Silvercrest Asset Management Group Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise. Silvercrest provides investment management and family-office services. The 2013 comparative period spans the company’s IPO and reorganization, so some year-over-year comparisons are affected by changes in entity structure and accounting for partner incentive payments.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $17.817 million | $14.737 million | $51.763 million | $42.894 million |
| Income before other expense, net | $4.476 million | $3.187 million | $12.514 million | $14.785 million |
| Net income | $2.923 million | $2.249 million | $7.962 million | $13.179 million |
| Net income attributable to Silvercrest | $1.358 million | $0.734 million | $3.653 million | $11.664 million |
| Adjusted EBITDA and margin | $5.292 million; 29.7% | $4.286 million; 29.1% | $15.381 million; 29.7% | $12.816 million; 29.9% |
- Q3 revenue rose 20.9%, primarily on higher management and advisory fees. Nine-month revenue rose 20.7%.
- Management and advisory fees were $16.816 million in Q3 and $48.487 million year to date. Performance fees were nil in both 2014 periods; family-office revenue declined year over year.
- Nine-month compensation and benefits increased 50.8% to $29.431 million, including $13.062 million of partner incentive payments. Total expenses rose 39.6% to $39.249 million.
- The nine-month GAAP net-income comparison is affected by higher 2014 taxes and the post-IPO treatment of partner incentives as compensation rather than distributions. Adjusted net income was $7.637 million versus $5.813 million; adjusted diluted EPS was $0.62 versus $0.47.
- Cash and cash equivalents were $27.943 million at September 30, 2014, versus $27.122 million at year-end 2013. Total assets were $96.507 million and total liabilities $46.653 million.
- Operating cash flow was $10.869 million for the nine months, down from $19.947 million. Investing activities used $1.581 million and financing activities used $8.467 million; ending cash increased $0.821 million.
- Debt comprised $8.127 million of notes payable and $3.000 million drawn on the revolving facility. The $7.5 million revolver therefore had $4.5 million undrawn; the separate $7.5 million term facility was undrawn. The company reported compliance with credit-facility covenants.
- Silvercrest paid $2.724 million in Class A dividends, or $0.36 per share, during the nine-month period. Management said it expected to continue quarterly dividends, subject to cash availability and financing restrictions.
Assets under management and period changes
- Assets under management (AUM) were $16.4 billion at September 30, up 12.3% year over year and 4.5% from December 31, 2013, but down 1.8% from $16.7 billion at June 30, 2014.
- For Q3, gross inflows of $0.9 billion exceeded gross outflows of $0.7 billion, while market depreciation reduced AUM by $0.5 billion. For the nine months, discretionary AUM increased $1.0 billion, while non-discretionary AUM declined $0.3 billion.
- Management cited growth in separately managed accounts, equity exposure and the Richmond, Virginia expansion as contributors to fee growth. The average annual management fee was 0.40% for the nine months, down from 0.44% a year earlier, partly due to increased lower-fee non-discretionary assets.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected operating cash flow to fund operations and commitments over the following 12 months.
- Results are sensitive to market levels because most revenue is based on AUM. Market declines may also prompt client withdrawals. Q3 AUM was affected by market depreciation, and several equity strategies recorded negative returns during the quarter.
- The tax receivable agreement requires Silvercrest to pay eligible former and current partners 85% of realized tax savings. The filing estimates approximately $15.9 million of future payments related to the original unit purchase, with additional amounts possible from later exchanges; timing and amounts remain uncertain.
- In October 2014, Silvercrest and two former principals agreed to reduce their notes by $1.722 million after reviewing note covenants. The resulting $3.578 million principal was scheduled in four installments beginning November 1, 2014. The company had withheld the originally scheduled June 2014 payment pending that review.
- Operating lease commitments, net of non-cancellable subleases, totaled $9.906 million. The filing reported no pending or known threatened material legal proceedings and no off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of September 30, 2014; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring fee revenue versus partner incentive accounting, taxes and the non-GAAP adjustments.
- Whether AUM growth, net client flows and investment performance continue, particularly following Q3 market-related declines and weakness in selected strategies.
- The timing and cash impact of former-principal note installments, acquisition-related payments, dividends and the tax receivable agreement.
- Whether the company maintains credit-covenant compliance and sufficient liquidity as it funds distributions, operating commitments and growth.
- How future exchanges of partnership units affect ownership, tax savings, tax-receivable-agreement obligations and per-share results.