Business context and reporting period
Silvercrest Asset Management Group Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019. It provides investment management and family-office services to high-net-worth individuals, families and institutions. Silvercrest held approximately 63.3% of Silvercrest L.P.; the remaining partnership interests are reflected as non-controlling interests.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $22.6 | $24.3 |
| Management and advisory fees | $21.6 | $23.3 |
| Family-office services revenue | $1.0 | $1.0 |
| Total expenses | $18.6 | $19.0 |
| Net income | $3.0 | $4.1 |
| Net income attributable to Silvercrest | $1.7 | $2.2 |
| Basic and diluted GAAP EPS | $0.20 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $5.8 | $6.9 |
| Adjusted EBITDA margin (non-GAAP) | 25.5% | 28.5% |
| Net income margin | 13.5% | 16.6% |
Assets under management (AUM) were $20.8 billion at quarter-end, versus $21.5 billion a year earlier and $19.0 billion at December 31, 2018. Average AUM was $19.9 billion versus $21.4 billion. The average annual management fee was 0.45% versus 0.46%.
Operating cash flow was negative $20.9 million, compared with negative $15.2 million in Q1 2018; investing cash flow was negative $0.6 million and financing cash flow negative $2.2 million. Cash declined $23.8 million during the quarter to $45.5 million. Management attributed the operating cash use principally to compensation payments, including payment of accrued prior-year compensation, and noted that first-quarter cash flows are seasonal.
At March 31, total assets were $146.5 million, total liabilities $63.4 million and total equity $83.0 million. Cash and cash equivalents were $45.5 million. No borrowings were outstanding under the $7.5 million revolving facility or $7.5 million delayed-draw term facility. The revolver was due to mature June 21, 2019; the term loan could be drawn through June 25, 2023 and matures June 24, 2025. The company reported compliance with credit covenants. Management said operating cash and available liquidity were expected to meet needs for the next twelve months.
Material changes versus the prior comparable period
- Revenue fell 7.2%, primarily due to net client outflows in discretionary AUM, partly offset by market appreciation. Year over year, AUM declined $0.7 billion; the company reported greater market appreciation but also greater net outflows than in Q1 2018.
- From year-end 2018 to March 31, 2019, AUM rose 9.3% to $20.8 billion, with $1.8 billion of market appreciation. Gross inflows and outflows were each about $2.2 billion. Discretionary AUM increased by $1.1 billion and non-discretionary AUM by $0.7 billion.
- Expenses decreased 2.4%. Compensation and benefits fell 6.6%, mainly because bonus accruals were lower by $1.4 million, partly offset by higher salaries and benefits. General and administrative costs rose 10.2%, including higher portfolio/systems, occupancy, and moving expenses.
- Adjusted net income, a non-GAAP measure, was $3.3 million versus $4.1 million; adjusted EPS was $0.24 versus $0.31 basic and diluted.
Outlook, risks, contingencies and unusual items
- No formal earnings or AUM guidance was provided. Management expects cash needs over the next twelve months to be met primarily from operations. Results remain sensitive to market levels, investment performance, client inflows and outflows, fee rates, and client retention.
- On January 15, 2019, Silvercrest acquired certain Neosho Capital assets. It paid $0.4 million cash at closing and issued $0.02 million in partnership units; contingent consideration was valued at $1.7 million at acquisition. The deal also provides for a $0.3 million first-anniversary payment and subsequent earnouts, subject to the agreement.
- After quarter-end, Silvercrest agreed to acquire substantially all relevant assets of Cortina Asset Management for a maximum stated amount of $44.9 million, generally 80% cash and 20% partnership units, plus potential earnouts of up to $26.2 million over four years. Closing was anticipated within 120 days of the April 12 agreement, subject to conditions. The filing does not specify the final funding or liquidity impact.
- Adoption of ASC 842 on January 1, 2019 brought operating lease assets of $36.2 million and liabilities of $42.8 million onto the balance sheet. Undiscounted minimum operating lease commitments were $56.7 million, partly offset by $0.2 million of subleases.
- The tax receivable agreement requires payment to eligible partners of 85% of realized tax savings. Its recorded liability was $9.1 million; payment amounts and timing are uncertain. Management estimated approximately $9.4 million of future payments related to the original unit purchase, assuming sufficient taxable income and no material tax-law changes, with later exchange-related payments additional.
- Other risks include market-driven declines in fee revenue and AUM, competition, retention of investment professionals and clients, regulation, cybersecurity and operational safeguards, and potential tax or acquisition-related costs. The company reported no significant off-balance-sheet arrangements and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether AUM gains persist: quarter-over-quarter growth was driven substantially by market appreciation, while year-over-year AUM and revenue were lower.
- How the June 2019 revolver maturity was addressed and how the Cortina purchase price and earnouts were financed after closing.
- Whether Neosho and Cortina deliver expected client retention, revenue, and integration benefits, and how contingent consideration changes.
- The sustainability of cash generation given negative first-quarter operating cash flow, compensation seasonality, partner distributions, dividends and lease payments.
- Future realized tax savings and payments under the tax receivable agreement, including the exposure if expected tax benefits are not achieved.