Silvercrest Asset Management Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 3, 2024

There are 4 speakers on the call.

Operator

Good morning, and welcome to the Silvercrest Asset Management Group, Inc. 1st Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity 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

Thank you very much and good morning. Welcome to our Q1 2024 earnings conference call. Usually I read my business update for the quarter, but I thought it'd be helpful this morning, it's been a while, to really talk about what Silvercrest does and highlighting the nature of our firm strategically. Silvercrest is an independent wealth management firm and we combine top quality investment expertise with high levels of customer service. Our customer facing investment professionals who provide customized advice and service to our well over 600 ultrahigh net worth individuals and institutions have consistently enjoyed annual customer retention rates of over 98% and most of our revenues come from recurring management fees.

Speaker 1

We also have great employee retention with very little turnover and people have dedicated their careers at building this firm. Because of the excellent investment returns we've generated for our clients over time and our superb client service, our assets under management have grown from $4,000,000,000 to $30,000,000,000 over the last 20 years. Unlike many of our wealth management competitors, we're 100% open architecture, which is to say they have no none of their own internal investment management. We have a strong investment culture at Silvercrest focused on building, supporting, retaining, training, really strong intellectual capital on behalf of our clients. We employ over 30 institutional grade investment professionals to manage equity and fixed income portfolios.

Speaker 1

These in house investment teams all employ fundamental company and security analysis and most of our proprietary strategies have excellent long term investment track records. Our in house investment teams also provide valuable input and feedback to our asset allocation, 3rd party manager selection and OCIO teams. Our clients tell us that our asset allocation advice and investment returns have consistently been better than many of our peer organizations. 1 of our key value propositions is delivering institutional quality investment capabilities to our high net worth clients. We have built the firm in order not only to deliver institutional quality, but our proof of thesis is that we have institutional clients.

Speaker 1

And about 30% of our assets under management are now managed on behalf of organizations, consultants and others who are professional investors. This is proof of thesis about what our clients are getting. I'd also like to highlight that my colleagues and I here at Silvercast have one job, which is investing our clients' assets well. We're not part of a large global investment bank with highly levered balance sheet and the executives' employees here own over 30% of our outstanding shares and many of us, including me, have most of our own family assets managed at Silvercrest. So we are well aligned both on the upside and downside with both our clients and our shareholders.

Speaker 1

We think Silvercrest is one of the best wealth management firms in the world. So please don't hesitate to reach out to me, Scott Gerard or any of my colleagues if you'd like to discuss becoming a client or working with us in the future. Now I'd like to update you on our company's progress for the Q1 of 2024. Supportive equity markets in the Q1 set the stage for a much better environment for our business, continuing progress that began in the Q4 of 2023 as the market broadened its gains. While we continue to expect uncertain economic and market environment, Silver Coast has never had more business opportunities or initiatives underway.

Speaker 1

I think 2024 into 2025 will prove to be one of the most formative years in the history of Silvercrest. We're focused on those new opportunities as well as investments to drive future growth in the business, including value added hires. As part of those initiatives, Silvercrest is accruing a higher interim percentage of revenue for compensation and we will adjust compensation accruals to match those important investments the business. Silvercrest just announced as of yesterday hiring a new team to expand its international and global equity investment capabilities as well as our global outreach. The team will complement Silvercrest's existing international team and capabilities for a more diversified robust offering.

Speaker 1

The team brings significant investment expertise, a proven track record and experience managing significant equity mandates on behalf of large institutions around the world. Primarily due to the supportive market, Silvercrest discretionary assets under management increased by $800,000,000 during the quarter or 3.7 percent to $22,700,000,000 The firm's total AUM increased by $1,200,000,000 to end the first quarter at $34,500,000,000 Year over year from the Q1 of 2023, our discretionary AUM and total AUM increased by 6.6% and 15.4% respectively, while top line revenue increased by 2.9% from the end of the Q1 of last year, most metrics of the business are down due to higher expenses primarily related to compensation expense. Silvercrest's pipeline of new institutional business opportunities have more than doubled since the Q4 of 2023. The firm's total new business pipeline now stands at $2,000,000,000 which is up substantially from $700,000,000 in the 4th quarter. We expect near term positive flows to result from those opportunities for both our institutional equity and OCIO capabilities.

