Silvercrest Asset Management Group Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Silvercrest provides investment management and family-office services. Silvercrest controlled and consolidated Silvercrest L.P.; its other partners held approximately 38.5% of SLP’s economic interests at period-end. The 2013 comparative results are those of SLP, Silvercrest’s accounting predecessor, before the July 2013 IPO and reorganization, so certain comparisons are affected by changes in structure and accounting presentation.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $17.226 million | $14.472 million | $33.946 million | $28.157 million |
| Operating income before other items | $4.243 million | $5.825 million | $8.038 million | $11.598 million |
| Net income | $2.798 million | $5.467 million | $5.039 million | $10.929 million |
| Net income attributable to Silvercrest | $1.351 million | Not clearly provided | $2.295 million | Not clearly provided |
| Adjusted EBITDA (non-GAAP) | $5.108 million | $4.393 million | $10.089 million | $8.530 million |
| Adjusted EBITDA margin (non-GAAP) | 29.7% | 30.4% | 29.7% | 30.3% |
Management and advisory fees were $16.088 million for Q2 and $31.671 million for the half year, up 21.2% and 23.1%, respectively. Family-office revenue declined 5.2% in Q2 and 6.2% for the half year. Performance fees and allocations were nil in Q2 and for the first half of 2014.
Compensation and benefits increased 64.7% in Q2 and 75.0% for the half year, to $9.761 million and $19.472 million. This largely reflects partner incentive allocations recorded as compensation after the IPO; $4.326 million in Q2 and $8.440 million for the half year were included. General and administrative expense rose 18.4% in both comparison periods. Total expenses grew faster than revenue, and GAAP net income fell; the predecessor comparison also reflects the post-IPO corporate tax burden and a different treatment of partner incentives. Adjusted EBITDA increased, while its margin edged lower.
Assets under management were $16.7 billion at June 30, 2014, up 6.4% from year-end 2013 and 20.1% from June 2013. First-half growth included $2.0 billion of gross inflows, $1.4 billion of gross outflows and $0.4 billion of market appreciation. Average AUM was $16.5 billion in Q2 and $16.2 billion for the half year. The average annual management fee was 0.42% for both 2014 periods; the six-month rate was down from 0.45% in 2013.
Cash and cash equivalents were $21.438 million, down from $27.122 million at December 31, 2013. First-half operating cash flow was $2.428 million, compared with $14.929 million a year earlier; investing activities used $1.969 million and financing activities used $6.143 million. The filing attributes the operating-cash-flow decline principally to lower net income and payment of partner incentives. The company reported sufficient liquidity from operations for the next 12 months.
Total liabilities were $41.000 million and total equity was $49.274 million at June 30. Debt included $8.164 million of notes payable and $3.000 million drawn on a revolving facility; the company also had a $7.5 million delayed-draw term loan available, with none drawn. Revolver interest was 3.75%. The company reported compliance with credit-facility covenants at June 30. It paid $1.806 million in Class A dividends during the half year, equivalent to $0.24 per share.
Material changes versus the prior comparable period
- Revenue increased 19.0% in Q2 and 20.6% for the half year, primarily from higher management and advisory fees as AUM grew.
- GAAP net income fell 48.8% in Q2 and 53.9% for the half year. The change reflects sharply higher reported compensation, including partner incentives, and higher taxes following the IPO-related corporate reorganization.
- Adjusted EBITDA rose 16.3% in Q2 and 18.3% for the half year, but adjusted margins declined by 0.7 and 0.6 percentage points, respectively.
- First-half cash from operations decreased substantially, in part because partner incentive compensation was paid and accrued under the post-IPO presentation rather than treated as partner distributions.
- AUM growth was positive year over year, though first-half 2014 net inflows and market appreciation were lower than in the first half of 2013, according to management.
Outlook, risks, contingencies and unusual items
The company provided no quantitative earnings or revenue guidance. Management expects cash needs over the next 12 months to be met primarily from operating cash flow and expects to continue quarterly dividends, subject to available cash, credit-facility restrictions and operating needs. Management cautioned that results are not necessarily indicative of full-year performance.
- Former-partner notes: Silvercrest did not make the scheduled June 3, 2014 installment on notes issued in connection with former-partner unit redemptions. The notes had $5.3 million principal outstanding at June 30, plus approximately $0.2 million accrued interest. Management said it was assessing note covenants and whether any reduction could be made.
- Tax receivable agreement: Silvercrest is obligated to pay eligible former and current partners 85% of certain tax savings actually realized. Management estimated approximately $15.3 million of future payments related to the initial unit purchase, assuming sufficient taxable income and other assumptions; payments tied to later exchanges would be additional. Timing and amounts are uncertain, and payments could in some circumstances exceed realized cash tax savings.
- Market and client risks: Fee revenue depends primarily on AUM, investment performance, market prices, client flows and fee mix. Management estimates that a 10% change in average AUM would change annualized revenue by approximately $6.9 million for the Q2 period, based on the stated weighted average fee rate.
- Other exposures: The filing describes lease commitments, debt covenants, contingent acquisition consideration, dependence on key investment professionals and service providers, competition, regulation, and risks to client retention and fee levels. No material off-balance-sheet arrangements were reported; no legal proceedings were pending or known to be threatened.
- Tax and reporting changes: The new revenue-recognition standard was under evaluation, with adoption scheduled for 2017. Management said adoption of the 2014 share-based-payment guidance was not expected to have a material effect. Disclosure controls were assessed as effective, with no material internal-control changes reported for the quarter.
Most important facts for investors to verify
- Whether the missed $5.3 million former-partner note installment is due, can be reduced, or creates covenant or default risk.
- Whether AUM growth is sustained by net client flows and investment performance, and whether the 0.42% fee rate holds as asset mix changes.
- How partner incentive compensation, taxes and non-controlling interests affect cash available to Silvercrest shareholders and reported GAAP earnings.
- The timing, amount and funding of tax receivable agreement obligations, alongside dividends and debt service.
- Whether operating cash flow recovers after incentive payments and remains adequate for distributions, dividends and business needs.