Silvercrest Asset Management Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results include Silvercrest and Silvercrest L.P.; Silvercrest held approximately 63% of SLP’s economic interests. Financial amounts below are in millions unless stated otherwise.
Business context and performance
Silvercrest provides investment management and family office services to high-net-worth individuals, families and institutional clients. Assets under management (AUM) were $18.2 billion at quarter-end, up 12.3% from $16.2 billion a year earlier and 1.7% from $17.9 billion at December 31, 2014. Q1 AUM growth reflected $0.8 billion of gross inflows, $0.7 billion of gross outflows and $0.2 billion of market appreciation.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Management and advisory fees | $16.703 | $15.583 | +7.2% |
| Family office services revenue | $0.725 | $1.137 | -36.2% |
| Total revenue | $17.428 | $16.720 | +4.2% |
| Income before other expense and taxes | $4.138 | $3.795 | +9.0% |
| Net income, consolidated | $2.810 | $2.241 | +25.4% |
| Net income attributable to Silvercrest | $1.403 | $0.944 | +48.6% |
| GAAP diluted EPS | $0.18 | $0.13 | — |
| Adjusted EBITDA | $4.966 | $4.981 | -0.3% |
| Adjusted EBITDA margin | 28.5% | 29.8% | -1.3 percentage points |
Consolidated net margin was approximately 16.1%, versus 13.4% a year earlier. The effective tax rate was 31.6%, compared with 39.4%; the prior-year rate included a discrete deferred-tax item related to a New York State tax-rate reduction. Average AUM was $18.1 billion, while the average annual management fee rate declined to 0.39% from 0.42%, primarily due to growth in non-discretionary, lower-fee assets.
Operating cash flow was negative $10.246 million, versus negative $4.303 million in Q1 2014. Investing cash use was $0.162 million, compared with $1.707 million; financing cash use was $1.840 million, compared with $2.072 million. Cash declined $12.248 million during the quarter to $18.572 million. Management attributed the higher operating cash use mainly to compensation payments and timing of vendor payments and other assets.
At March 31, cash was $18.572 million; total assets were $85.384 million and total liabilities were $30.810 million. Notes payable totaled $4.064 million; the $7.5 million revolving facility had no borrowings, and the $7.5 million delayed-draw term loan was undrawn. The company reported compliance with credit-facility covenants. It also had $0.274 million of capital-lease principal outstanding. Total equity was $54.574 million.
Material changes and notable items
- Management and advisory fee growth was supported by higher AUM and an increased concentration of higher-fee equity strategies. Family office revenue fell by $0.412 million; private-fund revenue also declined.
- Total expenses rose 2.8% to $13.290 million. General and administrative expense increased 9.8%, partly reflecting professional fees and investment research costs. Lower equity-based compensation partly offset higher salaries, benefits and partner incentive accruals.
- Interest expense fell to $0.058 million from $0.127 million, reflecting reduced credit-facility borrowings and lower notes-payable balances.
- On March 30, 2015, the company signed an agreement to acquire substantially all of Jamison Eaton & Wood’s business and assets. The proposed consideration includes approximately $3.6 million cash, $2.4 million of notes and $4.0 million in SLP units, plus potential earnouts based on 20% of specified EBITDA. The acquisition remained subject to closing conditions; the filing does not report a completed closing in the quarter.
- The estimated tax receivable agreement (TRA) liability was $15.785 million. Silvercrest is generally obligated to pay former and current SLP partners 85% of qualifying tax savings; actual amounts and timing depend on taxable income, exchanges, tax rates and other factors.
Outlook, risks and contingencies
No specific revenue, earnings or AUM guidance was provided. Management expected operating cash flows to meet requirements over the next 12 months and intended to continue quarterly Class A dividends, subject to cash availability, distributions from SLP and credit-facility restrictions. The company paid $0.932 million in Class A dividends during the quarter.
Key risks include market declines that reduce AUM and fee revenue, client withdrawals, investment performance, net flows, fee pressure, client concentration and retention, and the ability to recruit and retain investment professionals. Other cited risks include regulatory and litigation costs, data security and operational safeguards, and the significant, uncertain timing of TRA payments. The filing reported no material pending or threatened legal proceedings and no off-balance-sheet arrangements. Operating lease commitments, net of non-cancellable subleases, totaled $8.217 million.
Important facts for investors to verify
- Whether the Jamison acquisition closed, its final consideration and the resulting contribution to AUM, revenue and expenses.
- Drivers of AUM flows, client retention and fee-rate changes, especially the decline in family office revenue and average fee rate.
- The sustainability of earnings growth given flat Adjusted EBITDA and lower adjusted EBITDA margin.
- Cash-flow normalization after the large Q1 compensation outflow, and capacity to fund dividends, partner distributions, debt maturities and acquisition obligations.
- TRA liability assumptions and potential payments, along with continued compliance with credit-facility covenants.