on or around June 16 to shareholders of record as of the closed business on June 9. Scott, if you could go through the financials and then we'll open up the call for questions. Sure. Thanks.

Speaker 1

As disclosed in our earnings release for the Q1, Again, discretionary AUM as of March 31st this year was $21,300,000,000 and

Speaker 2

total AUM as of March 31st this year was $29,900,000,000 Revenue for the quarter was $29,400,000 and reported consolidated net income for Approximately $33,500,000 in the Q1 of 2022. This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the Q1 of this year were $22,700,000 representing approximately a 26% increase from expenses of $18,100,000 for the same period last year. The increase was primarily attributable to an increase in G and A expense of $6,800,000 partially offset by a decrease in compensation and benefits expense of $2,200,000 Compensation and benefits expense again decreased by 2 12% to $16,500,000 for the Q1 of this year from $18,700,000 for the same period last year. The decrease was primarily attributable to a decrease in the accrual for bonuses of $2,600,000 partially offset by an increase in salaries and benefits of $400,000 primarily as a result of merit based increases and newly hired staff.

Speaker 2

G and A expenses increased by $6,800,000 to $6,200,000 for the Q1 of this year from negative $600,000 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 $6,500,000 that was recorded during the Q1 of 2022, In addition to increases in professional fees, portfolio and systems expense and travel and entertainment expense, Reported consolidated net income was $5,300,000 for the quarter as compared to $12,400,000 for the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the Q1 of this year was approximately 3,200,000 were $0.34 $0.33 per basic and diluted Class A share, respectively. Adjusted EBITDA, which we define as EBITDA without giving equity based compensation expense and non core and non recurring items was approximately $8,200,000 or 27.8 percent of revenue for the Q1 of this year compared to $10,300,000 or 30.6 percent 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 percent, was approximately $5,000,000 for the quarter or 0 point and Class B shares outstanding as of the end of the reported 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 2

Looking at the balance sheet, total assets were approximately 178 $600,000 as of March 31st this year compared to $212,700,000 as of the end 2022. Cash and cash equivalents were approximately $41,600,000 at March 31st this year compared to $77,400,000 at the end of last year. Total borrowings as of March 31st this year were $4,500,000 And total Class A stockholders' equity was approximately $84,400,000 at March 31st this year. That concludes my remarks. We'll now turn it over for Q and

Speaker 1

A. Thanks, Scott. Thanks.

Operator

Thank you. Now I'll begin the question and answer First question comes from Samad Adi of Piper Sandler. Please go ahead.

Speaker 1

Good morning, Smedes.

Speaker 3

Hey, good morning, guys.

Speaker 4

Good morning.

Speaker 3

Good morning. Wanted to start with capital allocation. I know you guys last quarter, We talked about wanting to put more capital to work towards repurchases. It seems like the dip in March lets you guys Purchased 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?

Speaker 3

I mean, should we be looking at it Some kind of percentage of cash flows or net income? Any help there would be appreciated.

Speaker 1

Yes. 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 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 may slow down my purchases because I've got great use of capital for return on invested capital.

Speaker 1

For return on invested capital, other opportunities in the marketplace that we're really evaluating. It's much, much more for me about the 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 going to buy back 1 of the better asset management companies I know, which is Silver 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.

Speaker 1

So that's a 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. So that has a lot to do with the volume we were able to buy in the Q1.

Speaker 3

Great. That's helpful. Thanks, Rick. And then kind of sticking with capital allocation a little bit on the Inorganic growth side, just as far as the M and A environment, I mean, it just seems like the industry wide activity in the wealth management space has really picked up over the last, say 12 months to 18 months, particularly compared to alternative and traditional asset management. So just kind of wondering if you can update us on If you've seen any shift in conversation between March and today on that side of the business, both from an M and A perspective or Maybe even team lift outs or individual hires would have been helpful.

Speaker 1

Yes. Okay. So on the look, I'll start with the M and A front. It was very strong, I think, a year ago, and it really fell off a cliff towards the end of last year. It has picked back up.