Speaker 1

As a high end wealth and asset management firm, Silvercrest serves families and institutions from across the globe despite headline news of international tensions. We continue to see substantial new opportunities globally for Affirm with our high quality capabilities coupled with superior client service that I mentioned in the opening of my remarks. With that, I'll turn this over to Scott Gerard for some comments on our financials and then we'll turn to questions. Thank you.

Speaker 2

Thanks, Fred. As disclosed in our earnings release, for the Q1, discretionary AUM as of March 31, 2024 was $22,700,000,000 and total AUM as of the same period was $34,500,000,000 Revenue for the quarter was 30 point $3,000,000 and reported consolidated net income for the quarter was $4,900,000 Revenue for the quarter increased year over year by $800,000 or 2.8 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 1 point dollars or 7.4 percent, primarily driven by increased compensation and benefits expense and to a lesser extent increased general and administrative expenses. Compensation and benefits expense for the quarter increased year over year by $1,200,000 or 7.1 percent of revenue, primarily due to an increase in the accrual for bonuses. Based on the increased recurring cash compensation ratio over the past 2 years, due in part to the investment in the next generation of associates to drive future growth, we increased the amount of the interim variable compensation accrual.

Speaker 2

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 approximately 8.3 percent, primarily due to increases in travel and entertainment expenses, occupancy and related costs, professional fees and increased depreciation and amortization expense. Reported net income attributable to Silvercrest or to Class A shareholders for the Q1 was approximately $3,000,000 or $0.32 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 nonrecurring items, was approximately $7,500,000 or 24.6 percent of revenue for the quarter. Adjusted 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 $4,700,000 for the quarter or $0.34 $0.33 per adjusted basic and diluted EPS respectively.

Speaker 2

Adjusted EPS is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent diluted, we add unfested 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 $170,200,000 as of March 31st this year compared to $199,600,000 as of the end of 2023. Cash and cash equivalents were approximately $39,700,000 as of March 31st this year compared to $70,300,000 at the end of last year. Cash and cash equivalents at the end of the Q1 is net of our annual compensation payouts.

Speaker 2

Total borrowings as of March 31st for this year were $1,800,000 and total Class A stockholders' equity was approximately 83 point $9,000,000 as of the end of the Q1. That concludes my remarks. And now we can go into Q and A. Thank you, Scott.

Operator

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

Speaker 3

Yes. Good morning, Rick and Scott. Good morning. The pipeline jumped quite a bit. What caused the pipeline to jump so suddenly?

Speaker 1

Yes, thanks. And bear with me as I answer questions you may have noticed in my interim a little hoarse, I'm struggling with some spring allergies. The pipeline grew substantially primarily because we are now included in a lot more consultant searches for the OCIO team than we had been. In building that initiative, you may recall in the past that I've talked about our need to really cultivate those search firms that specialize in the OCIO space. It takes time to do that and we've made really, really nice progress there.

Speaker 1

The other thing that has happened with the OCIO pipeline is that we're getting more client referrals now that we've done a great job. The OCIO asset allocation and manager selection portfolio which gets reported in databases is well ahead of its benchmark in the institutional space as well. So we're just getting more attention. And those mandates are large. So you saw a very significant jump in the pipeline for that reason.

Speaker 1

Last quarter, the total pipeline for the firm across value growth and OCIO was on the lower side. We talked about that. It was about $650,000,000 and it now stands in total in excess of $2,000,000,000

Speaker 3

Okay. And on the international strategy side, could you talk a little bit about how much you have in existing assets, the length of existing track record and how many senior personnel portfolio managers you have? And then with these new hires, what sort of strategies you anticipate? How many more strategies or plans do you anticipate?

Speaker 1

Right. So the main strategy that I look at which is there are several based out of our San Diego office when that firm joined us in 2019 has about $300,000,000 It's fairly small in the deeper value space. They have global small cap international value in emerging markets, but the $300,000,000 are in the international value. Obviously, small cap is important as well. Total assets are higher than that.

