Silvercrest Asset Management Group Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company provides investment management and family-office services to high-net-worth individuals, families, and institutional clients. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $19.953 | $17.817 | $55.927 | $51.763 |
| Income before other income/expense | $4.269 | $4.476 | $13.010 | $12.514 |
| Net income, consolidated | $2.783 | $2.923 | $8.920 | $7.962 |
| Net income attributable to Silvercrest | $1.326 | $1.358 | $4.450 | $3.653 |
| Adjusted EBITDA (non-GAAP) | $5.754 | $5.292 | $16.088 | $15.381 |
| Adjusted EBITDA margin (non-GAAP) | 28.8% | 29.7% | 28.8% | 29.7% |
- Q3 revenue grew 12.0%, while consolidated net income declined 4.8%. Nine-month revenue rose 8.0% and consolidated net income rose 12.0%.
- Management and advisory fees rose 13.7% in Q3 and 10.3% for nine months. Family-office services revenue declined 16.5% and 25.7%, respectively.
- Expenses increased faster than revenue: 17.6% in Q3 and 9.4% for nine months. Compensation and benefits were the largest expense, totaling $11.547 million in Q3 and $31.740 million year to date.
- Assets under management (AUM) were $17.6 billion at September 30, 2015, up from $16.4 billion a year earlier but down from $19.0 billion at June 30, 2015 and $17.9 billion at December 31, 2014. Q3 market depreciation was $1.4 billion; nine-month market depreciation was $1.2 billion.
- Cash was $26.080 million, versus $30.820 million at year-end 2014. Total assets were $101.946 million; total liabilities were $42.408 million and total equity was $59.538 million.
- Operating cash flow was $9.047 million for nine months, versus $10.869 million in 2014. Investing activities used $3.888 million and financing activities used $9.899 million, resulting in a $4.740 million decrease in cash.
- Notes payable totaled $5.152 million, compared with $4.124 million at year-end 2014. No revolving-credit borrowings were outstanding; the company reported compliance with its credit-facility covenants. The facility provides up to $7.5 million of revolving credit and a $7.5 million delayed-draw term loan.
Material changes and notable items
- Jamison acquisition: Closed June 30, 2015, adding approximately $0.7 billion of reported AUM. Consideration included $3.550 million cash, $2.165 million of notes, $3.562 million of equity, and $1.429 million of estimated contingent consideration. The preliminary allocation included $4.678 million goodwill and $5.800 million intangible assets. Jamison contributed $1.465 million revenue and $0.188 million income before taxes in the reported periods.
- Q3 AUM movement: Reported AUM fell $1.4 billion during the quarter, primarily from market depreciation, partly offset by the acquired Jamison assets. Nine-month AUM declined $0.3 billion from year-end, as market depreciation and outflows outweighed inflows and acquisition-related additions.
- Tax-related item: Other income for the nine-month period included a $1.0 million favorable adjustment to the tax receivable agreement liability, following a reduction in New York City’s future effective corporate tax rate. The company estimated the TRA liability at $15.317 million at quarter-end and stated that payments may be substantial.
- Equity compensation: In August, the company granted 966,510 restricted stock units to existing Class B unit holders. Q3 compensation expense included $0.484 million related to these awards; $12.174 million of related expense remained unrecognized at quarter-end.
- Class A dividends totaled $2.824 million for the first nine months, equal to $0.36 per share. Management said it intends to continue quarterly dividends, subject to cash availability and financing restrictions.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected operating cash flows to meet liquidity requirements for the next 12 months.
- Management identified market declines as a direct risk to fee revenue and client retention: most advisory fees depend on AUM, and market depreciation can also prompt client withdrawals. A 10% change in average AUM was estimated to change annualized revenue by approximately $8.0 million for Q3-period averages and $7.5 million for nine-month averages.
- Other disclosed risks include retaining significant clients and investment professionals, maintaining fee rates, competition and investment performance, regulatory and compliance costs, cybersecurity and operational safeguards, and execution of the growth strategy.
- Jamison earnouts are tied to 20% of specified EBITDA for periods through 2020; their eventual amount may differ from the recorded estimate. The acquisition purchase-price allocation remained preliminary.
- Under the TRA, Silvercrest owes partners 85% of qualifying realized tax savings. Payments depend on taxable income, unit exchanges, asset values and tax rates; a successful tax-authority challenge to basis increases could leave the company unreimbursed for payments already made.
- There were no material legal proceedings pending or threatened, and no off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective at September 30, 2015.
Key facts for investors to verify
- How much of reported AUM and fee growth reflects recurring client flows and investment performance versus the Jamison acquisition, and how the excluded $13.4 billion public-treasurer relationship with an $825,000 annual fee cap is treated.
- Whether AUM stabilization and fee revenue can offset the faster growth in compensation and general and administrative expenses, including partner incentives and new equity awards.
- The final Jamison purchase-price allocation, acquired-client retention, integration results, and future earnout payments.
- The expected timing and cash impact of TRA payments, and the assumptions supporting the recorded liability and tax benefits.
- Cash conversion, planned distributions and dividends, debt repayment schedule, and continued compliance with credit-facility covenants.