Silvercrest Asset Management Group Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Silvercrest provides investment management and family-office services to high-net-worth individuals, families, and institutions. This unaudited report covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in millions unless otherwise noted.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $20.5 | $20.0 | $59.1 | $55.9 |
| Income before other income/expense | $4.2 | $4.3 | $11.3 | $13.0 |
| Net income | $2.9 | $2.8 | $7.5 | $8.9 |
| Net income attributable to Silvercrest | $1.5 | $1.3 | $3.7 | $4.5 |
| GAAP diluted EPS | $0.19 | $0.17 | $0.47 | $0.57 |
| Adjusted EBITDA and margin | $5.9; 28.8% | $5.8; 28.8% | $16.6; 28.0% | $16.1; 28.8% |
- Q3 revenue rose 2.6%; management and advisory fees increased 1.8% and family-office services revenue rose 21.2%. Nine-month revenue increased 5.6%, but net income declined 16.0% and attributable income fell 16.2%.
- Q3 expenses increased 3.9% to $16.3 million. Nine-month expenses rose 11.3% to $47.8 million, led by compensation and benefits (+11.5%), including higher equity compensation, salaries, and acquisition-related headcount and costs.
- Assets under management (AUM) were $17.9 billion at quarter-end: up 4.1% from June 30, but down 1.1% from year-end 2015. Discretionary AUM was $13.2 billion and non-discretionary AUM $4.7 billion. Nine-month net outflows and market movements included $4.1 billion of gross outflows, $3.4 billion of gross inflows, and $0.5 billion of net market appreciation.
- Operating cash flow for the first nine months was $9.3 million, versus $9.0 million a year earlier. Investing activities provided $0.1 million, while financing activities used $11.0 million; cash declined $1.6 million to $30.0 million.
- At September 30, cash was $30.0 million, total liabilities $39.1 million, and notes payable $2.6 million, down from $4.5 million at December 31, 2015. No revolving-credit borrowings were outstanding; the $7.5 million revolver was scheduled to mature December 24, 2016. The company reported compliance with credit-facility covenants.
- The company paid $2.9 million in Class A dividends and distributed $5.8 million to partners during the nine-month period. Future net operating-lease commitments were $60.7 million; this includes long-dated office leases.
Changes, outlook, and risks
- Management attributed revenue growth principally to the Jamison acquisition and, for family-office services, the Cappiccille acquisition. Cappiccille was acquired in January 2016; its contingent consideration liability was $0.4 million. Jamison earnout liability was $1.2 million at quarter-end.
- Other expense was $0.2 million in Q3 2016, compared with near break-even a year earlier; for the nine-month period, other income/expense shifted from $0.9 million of income to $0.2 million of expense. Management cited changes in the fair value of the tax receivable agreement (TRA) liability. The TRA liability was estimated at $15.0 million; Silvercrest pays former and current partners 85% of realized specified tax savings.
- Management said operating cash flow should meet liquidity needs over the next 12 months and expects partner distributions to remain a material use of cash. The filing provides no quantified revenue, earnings, or AUM guidance.
- Key risks include market declines reducing fee-generating AUM and revenue, client outflows, ability to retain clients and investment professionals, fee pressure, and regulatory, operational, and cybersecurity risks. A public treasurer’s office relationship includes approximately $14.8 billion of excluded non-discretionary assets and an annual fee cap of $825,000, making the fee arrangement unusually low relative to the assets.
- No material legal proceedings or significant off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether AUM growth and client flows persist, particularly in discretionary accounts, and how markets or outflows affect recurring fees.
- How much reported revenue and future growth depend on Jamison and Cappiccille, and the eventual amount and timing of acquisition earnouts.
- The December 2016 revolver maturity and subsequent financing arrangements, alongside lease obligations, distributions, and dividend capacity.
- The assumptions behind the $15.0 million TRA liability and deferred tax assets, including the timing and amount of future payments.
- The quality and comparability of Adjusted EBITDA and other non-GAAP measures, including adjustments excluded from reported results.