Speaker 1

I'm just mentioning it from an immediate institutional perspective. And that's small and it's a fantastic team. Actually their performance is great. The performance precedes Silvercrest, but at Silvercrest it's from 2019 and they've done extremely well on a relative basis versus their respective benchmarks. The new team that has joined us really focuses primarily on global value equity.

Speaker 1

It's much more of a relative value capability and virtually no overlap with the approach that the existing team has. And we expect given the flows internationally into global equity mandates especially from very large pools of sovereign wealth or other capital, retirement capital etcetera. That will bulk the entire complex at Silvercrest and allow us to compete much more effectively across the entire international book. So we think it's going to have a knock on effect as the global equity team that just joined us rose their assets.

Speaker 3

And the former global sorry, go ahead.

Speaker 1

I was just going to mention that the pipeline of $2,000,000,000 does not include the pipeline of this new team. That pipeline in and of itself is quite substantial. But since they've just joined us, I'm not going to quite measure it yet. We'll give you an update over the next couple of quarters.

Speaker 3

As a former Global Fund Manager, I wish you all the success. Thank you so much.

Speaker 1

Thank you.

Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Speaker 3

Hey, thanks. Good morning. Rick and Scott, can you remind us on the historical pull through of the pipeline and just in terms of percentage over time? I know it's not necessarily the next quarter, obviously, but just wanted to get a sense of big picture how much should be pulled through. And then had a follow-up about the EBITDA margin and how you see that evolving this year?

Speaker 1

Yes. So those very difficult questions to be honest because there's a lot of variability on how much gets pulled through. It's a high percentage, but it varies a lot based on the size of the potential mandates that are in the pipeline and we've got some really big ones in there. And so if I were to tell you something like 70% or 80%, that could give you a false expectation because just for argument's sake, if you've got something in there that's $700,000,000 or 1,000,000,000 dollars Sure you can do a percentage on it. But as you know percentages when it comes down to one thing is a small sample right versus the variability in a pool.

Speaker 1

Whereas if it were equal sized chunks of $50,000,000 giving you a percentage like 70 percent or 80% would be a lot better for looking into the future. So I hope you understand that I'm not going to give you a number on that just because we're always pretty conservative number 1. And number 2, I think given the mix of the potential pipeline there, it could be misleading. I will restate the standards for that pipeline, which is that we are in finals or semifinals or we have been invited to submit an RFP and we expect a decision to be made in the next six months. And we're very rigorous about that.

Speaker 1

I think it really is a good measure of the opportunities for the company. You may recall a couple of times over the past two years, 2, 3 years, our pipeline actually was reduced substantially primarily because it was going to take more than 6 months. We pulled things out of the pipeline for that reason. So I think that well covers how we look at the pipeline, how conservative it is. I would just say that yes, we expect a high percentage, but I think the mix right now makes that uncertain.

Speaker 1

Did I address both questions?

Speaker 3

Sure. And I just had a follow-up on the EBITDA margin and kind of how you see that evolving.

Speaker 1

All right. Thank you. So the EBITDA margin when we are in a steady state business that's really growing nicely is anywhere from 27% to call it 32% at the very highest, which we saw at the end of 2021. To get that high usually requires performance fees. We haven't had performance fees since the end of 2021 performance fees almost all go to the bottom line and are great boost to cash flow and therefore EBITDA.

Speaker 1

When we're investing in the business and growth is slower, you're going to see that EBITDA get hit. We saw that happen in 2023, 2022 and of course we're accruing more for compensation this year as a result. We did see an uptick as you know from the Q1 of last year to Q1 of this year. I think I can't really give you a good projection what will happen with that EBITDA because we have pointed out that we are going to hit EBITDA, we're going to hit earnings to invest in new personnel. I think I provided a lot of guidance on that last year.

Speaker 1

Here we are, we're doing it. This is just one example of this team. But the timing of the growth of the assets and revenue that would increase EBITDA is not entirely known. So to tell you what direction that may go for the rest of the year, I can't really forecast for you. In the past, when we've made these investments at say 28% EBITDA margin, 29% off in 27%, we were growing faster than those investments.

