Silvercrest Asset Management Group Q3 2024 Earnings Call Transcript

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November 1, 2024

Key Takeaways

  • Positive Sentiment: The firm’s discretionary AUM rose by $1 billion to $22.6 billion, marking a 5% sequential and 10% year-over-year increase that boosts revenue visibility.
  • Positive Sentiment: Silvercrest’s institutional business pipeline grew 20% to $1.2 billion in Q3, excluding potential global equity mandates that could drive very significant inflows.
  • Negative Sentiment: Total expenses climbed 12% year-over-year, driven by higher compensation and G&A investments, which has weighed on margin metrics.
  • Neutral Sentiment: Reported Q3 net income was $3.7 million (or $0.24 per share), with an adjusted EBITDA margin of 20.9%, below the long-term target of 27%.
  • Positive Sentiment: The company repurchased $1.4 million of Class A shares under its $12 million buyback plan, treating share repurchases as an alternative form of acquisition while retaining cash flexibility.
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Earnings Conference Call
Silvercrest Asset Management Group Q3 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Silvercrest Asset Management Group, Inc. Third Quarter 2024 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.

Operator

Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties, 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.

Operator

I would now like to turn the conference over to Rick Huff, Chairman and CEO of Silvercrest. Please go ahead.

Speaker 1

Thank you and thanks for joining us for the Q3 of 2024. Supportive markets and improving economic conditions helped Silvercrest's assets under management growth during the Q3, pointing to improved top line revenue. The firm also saw improved business development results and will report a robust pipeline of new business opportunities. A persistent trend in the market's recovery since 2022 has been the narrow leadership of large cap growth equities. We noted during our Q2 earnings call that despite progress in the market, large cap value and small cap stocks had actually declined during that quarter.

Speaker 1

We've been pleased to see broader company market participations throughout the Q3 and an increase in equities across the market cap spectrum, which benefits Silvercrest Diversified Wealth Management Business as well as our exposure to the small cap institutional business. The increases during the quarter bode well for future revenue. We're optimistic about securing significant organic net flows over the next two quarters. Silvercrest discretionary AUM increased by $1,000,000,000 during the quarter to $22,600,000,000 primarily due to rising markets. This net increase in discretionary AUM which drives our revenue represents a 5% increase since the Q2 and a year over year increase of 10% since the Q3 of 2023.

Speaker 1

New client accounts and relationships increased during the quarter led by new small cap opportunity mandates. While we report discretionary outflows during the quarter, the outflows were revenue neutral to the firm. Overall, total asset flows and market increases were a net positive for the firm and should drive an increase in 4th quarter revenue. Total AUM at the end of the 3rd quarter was $35,100,000,000 and total AUM increased year over year from the Q3 2023, up 13%. Despite these increases, Silvercrest has been investing in the future growth of the business, which has resulted in higher total compensation and which we have adjusted for on a quarterly basis.

Speaker 1

As a result, while top line revenue has increased, most metrics of the business are down due to these higher expenses. Silvercrest pipeline of new institutional business opportunities increased during the Q3 by 20% and now stands at $1,200,000,000 Importantly, the firm's pipeline does not yet include potential mandates for our global equity strategy which is a high capacity for very significant inflows. Over the past two quarters, we have worked to build the infrastructure to support that team and strategy while undertaking business development. We are optimistic about near term positive AUM flows and resulting revenue increases to result from the pipeline. I've consistently mentioned that Silvercrest has never had more business opportunities under WED.

Speaker 1

We have made and will make investments to drive future growth in the business. We expect to make more hires to complement our outstanding professional team and to drive future growth. Silvercrest continues to accrue a higher interim percentage of revenue for compensations for this purpose. And as mentioned, we will continue to adjust compensation levels to match these important investments in the business and we will keep you informed of our plans and the progress of these investments. We continue to see substantial new opportunities globally for Affirm with our high quality capabilities coupled with superior client service.

Speaker 1

Scott, why don't you address the financials and then we'll take questions?

Speaker 2

Great. Thanks, Rick. As disclosed in the release for the Q3, discretionary AUM as of September 30 was $22,600,000,000 and total AUM as of the end of the third quarter was $35,100,000,000 Revenue for the quarter was $30,400,000 and reported consolidated net income for the quarter was $3,700,000 Looking further into the Q3, revenue increased year over year by 0 point $7,000,000 or approximately 2 percent, primarily driven by increased discretionary AUM resulting from market appreciation, partially offset by net client outflows. Expenses for the quarter increased year over year by $2,800,000 or 12%, primarily driven by increased compensation and benefits expense and to a lesser extent increased G and A expenses. Compensation and benefits for the quarter increased year over year by $1,900,000 or approximately 11%, primarily due to an increase in salaries and benefits and the accrual for bonuses.

Speaker 2

Based on the increased recurring cash compensation ratio over the past 2 years, due in part to the investment in the next generation of portfolio managers and other associates, we increased the amount of the interim variable compensation accrual to potentially narrow the adjustment in the Q4. Also compensation and benefits expense for the quarter increased year over year as a result of increases in salaries due to merit based increases. General and administrative expenses increased by $900,000 or approximately 13%, primarily due to increases in professional fees, portfolio and systems expense expense. Reported net income attributable to Silvercrest or the Class A shareholders for the Q3 was approximately $2,300,000 or $0.24 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and non core and non recurring items was approximately $6,300,000 or 20.9 percent of revenue for the quarter.

