Silvercrest Asset Management Group Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results include Silvercrest Asset Management Group Inc. and Silvercrest L.P. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and operating performance
Silvercrest provides investment management and family-office services to high-net-worth individuals, families and institutional clients. Revenue is primarily driven by assets under management (AUM) and fee rates. At June 30, 2016, AUM was $17.2 billion, down 9.5% from $19.0 billion a year earlier, but up from $17.0 billion at March 31, 2016. AUM excludes approximately $15.2 billion in non-discretionary public-treasurer assets subject to an $825,000 annual fee cap.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $19.337 | $18.546 | $38.600 | $35.974 |
| Income before other income/expense | $3.505 | $4.603 | $7.129 | $8.741 |
| Net income | $2.106 | $3.327 | $4.602 | $6.137 |
| Net income attributable to Silvercrest | $0.926 | $1.721 | $2.233 | $3.124 |
| Diluted GAAP EPS | $0.12 | $0.22 | $0.28 | $0.40 |
| Adjusted EBITDA | $5.416 | $5.368 | $10.671 | $10.334 |
| Adjusted EBITDA margin | 28.0% | 28.9% | 27.6% | 28.7% |
Financial condition, cash flow and liquidity
- Revenue rose 4.3% in Q2 and 7.3% for the first half, principally reflecting management and advisory fee growth and the Jamison acquisition. Jamison contributed $1.1 million of Q2 revenue and $2.5 million for the first half.
- Expenses grew faster than revenue: total expenses increased 13.5% in Q2 and 15.6% for the first half. Compensation costs, including higher equity-based compensation and acquisition-related headcount, and general and administrative expenses were key drivers.
- Cash and cash equivalents were $21.255 million at June 30, down from $31.562 million at year-end 2015. Total assets were $95.585 million; total liabilities were $33.570 million.
- Six-month operating cash flow was negative $2.919 million, compared with negative $1.510 million in 2015. Financing activities used $7.552 million, including $4.415 million of partner distributions, $1.922 million of Class A dividends and debt repayments. Net cash declined $10.307 million.
- Notes payable totaled $3.588 million, down from $4.514 million at year-end. No amount was drawn on the $7.5 million revolving facility or the $7.5 million delayed-draw term loan; the revolver matures December 24, 2016. The company reported compliance with credit-facility covenants.
- The company paid Class A dividends of $0.24 per share for the first half. Net operating lease commitments were $61.222 million, primarily reflecting the extended New York City office lease.
Material changes and management commentary
- Despite lower year-over-year AUM, management and advisory fees increased 4.1% in Q2 and 6.9% for the first half. The average annual management fee rate rose to 0.45% in Q2 and 0.44% for the first half, compared with 0.39% and 0.38%, respectively, in 2015.
- First-half AUM declined from $18.1 billion to $17.2 billion. Non-discretionary AUM fell $1.4 billion, partly offset by a $0.5 billion increase in discretionary AUM. Management cited client outflows and market depreciation as contributors to the decline.
- Profitability weakened: first-half net income attributable to Silvercrest fell about 29%, while adjusted EBITDA increased about 3% and its margin declined 1.1 percentage points. Lower other income was a major factor; other income was $0.116 million for the first half versus $1.005 million in 2015, largely because of a smaller tax-receivable-agreement fair-value adjustment.
- The Cappiccille tax-services acquisition closed January 11, 2016; consideration included $0.148 million cash and $0.354 million estimated contingent consideration. Jamison was acquired in June 2015. Acquisition-related amortization, compensation and operating costs contributed to expense growth.
- Management said cash from operations is expected to meet liquidity needs and commitments for the next 12 months, and it intends to continue quarterly Class A dividends. No specific earnings or AUM guidance was provided.
Risks, contingencies and unusual items
- Results are sensitive to securities markets, investment performance, client inflows and outflows, client retention, fee levels and the ability to attract and retain investment professionals. A 10% change in average AUM was estimated to change annualized revenue by approximately $7.7–$7.8 million at the period’s weighted average fee rates.
- The tax receivable agreement requires payment to eligible partners of 85% of realized tax savings. Its estimated liability was $14.695 million; management said future payments could be substantial. Actual timing and amounts depend on taxable income, exchanges, share prices and tax law, and payments could in some circumstances exceed actual cash tax savings.
- Contingent acquisition earnouts include $0.354 million for Cappiccille and $1.162 million for Jamison at June 30. No material legal proceedings were pending or threatened, though the company may face ordinary-course litigation. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Cash flow and period comparisons were affected by timing: accrued compensation payments were a significant operating cash use, and first-quarter cash flows are seasonally influenced by prior-year performance fees and incentive compensation.
Important facts for investors to verify
- Whether AUM outflows—especially in non-discretionary relationships—continue, and how market performance affects fee revenue.
- Whether revenue growth and the higher average fee rate can offset compensation and administrative cost growth and sustain adjusted EBITDA margins.
- Cash conversion and liquidity, including accrued compensation payments, partner distributions, the December 2016 revolver maturity and remaining acquisition-note repayments.
- The amount and timing of TRA payments, contingent earnouts, and the effect of the extended office lease commitments on future cash needs.
- How much reported performance depends on Jamison and Cappiccille contributions, acquisition integration and non-GAAP adjustments; adjusted measures are not substitutes for GAAP results.