Silvercrest Asset Management Group Inc.

Good morning and welcome to the Silvercrest Asset Management Group, Inc. first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Before we begin, let me remind you that during today's call, Silvercrest will make forward-looking statements. Pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, all statements other than statements of historical fact, including statements regarding future events and developments and Silvercrest's future performance, as well as management's current expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties and there are important factors that could cause actual results, level of activity, performance, or achievements to differ materially, the statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Silvercrest brand, and other factors disclosed in the company's filings with the SEC, including these factors listed under the caption entitled Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2019, and quarterly report on Form 10-Q for the three months ended March 31, 2020, filed with the SEC. In some cases, these statements can be identified by forward-looking words such as believe, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative or plural of these words, and other similar expressions. These forward-looking statements are predictions based on Silvercrest's current expectations and its projections about future events. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update these forward-looking statements. I would now like to turn the conference over to Rick Huff, Chairman and CEO of Silvercrest. Please go ahead.

Thank you, and thank you for joining us this morning for the first quarter of 2020 results for Silvercrest Asset Management Group. Silvercrest entered the first quarter of 2020 prior to the ongoing coronavirus pandemic and market dislocations with successful execution of its business strategy, complete integration of its new growth equity strategies, organic growth and its outsourced chief investment officer, otherwise known as OCIO business, and a new high in assets under management representing a full recovery from the market lows of late 2018. In the midst of the unprecedented economic disruption of the viral pandemic, Silvercrest concluded the first quarter of 2020 with $20.6 billion in assets under management, a year-over-year decrease of $0.2 billion from the first quarter of 2019. Much greater market depreciation of $2.2 billion over that time was mostly offset by client inflows of $2 billion over the same periods. Our revenue, net income, adjusted net income, and adjusted EBITDA margins and GAAP and adjusted earnings per share each increased substantially year over year. SilverCust has always maintained a high-quality balance sheet and substantial cash reserves, both to preserve flexibility for new growth opportunities and to weather market volatility inherent in the business due to severe market corrections or exogenous events such as the current pandemic. Silvercrest reported 32.8 million in cash and cash equivalents as of March 31st and carries a manageable level of debt of 15.3 million as of March 31st, 2020. Silvercrest currently pays a generous quarterly dividend of 16 cents or an annual dividend of 64 cents per Class A share of common stock. The firm anticipates that it can support the current dividend for a sustained period of time, even while continuing to invest in the business. I'm pleased to report that during the first quarter of 2020, the firm seamlessly transitioned its entire business to operate remotely, the firm long prepared for disaster recovery and business continuity. Silvercrest's critical technology infrastructure was already cloud-based and operating remotely prior to this crisis. Silvercrest was unusually well-prepared. Our firm was founded in the wake of the tech bubble crash and post-9-11. Our partners have a long-term vision, and we experienced the global financial crisis as a relatively young firm flourishing afterward. Our firm's partners have the fortitude to guide our clients with mature, steady hands. While the current pandemic has caused great suffering, it also represents an opportunity to solidify our relationships and prove the value of our organization and its capabilities. The first quarter of 2020 experienced net positive organic flows, which includes $163 million in new client accounts. Silvercrest has maintained a proven ability over time to continue attracting net positive asset flows despite industry-wide trends in active management, and we remain proud of our ability to continue growing the business even during difficult environments. Last quarter, we announced that our first OCIO clients had provided half of Silvercrest's new client account growth. That business continues to develop new opportunities. We are proud of growing that business from scratch, and we expect continued success. The current economic environment is stressful and the market represents a step backward for our business, as with many others, potentially slowing new business activity. Nonetheless, Silvercrest has successfully made investments and will continue to make investments in new high net worth portfolio management professionals, marketing its institutional quality equity strategies, and pursuing its new OCIO initiative. Regardless of the environment, Silvercrest will continue to opportunistically seek to effectively deploy capital to enhance and complement its organic growth. On April 28, 2020, the company's Board of Directors declared a quarterly dividend of $0.16 per share of Class A common stock, and the dividend will be paid on or about June 19, 2020 to shareholders of record as of the close of business on June 12. With that, I will hand it over to Scott Gerard to go over our financials before we take questions. Thank you. Scott?