Speaker 1

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 Just to Silvercrest. A lot of them are regional, retail, Much smaller RIAs, they might have an accounting focus or something else. We're looking for High end firms with the high end clientele in Money Center City. So 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 and A. It absolutely has picked up.

Speaker 1

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 the how people have used capital and 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, etcetera. So I think that's supportive.

Speaker 1

With regards to hiring Potential lift outs, we usually don't participate in the normal lift outs you see from the bulge bracket firms, wire Others that are aggressively recruiting and buying broker books, we work and look to hire people who are fiduciaries. Many of those serve in more of a private banking role. The and 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 5 years ago, 4 years ago, we hit COVID.

Speaker 1

Those portfolio managers are growing at the firm, which is great. I, as a result of the banking crisis and people questioning Their work environment for their clients has resulted in me currently having probably more With potential hires than I can recall over the past several years, it's very, very busy on that front 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 I've always said that we're holding, but it is very active in terms of the number of people we're speaking with.

Speaker 3

Great. Thanks for all that color. And then, last one, obviously, on the pipeline. So 6 month actionable between CIO and Equity Asset Classes. I know last quarter you mentioned OCIO at around $690,000,000 and the overall pipeline at like $1,650,000,000 Kind of equates around $1,000,000,000 for equity.

Speaker 3

Just wondered if you could update us on those numbers.

Speaker 1

Sure. It's come up quite substantially again. So 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 $1,650,000,000 last Quarter, it's now $1,950,000,000 So we've added another $300,000,000 to the pipeline. It should be pointed out that that includes Us getting some wins in the quarter.

Speaker 1

So without additional potential things in the pipeline, the pipeline It would have decreased and decreased for good reasons, but it actually increased despite those wins. So 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.

Speaker 1

Long only institutional search environment is very slow. 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. So 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.

Speaker 1

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 it's much more Difficult. So I just want to 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. But again, the search environment itself feels it just feels slow. With regards to OCIO, that pipeline is a little bigger.

Speaker 1

It's 6.95 compared to 6.90 at the end 4th quarter, but that also had some wins. We had approximately, I think, around a $30,000,000 new OCIO client come on In the Q1. So the OCIO business, which is now 1 point almost 1,520,000,000 Some of that went up with the market, of course, which was supportive in the Q1, 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 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.

Speaker 3

Great. Thanks for taking my questions.

Operator

Thank you. Next question will be from Sandy Mehta, Ballywake Research, please go ahead.

Speaker 4

Yes. Good morning. Last year was a very Active year for new product launches. And any update on what progress you're seeing? I know it's still early days for these new products.

Speaker 4

And What are you likely to do this year in terms of new products? Thanks.

Speaker 1

Sameet, 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?

Speaker 4

There were some earlier last year, there were some new products in growth. And then in the 4th Quarter press release, you talked about a large cap value unit investment trust that was launched.

Speaker 1

So I'm not sure what it was a year ago because we oh, I think I do know. So when we acquired Cortina And built out the Milwaukee capability that was small cap and micro 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 have referenced a year ago.

Speaker 1

The performance in multicap 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, kind of a ballast of AUM that makes it more and more a 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 LargeCap 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.

Speaker 1

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. So our mandate now, I think, is to grow those capabilities and We 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. And I should mention, one of the key wins that we had in the first Quarter was to the growth team.

Speaker 1

So 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 proven way.

Speaker 4

Okay. And given that markets were down

Speaker 1

Last year

Speaker 4

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 redemptions for that reason? Thank you.

Speaker 1

I don't comment on forward quarters. The quarter that we're in, I usually report on that after I have all of the results. But 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.

Speaker 1

And 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 that 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, but that's my expectation. There's no way I actually know it at this stage.

Speaker 4

Great. Thank you so much.

Speaker 1

You're welcome.

Operator

Thank you. Next question will be from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Speaker 5

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?