Speaker 2

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 $3,800,000 for the quarter or $0.27 $0.26 per adjusted basic and diluted earnings per share, respectively. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent by Lunab, we add unvested restricted stock units and non qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking at year to date September 30 this year, revenue increased year over year by $2,800,000 or approximately 3 percent, primarily driven by increased discretionary AUM resulting from market appreciation, partially offset by net client outflows. Expenses increased year over year by $6,900,000 or 10%, primarily driven by increased compensation and benefits expense and again to a lesser extent increased G and A.

Speaker 2

Compensation expense increased year over year by $4,800,000 or approximately 10%, again primarily due to an increase in the accrual for bonuses and increase in salaries due to merit based increases. G and A expenses increased by $2,100,000 or approximately 11%, primarily due to increases in travel and entertainment expenses, occupancy expense, professional fees, portfolio and systems expense, recruiting expense and trade hour expense. Reported net income attributable to Silvercrest was approximately $7,900,000 or $0.83 per basic and diluted Class A share. Adjusted EBITDA was approximately $21,000,000 or 22.9 percent of revenue and adjusted net income was approximately $12,900,000 or $0.93 $0.89 for adjusted basic and diluted EPS, respectively. Taking a look at the balance sheet, total assets were approximately $184,200,000 as of September 30, compared to $199,600,000 as of December 31 last year.

Speaker 2

Cash and cash equivalents were approximately $58,100,000 as of September 30, and this compared to December 31 last year, which was at $70,300,000 There were no borrowings as of September 30. Total Class A stockholders' equity was approximately 84.6 $1,000,000 as of the end of Q3 and we repurchased approximately $1,400,000 of Class A shares. That concludes my remarks and we will now open up the call for Q and A. Thank you, Scott.

Operator

We will now begin the question and answer The first question comes from Sandy Mehta with EvaluATE Research. Please go ahead.

Speaker 1

Good morning, Sandy.

Speaker 3

Yes. Thanks. Yes, good morning, Rick and Scott. On the global strategies, could you provide some more details on the opportunity in terms of inflows, also in terms of the staffing? Have you fully staffed up the team, including the business development officers, as well as other new strategies that you've been developing several over the last few years, an update on the outlook for that in terms of inflows and also the an OCIO update please?

Speaker 1

Okay. Let me start with the global equity strategy. We have hired most of the primary portfolio management team of analysts and those executing the strategy. We have also hired administration and have trading covered, but that will be probably expanding a bit more. I could see us hiring another analyst.

Speaker 1

I think we're in the market for that now. With regards to business development, at this stage, we're well covered by our internal capabilities. And of course, the rest of the infrastructure at the firm to support a team like that is already here. We were able to attract this high quality team in part because of the robustness of the infrastructure that we've built oriented towards the institutional business across compliance, trading, operations, technology, etcetera, that's strong financial controls, you name it. So we're getting close.

Speaker 1

Obviously, the key parts were the expensive parts early on when that team joined us in I believe the Q2. And we have spent the past few months not only making sure that we were ready to take on a significant amount of business, but introducing the capability to significant asset allocators globally. The opportunity is absolutely enormous for us. The team in its past has managed 1,000,000,000 and 1,000,000,000 of dollars. Number 1, so they have experience doing it and are well known in the market place.

Speaker 1

Number 2, if you look at asset flows in the business, global equity at least if you look at the international stage is the highest in demand capability right now. That is where a lot of flows are going that and private equity. 3rd, when you look at the large families and institutions outside of the U. S, they very much want exposure to global equities. They do not divide in place in quite the same way that we do in the United States where we make much stronger distinctions between different asset classes in equity equity markets with the biggest exposure in the United States.

Speaker 1

So this gives us a really credible capability in talking to those larger families outside of the U. S, which as you know has been an increasing part of our business. I have not included the potential for global equity in our pipeline. I announced in my introductory remarks that we have a pipeline now of 1,200,000,000 dollars That is up 20% or $200,000,000 basically from the Q2 where we stood at $1,000,000,000 So anything that would flow over the next couple of quarters into the global equity would be in addition to the pipeline of $1,200,000,000 I obviously since I spoke extensively about my expectations in my opening remarks, I'm very, very optimistic for quite significant inflows over the next two quarters to the extent that we could even see nice organic net organic flows for 2024 as a result of those flows. But we will keep you posted and of course put out a press release when we think that is going to come to fruition.

Speaker 1

On the pipeline, I think I mentioned previously of that last quarter that the value pipeline value equity pipeline had really reduced, but that has picked back up, which is really nice to see. Our growth pipeline is smaller than it was in the Q2 and that is because we won a couple of really meaningful mandates. So that's really good news. And the OCIO portion of the $1,200,000,000 pipeline stands at about $600,000,000 That portfolio to answer your final question is about $1,600,000,000 in total right now.

