Silvercrest Asset Management Group Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 9, 2018. The filing reports annual results, with quarterly figures also provided. Silvercrest is a wealth-management firm serving ultra-high-net-worth individuals and institutional investors. Assets under management (AUM) were $21.3 billion at year-end.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $91.4 million | $80.3 million | +13.8% |
| Management and advisory fees | $86.5 million | $76.2 million | +13.6% |
| Performance fees and allocations | $0.8 million | $0.3 million | +$0.5 million |
| Family office services revenue | $4.0 million | $3.8 million | +6.0% |
| Total expenses | $71.0 million | $65.6 million | +8.2% |
| Income before other income and expense | $20.4 million | $14.6 million | +39.2% |
| Consolidated net income | $12.5 million | $10.0 million | +25.5% |
| Net income attributable to Silvercrest | $5.3 million | $5.0 million | +6.4% |
| Basic and diluted GAAP EPS | $0.66 | $0.62 | +$0.04 |
| Adjusted EBITDA (non-GAAP) | $27.9 million | $22.5 million | +24.2% |
| Adjusted EBITDA margin (non-GAAP) | 30.5% | 28.0% | +2.5 pts |
Management reported a 13.7% consolidated net income margin, versus 12.4% in 2016. Adjusted net income was $13.1 million and adjusted diluted earnings per share were $0.95; these are non-GAAP measures and include adjustments and a presumed 40% tax rate.
- AUM and fee drivers: Year-end AUM rose 14.5% to $21.3 billion from $18.6 billion. Discretionary AUM increased $2.2 billion to $16.0 billion and non-discretionary AUM increased $0.5 billion to $5.3 billion. Growth reflected market appreciation and net client inflows. Average AUM was $20.0 billion, and the average management fee rate rose to 0.46% from 0.44%.
- Cash flow and liquidity: Operating cash flow was $29.6 million, compared with $18.0 million in 2016; investing activities used $0.8 million and financing activities used $12.5 million. Cash and cash equivalents increased to $53.8 million from $37.5 million.
- Debt and obligations: Notes payable were $0.7 million at year-end, down from $2.5 million. The $7.5 million revolving facility had no borrowings outstanding and was extended to December 2018; the separate $7.5 million delayed-draw term loan was undrawn. Total liabilities were $45.2 million. Contractual obligations included $60.2 million of operating lease payments and an estimated $8.7 million under the tax receivable agreement (TRA).
- Equity and distributions: Silvercrest paid $0.48 per Class A share in dividends during 2017, totaling $3.9 million, and distributed $6.2 million to partnership principals. In February 2018, the board declared a $0.14-per-share dividend for the fourth quarter of 2017.
Material changes and unusual items
- Revenue growth outpaced expense growth. Compensation and benefits rose 10.5% to $54.1 million, principally due to a $4.3 million increase in bonus accruals; general and administrative expenses increased 1.4% to $16.8 million.
- Other income included a $5.3 million favorable adjustment to the estimated TRA liability, principally reflecting lower projected federal and New York City tax rates. This helped lift pretax income and is not ordinary fee revenue.
- The income tax provision increased to $13.7 million from $4.7 million. It included $7.3 million of deferred tax expense from revaluing deferred tax assets after the Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The effective tax rate was 52.3%, versus 31.9% in 2016.
- In the fourth quarter, consolidated net income was $1.9 million, while net loss attributable to Silvercrest was $80,000, or $0.01 per share. The filing’s quarterly figures show the effects of the year’s tax and allocation items.
- FY2017 AUM growth included $7.3 billion of gross inflows, $6.7 billion of gross outflows, and $2.1 billion of market appreciation. The filing says client outflows also increased from 2016.
Outlook, risks, and contingencies
- No quantified earnings, revenue, or AUM guidance is provided. Management describes continued organic growth, strategic hiring and acquisitions, expansion of institutional business and family-office services, and possible geographic expansion as priorities.
- Results are sensitive to market levels and client flows because most revenue is asset-based. Management estimated that a 10% change in average AUM, assuming a proportionate change across products, would change annual revenue by approximately $9.1 million at the 2017 average fee rate.
- Key risks include investment underperformance, market declines, client withdrawals, fee pressure, reliance on key investment professionals and large strategies, competition, regulatory and compliance costs, cyber and operational disruptions, and the execution and integration risks of acquisitions. The small-cap strategy was closed to new investors at the time of filing.
- The TRA requires payment to principals of 85% of certain realized tax savings. The estimated liability was $8.7 million at year-end; actual amounts and timing depend on exchanges, tax rates, taxable income and other factors. Certain change-of-control or early-termination events could accelerate payments.
- The company reported no material legal proceedings pending or threatened and no significant off-balance-sheet arrangements. It stated that cash from operations should meet normal operating needs for the next 12 months and that it was in compliance with credit-facility covenants.
- The company identified the impact of tax reform and future regulation, including implementation of accounting standards, as uncertainties. It expected the new lease-accounting standard to increase reported assets and liabilities when adopted.
Important facts for investors to verify
- How much of AUM and fee growth reflects durable net inflows versus market appreciation, and whether rising outflows persist.
- The sustainability of the 2017 expense leverage and Adjusted EBITDA improvement, including compensation and incentive accruals.
- The recurring earnings and cash impact of the tax-reform-related deferred tax revaluation and TRA fair-value adjustment; distinguish these items from core operating performance.
- The terms, timing, and potential acceleration of TRA payments, as well as the company’s capacity to fund dividends, principal distributions and growth plans while meeting lease obligations.
- How performance results compare after advisory fees and expenses: the filing’s composite returns are gross of advisory fees and past performance is not indicative of future results.