Silvercrest Asset Management Group Q4 2023 Earnings Call Transcript

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March 8, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Silvercrest Asset Management Group, Incorporated 4th Quarter and Full Year 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, this event is being recorded. Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward looking statements.

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 the caption Risk Factors. For all such forward looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward looking statements made on this call are made as of the date hereof and Silvercrest assumes no obligation to update them. I would now like to turn the conference over to Rick Huff, Chairman and CEO of Silvercrest.

Operator

Please go ahead.

Speaker 1

Matt, thank you very much and good morning to our Q4 year end 2023 results. After the volatile and difficult market environment of 2022, we hope 2023 would lead to improved markets helping to recover both Silvercrest's discretionary assets under management as well as our top line revenue. The year 2023 was unusual. Equity market gains were highly concentrated in a handful of large cap technology companies as a result of such narrow leadership and economic uncertainty during the Q3 of 2023 earnings call. I had stated we could face challenging market conditions at Silvercrest for yet another year.

Speaker 1

During the Q4 of 2023, company participation in equity market gains broadened significantly. Progress has continued into 2024 setting the stage for a better environment for our business. During the Q4 of 2023, Silvercrest's discretionary AUM rose by $1,400,000,000 or 6.8 percent to $21,900,000,000 and Silvercrest total AUM increased by $2,100,000,000 or 6.7 percent to $33,300,000,000 during the Q4. For 2023, Silvercrest's discretionary AUM increased by $1,000,000,000 or 4.8%. Our total AUM increased during 2023 by 15 percent or $4,400,000,000 to $33,300,000,000 from $28,900,000,000 at the end of 2022.

Speaker 1

The total 2023 increase was attributable to market appreciation of $3,800,000,000 and client net inflows of 0 point $6,000,000,000 or $600,000,000 Silvercrest's revenue for the year, however, significantly lagged increases in assets under management due to broad market gains concentrated in the Q4 of 2023. Silvercrest primarily bills quarterly in advance. Revenue decreased by $5,800,000 or 4.7 percent to $117,400,000 for 2023 from $123,200,000 for 20 22. This decrease was driven by market depreciation in prior years, partially offset by market appreciation and net inflows during 2023. Revenue for the Q4 of 2023 was flat year over year.

Speaker 1

Our financial results in the 4th quarter also were negatively affected by adjustments to total compensation for 2023, with total recurring cash compensation as a percentage of revenue rising to 59% from Silvercrest's typical interim accrual rate of 55%. Silvercrest completed the year with adjusted EBITDA of 26 $900,000 or 22.9 percent of revenue, down from $32,000,000 or 26 percent of revenue. Adjusted diluted earnings per share for 2023 was $1.12 down from $1.35 in 20.22. For the Q4, adjusted EBITDA was $2,600,000 or 9 percent of revenue, down from $4,400,000 or 15.6 percent of revenue in the Q4 of 2022, both affected by 4th quarter adjustments. Adjusted diluted earnings per share for the Q4 was $0.07 down from $0.15 in the Q4 of 2022.

Speaker 1

With the AUM increases during the Q4 and so far in 2024, we expect a better environment in 2024. Silvercrest pipeline of new business opportunities have significantly improved since the Q4 of 2023. While the institutional search environment remains slow, Silvercrest actionable institutional business pipeline has increased to 735,000,000 dollars Silvercrest's outsourced Chief Investment Officer or OCIO AUM has risen to $1,700,000,000 which includes a new small college endowment. The OCOIO pipeline has increased to $585,000,000 and our consultant relationships have strengthened. Silvercrest has never been busy here with its new initiatives.

Speaker 1

We're focused on those new opportunities as well as investments to drive growth in the business, including value added hires. Scott, that concludes my opening remarks. If you could cover financials. Thanks.