Great. Thanks, Rick. As disclosed in our earnings release for the first quarter, Discretionary AUM as of March 31, 2020 was $14.9 billion, and total AUM as of March 31, 2020 was $20.6 billion. Revenue for the quarter was $28.4 million, and reported consolidated net income for the quarter was $9.7 million. Delving further into the quarter, again, revenue was approximately $28.4 million, which represented approximately a 26% increase. over revenue of $22.6 million for the same period last year. This increase was driven primarily by increased net client flows in discretionary assets under management, including $1.7 billion in assets under management acquired on July 1, 2019, in connection with the Cortina acquisition, partially offset by market depreciation. Revenue for the quarter ended March 31st, 2020 related to the Cortina acquisition was approximately 2.9 million. Total AUM decreased from December 31st, 2019 to March 31st, 2020, primarily because of market declines resulting from the COVID-19 pandemic. Most of our revenue is built in advance based on closing market values from the last day of the previous calendar quarter. First quarter 2020 revenue was primarily based on December 31st, 2019 market values. Expenses for the quarter were $15.8 million, representing approximately a 15% decrease from expenses of $18.6 million for the same period last year. This decrease was primarily attributable to a decrease in general and administrative expenses of $5.2 million and an increase in compensation and benefits expense of $2.4 million. Compensation increased primarily as a result of merit-based increases in newly hired staff, including the addition of Cortina staff and an increase in the accrual for bonuses, partially offset by a decrease in equity-based compensation expense due to a decrease in the number of unvested restricted stock units. The decrease in general and administrative expenses for the quarter of this year was primarily attributable to a $6 million decrease in the fair value of contingent consideration related to the Cortina acquisition, partially offset by increases in professional fees due to increases in acquisition-related fees resulting from the Cortina deal, depreciation and amortization expense related mainly to amortization of intangible assets related to Cortina, and to the renovation of our office space in New York City, occupancy and related expenses and an increase in the fair value of contingent consideration related to the Capicelli acquisition. Reported consolidated net income was $9.7 million for the quarter as compared to $3 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter of 2020 was approximately $5.5 million or $0.59 per basic and diluted Class A share. Adjusted EBITDA which we defined as EBITDA without giving effect to equity-based compensation expense and non-core and non-recurring items was approximately 8.2 million or 29% of revenue for the quarter compared to 5.8 million or 25.5% of revenue for the same period in the prior year. Adjusted net income, which we defined as net income without giving effect to non-core and non-recurring items and income tax expense assuming a corporate rate of 26% was approximately 5.1 million for the quarter or 36 cents per adjusted basic and diluted earnings per share. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we had unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Looking quickly at the balance sheet, total assets were approximately 189.2 million as of March 31st, 2020, compared to 214.2 million as of December 31st, 2019. Cash and cash equivalents were approximately 32.8 million at March 31st of this year, compared to 52.8 million at the end of last year. Total borrowings as of March 31st of this year were $15.3 million. Total Class A stockholders' equity was approximately $69.8 million as of March 31st of this year. That concludes my remarks. I'll now turn it over to Rick for a Q&A.

Thanks very much. Appreciate that, Scott. We can now open the line for discussion and questions. Thank you.

We will now begin the question and answer sessions. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

And our first question comes from Sumit Modi of Piper Sandler.

Please go ahead.

Thanks. Good morning, Rick. Good morning, Scott. I hope you guys are doing well, staying healthy.

Good morning.

Just wanted to touch on this last quarter. We touched on this last quarter a few days into March. I wanted to get an update on the M&A environment, if conversations or your strategies changed at all over the course of the last couple months. You know, things have certainly ramped up, to say the least, from a volatility perspective after that conversation.

So, you know, M&A is something that we've periodically engaged in selectively and carefully. I can't say we've changed the strategy because we are continually reaching out to peers and businesses that may be of interest to Silvercrest or interested in Silvercrest on an ongoing basis. Our outreach is probably ramped up a bit only in the sense that I think it's really important to be in close touch with peer firms and institutions, understand what they're going through, how they see the environment, how it's affecting their businesses. We're very open with sharing ideas about the business and have great relationships with the leaders of a lot of other firms. And we've just made sure that we stay close and have continued to foster those relationships. I think the environment obviously will be changed for the amount of M&A. Often in these environments, when you're talking about boutique businesses, those who may have been in market decide to leave and wait for a recovery in asset values and revenues. But there are others who are looking at longer-term strategic options, and this may help realign the market with the reality of, volatility that occurs on a more frequent basis than I think people are willing to acknowledge. We had the tech bubble 20 years ago, we had the global financial crisis 10 years ago, and now we have this crisis. If you go back in time, it's not unusual to have pretty major sell-offs, at least every 10 years, and certainly there are intermediate periods of sell-offs. And as you know from these calls, it's long been my view that that many businesses were overvalued on the basis of their annuities, and there was a tremendous amount of leverage flying into the market to prop up valuations. And now that we have a lot of dry powder, a very healthy balance sheet, and that there may be a realignment or a modification in valuations, I feel optimistic about the environment at some point going forward. It takes time for things to settle and open up, but at least on the M&A front, I kind of welcome the potential shakeout.