Speaker 1

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

Speaker 2

Yes. So basically, The balance, the liability related to the earn out arrangement, which would have been the growth payment Due after the Q2, that's basically going to go down to 0 as of June 30. It's now at less than $2,000 So There won't be any future payment on that and that explains why our GAAP numbers, the G and A expense went up so much because we had a fair value Related to that arrangement a year ago. And but from an 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.

Speaker 5

Got it. Great. And then I guess just holistically, the EBITDA margin seemed to be somewhat normal, if I could use that word This quarter and kind of what you had thought, is that a good impression?

Speaker 1

Yes. I think that absolutely is. And just to remind those without the history, That $27,800,000 or $28,000,000 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, I am today. When we were hitting -thirty 2 Percent EBITDA margin thereabouts at the end of 2021, that was high.

Speaker 1

That was very high. It was We raced ahead of our investments. It grew faster than we expected. We had performance fees That were contributing to that. And I felt that we would be making further investments that could well hit that EBITDA margin to bring it back down, perhaps closer to what we are today.

Speaker 1

So 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 and P and L. You don't have the tax advantages that you do with an acquisition. But The simple answer is yes.

Speaker 1

This is pretty normal and a big step up from the almost 16% or 15.6% EBITDA margin in the 4th Albeit that was related to a lot of adjustments for comp at the end of the year.

Speaker 5

Great. Then last question, just as back to comment about having very busy conversations, I certainly can appreciate that. Do you think that this is sort of going to be a 6, 9, even 12 month process and that There's a lot more of kind of slower moving where individuals may have gone to Brand X kind of forced upon them and then they Do change gears within a year. Is there kind of more of a longer tail to this process?

Speaker 1

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.

Speaker 1

And 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. And then 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. So we'll see.

Speaker 5

Got it. But the culture and your long term principles obviously override the growth aspect. So thank you for pointing that out.

Speaker 1

Yes, very clearly. Yes, it's just absolutely critical if you're building a sustainable growing business that doesn't get disrupted.

Speaker 5

Great, Rick. Thank you and Scott very much.

Speaker 1

Thank you, Chris. Thanks.

Operator

Thank you. Next question will be from Chris Sakai of Singular Research. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 5

Good morning.

Speaker 6

I just had a question. Could you shed some light on Silvercrest is doing anything on the marketing front? What's Silvercrest doing to really drive growth client inflows?

Speaker 1

Yes. Well, there's really 3 key organic Growth areas of the firm. 1 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 Investment officer capability of $695,000,000 That business kind of sits in between pure institutional type Cultivation of consultants and intermediaries and RFP processes, we have marketing devoted to that. But a lot of nonprofit foundation endowment boards have high net worth individuals that sit on them.

Speaker 1

Often those processes are driven by the fiduciary board itself or the investment committee on a foundation itself and is 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, our marketing materials, and is a referral relationship 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 I would say it's quite busy. Just looking at our marketing output, which I can tell and Quite a bit of the Q1 was related to the high net worth business.

Speaker 1

I personally who work on prospects probably Have more than I usually do, a lot of that due to the banking disruption. And then 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 Call and we're very active about pursuing.

Speaker 6

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

Speaker 1

It does in 3 different ways. 1, 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 Hi 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. So very busy, lots of questions around that How to navigate things at the time there was concern about First Republic, how to organize accounts to So 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 We're prudent fiduciaries on their behalf. I feel much better about that, but there's lots of discussion and you want to make sure You are well aware of the environment and how best to protect your clients.

Speaker 1

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.

Speaker 1

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

Speaker 6

Okay, great. Thanks for the answers.

Speaker 1

You're very welcome. Thank you.

Operator

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

Speaker 1

Thanks. I really don't have any closing remarks. It was a constructive quarter. I think there's a lot of opportunity. Nice to see that our business development pipeline has grown and that we have any number of conversations to progress this business.

Speaker 1

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.

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Earnings Conference Call
Silvercrest Asset Management Group Q1 2023
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