Speaker 2

Great. Thanks, Rick. As disclosed in our earnings release for the Q4, discretionary AUM as of the end of 2023 was $21,900,000,000 and total AUM as of the same period was $33,300,000,000 dollars Revenue for the quarter was $28,500,000 and reported consolidated net loss for the quarter was 600,000 dollars Revenue for the Q4 was approximately $28,500,000 was flat for the same period in the prior year. Expenses for the Q4 were $29,500,000 representing approximately a 21% increase from expenses of $24,400,000 for the same period last year. This increase was primarily attributable to an increase in compensation and benefits expense of $4,000,000 and general and administrative expenses of $1,200,000 Compensation and benefits again increased by $4,000,000 or approximately 21 percent to $22,700,000 for the 4th quarter from $18,700,000 for the same period last year.

Speaker 2

The increase was primarily attributable to increase in bonuses of $3,500,000 salaries and benefits of $300,000 primarily as a result of merit based increases and newly hired staff and an increase in equity based compensation of $200,000 due to the granting of additional restricted stock units. General and administrative expenses increased by $1,100,000 or approximately 20.8 percent to $6,800,000 for the 4th quarter from $5,700,000 for the same period in the prior year. This was primarily attributable to an adjustment to the fair value of contingent consideration related to the Cortina acquisition of $800,000 recorded during the 3 months ended December 31, 2022, an increase in the adjustment at a fair value of contingent consideration related to the Neosho acquisition of $300,000 and also increases in occupancy and related costs and charitable donations, partially offset by a decrease in professional fees. Reported consolidated net loss was $600,000 for the quarter as compared to 3,300,000 dollars of net income in the same period in the prior year. Reported net loss attributable to Silvercrest or the Class A shareholders for the Q4 of 2023 was approximately $400,000 or 0 point 0 $5 and 0 point 0 $4 per basic and diluted Class A share, respectively.

Speaker 2

Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and non core non recurring items was approximately $2,600,000 or 9 percent of revenue for the Q4 compared to $4,400,000 or 15.6 percent of revenue for the same period in the prior 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 $1,000,000,000 for the quarter or $0.08 $0.07 for 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 RSUs and non qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at the full year, revenue for the year was approximately $117,400,000 and that represented a 4.7% decrease from revenue of $123,200,000 for the same period last year. This decrease was driven by market depreciation in prior years, partially offset by market appreciation and net client inflows during 2023.

Speaker 2

Expenses for the year ended December 31, 2023 were 98,600,000 representing approximately a 16% increase from expenses of $84,700,000 for the same period last year. This increase was primarily attributable to increases in compensation and benefits expense of 1,000,000 dollars and general and administrative expenses of $12,900,000 Compensation and benefits expense was approximately 1% higher at $72,600,000 for 2023 compared to $71,600,000 in 2022. The increase was primarily attributable to increases in equity based compensation expense of $500,000 due to an increase in the number of unvested restricted stock units and unvested non qualified stock options outstanding and an increase in salaries and benefits expense of $1,300,000 primarily again as a result of merit based increases in newly hired staff, partially offset by a decrease in the accrual for bonuses of $800,000 General and administrative expenses increased by $12,900,000 to $26,000,000 for 2023 compared to $13,000,000 in 2022. The increase was primarily attributable to increases in the fair value of contingent consideration related to the Cortina and Neosho acquisitions of $11,800,000 $300,000 respectively also increases in portfolio and systems expense, occupancy related costs, marketing costs, depreciation and amortization and office expense. These increases were partially offset by lower professional fees, sub advisory and referral fees and telephone and Internet costs.

Speaker 2

Reported consolidated net income was $15,200,000 for 2023 compared to $30,800,000 in the same period in the prior year. Reported net income attributable to Silvercrest for the year ended twelvethirty onetwenty 3 was approximately $9,100,000 or $0.96 per basic and diluted Class A share. Adjusted EBITDA was approximately 26 $900,000 or 22.9 percent of revenue for 20 23 compared to $32,000,000 or 26 percent of revenue for 20 22. Lastly, adjusted net income was approximately $16,100,000 for 20 23 or 1 $0.16 and $1.12 per adjusted basic and diluted EPS, respectively. Quickly looking at the balance sheet, total assets as of the end of 20 23 were $199,600,000 compared to $212,700,000 at the end of 2022.

