Silvercrest Asset Management Group Inc. quarterly report, Q1 FY2018

Business context and reporting period

Silvercrest Asset Management Group Inc. provides investment management and family office services to ultra-high-net-worth individuals, families and institutional investors. This unaudited Form 10-Q covers the quarter ended March 31, 2018; comparisons are with the quarter ended March 31, 2017 unless otherwise noted. Silvercrest consolidates Silvercrest L.P., in which it held approximately 62% of the economic interests.

Financial and operating results

Metric	Q1 2018	Q1 2017 / prior date
Total revenue	$24.3 million	$22.0 million; up 10.8%
Management and advisory fees	$23.3 million	$21.0 million; up 10.9%
Family office services revenue	$1.0 million	$0.9 million; up 10.3%
Total expenses	$19.0 million	$17.2 million; up 10.7%
Net income, consolidated	$4.1 million	$3.3 million
Net income attributable to Silvercrest	$2.2 million; $0.27 per share	$1.7 million; $0.21 per share
Adjusted EBITDA (non-GAAP)	$6.9 million; 28.5% margin	$6.5 million; 29.6% margin
Assets under management	$21.5 billion at quarter-end; $21.4 billion average	$19.3 billion at quarter-end; $19.0 billion average

Revenue growth was principally attributed to higher assets under management. Average annual management fee rate remained 0.46%. Discretionary accounts generated $21.7 million of revenue, versus $19.3 million; private funds generated $1.6 million, versus $1.7 million. Compensation and benefits rose 9.4% to $14.3 million, including $6.8 million of partner incentive payments. General and administrative expense increased 14.6% to $4.7 million, largely reflecting higher occupancy costs, including New York office rent.

Q1 AUM increased from $21.3 billion at December 31, 2017 to $21.5 billion. Gross inflows were $2.2 billion and gross outflows $2.0 billion; market movement was approximately flat overall. Discretionary AUM declined $0.1 billion during the quarter, including equity-market depreciation partly offset by fixed-income appreciation, while non-discretionary AUM increased $0.3 billion. The filing reports strong long-term results for several equity composites, but notes that past performance is not indicative of future results.

Balance sheet, liquidity and cash flow

At March 31, 2018, cash and cash equivalents were $35.4 million, down from $53.8 million at year-end; total assets were $100.1 million and total liabilities $25.9 million. Notes payable were $0.7 million principal plus accrued interest, or $0.749 million reported. No revolving-credit borrowings were outstanding. The company reported a $15 million credit facility, including a $7.5 million revolver extended through December 20, 2018; it was in compliance with covenants. The remaining term-loan draw availability was stated to run through June 25, 2018.

Cash decreased $18.4 million during the quarter. Operating activities used $15.2 million, compared with $11.3 million used a year earlier; the company attributed the use mainly to compensation payments and timing-related working-capital changes. Investing activities used $0.1 million and financing activities used $3.1 million. Financing uses included $2.1 million of partner distributions and $1.1 million of Class A dividends. The quarterly Class A dividend increased from $0.12 to $0.14 per share.

Changes, outlook, risks and unusual items

• Income tax provision declined to $1.3 million from $1.4 million; the effective rate was 24.2%, versus 30.3%, reflecting the lower corporate tax rate under the Tax Cuts and Jobs Act, partly offset by other tax factors.
• Management stated that operating cash flow and existing liquidity were expected to fund operations and commitments for the next 12 months. The filing provides no numerical revenue, earnings or AUM guidance.
• Management highlighted sensitivity to market levels, investment performance, client inflows and outflows, fee mix, client retention, competition and the ability to attract and retain investment professionals. A 10% change in average AUM was estimated to change annualized revenue by approximately $9.8 million at the reported 0.46% fee rate.
• Long-term operating-lease commitments totaled $60.1 million before sublease receipts, or $60.0 million net; Q1 net rent expense was $1.4 million. The company also disclosed a $9.1 million estimated tax receivable agreement liability. It generally owes principals 85% of realized tax savings; future payments could vary and may be substantial.
• Other notable matters include $0.4 million of acquisition earnout payments during the quarter, $4.3 million of unrecognized equity compensation expense, and seasonal first-quarter cash flow effects from prior-year performance fees and incentive compensation. The company reported no significant off-balance-sheet arrangements and no goodwill impairment in the quarter.
• Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. Whether AUM growth is sustained by net client flows and investment results, particularly given Q1 equity depreciation and outflows.
2. Whether the operating cash outflow was primarily timing-related and how compensation payments and working-capital needs affect cash in subsequent quarters.
3. The renewal or replacement of the revolver before its December 2018 maturity, and the status of the stated term-loan draw window.
4. The affordability of dividends and partner distributions alongside lease commitments, debt service and potential tax receivable agreement payments.
5. How market declines, client withdrawals, fee mix and retention could affect recurring fee revenue and margins.