Silvercrest Asset Management Group Inc.

Good morning and welcome to the Silvercrest Asset Management Group Inc. Q3 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, certain statements made regarding your future performance are forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from the statements that are made. Those factors are disclosed in the filings with the SEC under the caption risk factors. For all such forward-looking statements, we claim the protections provided by Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update them. I would like now to turn the conference over to Rick Hugh, Chairman and CEO of Silvercrest. Please go ahead.

Thanks. This is Richard Hoff joining you. Appreciate you joining us for our third quarter 2020 call. Silvercrest's discretionary assets under management, which drove our top line revenue, grew approximately 4% during the quarter to $17.9 billion as of September 30, 2020. The growth in discretionary assets under management was supported by markets, increasing our asset values by $700 million along with $200 million in new client accounts. These increases were offset by outflows of $200 million, primarily for tax payments as a result of delayed tax deadlines due to the coronavirus crisis. The firm's total assets under management during the quarter increased approximately 3% to end the quarter with $24.4 billion in total assets under management. Due to this year's market recovery, continued organic growth, and our accretive acquisition in the second half of 2019, the firm's revenue, our adjusted net income, adjusted EBITDA, and adjusted EBITDA margins for the nine months ended September 30, 2020, have each grown year over year. For the nine months ended September 30, 2020, adjusted diluted earnings per share increased approximately 13% year over year. Silvercrest's Outsource Chief Investment Officer, OCIO, initiative, which we began marketing heavily a year ago, contributed meaningfully to new business development in the third quarter and is poised to cross important AUM thresholds to be considered for new OCIO mandates. We continue to be proud of our progress in that business. Silvercrest's institutional asset management pipeline is rebuilding along with new initiatives, and we expect the institutional business to improve and contribute new AUM to the firm. Regardless of the environment, Silvercrest will continue to opportunistically seek to effectively deploy capital to enhance and complement our organic growth. Silvercrest has successfully made investments to organically grow the business and will continue to make those investments with its cash flow and reserves. We've hired new high-net-worth portfolio management professionals in New York and will continue to add new talent both to maintain a high level of client service and to grow the business. On November 4th, 2020, the company's board of directors declared a quarterly dividend of 16 cents per share of Class A common stock. The dividend will be paid on or about December 18, 2020 to shareholders of record as of close of business on December 11th. With that, I'll turn it over to Scott to review our financials, and then we'll open the line for questions. Thanks. Thanks, Rick.

As disclosed in our earnings release for the third quarter, Discretionary AUM as of September 30th, 2020 was $17.9 billion and total AUM as of September 30th was $24.4 billion. Revenue for the quarter was $27.2 million and reported consolidated net income for the quarter was $3.5 million. Revenue for the third quarter was approximately $27.2 million, representing approximately a 2% decrease over revenue. of approximately $27.8 million for the same period last year. This decrease was driven by the continued impact of COVID-19 on the financial markets that occurred during the first quarter of 2020, which had the effect of reducing AUM in addition to net client outflows, and this was partially offset by market appreciation during the third quarter of this year. Most of our revenue was built in advance based on closing market values from the last day of the previous calendar quarter. Third quarter 2020 revenue was primarily based on June 30, 2020 market values. Expenses for the third quarter were $22.2 million, representing approximately a 3 percent increase from expenses of $21.5 million for the same period last year. This increase was primarily attributable to an increase in general and administrative expenses of $.6 million. Compensation and benefits expense was basically flat in the third quarter compared to the same period last year. The increase of approximately 0.6 million in general and administrative expenses in the third quarter of this year was primarily attributable to increases in the fair value of contingent consideration related to the Cortina acquisition and portfolio and systems expense, partially offset by decreases in professional fees due to lower Cortina acquisition-related fees, travel and entertainment, and reduced office expenses due to COVID-19. Furthermore, there was a decrease in storage and moving expenses as a result of the completion of the renovation of our space in New York City. Reported consolidated net income was 3.5 million for the quarter. This compared to 4.8 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the third quarter of this year was approximately 2.1 million or 22 cents per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core, non-recurring items, was approximately 8.1 million or 29.9 percent of revenue for the quarter compared to 8.9 million or 32.1 percent of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items, and income tax expense assuming a corporate rate of 26 percent was approximately 5.1 million for the quarter, or 35 cents per adjusted basic earnings per share and adjusted 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 diluted, we had unvested restricted stock units and non-qualified stock options to the shares outstanding to compute diluted adjusted EPS. Looking year-to-date, revenue for the nine months ended September 30th of this year was approximately $79.6 million, representing approximately a 7% increase over revenue of approximately $74.3 million for the same period last year. This increase was driven primarily by net client inflows in discretionary AUM, including $1.7 billion in assets under management acquired on July 1, 2019, in connection with the Cortina acquisition, partially offset by net client outflows and market depreciation in the first quarter of this year. Expenses for the nine months ended September 30th, were 60.6 million. This represented approximately a 2% increase from expenses of 59.6 million last year. Comp and benefits expense increased approximately 1.7 million during the nine months ended September 30th of this year compared to the same period last year. General and administrative expenses decreased approximately 0.7 million during the nine months ended September 30th of this year when compared to the same period last year. Looking at comp and benefits, it increased for the nine months ended September 30th this year, primarily because of an increase in salaries and benefits expense as a result of merit-based increases and 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 and unvested non-qualified stock options outstanding. The decrease in general and administrative expenses for the nine months ended September 30th of this year was primarily because of year-to-date decreases in the fair value of contingent consideration related to the Cortina deal, travel and entertainment, and reduced office expenses, all related to COVID-19. Professional fees were lowered due to lower Cortina acquisition-related fees. and we also had reduced printing costs and storage and moving expenses. There were increases in depreciation and amortization expense related mainly to the amortization of intangible assets related to the Cortina acquisition and to the renovation of our office space in New York City. Occupancy and related expenses increased in addition to portfolio and systems expense, and there were increases in the fair value of contingent consideration related to the Jamison and Capucilli acquisitions. Reported consolidated net income was approximately $14 million for the nine months ended September 30th. This compared to $11.2 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the nine months ended September 30th was approximately $8.1 million or $0.85 per basic and diluted Class A share. Adjusted EBITDA was approximately $23 million or 28.9% of revenue for the nine months ended September of this year. This compared to $21.3 million or 28.6% of revenue for the same period last year. Adjusted net income was approximately $14.1 million for the nine months ended September of this year or $0.98 for adjusted basic earnings per share and $0.97 for adjusted diluted EPS. Total assets were approximately 201.2 million as of September 30th, this compared to 214.2 million as of December 31st last year. Cash and cash equivalents were approximately 48.2 million in September, compared to 52.8 million at December 31st of the end of last year. Total borrowings as of September 30th of this year were 13.5 million, And total Class A stockholders' equity was approximately $69.5 million at September 30th of this year. That concludes my remarks. I'll turn the call over to Rick for Q&A.