Speaker 4

Okay. I believe I think

Speaker 3

I quoted all of your questions. Thank you. Thank you so much. And just one follow-up. I believe you had some buybacks mentioned at the end of your comments.

Speaker 3

Can you update us on the buyback activity? Generally, it's been very slow. And how do you look at the use of cash in terms of buybacks versus saving money for a potential acquisition, which nobody knows when that may or may not happen? Thank you.

Speaker 1

Yes, exactly. And if you looked at our past history, Sandy, we have a lot of cash on the balance sheet and then boom we had a really meaningful accretive acquisition when we merged with Cortina which gave us the growth equity capabilities. In fact the inflows that I just mentioned with the pipeline were primarily into the small cap opportunity portfolio, which is with that team. So, yes, all of a sudden you don't know when that's going to happen. We think it's really important to buy back shares when we have the cash to do so and we think it's a compelling value.

Speaker 1

I view it as acquisition by another means. We're just buying ourselves instead of somebody else. However, it is slow to put to work primarily because we have volume restrictions as we are in the market. And we are very active in the market. We're careful about it of course, but we're being much more aggressive this time around in the market than we were the last time we did a buyback in order to affect as much of that buyback as soon as we can.

Speaker 1

The reason we chose this form of a buyback in talking to our counselors and advisers at the different banks we work with and elsewhere is because it does give us the flexibility to stop the buyback should something be coming to fruition. And we have the use of that cash if that were to happen. In the meantime, we're going to support our security and buy back shares as often as we can. And we will continue to reevaluate this as we go along and as cash builds.

Speaker 2

Right. And Sandy, just a reminder that the plan we disclosed in middle of August, it's up to $12,000,000 buyback plan. So we had roughly 6 weeks of available purchasing time through the end of Q3. And so that resulted in about $1,400,000 repurchase.

Speaker 3

All right, great. Thank you so much.

Speaker 4

You're welcome.

Operator

The next question comes from Chris Sakai with Singular Research. Please go ahead.

Speaker 4

Yes. Hi. Just a question on adjusted EBITDA margin. Do you still are you still trying to get it back to 27% in the long term?

Speaker 1

Yes. Long term, this is a business that as a mature business runs into the upper 20s as an EBITDA margin. And so, yes, that's what we're aiming for. I was very clear over the past year and a half, 2 years however that we would be hitting earnings, we would be hitting EBITDA in order to set up the next stage of our company's growth and also to be super prudent about the next generation and redundancy in the business. We have a history of very successfully transitioning the business to the next generation.

Speaker 1

And when I joined the firm, I'm an example of that as are many of my colleagues. But going back 10 years, there was a gap kind of in the middle between very senior people and very junior. We've really filled that in well. But we've also been able to successfully hire and then build new capabilities. The OCIO team would be an example of that where we've been able to organically grow something from scratch.

Speaker 1

Let's not forget that I've mentioned in the past, it's not just about this global equity team. In order to win large mandates and serve the biggest

Operator

families, it's all the rest of the infrastructure. And as you grow, you

Speaker 1

have to put a little bit more investment 100 families with a couple of $100,000,000 And as we've grown and capacity fills, we have to invest in all aspects of the business in order to set the stage for the next piece of growth. We've also announced I think in the Q2 that we were greenfielding an organic growth opportunity in Atlanta. We have our full MAS license in Singapore. We have clients there now. We have employees.

Speaker 1

That is going to be important as we look at different time zones in dealing with not only clients, but trading opportunities in global equity. So this is a very broad and we're investing in other business development. This is a very broad based effort that we have always been successful at growing into. In the past, we didn't necessarily make as large investments and we were able to grow quickly through those investments. So there may have been a slight hiccup in or pull down in EBITDA, but we grow through it.

Speaker 1

So it wasn't even noticeable. This we're getting ahead of it just a bit as I forecast that we would, but I'm quite optimistic that we're going to see the fruits of this over the next year.

Speaker 4

Okay. Sounds good. One question as well. For your new hiring, is this can you give an idea, are you hiring salaries at market rates or are you hiring at higher than market rates? Can you give us an idea of that?

Speaker 1

I would argue that we're hiring people at competitive rates. We do not need to overpay to attract people to our firm. This is an incredible place to work with a very strong culture. We have very low employee turnover. People really commit their careers here and we're very proud of that.

Speaker 1

When you have that kind of entrepreneurial environment where people have a lot of autonomy and purpose, you can you have to be competitive to get the best talent, but you certainly don't need to overpay.

Speaker 4

Okay, great. Thanks.

Operator

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. And thank you for joining us for our Q3 results. I appreciate the attention and the questions. Just to emphasize, we ended the Q3 with an AUM increase of $1,000,000,000 which represents a nice quarter over quarter 5% increase and we're up 10% year over year.

Speaker 1

That is revenue that has not yet been recognized. So that's a good forward looking visibility into the firm. And as I emphasized several times during the call, I'm quite optimistic about our net organic flows looking forward, at least over the next couple of quarters. Thanks to the progress we've made with the business development investments that we've made in the business. Thanks so much for joining us.

Speaker 1

I look forward to updating everyone at the end of the Q4.

Operator

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

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