Silvercrest Asset Management Group Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; fourth-quarter results are included below. Silvercrest is a wealth-management firm serving ultra-high-net-worth individuals and institutional investors, with family-office services. Assets under management (AUM) were $19.0 billion at year-end.
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $98.7 million | $91.4 million |
| Management and advisory fees | $94.7 million | $86.5 million |
| Performance fees and allocations | $25,000 | $834,000 |
| Total expenses | $77.5 million | $71.0 million |
| Net income, consolidated | $17.4 million | $12.5 million |
| Net income attributable to Silvercrest | $9.6 million | $5.3 million |
| GAAP diluted earnings per share | $1.16 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $29.6 million | $27.9 million |
| Adjusted EBITDA margin (non-GAAP) | 30.0% | 30.5% |
| Net income margin | 17.6% | 13.7% |
- Fourth-quarter 2018 revenue was $24.8 million; consolidated net income was $5.2 million, and net income attributable to Silvercrest was $2.9 million, or $0.35 per share.
- Cash and cash equivalents rose to $69.3 million from $53.8 million. Operating cash flow was $28.9 million; investing activities used $1.8 million and financing activities used $11.6 million.
- Year-end total assets were $133.4 million and total liabilities were $51.0 million. No borrowings were outstanding under the credit facility, and notes payable were zero at year-end. The facility provides up to $15 million in total commitments, subject to its terms and covenants.
- Dividends paid were $0.56 per Class A share, up from $0.48 in 2017. Cash dividends and distributions to limited partners totaled approximately $11.4 million in 2018.
Changes versus the prior year
- Revenue increased 8.0%, driven by higher management and advisory fees and average AUM, despite lower year-end AUM. Average AUM was $20.2 billion versus $20.0 billion; the average management fee rate rose to 0.49% from 0.46%.
- Year-end AUM declined 10.8% to $19.0 billion from $21.3 billion. Discretionary AUM fell $1.8 billion and non-discretionary AUM fell $0.5 billion. Management attributed the decline to market depreciation and net client outflows; total market depreciation was $1.1 billion, and net cash outflows were $0.6 billion.
- Discretionary equity AUM declined 13.5% and fixed-income AUM declined 5.8%. Several value strategies had negative 2018 returns; the small-cap, smid-cap, small-cap concentrated and multi-cap value composites returned -15.7%, -12.4%, -12.2% and -10.6%, respectively.
- Expenses increased 9.2%, faster than revenue, mainly due to compensation and benefits (+7.0%) and general and administrative costs (+16.2%). General and administrative costs included higher rent, recruiting, professional fees and research/system costs.
- Performance-fee revenue fell by $809,000 to $25,000. Other income declined to $1.7 million from $5.9 million, largely because 2017 included a $5.3 million favorable fair-value adjustment to the tax receivable agreement liability.
- The income-tax provision was $5.5 million versus $13.7 million in 2017, when tax reform caused a significant one-time revaluation of deferred tax assets. The 2018 effective tax rate shown in the tax note was 23.91%.
Outlook, risks and unusual items
- The filing provides no numerical earnings or AUM guidance. Management describes continued plans for organic growth, selective hiring and acquisitions, institutional and OCIO growth, and expansion into additional U.S. wealth centers.
- Management says operating cash flow is expected to meet near-term liquidity needs. The company reports compliance with credit-facility covenants at year-end. Its New York office lease runs through September 2028; adoption of the new lease accounting standard in 2019 was expected to add approximately $45 million of operating lease liabilities and corresponding right-of-use and other assets.
- Key risks include market declines and client withdrawals, investment underperformance, fee pressure, dependence on a limited number of strategies and large client relationships, and retention of key investment professionals. The top 50 client relationships represented approximately 57% of AUM.
- Other material risks include extensive regulation and compliance costs, cybersecurity and operational failures, litigation and reputational exposure, acquisition integration, and the tax receivable agreement (TRA). Silvercrest’s TRA generally requires it to pay principals 85% of realized tax savings; the reported TRA liability was approximately $9.0 million at year-end. Certain change-of-control or early-termination events could accelerate payments.
- The company reported no material pending or threatened legal proceedings and no significant off-balance-sheet arrangements. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- Track AUM trends, especially net flows versus market performance, and whether outflows and weak value-strategy results persist.
- Assess the durability of fee rates and growth in recurring management fees against compensation, occupancy and other expense growth.
- Review the reconciliation and definitions of non-GAAP Adjusted EBITDA and adjusted earnings; these measures are supplemental and are not substitutes for GAAP results.
- Confirm the status and covenants of the revolving credit facility, whose maturity had been extended to June 21, 2019, and monitor lease obligations and TRA cash payments.
- Consider client and strategy concentration, key-person retention, and the potential effects of market volatility, acquisitions and regulatory or cybersecurity events.