Silvercrest Asset Management Group Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results include Silvercrest and Silvercrest L.P.; amounts below are in millions unless stated otherwise.
Business context
Silvercrest provides investment management and family-office services to high-net-worth individuals, families, and institutions. Revenue is driven principally by management fees tied to assets under management (AUM). At quarter-end, AUM was $27.4 billion, including 71% discretionary and 29% non-discretionary assets.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $29.0 | $33.5 | $94.7 | $97.8 |
| Net income | $5.6 | $6.4 | $27.5 | $16.4 |
| Net income attributable to Silvercrest | $3.4 | $3.7 | $16.8 | $9.6 |
| Net income margin | 19.4% | 19.0% | 29.0% | 16.7% |
| Adjusted EBITDA and margin | $8.2; 28.1% | $10.3; 30.9% | $27.6; 29.1% | $30.4; 31.1% |
| Basic and diluted GAAP EPS | $0.35 | $0.38 | $1.70 | $0.99 |
Q3 management and advisory fees were $27.9 million, down 13.3%; family-office revenue was $1.1 million, and performance fees were zero. For nine months, management and advisory fees were $91.5 million, down 3.1%; performance fees were negligible at $0.002 million.
At September 30, cash was $67.4 million, total assets $205.1 million, total liabilities $77.1 million, and total equity $128.0 million. Operating cash flow for nine months was $7.7 million versus $21.6 million a year earlier. Investing used $0.7 million and financing used $25.4 million, producing an $18.4 million net cash decrease. Cash dividends paid to Class A holders were $5.1 million; share repurchases cost $5.2 million.
Term-loan borrowings were $6.3 million, down from $9.0 million at year-end 2021; no revolver borrowings were outstanding. The company reported compliance with credit-facility covenants. The revolving facility’s amended maturity is June 18, 2023; the term loan matures July 1, 2026. Cash and cash equivalents declined from $85.7 million at December 31, 2021.
Material changes versus prior periods
- Q3 revenue fell 13.2%, primarily reflecting market depreciation and net outflows in discretionary AUM. AUM declined 4.5% from $28.7 billion at June 30 and 11.6% year over year from $31.0 billion.
- For the first nine months, AUM decreased 15.2% from $32.3 billion at year-end 2021. Market depreciation reduced AUM by $5.2 billion; net client flows added $0.3 billion overall, with discretionary net outflows partly offset by non-discretionary inflows.
- Q3 total expenses fell 13.2% to $21.9 million, including lower bonus accruals and lower acquisition-related contingent-consideration expense. Nine-month expenses fell 21.3% to $60.3 million, largely because Cortina earnout fair-value adjustments reduced expense by $10.9 million in 2022, compared with a $4.6 million expense increase in 2021.
- Despite lower nine-month revenue, reported nine-month net income rose to $27.5 million, while Adjusted EBITDA declined to $27.6 million. The results were materially affected by the non-cash Cortina earnout fair-value adjustment; the company paid $5.6 million of Cortina earnout consideration during Q3.
Outlook, risks, and unusual items
- No specific earnings or AUM guidance was provided. Management said it expects operating cash flow to fund operations and commitments for the next 12 months, while continuing to monitor liquidity.
- Management emphasized that revenue is highly correlated with securities markets. A 10% change in average AUM was estimated to change annualized revenue by approximately $11.6 million using Q3 average AUM and fee assumptions.
- Risks include market declines and further client withdrawals, fee pressure, client retention and investment performance, employee retention, regulatory and litigation costs, data-security or operational failures, acquisition integration, and uncertainty around the COVID-19 pandemic’s effects.
- The tax receivable agreement requires payment to eligible partners of 85% of realized tax savings. The estimated liability was $9.4 million at September 30; actual payments depend on taxable income, exchanges, tax rates, and other factors and may exceed realized cash tax savings in certain circumstances.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing identifies no material impairment charge or material uncertain tax position.
Important facts for investors to verify
- Whether AUM and net flows stabilize, particularly in discretionary accounts, and how market performance affects fee revenue.
- How much of reported earnings and expense improvement reflects the Cortina earnout fair-value remeasurement rather than recurring operations; review GAAP and non-GAAP reconciliations.
- Cash conversion and liquidity: operating cash flow declined substantially, while dividends, partner distributions, repurchases, debt service, and earnout payments consumed cash.
- Credit-facility terms, covenant headroom, the June 2023 revolver maturity, and the effect of higher interest rates.
- Future Cortina growth earnout exposure, remaining Neosho obligations, and the timing and amount of tax receivable agreement payments.
- Dividend and repurchase plans relative to operating cash generation and the company’s stated liquidity needs.