Silvercrest Asset Management Group Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited condensed consolidated results; dollar amounts below are in millions unless noted.
Business context and reporting period
Silvercrest provides investment management and family-office services to high-net-worth individuals, families and institutions. Its revenue is primarily management and advisory fees tied to assets under management (AUM). At June 30, 2021, AUM was $31.0 billion, up 30.3% from $23.8 billion a year earlier and 11.5% from $27.8 billion at year-end 2020.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Revenue | $33.1 | $24.0 | $64.3 | $52.4 |
| Income before tax | $7.3 | $1.2 | $12.8 | $13.7 |
| Net income | $5.7 | $0.8 | $10.0 | $10.5 |
| Net income attributable to Silvercrest | $3.3 | $0.5 | $5.9 | $6.0 |
| Net income margin | 17.1% | 3.3% | 15.5% | 20.0% |
| Adjusted EBITDA (non-GAAP) | $10.4 | $6.7 | $20.1 | $14.9 |
| Adjusted EBITDA margin (non-GAAP) | 31.5% | 27.7% | 31.2% | 28.4% |
Q2 management and advisory fees were $32.0 million, up 38.9%; family-office services revenue was $1.1 million, up 11.6%. H1 management and advisory fees rose 23.4% to $62.2 million, and family-office revenue increased 8.6% to $2.2 million.
Cash flow and balance sheet: H1 operating cash flow was $2.0 million, versus cash used of $4.4 million in H1 2020. Investing activities used $0.4 million and financing activities used $10.4 million; cash declined $8.9 million to $53.6 million. Cash was $62.5 million at December 31, 2020. Term-loan borrowings were $10.8 million, down from $12.6 million; there were no revolver borrowings. Total liabilities were $96.8 million and total equity was $106.0 million at quarter-end.
Material changes versus the prior comparable period
- Q2 revenue increased 37.8%, while H1 revenue increased 22.8%, supported chiefly by higher AUM and market appreciation.
- Q2 net income and attributable income rose substantially from the prior-year quarter. In contrast, H1 net income declined 4.5% and income attributable to Silvercrest declined 2.2%.
- H1 expenses increased 33.6% to $51.3 million. Compensation and benefits rose 24.2% to $36.1 million, primarily because of higher bonus accruals, salaries and equity compensation. General and administrative expense rose 62.6% to $15.2 million, mainly reflecting changes in the fair value of Cortina acquisition earnouts.
- AUM increased during H1 by $3.7 billion from market appreciation, partly offset by $0.5 billion of net client outflows. In Q2, $2.2 billion of market appreciation more than offset $0.2 billion of net outflows.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified revenue, earnings or AUM guidance. Management expected cash generated by operations to meet liquidity needs for the next 12 months and expected distributions to limited partners and quarterly Class A dividends to remain material cash uses.
- Management said demand for services continued, but cautioned that COVID-19, economic conditions and securities-market movements could affect operations, AUM and revenue. The company operates remotely and reported no material impact on its financial reporting controls from remote work.
- Revenue is highly sensitive to market values and client flows. Management estimated that a 10% change in average AUM, assuming a proportional change across products, would change annualized revenue by approximately $13 million for the Q2 and H1 2021 periods.
- Cortina contingent consideration was $19.9 million at June 30, 2021; a $3.9 million H1 fair-value expense was recorded. Cortina met the threshold for a $3.37 million first retention payment. Earnout valuations depend on forecast growth and other unobservable assumptions.
- The revolving-credit-facility maturity was extended to June 18, 2022; the term loan matures July 1, 2026. The company reported compliance with credit covenants at June 30, 2021. The facility includes financial tests and restrictions on certain actions.
- The estimated tax receivable agreement liability was $9.5 million. Payments depend on realized tax savings and may vary; the filing warns that payments could exceed actual cash savings in certain circumstances.
- Management identified market and AUM volatility, client retention, fee levels, competition, employee retention, regulation, cybersecurity and privacy, litigation, COVID-19, and acquisition integration among risks. The company reported no material contingencies beyond those described in the filing.
Important facts for investors to verify
- Whether AUM growth can be sustained through client inflows and investment performance, given net outflows in H1 2021.
- How much of future revenue and earnings depends on market appreciation, compensation and bonus accruals, and the timing of performance-related fees.
- The assumptions and potential cash-payment timing underlying Cortina earnouts and the $19.9 million contingent-consideration liability.
- Liquidity after dividends, partner distributions, debt service, lease commitments and potential tax receivable agreement payments; also monitor the revolver’s June 2022 maturity and covenant compliance.
- How non-GAAP Adjusted EBITDA and Adjusted EPS reconcile to GAAP results; the filing’s adjustments include acquisition-related and earnout fair-value items.