Speaker 2

Cash and cash equivalents were approximately $70,300,000 at the end of 'twenty three compared to $77,400,000 at the end of 2022. Total borrowings as of the end of 2023 were $2,700,000 Total Class A stockholders' equity was approximately $82,700,000 at the end of 2023. That concludes my financial remarks. I'll turn it over to Rick for Q and A.

Speaker 1

Great. Thank you, Scott. Look forward to talking to anyone on the call. Thanks.

Operator

We will now begin the question and answer session. Today's first question comes from Freddie Strickland with Janney Montgomery Scott. Please go ahead.

Speaker 3

Hey, thanks and good morning. I just wanted to start on expense trends, understand the revenue drop in the 4th quarter impacted the ratios on G and A and compensation. I mean, should we expect a more normal year for those ratios as we look into this year?

Speaker 1

With regards to and thanks for joining us, Freddie, I saw the report this morning, just as a comment. I think it was pretty close to getting the situation right. With regards to 2024, certainly as we enter it and build for the Q1 based on the increase Q4 that we saw with the broader market participation, you would expect the compensation ratio to come back down towards our normalized 55% as progress is made. That said, we are making investments in the business and new personnel. And depending on when those occur during the year, it could affect that ratio.

Speaker 1

And if market progress were to stop, it would affect that ratio or if you've got something in the pipeline. So the expectation is it would go in that direction, but we plan to invest in the business. And you may recall that I have commented in several calls about the need to make investments in personnel to grow the business and that, that would hit earnings and EBITDA when I did that. Really what you're seeing in 20 20 3 is the market effect in addition to some new investments that are not yet at the ratio that we strive to achieve for the company, both in terms of contributing compensation as well as EBITDA. What I think we will consider doing is increasing that ratio in 2024 and accrue at a different level.

Speaker 1

I don't know what that will be yet. It will not be 59%, I can tell you that. But it will be higher than our typical 55. We don't like making big adjustments in the Q4 to normalize the year. Sometimes that works in everyone's favor.

Speaker 1

You may recall the Q4 adjustment for 2021 was very significant in the other direction. I think our ratio that quarter was 52 or 3, maybe even been below 52. I don't quite recall, but it was in that range. So I think given the investments we plan to make and just my general comments carrying over from last quarter about the economic environment, I think it would be prudent for us to accrue at a higher rate, even if on a steady state basis for the business without significant new investments, we would target and do target that 55% cash compensation ratio. So we haven't changed the business model what we're looking to do.

Speaker 1

It's really more about being realistic where we are with the markets. Hope that's not too long winded, but I think that deserves a very thorough explanation.

Speaker 3

No, that's very helpful. I appreciate that. And just switching gears for a second, I appreciate the color on the CIO pipeline. It sounds like there's still some solid momentum there, plenty of potential. Do you have an idea of how much OCIO could be as percentage of total AUM just over the next 4 or 5 years?

Speaker 3

Is there a specific goal you have in mind and big picture there?

Speaker 1

Yes. I mean, my specific goal is for that to be a few to several $1,000,000,000 I know that's a bit of a range, but I can see us crossing well over $2,000,000,000 this year if things go well, just the pipeline alone is $585,000,000 up $400,000,000 last quarter. And it's always been my goal for it to be in that range. When we're talking about total assets to use the metric you just gave of $33,000,000,000 then the total within a reasonable period of time could well be 15% of total AUM. In terms of discretionary AUM, which is down at 28 let's see, where is it?

Speaker 1

Where are we at? Sorry, I lost my data here. At any rate, it would be a higher share of that, let's call it 20% or something like that. But that will take a couple of few years to get to $21,900,000,000 sorry, it eluded me. So if we can get to if we can increase as I expect to, let's say, double it over the next 2 years or so.

Speaker 1

That's going to be a meaningful part of our AUM. One important part about OCIO is that there are a lot of consultants and players that are virtually giving the business away. We don't view it as an economic model. And we're being very selective about the institutions we work with, who want a partner, who want bespoke solutions, who want discretionary management. And so in doing that, we're maintaining reasonable fee basis that looks more like our institutional business.

