Silvercrest Asset Management Group Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in millions unless otherwise stated. Silvercrest completed its reorganization on June 26 and IPO on July 2, 2013; the nine-month 2013 results combine six months of predecessor Silvercrest L.P. results and one quarter of post-reorganization consolidated results, limiting comparability.
Business context and performance
Silvercrest provides investment management and family office services to high-net-worth individuals and institutional clients. Assets under management (AUM) reached $14.6 billion, up 30.4% from September 2012 and 5.0% from June 2013. Management attributed the year-over-year increase to client flows, market appreciation and the Ten-Sixty acquisition, which added approximately $1.9 billion of primarily non-discretionary AUM.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $14.7 | $12.8 | $42.9 | $37.5 |
| Income before other income (expense) | $3.2 | $4.9 | $14.8 | $14.9 |
| Net income | $2.2 | $4.7 | $13.2 | $14.1 |
| Net income attributable to Silvercrest | $0.7 | Not separately shown | $11.7 | Not separately shown |
| Adjusted EBITDA (non-GAAP) | $4.3 | $3.8 | $12.8 | $10.6 |
| Adjusted EBITDA margin (non-GAAP) | 29.1% | 29.7% | 29.9% | 28.2% |
- Q3 revenue grew 15.5%, led by management and advisory fees, up 17.1%; nine-month revenue rose 14.2%. Performance fees were small and declined year over year.
- Q3 expenses increased 47.7% to $11.6 million, chiefly as compensation and benefits rose 74.2% to $8.4 million. The increase included higher partner incentive compensation, bonuses, salaries and benefits. Nine-month expenses rose 24.2% to $28.1 million.
- Cash and cash equivalents were $25.1 million at September 30, versus $13.4 million at year-end 2012. Total assets were $77.9 million and total liabilities $35.1 million.
- Nine-month operating cash flow was $19.9 million, investing cash outflow $3.3 million, and financing cash outflow $5.0 million; cash increased $11.6 million from year-end.
- Notes payable were $9.7 million, including partner-redemption and acquisition notes. Revolver principal outstanding was $5.0 million; the $15.0 million credit facility also included an undrawn $7.5 million term loan. The company reported compliance with its covenants.
Material changes and unusual items
- The IPO and related transactions generated net proceeds, including the over-allotment, and materially changed the capital structure. Silvercrest purchased $35.4 million of SLP units from partners; SLP also made a $10.0 million special distribution to existing partners.
- After the IPO, partner incentive allocations are recorded as compensation expense rather than distributions. Management cited this accounting change as a major contributor to higher compensation expense.
- The Ten-Sixty asset acquisition closed in March 2013 for $2.5 million cash plus a promissory note; it added goodwill and customer-related intangible assets.
- The company recognized a $12.8 million deferred tax asset associated with the IPO-related tax-basis step-up and recorded a tax receivable agreement (TRA) liability. Under the TRA, Silvercrest generally owes participating partners 85% of qualifying realized tax savings.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management expects operating cash flow to meet liquidity needs over the next 12 months and stated an intention to begin quarterly Class A cash dividends in Q4 2013, subject to available cash, board decisions and financing restrictions.
- Management expects public-company costs to rise. The company also expects partner distributions to remain a material use of cash; dividend capacity depends on distributions from SLP.
- Revenue is sensitive to market levels and client flows because advisory fees are primarily AUM-based. A 10% change in average AUM was estimated to change annualized revenue by approximately $5.9 million for the quarter or $5.7 million for the nine-month period, using the respective period fee rates.
- Other risks include investment performance and client withdrawals, credit-facility covenants, and uncertainty in the timing and amount of TRA payments. Management noted that TRA payments could be substantial; tax-basis challenges could leave the company unreimbursed for payments already made.
- Operating lease commitments, acquisition-related earn-outs and debt repayments remain obligations. The filing reports no pending or known threatened legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Assess the post-IPO cost base and the recurring impact of partner incentive compensation on margins and earnings.
- Track AUM composition, organic net flows, market-driven growth, and fee-rate changes; the Ten-Sixty addition included significant non-discretionary assets.
- Reconcile GAAP results with Adjusted EBITDA and adjusted earnings, including the company’s non-GAAP adjustments and ownership interests.
- Review debt maturities, credit-facility covenant headroom, planned distributions and dividends, and the liquidity effects of partner redemptions.
- Monitor actual tax savings and the resulting timing and amount of TRA payments; the filing notes that estimates depend on exchanges, taxable income, share prices and tax rates.