Silvercrest Asset Management Group Inc. quarterly report, Q2 FY2019

Full document

Silvercrest Asset Management Group Inc. — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results include Silvercrest and Silvercrest L.P. Silvercrest provides investment management, advisory, and family-office services. Unless noted otherwise, financial amounts below are in millions of dollars; AUM is in billions.

Financial performance and liquidity

MetricQ2 2019Q2 2018Six months 2019Six months 2018
Revenue$23.897$24.577$46.469$48.908
Income before other income and expense$4.430$5.453$8.429$10.747
Net income$3.351$4.193$6.396$8.243
Net income attributable to Silvercrest$1.864$2.337$3.573$4.568
Diluted EPS$0.22$0.28$0.42$0.55
Adjusted EBITDA$6.566$7.094$12.319$14.018
  • Q2 net income margin was 14.0%, versus 17.1% a year earlier; six-month margin was 13.8%, versus 16.9%. Adjusted EBITDA margin was 27.5% and 26.5%, respectively, compared with 28.9% and 28.7%. Adjusted EBITDA is a non-GAAP measure.
  • Management and advisory fees were $22.879 million in Q2 and $44.468 million for the first six months; family-office services revenue was $1.018 million and $2.001 million, respectively.
  • Cash and cash equivalents were $50.877 million at June 30, down from $69.283 million at December 31, 2018. Total assets were $151.285 million, liabilities $68.757 million, and equity $82.528 million.
  • Six-month cash flows were $(8.087) million from operations, $(3.215) million from investing, and $(7.104) million from financing, a net cash decrease of $18.406 million. Operating cash use reflected, in part, a $17.902 million reduction in accrued compensation, including bonus payments.
  • No borrowings were outstanding on the revolving facility or delayed-draw term loan at June 30. The existing facility was secured and subject to financial covenants; the company reported compliance at quarter-end. Operating lease liabilities of $41.768 million were recognized following adoption of ASC 842.

Changes versus prior comparable periods

  • Q2 revenue fell 2.8% year over year; six-month revenue fell 5.0%. Management attributed the decreases primarily to net client outflows in discretionary AUM and market effects.
  • Q2 net income attributable to Silvercrest fell to $1.864 million from $2.337 million; six-month attributable income declined to $3.573 million from $4.568 million.
  • Compensation and benefits expense decreased 3.0% in Q2 and 4.8% for the first six months, mainly because bonus accruals were lower. General and administrative expense increased 16.5% and 13.3%, respectively, with higher occupancy, acquisition-related legal, systems/research, and office-renovation costs.
  • Period-end AUM was $21.7 billion, compared with $21.8 billion a year earlier. It rose 4.3% in Q2 from $20.8 billion at March 31 and 14.2% from $19.0 billion at December 31, 2018, with market appreciation a significant contributor. At June 30, 74% was discretionary and 26% non-discretionary.
  • Average annual management fee rate was 0.45% in Q2 and 0.46% for the six months. Private-fund AUM and revenue were lower than the comparable periods.

Outlook, commentary, and material items

  • Management expected operating cash flows to meet liquidity needs for the next twelve months. No specific earnings, revenue, or AUM guidance was provided.
  • On July 1, 2019, after quarter-end, Silvercrest completed its Cortina Asset Management acquisition. Closing consideration included $33.577 million cash and $8.952 million in Silvercrest L.P. units; up to an additional $26.209 million may be payable in earn-outs over four years. Closing cash was funded partly with cash on hand and partly with credit-facility borrowings.
  • Also on July 1, the credit facility was amended: the delayed-draw term-loan commitment increased to $25.5 million, with a commitment period through July 1, 2024 and maturity in 2026; the revolving commitment increased to $10 million. These are commitments, not reported quarter-end borrowings.
  • The Neosho acquisition closed in January 2019. Its contingent-consideration liability was $1.686 million at June 30; other acquisition earn-out liabilities included $126,000 for Cappiccille and $204,000 for Jamison.
  • The tax receivable agreement requires payment to eligible partners of 85% of realized tax savings. The recorded liability was estimated at $9.271 million; payment timing and amounts depend on tax savings and other factors. The filing warns that payments could in some circumstances exceed actual tax savings.
  • Key risks include market declines reducing AUM-based fees, client withdrawals, investment performance, competition, client retention, personnel retention, regulatory and litigation costs, and data-security or operational failures. Management stated disclosure controls were effective at June 30, 2019 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether AUM growth and market appreciation can offset net flows and continued pressure on management-fee revenue.
  2. The Cortina acquisition’s integration, actual funding and borrowing, and the amount and conditions of potential earn-out payments.
  3. Quarter-end cash conversion and the timing of compensation payments, distributions to partners, and Class A dividends.
  4. Credit-facility borrowing levels, covenant headroom, and the effect of the expanded facility and acquisition financing.
  5. The realized tax benefits, timing, and ultimate payments under the tax receivable agreement, as well as the assumptions underlying acquisition earn-outs and goodwill.
  6. The effect of ASC 842 lease liabilities and ongoing occupancy costs on reported leverage and cash commitments.