That makes sense. Thank you for that. Just turning to the fee rate, on the discretionary side, it looks like it came down to 58.7 basis points in the quarter, kind of the lowest it's been since 4Q18, but kind of still within that range, 58 to 60%. Just wondering if it was kind of affected by institutional mandates in the quarter versus high net worth and how you feel that rate's going to be in the years. Is 58 to 60 still an okay bogey?

Yeah, it's an okay bogey. I don't think we've been as high as 60 for years. I think this came up in our last conference call. It depends what you're looking at. Are you looking at beginning period AUM, end of period, or average AUM, and it If you're looking at average, it's kind of a fictional number because we don't bill on average AUM over the quarter. And the new business flows that occurred at least during the first quarter were more high net worth than institutional. We had new institutional business. But, of course, large family relationships can get institutional-like pricing. Our basis points have not really moved around at all over the past, 15 years. They may come down a basis point or so, but it's been in that ballpark for a very long time.

Got it. Thanks. And then I guess one on, you know, I appreciate the commentary from you guys, you know, still planning to invest in high net worth professionals, you know, marketing, you know, marketing the equity strategies, pursuing the OCIO initiative. you know, all good things in this environment. But, you know, are there any verticals that you are not involved in at the moment that you kind of wish you were in this environment and maybe that you can lean into this year and build a presence to take advantage of any opportunities? Is that anything you guys are thinking about?

No, I think, you know, one thing that we have done pretty well as an organization and have picked our strategic priorities and then successfully execute those before going on to too many other things. And The strategies that we have chosen are all highly compatible with our high net worth business. They all work together to reinforce each other. So our equity business, which we started, of course, in value equity and have now expanded with the growth equity capabilities, is a very important use to the high net worth audience. And the fact we have institutional clients is proof of thesis that what we are delivering to our client base, our institutional quality equity capabilities. The same goes now for the OCIO initiative. It was born out of the intellectual capital we created in our investment policy and strategy group, which serves to select managers, build asset allocations, do risk management, and otherwise support the high net worth business, which is led by our portfolio managers. I'll remind you, our portfolio managers are not just relationship managers. They are investors in their own right and have a dual role of handling relationships in the investments as well as bringing a new business, which they have done effectively over the years. Again, the OCIO business is proof of thesis from institutions that what we are delivering from an investment policy perspective is of institutional quality. And we have family office services, as you well know. We also have a family business advisory capability as part of that. And, you know, we're going to be really careful about the kind of businesses we would go into to further diversify what we're doing. It has to be compatible. It has to be part of a single story. And it has to be something that we feel we have the bandwidth and ability to execute successfully. Now that we have growth equity, international value, additional value strategies in the that's a lot of wood to chop and potential success. So I don't see us necessarily going into new verticals until we've achieved some further success in those initiatives that already exist.

Okay, got it.

Yeah, that makes sense. I would add, by the way, just adding new portfolio managers or doing M&A, you can add talent two different ways, is significant in its own way. in its own right, as each person brings in new business and contributes to the whole and requires management and other work.

Okay, got it. Thank you. I guess just turning to the flow picture, a couple questions there, but it looked like you had some really solid organic growth in the quarter, relatively speaking, and definitely nice to see, especially compared to the backdrop of 4Q18. Just wanted to get some color around the makeup of those new clients. You know, I saw last quarter the OCIO business made about half the contributions, but just wanted to get an update on the quarter and then on the OCIO initiative as well, how that's progressing.

Yeah, so the first part was institutional or OCIO?

Sorry. The first part was the, just in general, the new business and that new business in the quarter, kind of what was the makeup of those new clients?

Yeah, okay. With new business in the quarter, it was a pretty decent new business quarter. We had even positive net flows when you looked at existing clients, although I should point out that because of the corona pandemic, taxes, as you well know, were moved into July. So there may be cash that was not raised in the first and second quarters, which we normally see in order to pay taxes earlier in the year could potentially happen in the third quarter. As you well know, there's always a headwind for taxes in this business or other expenses. And so we just don't know how that's going to shake out in flows. But that's normal for the course. I just think it's worth pointing out that it may be a bit delayed this year. And it's not always a hit to our to our flows each year. It just depends. But there have been meaningful capital gains in recent years that have meant outflows. But with new business, I guess it was about 163 million. It was really tilted towards a high net worth business in that first quarter. One of the nice things about how we've diversified the business over the past few years is we're not reliant on one single engine of growth, which we had been for a very long time. We did have new institutional business come in the door, but we also had some rebalancing as well. Our performance has held up quite well over time, as you noted in your note. And I would say there was only maybe 25 million in absolute new businesses. Accounts, there were greater flows than that into institutional, but absolute new clients was about $25 million. The balance was high net worth. The OCIO business I don't think had much in the first quarter, but as I noted at the end of our last call, its pipeline remains very strong, and I'm optimistic that it will continue to be a meaningful contributor in the second, third, fourth quarters.

