Silvercrest Asset Management Group Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014. Silvercrest provides investment management and family-office services. The year-earlier figures are those of its accounting predecessor, Silvercrest L.P., before Silvercrest’s 2013 reorganization and IPO, so comparisons are affected by changes in structure, taxes, and accounting for partner incentive payments.
Key financial metrics
- Revenue: $16.72 million, up 22.2% from $13.69 million. Management and advisory fees rose 25.1% to $15.58 million; family-office revenue fell 7.2% to $1.14 million. No performance fees were recorded, versus $3,000 a year earlier.
- Profit: Net income was $2.24 million versus $5.46 million. Net income attributable to Silvercrest was $944,000; the filing does not present a comparable 2013 attributable amount. Income before other income/expense declined to $3.80 million from $5.77 million. The effective tax rate increased to 39.5% from 5.7%, reflecting the post-IPO corporate structure and deferred-tax items.
- Margins and adjusted results: Adjusted EBITDA, a non-GAAP measure, rose to $4.98 million from $4.14 million; adjusted EBITDA margin was 29.8% versus 30.2%. Adjusted net income was $2.32 million versus $1.83 million, and adjusted diluted EPS was $0.19 versus $0.17.
- Assets under management (AUM): $16.2 billion at quarter-end, up 18.7% year over year and 3.2% from year-end 2013. Q1 gross inflows were $1.2 billion, outflows $0.6 billion, and market depreciation $0.1 billion. Average AUM was $16.0 billion. Average annual management fee rate declined to 0.42% from 0.44%.
- Cash flow: Operating activities used $4.30 million, compared with $7.38 million generated in Q1 2013. The company attributed the change primarily to payment of partner incentives and the associated reduction in accrued compensation. Investing activities used $1.71 million, including a $1.68 million acquisition earn-out; financing activities used $2.07 million, including $903,000 in Class A dividends.
- Liquidity and debt: Cash was $19.04 million at March 31, down from $27.12 million at year-end. Total assets were $87.04 million and total liabilities $37.36 million. Debt included $8.20 million of notes payable and $3.00 million drawn on a revolving facility; the $7.50 million delayed-draw term loan was undrawn. The company reported compliance with credit-facility covenants.
- Dividend: The company paid $0.12 per Class A share during the quarter and said it expects to continue quarterly dividends, subject to cash availability, distributions from Silvercrest L.P., and credit-facility restrictions.
Material changes and management commentary
- Revenue growth reflected higher AUM and a greater concentration of higher-fee equity assets. Management cited growth in separately managed accounts; discretionary AUM increased to $10.6 billion from $8.6 billion year over year.
- Expenses increased 63.4% to $12.93 million. Compensation and benefits rose 86.7% to $9.71 million, principally due to $4.11 million of partner incentive payments recognized as compensation after the IPO, as well as employee incentives and staffing costs. General and administrative expense increased 18.6% to $3.21 million.
- Management said operating cash and existing liquidity should fund operations and commitments for the next 12 months. It identified seasonality in first-quarter cash flows from prior-year performance-fee receipts and payment of prior-year incentive compensation.
- The tax receivable agreement requires payment to eligible partners of 85% of realized tax savings. Silvercrest estimated approximately $15.3 million of future payments relating to the initial unit purchases, assuming sufficient taxable income; payments from later exchanges would be additional. Timing and amounts are uncertain.
Risks, contingencies, and unusual items
- Revenue is sensitive to market values, AUM flows, investment performance, client retention, fee rates, and competition. Management estimated that a 10% change in average AUM would change annualized revenue by approximately $1.6 million at the stated fee rate.
- Credit-facility covenants restrict, among other things, additional debt, liens, investments, and certain asset transactions. Debt service, partner distributions, dividends, and tax-receivable-agreement payments compete for cash.
- The filing describes a $1.68 million payment of previously accrued earn-out consideration related to the Marathon Capital Group acquisition. It also reports a $244,000 discrete deferred-tax expense from a reduction in New York State statutory tax rates.
- Operating leases and subleases resulted in disclosed future net lease commitments of $11.56 million. A new office lease commenced May 1, 2014. No material off-balance-sheet arrangements or pending or threatened legal proceedings were reported.
- Management identified risks involving market volatility, client outflows, employee retention, regulation, cybersecurity and operational safeguards, and reliance on third-party service providers. No quantitative earnings guidance was provided.
Important facts for investors to verify
- How much of revenue and AUM growth is sustainable, given the quarter’s market depreciation, lower average fee rate, and absence of performance fees?
- Whether the sharp increase in compensation expense and the timing of incentive payments continue to affect margins and operating cash flow.
- The reconciliation of GAAP and non-GAAP results, including the effect of post-IPO partner incentive accounting and the non-controlling interest in Silvercrest L.P.
- Expected timing and funding of debt maturities, dividends, partner distributions, and tax receivable agreement obligations.
- Whether client retention, investment performance, and credit-facility covenant compliance remain supportive of management’s stated liquidity outlook.