Speaker 1

But it also means our passing on really low fee basis business that we don't think progresses things that takes a lot of effort for very little reward. The sum total of that means that we will grow steadily, but a bit more slowly if we were just trying to win everything

Speaker 3

out there. Understood. Just one last one real quick. Just curious in terms of M and A acquiring other asset managers, have you seen pricing shift at all there?

Speaker 1

I've seen it shift a bit. There are players who've sort of exited temporarily, it seems. They're really aggressive acquisition that we were seeing in the past. It continues to be pretty hot, especially at the smaller retail end of things. The multiples definitely have come down, but I would argue they've come down more in term deal in deal terms than they have in say the nominal multiple that's put on a business because if you shift more to earn outs or certain performance goals over a period of years, the nominal multiple on EBITDA for the business may still look the same, but in effect on a discounted rate and reality, it could well be very different.

Speaker 1

So if you want to use the analogy of sports contracts, right, those big top multiples are being hit if there is growth, if you win the Super Bowl, whatever it might be. So in practical terms, they've come down even if they've only slightly come down in terms of the headline nominal number.

Speaker 3

I think sports analogies always help. So appreciate it. Thanks for taking my question.

Speaker 1

You're welcome.

Operator

Thank you. The next question is from Chris Sakai with Singular Research.

Speaker 4

I had a question on bonuses. How are they calculated? And what can we expect in this quarter and the year?

Speaker 1

So there's a mix at the firm. Obviously, you have a lot of people who are on discretionary compensation plans. You have equity teams and investment teams that are tightly related both to their AUM revenue as well as to performance. I've mentioned before, for example, that our growth team in Milwaukee has had absolutely outstanding performance that increases their compensation versus the amount of revenue that you're getting on AUM. Our portfolio managers are tightly linked to AUM revenue as well.

Speaker 1

The pool overall will grow when you make new hires and that those new hires are ahead of any AUM or revenue growth. The real story here is investing in our partners to maintain the business in the face of some declining revenue and difficult environment that we've been in for some time. What you're not seeing is an increase in the bonus pool. What you're seeing is an increase in the ratio to revenue. Bonus pools were actually down across the firm this year.

Speaker 4

Okay. Thanks for that. And can you help me understand as far as the AUM and revenue is concerned, it looks like you had higher AUM than a year ago, but about the same revenue. Is that just because of AUM the mix in AUM?

Speaker 1

If you looked at our AUM a year ago, we ended with $28,900,000,000 in total AUM and we ended 2023 with 33 point $2,000,000,000 in AUM. So it's actually up as it was and discretionary. So a lot of that is mix, but keep in mind, there was a significant change in the Q4 that really had a lot to do with increasing that AUM. We have not we don't bill in arrears. We don't bill in the stub period the money comes in.

Speaker 1

So the Q4 increase that you see in discretionary AUM is really a 1stq 2024 item because we bill quarterly in advance. 4 days in the year really matter to us and that's the end of each quarter. So really our year is set by where we are as of September 30, 2023. And as you know, there is a lot of market appreciation as well as new business in the Q4 of 2023 for us.

Speaker 4

Okay, great. Thanks.

Operator

Thank you. The next question comes from Sandy Mehta with EvaluATE Research. Please go ahead.

Speaker 1

Hi, Sandy.

Speaker 5

Yes. Good morning. In your comments, you mentioned that market overall equity markets have been broadening out a little bit in the Q4 and as well as Q1. The Fed is done raising rates and now they're likely to lower rates. The financial stocks have done well in the last few months, which is a big component of value indices.

Speaker 5

So can you talk a little bit more about I think you mentioned that the pipeline going forward or the marketability probably is improving. Can you talk about where you see in terms of marketing efforts going forward in this environment with the broadening market? Do you see more traction going forward? Thank you.

Speaker 1

Yes. You're welcome, Sandy. I don't necessarily see a high correlation between the broadening of the market and a more constructive environment and the pipeline opportunities. I think that they're pretty loosely correlated. But the market participation obviously has a big effect on revenue and what our assets look like.

