Silvercrest Asset Management Group Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Silvercrest completed its reorganization in June 2013 and IPO in July; 2013 results combine six months of predecessor Silvercrest L.P. and six months of the public holding company, so comparisons and per-share data require care. Amounts below are in U.S. dollars.
Business context and reporting period
Silvercrest is a wealth manager serving ultra-high-net-worth individuals, families and institutional investors, with investment advisory and family-office services. Assets under management (AUM) were $15.7 billion at year-end, up 40.2% from $11.2 billion. The company attributed growth to market appreciation, new and existing client business, and the Ten-Sixty acquisition. Approximately 64% of AUM was discretionary and 36% non-discretionary. Its top 483 client relationships represented about 97% of AUM.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $60.1 million | $51.7 million |
| Management and advisory fees | $53.5 million | $46.1 million |
| Performance fees and allocations | $1.8 million | $0.7 million |
| Family-office services revenue | $4.8 million | $4.9 million |
| Income before other income and expense | $16.5 million | $18.9 million |
| Net income | $17.2 million | $19.7 million |
| Net income attributable to Silvercrest | $13.7 million | Not presented on a comparable basis |
| Adjusted EBITDA | $17.3 million | $14.7 million |
| Adjusted EBITDA margin | 28.8%–28.9% as reported | 28.4% |
| Net cash from operating activities | $26.4 million | $20.8 million |
| Cash and cash equivalents at year-end | $27.1 million | $13.4 million |
Revenue increased 16.2%. Compensation and benefits rose 58.7% to $30.3 million, including $8.2 million of partner incentive payments recognized as expense following the IPO and $0.8 million of IPO-related bonuses. Total expenses increased 32.7% to $43.5 million. The filing reports income before other income and expense of $16.5 million, down from $18.9 million; the 2013 figure was affected by the post-IPO expense presentation.
At December 31, 2013, total assets were $100.7 million, total liabilities $52.6 million and total equity, including non-controlling interests, $48.2 million. Debt comprised $8.3 million of notes payable and $3.0 million drawn on the revolving facility, or $11.3 million in total. The company reported $15.3 million of estimated tax-receivable-agreement obligations. No amount had been drawn on the $7.5 million delayed-draw term loan.
For the fourth quarter of 2013, unaudited revenue was $17.2 million, income before other income and expense was $1.7 million, net income was $4.0 million and net income attributable to Silvercrest was $2.0 million. Diluted net income per share/unit was $0.32.
Material changes versus the prior comparable period
- Management and advisory fees grew 16.1%, primarily with higher average AUM and a greater concentration in equity strategies, which carry higher fees.
- Year-end AUM rose $4.5 billion. Management cited $2.3 billion of market appreciation and an increase in non-discretionary AUM associated primarily with Ten-Sixty; client inflows and outflows also affected balances.
- Performance fees and allocations increased by $1.1 million, attributed primarily to higher returns at external investment strategies.
- Net income declined to $17.2 million from $19.7 million. 2013 included $3.0 million of life-insurance proceeds related to the former CEO, partly offset by lower equity income from investments. The tax provision rose to $2.1 million from $1.1 million as the corporate structure changed and taxable income increased.
- Operating cash flow increased to $26.4 million from $20.8 million. Cash rose to $27.1 million, reflecting operating cash generation and IPO proceeds, among other financing activity.
- The Ten-Sixty acquisition closed in March 2013 for approximately $4.1 million of consideration, including cash and a note; the acquired adviser managed approximately $1.9 billion, primarily for institutional clients.
Outlook, commentary, risks and unusual items
Management did not provide numerical forward guidance. It expects to pursue organic growth, strategic hiring and acquisitions, and expansion in institutional markets; it also discussed potential offices in additional U.S. wealth centers. Management stated that operating cash flow and available liquidity were expected to meet normal working-capital needs for the following 12 months. These are expectations, not guarantees.
- Market and AUM sensitivity: Most revenue depends on AUM and investment performance; falling markets, withdrawals or loss of major clients could reduce fees. Discretionary accounts generated approximately 83% of investment-management fees.
- Client concentration and personnel: A small number of clients account for substantial AUM. The former CEO died in November 2013; Richard Hough became CEO. Retention of investment professionals and clients remains important.
- Regulatory and operational exposure: The business is subject to SEC, CFTC and other requirements, with potential compliance costs, investigations, litigation, conflicts, cyber and service-provider risks. The company reported no pending or threatened legal proceedings.
- Tax and capital structure: Under the tax receivable agreement, Silvercrest generally owes former and current partnership holders 85% of certain realized tax savings. Payments may be significant and could accelerate in specified transactions. Dividends remain discretionary and depend on distributions from Silvercrest L.P. and compliance with restrictions.
- Unusual items: The $3.0 million life-insurance benefit for the former CEO was included in other income; proceeds were received in January 2014. The filing also describes a $0.8 million charge for payments to a relative of the former CEO through November 2014 and accelerated vesting of certain equity awards following the CEO’s death.
- Debt terms: The $15.0 million credit facility is secured and includes financial and operating covenants; Silvercrest reported compliance at year-end. Outstanding debt and the tax receivable agreement are relevant to liquidity and future distributions.
Most important facts for investors to verify
- Reconcile reported GAAP profit, attributable profit and adjusted EBITDA, including the post-IPO accounting for partner incentives and the life-insurance proceeds.
- Assess how much of AUM growth came from investment returns, net client flows and the Ten-Sixty acquisition, and whether the growth is recurring.
- Review client and strategy concentration, retention, fee rates and the exposure of revenues to equity-market declines or client withdrawals.
- Confirm debt balances, maturities, covenant headroom, cash availability and the timing and amount of tax-receivable-agreement payments.
- Evaluate CEO succession and retention of key portfolio managers, along with the effect of compensation and public-company costs on margins.
- Consider that historical strategy returns cited in the filing are not guarantees and, in several cases, are presented gross of advisory fees.