Okay, great. And then I guess just touching off of the pipeline, I mean, can you give us an update there on the six-month actionable, how that looks today? I know you spoke last quarter about that, around $3.6 billion. But, you know, how do you view that today?

Yeah. So, as you know, the last time we updated everyone on the six-month actionable pipeline, which we're quite conservative about assessing, it's either where we're invited to or we're in a finals for a mandate. And the pipeline was just about historic highs the last time we spoke. On the institutional side, I think I'm going to hold off talking about pipelines. So much is kind of on hold right now in business. We're continuing to be very active. We're close to the consultants. We have had as many conversations as ever. And we expect our share of new business, but I think it'd be a bit imprudent to give a hard pipeline. There have been times on these calls when I've been very frank that the pipelines dried up or really slowed down, or as I did last quarter, talked about how large it was. I'd rather not characterize it because it's just uncertain. It just feels like a lot of things are waiting for more clarity in the macroeconomic environment. There also has been nearly unprecedented consolidation among the consultants, which are responsible for a lot of our institutional equity flows. And we're very busy cultivating those relationships and getting to know either new organizations or navigating the organizations as they've changed. The conversations are very positive. Our performance has done very well over reasonable time periods. And so I feel very good about it, but and I certainly don't want to be misunderstood as saying that the pipeline is dried up or there's an issue. There's not. I just don't want to characterize it because I do think the new business development is being stretched out a bit more over time.

Okay. Yeah, it's understandable.

I'm a little more, I should say, I didn't, that was on the institutional equity side on the OCIL business. I'm a little more confident in saying that the pipeline is, as I characterized it last time, robust, and it marches to a little different beat than the pure institutional equity business, and I remain short-term optimistic on that.

Got it. Okay. All right. And then just wanted to pivot over to the capital returns. I know your preferred method has historically been the dividend. you know, it's great to see you guys can easily maintain and even grow that while still investing in an environment like this. But, you know, just wanted to find out a little bit more about repurchases. I saw you guys, you know, put out that 10B51 last month. Just wanted to see what your kind of philosophy was around that and if you guys actually repurchased anything in this quarter.

The 10B51, I believe, was from my own personal purchases of stock. I'm a It's the largest piece of my own savings and wealth. And from time to time, I like to personally invest in the business. I wish I had more, quite honestly. And, you know, I don't have a plan that's regularly being executed. I could very well purchase more at some point. I have done so periodically, as you've seen in the filings. We favor... supporting the the high dividend as a means of returning capital to investors I think we've had discussions before about the issues of buying back our stock and what that could do to our float and when I was asked about this year and a half or even two years ago let me just say I'm really really glad I have the cash I do on our balance sheet that we have a low level of leverage at least short term, that would not have been a good use of capital. And we are now in a premier position with regards to how we look compared to many others in the industry, I would argue. Yes, our dividend can be supported for a very sustained period of time, even at the current market levels, even at the March levels. So we also feel good about that. I've also talked about, as we invest in the business, You've seen our EBITDA margins creep up over the years. They were in the kind of high-mid 20s, 25, 26, 27. It may have been somewhere around 26 or 27 when we went public, and it's come up as high as 30 or 31%. And the most recent quarter, it's come down just a bit. But I've also said that as we invest in the business, I could be pushing it down to the mid-20s. mid-20s or even 24%. I just think it's prudent to do that. We're not just running a static business here. Otherwise, it would be a declining annuity. I usually don't get into forward-looking comments, but it should be notable that, of course, we build close to the market lows at the end of March. As you know, we're reporting AUM as of March 31st, which often drives our second quarter results. So we look good year over year, especially considering that we had to climb out of the hole from the fourth quarter of 2018. I'm very pleased with the results. I'm pleased with new business development. But, you know, we're going to see some challenges. We tend to lag in terms of our results compared to other companies as a result. But this is going to be a very healthy cash flow generating business that continues to to grow. I hope that helps.

Yeah, that was definitely helpful. I just wanted to have one last cleanup question if I could here for maybe Scott, but obviously with the market impact in the quarter being what it was, should maybe pressure revenues in the second quarter, at least second quarter, but just wanted to get an idea of how maybe that impacts compensation and the ratio you guys are accruing to and if you're still kind of comfortable Like, it kind of ties into what you were talking about on the margins there, but just wanted to get an update, if I could.