Thanks very much, Scott. We can open the lines now for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're 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. Our first question comes from Sumit Modi with Piper Sandler. Please go ahead.

Hey, thanks. Good morning, guys.

Good morning. Good morning.

Just wanted to start with the OCIO business. A couple questions here, but just wanted to get some color, you know, first around the size of the platform today and how big is that. I think you mentioned $500 million last quarter. And the score you mentioned is starting to kind of reach that inflection point today. So, you know, keep talking about those levels that sort of qualify for those new mandates.

Yeah. And as you recall, I believe it was about half our organic growth in the last quarter. We went into the fourth quarter of last year with an effectively a zero to grow it. You're correct. It was half a billion at our last report. It's now closer to three quarters of a billion. And we have an actionable pipeline of new opportunities of just over 275 million. Actionable opportunities are ones where we've been invited, we've actively presented, or are in a finals presentation. And one key threshold that we're looking to cross is, which was what I was referencing, is a billion dollars in AUM. Just makes us a lot more credible and really there in the business. both in terms of the AUM to support the team and the firm continuing to put resources into it as a meaningful business, but secondly, in the diversity and types of institutions we're working with. In addition, we now have cultivated and are actively working with OCIO search firms, not unlike firms that would work with other institutions for equity or other mandates on their behalf, like consultants. So we feel good about the business, and we're pleased again with the progress during the third quarter of this year.

Okay, that's helpful. Thank you. And just to follow up on that, can you remind us of the mechanics around how the OCIO can Growth impacts AUM. Is that coming into discretionary AUM as new client assets? And kind of how should we best track the progress?

Yeah, sure. Mostly it is. We're taking an OCIO approach where we are acting as the fiduciary, as a discretionary manager. It's a bit differentiated from consultants and some of the other firms that are in OCIO. There will be assets for sure that go into non-discretionary. That happens with our wealth business as well. I believe we have a mandate in OCIO that is non-discretionary, but it's being feed at levels that are kind of in between non-discretionary and pure discretionary. Hopefully that converts over time. But most of it should be discretionary. It's kind of hard to say what the mix will ultimately be. Our non-discretionary assets in general, OCIO aside, are flat fee type businesses, but we don't have discretion over the assets. And to the extent it's OCIO, the fee will be a little bit higher than what we would see on the well side for non-discretionary. So mostly discretionary, but hard to say what can happen.

Okay. And is that fee around, you know, the institutional rate, like a 40, 50 basis points?

Yeah, that's right. It's more of an institutional rate business. That's correct.

Okay. And then just to follow up on kind of the first question there, on the six-month actionable pipeline, just pivoting a little bit to the institutional side, you know, I know we're a few months further past the heart of the pandemic. Has there been any change in the kind of demand between value and growth? You know, I know performance has remained pretty strong across the board, but Is there been any noticeable interest in one direction or the other?

