Silvercrest Asset Management Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparative periods ended September 30, 2019. Financial statement amounts below are in millions of dollars unless otherwise noted. Silvercrest provides investment management and family-office services. It held approximately 66.3% of Silvercrest L.P.; the remaining interest is reported as non-controlling interests.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $27.2 | $27.8 | $79.6 | $74.3 |
| Income before taxes | $4.8 | $6.3 | $18.5 | $14.9 |
| Net income | $3.5 | $4.8 | $14.0 | $11.2 |
| Net income attributable to Silvercrest | $2.1 | $2.7 | $8.1 | $6.2 |
| GAAP net income margin | 12.8% | 17.3% | 17.5% | 15.1% |
| Adjusted EBITDA and margin | $8.1; 29.9% | $8.9; 32.1% | $23.0; 28.9% | $21.3; 28.6% |
- Q3 management and advisory fees were $26.1 million, down 2.6%; family-office revenue was $1.0 million, up 3.1%. For the nine months, management and advisory fees rose 7.4% to $76.6 million; family-office revenue was nearly flat at $3.0 million.
- Q3 total expenses rose 3.2% to $22.2 million. Nine-month expenses increased 1.8% to $60.6 million, including compensation and benefits of $44.2 million.
- Q3 diluted GAAP earnings per share were $0.22 versus $0.30; nine-month diluted EPS was $0.85 versus $0.72. Adjusted diluted EPS, a non-GAAP measure, was $0.35 and $0.97, respectively.
- Assets under management (AUM) ended at $24.4 billion, up 2.5% from June 30, 2020 and 3.8% from September 30, 2019, but down 2.8% from December 31, 2019. Average AUM was $24.1 billion for Q3 and $24.8 billion for the nine-month period.
- Cash from operations was $10.1 million for the nine months, versus $3.8 million in 2019. Investing used $0.5 million versus $39.1 million; financing used $14.3 million versus providing $6.9 million. Cash declined $4.7 million to $48.2 million.
- At September 30, cash was $48.2 million; term-loan borrowings were $13.5 million, down from $16.2 million at year-end 2019. No revolving-credit borrowings were outstanding. Total liabilities were $100.3 million and total equity was $100.9 million.
Material changes and management commentary
- Q3 revenue and profit declined year over year, which management attributed to the lingering effect of first-quarter market declines on fee calculations and Q3 net client outflows, partly offset by market appreciation. Q3 AUM increased from June as market appreciation outweighed net withdrawals.
- Nine-month revenue growth reflected the Cortina acquisition, completed July 1, 2019, and discretionary client inflows; the comparison also includes Cortina revenue of $8.4 million in the 2020 period. Management cited COVID-related market depreciation as a drag on AUM and revenue.
- Management said demand for services continued but could weaken depending on the pandemic’s duration and severity. It expects COVID-19’s market effects to continue negatively affecting AUM and revenue, and stated that the pandemic’s full effect cannot be predicted. No specific earnings or revenue guidance was provided.
- Management expects operating cash flow to meet liquidity needs over the next 12 months, while continuing to monitor the pandemic’s effects. The revolving facility’s maturity was extended to June 19, 2021; the term loan matures July 1, 2026. The company reported compliance with credit-facility covenants at quarter-end.
Risks, contingencies and unusual items
- Revenue is highly tied to securities-market values and client flows; a market decline or client withdrawals could reduce fees and earnings. The company also identifies client retention, investment performance, fee levels, competition, hiring, cybersecurity and privacy, regulatory costs, and operational continuity as risks. Most employees were working remotely; management reported no material impact to financial reporting controls.
- Q3 general and administrative expense included a $1.7 million unfavorable fair-value adjustment to Cortina contingent consideration. For the nine months, contingent-consideration fair-value adjustments included a $0.5 million favorable Cortina adjustment, partly offset by charges related to Jamison and Cappiccille. Aggregate estimated acquisition contingent consideration was $14.8 million at quarter-end, measured using Level 3 inputs.
- The Cortina acquisition agreement provides for up to $26.2 million in potential earn-out payments over four years, subject to revenue and retention targets. The filing reports a $13.5 million Cortina earn-out liability at September 30, 2020.
- The tax receivable agreement requires payment to eligible partners of 85% of specified realized tax savings. The estimated liability was $10.0 million at September 30, 2020; payment timing and amounts depend on taxable income, exchanges, tax rates and other factors. Management says future payments may be substantial.
- Operating lease liabilities were $37.3 million; disclosed future operating lease commitments, net of subleases, totaled $48.1 million. The company also paid $4.6 million in Class A dividends and $6.5 million in partner distributions during the nine months.
Important facts for investors to verify
- Whether AUM and net client flows recover or deteriorate, and how market levels translate into management-fee revenue.
- Quarterly fee-rate trends: the average annual management fee was 0.45% in Q3 and 0.43% for the nine months, below 0.49% and 0.47% in the respective 2019 periods.
- Progress against Cortina earn-out targets and the effect of future fair-value changes or payments on earnings and cash.
- Revolver availability, the June 2021 revolving-facility maturity, debt-service requirements and continued covenant compliance.
- Actual timing and size of tax-receivable-agreement payments, dividend sustainability, and the assumptions behind non-GAAP adjusted results.