Speaker 1

The general environment in economic or macro as well as where people are with their events is really what drives the pipeline. In terms of the institutional pipeline, I mentioned that it was 735,000,000 dollars That's really the only pipeline we measure. It's much harder to do it on the high net worth side. And that's up from 650,000,000 dollars that I reported on in our last earnings call. We have several new searches, particularly in the small cap space, small cap growth, small cap opportunity and in small cap value.

Speaker 1

But I will say that it's a very despite that pipeline, it's a low anemic search environment generally. We're seeing rebalancing in performance bleeds that were that is a bit of a headwind. And the search for active management seems primarily focused right now on alternatives, whether that's credit or private equity. So despite the good pipeline, it's not a great search environment. We've seen it much better.

Speaker 1

We've had pipelines twice as big, if not close to 3 times as big. So that's constructive. It's good. I'm optimistic about this year with regards to our new business initiatives. But I think it's important to keep in mind despite the pipeline growing, it's somewhat of an anemic search environment.

Speaker 1

On the high net worth side, that's a little bit more serendipitous. It can take a month to acquire new client. It can take years. And it's there's not a process associated with the high net worth business that I can measure as reliably as I can the institutional pipeline. The institutional pipeline that we report to you all is very rigorously put together.

Speaker 1

It's only when we're in finals, semifinals or invited searches and you can't quite do the same on the high net worth side. For the high net worth side, we're seeing more and more activity come to us via the Internet, direct phone calls. There are lots of good conversations. That's about the best color I can give you. I feel pretty good about the high net worth business this year.

Speaker 1

We also will be investing and investigating pure business development roles for that business. Previously, we have tended to lead business development entirely up to the portfolio managers working with clients. But given the maturity of the firm and where we are, I think it's time for us to start focusing on pure business development roles. So we'll be looking potentially to invest in that this year, which has to do with some of my comments on personnel.

Speaker 5

And you talked about the accrual rate or the compensation as a percentage of revenue. Are you still overall targeting EBITDA margins on a normalized basis in the high 20s range?

Speaker 1

I think the business in a mature steady state environment without investments should be in that range. Keep in mind as well that we're often in that range when we receive performance fees. The highest we ever hit, I think was 32% EBITDA margin in the Q4 of 'twenty for 2021 for that year, which is a great market year, but we also had very substantial performance fees, which largely go to the bottom line. So that's in the mix. And of course, we haven't had any in the past 2 years.

Speaker 1

So that also affects kind of total revenue that affects that compensation ratio when you look at it. The compensation ratio in terms of the EBITDA margin, we target has been as you know 55%, which leads to that better margin. As we've discussed recently, however, we've also seen higher expenses for some of our fixed costs in this inflationary environment, which occurred at the same time as declining our flat markets. That pressure is going to take a while to grow out of. So while we target that EBITDA margin, it won't be easy to hit near term.

Speaker 1

I've also said that as we invest in personnel, we could very well hit EBITDA and therefore earnings in order to propel growth. And we're not afraid to do that and that's a possibility. When we've done it in the past, we grew faster than those investments in part because of very constructive markets. That's not the environment we find ourselves in. So in effect, when we made those investments previously over the past several years, those increased costs were hidden from our investors because we were able to grow faster than the investments we're making.

Speaker 1

So that's why I'm looking at accruing at a higher rate this year. It's going to take a while to continue growing out of this. As I said last quarter, I need to make these investments. I think it's good for the shareholders to continually grow the firm in this way. And then if I were to stop, I would absolutely expect both EBITDA and those margins to rise back to where they've been historically.

Speaker 5

Great. Thank you.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Rick Huff for any closing remarks.

Speaker 1

Great. Thank you for joining us for our Q4 report as well as 2023 results. As I mentioned, things are looking constructively better, especially with the increases we saw in the 4th quarter continuing in 2024. And many of our new business initiatives are just very active right now, which gives me some optimism for being able to continue to grow throughout this year, especially with the tailwind of constructive markets. Look forward to talking to you in the next quarter and I appreciate you dialing in.

Speaker 1

Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Silvercrest Asset Management Group Q4 2023
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