Silvercrest Asset Management Group Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Financial amounts below are in millions of dollars unless otherwise indicated. Silvercrest provides investment management and family-office services. It owns approximately 63% of Silvercrest L.P. and consolidates the partnership, with the remaining interest reported as non-controlling interests.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Total revenue | $22.1 | $19.3 | $44.0 | $38.6 |
| Management and advisory fees | $21.1 | $18.4 | $42.1 | $36.7 |
| Total expenses | $16.9 | $15.8 | $34.1 | $31.5 |
| Net income | $3.6 | $2.1 | $6.9 | $4.6 |
| Net income attributable to Silvercrest | $1.9 | $0.9 | $3.5 | $2.2 |
| GAAP diluted EPS | $0.23 | $0.12 | $0.44 | $0.28 |
| Net income margin | 16.3% | 10.9% | 15.7% | 11.9% |
| Adjusted EBITDA | $6.8 | $5.4 | $13.3 | $10.7 |
| Adjusted EBITDA margin | 30.7% | 28.0% | 30.1% | 27.6% |
- Revenue rose 14.2% in Q2 and 14.1% in H1, mainly from higher management and advisory fees as assets under management (AUM) grew. Performance fees and allocations were only $10,000 in both 2017 periods.
- Compensation and benefits increased 10.6% in Q2 and 12.4% in H1, chiefly from higher bonus accruals and salaries. General and administrative expense declined 3.5% in Q2 and 2.6% in H1.
- AUM was $19.9 billion at June 30, up 15.7% from $17.2 billion a year earlier and 7.0% from $18.6 billion at December 31, 2016. H1 AUM growth reflected $3.5 billion of gross inflows, $3.1 billion of gross outflows and $0.9 billion of market appreciation. Discretionary AUM represented 74% of total.
- Average annual management fee was 0.45% for Q2 and 0.46% for H1. About 92% of management and advisory fee revenue came from discretionary managed accounts in H1.
Cash flow, balance sheet and liquidity
- For H1, operating activities provided $0.9 million of cash, compared with $2.9 million used in H1 2016. Investing activities used $0.5 million; financing activities used $7.9 million. Cash declined $7.5 million to $30.0 million, from $37.5 million at year-end.
- Financing outflows included $4.6 million of partner distributions, $1.9 million of Class A dividends and $0.8 million of acquisition earn-out payments. The company paid $0.24 per Class A share in dividends during H1.
- At June 30, cash was $30.0 million, notes payable were $1.7 million, total liabilities were $33.2 million and total equity was $68.4 million. No revolving-credit borrowings were outstanding. The credit facility includes a $7.5 million revolver extended to December 23, 2017, and an undrawn $7.5 million delayed-draw term loan available through June 25, 2018. The company reported compliance with facility covenants.
- The company reported $58.4 million of minimum net operating-lease commitments, primarily extending through 2028, and $0.3 million of capital-lease obligations.
- The tax receivable agreement (TRA) liability was estimated at $14.5 million. Under the TRA, Silvercrest generally pays former and current partners 85% of qualifying realized tax savings. Management said future payments could be substantial and depend on taxable income, unit exchanges, tax rates and other factors.
Changes, outlook and risks
- Management attributed growth to AUM increases from client activity and market appreciation. It excluded approximately $15.7 billion of non-discretionary public-treasurer assets from reported AUM because the fee is capped at $825,000 annually and is not representative of its usual fee rate.
- No formal revenue, earnings or AUM guidance was provided. Management expects operating cash flow to meet liquidity needs over the next 12 months and expects partner distributions to remain a material cash use. It also intends to continue quarterly Class A dividends, subject to available cash and financing restrictions.
- Management estimates that a 10% change in average AUM, assuming a proportionate change across products, would change annualized revenue by approximately $8.8 million at the reported fee rates. This is a sensitivity estimate, not guidance.
- Key risks include market declines reducing fee-bearing AUM, client withdrawals and retention, investment performance, fee pressure, competition, hiring and retaining investment professionals, regulatory and litigation costs, and operational, data-security and privacy failures. The filing also notes uncertainty around possible tax-law changes and the possibility that TRA payments could exceed actual cash tax savings in certain circumstances.
- Other notable items: H1 2017 included a $105,000 employee sign-on bonus in management’s Adjusted EBITDA reconciliation. Adjusted EBITDA and adjusted earnings measures are non-GAAP; adjusted net income assumes a 40% tax rate. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether AUM inflows, outflows and market performance support continued growth in fee revenue, especially given the substantial market sensitivity of the business.
- Whether reported cash generation can sustain partner distributions, dividends, debt service and significant long-term lease commitments.
- The status and renewal of the revolving facility before its December 2017 maturity, and compliance with its AUM and leverage-related covenants.
- The assumptions, timing and potential cash burden of TRA payments, including the stated $14.5 million estimate and future exchange-related obligations.
- How compensation growth, bonus accruals and non-GAAP adjustments affect sustainable profitability and the comparability of adjusted results.