Yeah, we're, you know, you noticed for the first quarter that we accrued to a 55% recurring cash compensation ratio. And, you know, our plan is to do our best to try and continue to manage toward that. You know, as in prior years, There have been years where – many years where we've come in under that. For 2019, we came in just a tiny bit over that. So we're going to continue to look to, you know, manage that. Certainly, there's a variable portion, you know, implied in that ratio with our incentive comp pool. So, you know, that's – yeah, that'll move along, you know, with revenue. So, you know, that's our current position on that.

Okay, great. Thanks for taking all my questions, guys.

Thanks. Again, if you would like to ask a question, please press star, then 1. And our next question comes from Sandy Mehta of Evaluate Research. Please go ahead.

Yes, good morning. Congratulations on the strong growth in EPS and revenues in the quarter despite all the market turmoil. My question is along the lines of free cash flow. So structurally, your company, you've had much higher free cash flow versus EPS. In the last four years, it's been more than double. Free cash flow has been more than double reported EPS. Is that a trend that you see continuing? Is that the trend that you saw continuing strong free cash flow versus EPS in Q1 and Should we expect that for this year, regardless of whatever level the EPS turns out to be, but, you know, strong free cash flow vis-a-vis that?

I'll let Scott take that first, Sandy, and then I'll follow up with some more general comments on our growth and expectations.

Yes, Sandy, how are you doing? You know, keep in mind that when you're looking at our business, when you're looking at EPS or, you know, diluted EPS, which we focus on. There are several items that create disparity there. If you think about over the past year as a result of the Cortina acquisition, we had to layer on a meaningful amount of additional amortization expense. We've had a portion of our compensation structure has been equity-based compensation expense. We had a large grant that was made back in 2015, which fully amortized back in August of 2019. So you've got items such as that that will continue to affect just the diluted EPS, but aren't necessarily factors when it comes to generation of cash flow.

With regards to the cash flow generation and earnings, you know, as proud as we are of the performance in these environments and after the fourth quarter of 2018, which, you know, in retrospect doesn't look like much, but it was really created a difficult environment for asset managers and, you know, revenue and cash flow in the business going into 2019. That was a meaningful decline. And so, yeah, When you see the year-over-year numbers, we're comparing to a first quarter of 2019 that was fully depressed as a result of that disrupted market in 2018 and a full recovery to the end of last year, which set the stage for our Q1 2020 results and plus one of the larger or largest acquisition in the firm's history. And look, we'll take it wherever we can get it. And that's part of the business mix. But I think it's hard to expect on a ongoing short term, you know, annual basis, the kind of year over year increases that we saw, at least from that quarter to this quarter. I think it has to be averaged out over other market events and activity. Look, I'm optimistic we can continue growing the company and growing free cash flow and earnings as a result. We try to do deals and build the business in a fashion that's accretive pretty quickly and not hurt our earnings per share. I think I've talked about the growth drivers at the firm that all look like they're in good shape to continue doing that. But I think going from a market low revenue and cash flow generation to a fully recovered market plus an acquisition may skew things a bit to the high side, at least on a year-over-year basis.

Okay. And one last question. In April, the markets rebounded very strongly. I presume that you've seen a sharp rebound in your AUM. The month is complete. Can we ask you if you are willing to give an April end AUM number, or should we presume that your business has also grown in line with the markets?

I think you should presume our business has recovered with the market. The market lows were, I believe, towards the latter part of March 20th. and then started increasing a bit by the time we build based on asset under management as of March 31st. To give an April number for a business that is not retail-oriented with sponsored mutual funds or other flows like that, and that also only builds effectively four times a year, I think could be misleading. There's a lot of potential activity between where we sit now at the very beginning of May and when we actually bill, which would be June 30th, the values. So with another two entire months of this quarter to go before we even bill, I think we could money the waters by getting into monthly AUM or at this time. But you can presume that at least the equity part of our portfolio has increased generally in line with the market. Great. Thank you very much. You're welcome. Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Rick Hoff for any closing remarks.

Thank you. Thank you for joining us for our first quarter of 2020 results. We're pleased with the different initiatives at the company, whether that's in the high net worth growth initiatives to hire new portfolio managers or to continue growing the business with our existing portfolio management team who've done an excellent job, or our institutional equity business or the OCIO business. The firm did a very good job recovering from fourth quarter of 2018 and it's proved that it can organically grow the business in any number of different ways and we're optimistic about even in this environment our ability to continue doing so. Thank you for joining us and I look forward to speaking with you next quarter.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.