Business context and reporting period
Silvercrest Asset Management Group Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It provides wealth management, investment advisory and family-office services to ultra-high-net-worth individuals and institutional clients. Assets under management (AUM) were $17.9 billion at year-end, up 14.0% from $15.7 billion.
The company operates through Silvercrest L.P.; Silvercrest held approximately 63% of its economic interests, with the remaining interests reported as non-controlling interests. The 2013 comparison is affected by the June 2013 reorganization and IPO, and by a change in accounting for partner incentive payments.
Financial results and liquidity
- Revenue: $69.5 million, up 15.7% from $60.1 million. Management and advisory fees rose 21.6% to $65.0 million; family-office revenue fell 11.2% to $4.2 million; performance fees and allocations dropped 87.9% to $0.2 million.
- Profit: Income before other income and expense was $15.3 million, down from $16.5 million. Consolidated net income was $10.7 million, versus $17.2 million; net income attributable to Silvercrest was $4.8 million, versus $13.7 million. Basic and diluted earnings per share were both $0.63, compared with $1.68 and $1.63, respectively, in 2013.
- Margins: Adjusted EBITDA, a non-GAAP measure, was $21.1 million, or 30.4% of revenue, compared with $17.3 million and 28.9% in 2013. Income before other income and expense was approximately 22.1% of revenue, versus 27.5% in 2013.
- Cash flow: Operating activities provided $20.4 million, down from $26.4 million. Investing activities used $2.0 million and financing activities used $14.6 million. Cash increased $3.7 million to $30.8 million.
- Liquidity and debt: Year-end total assets were $99.7 million and total liabilities were $46.6 million. Notes payable were $4.1 million. The company reported no principal outstanding on its $7.5 million revolving facility, although the balance sheet reports $24,000 under revolving-credit borrowings; verify the nature of that amount. It reported compliance with its credit-facility covenants.
- Shareholder distributions: Silvercrest paid $0.48 per Class A share in 2014, totaling $3.7 million. The board declared a further $0.12-per-share dividend in February 2015.
Material changes versus prior periods
- Management and advisory fee growth reflected higher average AUM ($16.8 billion versus $13.5 billion), growth in discretionary accounts, and a greater concentration in higher-fee equity strategies. Year-end discretionary AUM was $11.6 billion, up 14.9%.
- Year-end AUM increased by $2.2 billion: $3.7 billion of gross inflows, $3.0 billion of gross outflows and $1.5 billion of market appreciation. The filing attributes part of the growth to the Richmond, Virginia office expansion.
- Total expenses rose 24.4% to $54.2 million, mainly because compensation and benefits increased 32.9% to $40.3 million. Partner incentive payments included in compensation expense were $18.7 million, compared with $8.2 million in 2013.
- The income-tax provision rose to $6.4 million from $2.1 million; the effective rate increased to 37.4% from 11.1%. The filing cites corporate taxation following the reorganization, higher taxable income and discrete deferred-tax items.
- Performance-fee revenue fell substantially, largely because returns at external investment strategies were lower. Family-office revenue declined following termination of accounts associated with a principal who left in 2013.
- In the fourth quarter, revenue was $17.7 million versus $17.2 million a year earlier; net income was $2.7 million versus $4.0 million, and net income attributable to Silvercrest was $1.1 million versus $2.0 million.
Outlook, commentary, risks and unusual items
- The filing gives no specific quantitative financial guidance. Management describes a growth strategy centered on organic growth, selective hiring and acquisitions, expansion into additional geographies, and institutional clients. It also expects continued investment in family-office services and the firm’s brand.
- Management said operating cash flow should meet working-capital needs for the next 12 months and that the company believes it has sufficient cash for operations and commitments over that period. Cash needs include compensation, partner distributions, dividends, debt service and potential growth investments.
- Key risks include market declines or client withdrawals reducing AUM-based fees; investment underperformance; concentration in key strategies and clients; fee pressure; loss of key professionals; acquisition and integration risks; and regulatory, cybersecurity, operational and litigation risks.
- The tax receivable agreement (TRA) generally requires payment to current and former partners of 85% of specified realized tax savings. Estimated contractual TRA payments totaled $15.6 million at year-end, but timing and actual amounts depend on future taxable income and other factors. Certain transactions or early termination could accelerate payments.
- Unusual items include $3.0 million of key-person life-insurance proceeds received in 2013, which did not recur in 2014; a $1.1 million increase in equity income from investments in 2014; and a $1.1 million discrete deferred-tax charge cited in the tax discussion. The filing reports no material pending or threatened legal proceedings.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2014. The filing did not include an auditor attestation on internal controls because Silvercrest was an emerging growth company.
Important facts for investors to verify
- Reconcile the reported $24,000 revolving-credit balance with management’s statement that no revolving principal was outstanding.
- Assess how much AUM and fee growth came from net client flows, market appreciation, acquisitions and the Richmond expansion, and whether client inflows remain sufficient.
- Review the sustainability of margins in light of rising partner incentive compensation and the divergence between revenue growth and GAAP earnings attributable to Silvercrest.
- Examine the TRA’s estimated payments, potential acceleration provisions and sensitivity to taxable income and future exchanges of partnership units.
- Confirm the composition and collectability of amounts due from Silvercrest Funds, which rose to $3.8 million, and review the company’s liquidity needs alongside dividends, partner distributions and acquisition plans.
- Interpret reported investment performance carefully: the strategy results shown are generally gross of advisory fees, and past performance does not assure future results.