Silvercrest Asset Management Group Inc. — Q3 2023 Form 10-Q
Business and period. Silvercrest provides investment management and family office services to high-net-worth individuals, families, and institutions. This unaudited report covers the quarter and nine months ended September 30, 2023; financial statement amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $29.7 | $29.0 | $88.9 | $94.7 |
| Income before other income/expense | $6.5 | $7.1 | $19.8 | $34.4 |
| Net income | $5.4 | $5.6 | $15.8 | $27.5 |
| Net income attributable to Silvercrest | $3.2 | $3.4 | $9.5 | $16.8 |
| GAAP diluted EPS | $0.34 | $0.35 | $1.00 | $1.70 |
| Adjusted EBITDA | $8.0 | $8.2 | $24.3 | $27.6 |
| Adjusted EBITDA margin | 26.9% | 28.1% | 27.3% | 29.1% |
GAAP net income margin was 18.1% in Q3 2023 versus 19.4% a year earlier, and 17.8% for the first nine months versus 29.0%. Adjusted diluted EPS, which includes Class A and Class B interests, was $0.36 for Q3 and $1.05 year to date, compared with $0.34 and $1.19, respectively.
- Revenue mix: Q3 management and advisory fees were $28.4 million, up 1.7%; family office services revenue was $1.3 million, up 17.0%; no performance fees were recognized. Nine-month management and advisory fees fell 6.6% to $85.4 million; family office services rose 6.2% to $3.4 million; performance fees were negligible.
- Assets under management (AUM): $31.2 billion at quarter-end, down 2.2% from June 30 but up 13.9% from September 2022. Q3 net client flows were negative $0.2 billion and market depreciation was $0.5 billion. Year to date, net flows added $1.0 billion and market appreciation added $1.3 billion. Average annual management fee declined to 0.38% in Q3 from 0.41%, and to 0.39% year to date from 0.42%.
- Cash flow: For the first nine months, operating cash flow was $6.2 million, investing cash outflow $3.4 million, and financing cash outflow $21.4 million; cash declined $18.6 million to $58.9 million. Investing outlays mainly reflected equipment and Milwaukee office buildout. Financing uses included $7.8 million of partner distributions, $5.2 million of Class A dividends, $5.7 million of share repurchases, and $2.7 million of term-loan repayments.
- Balance sheet and debt: At September 30, cash was $58.9 million, total assets $191.3 million, total liabilities $67.4 million, and total equity $123.9 million. Term-loan borrowings were $3.6 million, down from $6.3 million at year-end 2022; there were no revolver borrowings. Operating lease liabilities were $27.5 million. The company reported compliance with credit-facility covenants.
Material changes and drivers
- Q3 revenue grew modestly, but operating income before other items declined 8.2% and net income attributable to Silvercrest declined 6.3% year over year, as expenses grew faster than revenue.
- Nine-month revenue fell 6.2% and net income attributable to Silvercrest fell 43.3%. Average fee-rate compression and weaker management-fee revenue weighed on results despite higher ending AUM.
- Nine-month total expenses increased 14.6% to $69.1 million, chiefly because general and administrative expense rose to $19.1 million from $7.4 million. The comparison is distorted by a $10.9 million favorable reduction in Cortina acquisition contingent consideration recorded in 2022; the comparable 2023 adjustment was a $2,000 reduction. Compensation expense declined 5.6%, primarily from lower bonus accruals.
- Cash fell while the company continued dividends and buybacks. It repurchased approximately 300,000 Class A shares for about $5.8 million during the nine-month period.
Outlook, commentary, and risks
- Management provided no specific earnings or revenue guidance. It expects operating cash generation to meet cash and liquidity needs over the next 12 months and says it believes liquidity is sufficient for operations and commitments.
- Management fees are closely linked to market values and AUM; market declines, client withdrawals, investment performance, client retention, and fee mix may affect revenue. AUM declined during Q3, primarily from market depreciation and net outflows. Management estimates that a 10% change in average AUM would change annualized revenue by approximately $11.9 million for the quarter and $11.8 million for the nine-month period, using the respective weighted-average fee rates.
- Other disclosed risks include competition, retaining investment professionals and clients, cybersecurity and operational safeguards, regulatory costs, and the ability to integrate strategic transactions. Management discusses COVID-19-related uncertainty, though the filing does not quantify a distinct current-period impact.
- The tax receivable agreement requires payment to eligible SLP partners of 85% of qualifying realized tax savings. The estimated liability was $9.2 million at September 30; actual timing and amounts depend on taxable income, exchanges, tax rates, and other factors. Management cautions that payments could be substantial.
- Other items: the revolving facility maturity was extended to June 18, 2024; its stated capacity is $10 million. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material litigation or other contingency value is clearly described in the supplied filing text.
Important facts for investors to verify
- Whether AUM and client-flow trends improve, and whether the lower average fee rate reflects a persistent shift in asset or strategy mix.
- How much of the year-to-date earnings decline is recurring versus the prior-year Cortina contingent-consideration benefit and other adjustments; review the company’s non-GAAP reconciliations and definitions.
- Cash conversion and the sustainability of dividends, partner distributions, and repurchases given the $18.6 million year-to-date cash decline.
- Credit-facility terms, covenant headroom, revolver availability after applicable requirements, and the June 2024 revolver maturity.
- The assumptions underlying the $9.2 million tax receivable agreement liability and potential future payments.