Speaker 1

So in effect those investments were hidden. With the narrow market last year, the slower progress, the unsupported market as you know in 2022, What we're doing with regards to those investments is more apparent in hitting our EBITDA. I just think it has been very important for me to be very straightforward as it was last year about what we're doing and that this ultimately in a normalized environment will drive higher EBITDA margins. I do seek to push the company back into the mid to high 20% EBITDA margins, but that's going to take a bit. We have to see this business come in.

Speaker 1

We have to see the pipeline I just talked about come to fruition.

Operator

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

Speaker 2

Good morning, Chris. Chris.

Speaker 3

Hi, good morning. How should we be thinking about the growth of non discretionary assets under management versus the growth of discretionary assets under management in the coming quarters? I would

Speaker 1

first of all I've always asked investors to focus on our discretionary assets under management primarily because that has a direct link to revenue. There is a lagging effect with regards to that revenue that I think is important to take into consideration. Because we bill quarterly in advance and of course there are 4 days in the year which is to say at the end of each quarter that we report revenue on. So the effect you would see for example in the increase in discretionary assets under management from the Q1 of last year won't fully be realized until the Q2 of this year because we're billing quarterly in advance. That's just one important point I'd like anyone listening to keep in mind.

Speaker 1

Non discretionary assets under management are linked to our discretionary assets under management in that they are assets for clients. However, very often they are project flat fees associated with our very strong reporting capabilities, tracking of assets very often illiquids for our clients portfolio analysis mandates and also OCIO. So some of the OCIO assets are non discretionary. And as that capability grows, you'll see a growth in the non assets, which is a good thing. But there's been a lot of new reporting assets for some of our very, very largest and most important clients that has been bumping that number up.

Speaker 1

It's an extremely valuable capability to them. We have really excellent leading edge reporting platform and data warehouse that's being used a lot by our clients. And so what you're seeing I think is robustness of the firm's capabilities and you're also seeing a rise in alternative investment activity and illiquid holdings on our clients combined with OCIO. It's a healthy side of the business even if it is not a strong link to revenue in the way I just discussed the discretionary assets.

Speaker 3

Okay. Thanks for that. How should we be thinking about compensation and benefits expense in the coming quarters?

Speaker 1

Well, as you know, we adjusted it to 58% or 57% sorry in the Q1 after we had the adjustment in the Q4 of last year. That is including the new team we just announced. It may include a couple of other initiatives. We have a new business development person who joined us among other initiatives. We think we have a little room for some more hires, but it may not be enough.

Speaker 1

We'll see. And we'll just adjust that going forward as we find our at the right level given the investments we're making. In the past, when we have been accruing at 55% that was more than comfortable given the faster growth of the company in good market years that we saw. In 2021 we ended the year boy down at 52 something like that. Yes, 53.

Speaker 1

53 and which was unusual most years we're right on top of the 55. But as we get more aggressive in building the company and growing, we're going to have to accrue and change that. So if anything, it might go a little more up this year. To be honest, we'd like to avoid an adjustment in the Q4. All things being equal, I'd rather just be flat and very predictable throughout a year with very little adjustment, but it doesn't always work that way.

Speaker 1

And as I mentioned in my early remarks, I think the firm is at a very important inflection point and tipping point in its progress at its size and the kind of investments we're making. And so we would rather have a little more variability going forward as we do that and to explain that very clearly to you and other investors about why and how we're doing

Speaker 3

it.

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 very much for joining us this morning. I appreciated the questions as long as my rather you're paying attention to my rather prolonged introduction about what makes this firm special strategically and in the marketplace for high net worth and institutional investors alike. I think it's very important as we engage in more initiatives to grow the business that we keep those first principles in mind about how we build the company. As I also mentioned, I think this is going to be an incredibly formative years given the number of initiatives year given the number of initiatives that we have and the new professionals that we're bringing on board to build this company.

Speaker 1

I look forward to giving you more information about that pipeline and the success we expect those teams to enjoy on our behalf and on your behalf. Thank you very much.

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Earnings Conference Call
Silvercrest Asset Management Group Q1 2024
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