I wouldn't say that. You know, our excellent growth strategy, which has just put up terrific numbers, as you noted, as have our value strategies. But importantly, our U.S. small cap growth and opportunity capabilities are above the median for their peer group and had great performance last year. They're in a capacity constrained area in the small cap area of growth. But as you know, small cap has also been a bit out of favor as compared with large cap. And a lot of the attention that we've seen, of course, from institutions is in large cap growth, which is not where we're placed right now. That said, we'll be looking to eventually grow that capability And the pipeline for our small cap and opportunity growth has grown and is picking up. As you know, a lot of the pipelines froze. Our total opportunity for institutional business across value and growth is close to a billion dollars now. Whereas I didn't report on it, I believe, two quarters ago and mentioned last quarter that it was starting to open up. And we're still seeing it beginning to open up, both with the economy and but also as we get into fall and people are getting used to the situation of working.

Okay. Great. Thanks. I'll leave it there and hop back in the queue. Thank you.

You know, to me, I just want to add, I don't know if you're on the line, I should have mentioned this. This is important. Aside from the fact that we've got great performance across our capabilities, which is wonderful, we've kept that up, we also have come to agreement with Edmund de Rothschild in Europe for sub-advising a new fund there, which they will be distributing. That is awaiting final regulatory approval, but that should also lead to very meaningful institutional flows in time in Europe.

Okay, great. Thank you.

Our next question comes from Sandy Mehta with Evaluate Research. Please go ahead. Good morning, Sandy.

Hi, good morning. Congrats, Rick and Scott, on a solid quarter. I have two questions. You know, there's been a lot of M&A activity in the business. We had the Legg Mason deal, the Eaton Vance deal. Last month, activist shareholder Treon, they took stakes in Invesco and Janus. So has that changed a little bit the valuation dynamics when you are looking at acquisitions? What are your thoughts on those transactions and how do you view them?

Yeah, I don't think they really have much of a valuation impact when you look at our business. When you look at those giant complexes of vast financial supermarkets and capabilities, it's just a completely different world from the primarily wealth management one. with small asset management. As you well know, pure asset managers, especially boutiques, have been quite out of favor as a result of struggling to maintain AUM and grow AUM in the light of the competition from passive strategies, and there's been tremendous fee compression. Those big organizations and how they work and their mutual fund complexes and all sorts of other means of making money just aren't apples to apples. So frankly, I don't pay a lot of attention to it. I don't think Scott does either. And of course, those big firms continuing to merge and create giant supermarkets is one reason why there's a burgeoning growth in small boutiques across the country and a result of those kinds of mergers. So, no, I don't think it affects things.

Okay. And a second question was, a few weeks ago, Silvercrest had SEC filing related to a hedge fund offering of $11 million. Was that a routine sort of regulatory filing, or does that represent some new initiative on the hedge fund side for Silvercrest?

You know, without specifics, I'm not sure what that might reference. We have vehicles for our investors that we start from time to time. We've had some funds for putting together alternative investments on behalf of our clients, whether that's for a specific strategy in alternatives or to make it possible for investors clients to diversify across a number of different types of alternative investments. Without specifics, I'm not sure what that might be. It could be any number of filings that we made that are related to either what we have or reorganizing something that we've done. But there are no new meaningful initiatives that we would announce at this time. Great.

Thank you so much.

You're welcome. Our next question comes from Christopher Marinek with Jani. Please go ahead.

Hey, thanks. Good morning. I wanted to ask you about the seasonality of the EBITDA margin. Is that at all something that would evolve these next couple of quarters?

Evolve off? Is that what you said?

Yeah, the seasonality of EBITDA's margin.

Yeah, so there's not a lot of seasonality to it. There's a bit. I'll let Scott address it a bit after I answer your question. If you look over the history of the firm, we're kind of running at our high levels of EBITDA margins right now. I've said in prior calls that as we make investments in the business to grow, which we should all be in favor of, we could be pushing that margin down even to the mid-20s. I've never actually had to done that. We've grown fast enough to make the investments we want to grow the business without meaningfully hitting our EBITDA, but it's certainly a possibility. In the fourth quarter, we often see a bump in our EBITDA margin because we sometimes have performances from alternative investments that basically just bump everything up with no associated costs. But aside from that, I don't think there's a serious pattern to it. Scott?

Yeah, no, just a couple things that occur in the fourth quarter. From an expense standpoint, there is some seasonality to expenses related to year-end, whether from a client perspective or increased audit fees because of interim audit procedures that are done. So that leads to higher expense in the fourth quarter than, say, the second or third quarters. In the fourth quarter, we will also finalize our compensation for the year. In some years, we've come in under compensation goals, and in other years, we've come out a little bit above it. So there could be some movement in either direction incrementally on our EBITDA margin.

Which is why I say the fourth quarter is not predictable. We may have those additional expenses, but We also have the performance fees, and we sometimes come in under comp, that we recruit the rest of the year. So there's no real serious pattern. In fact, last year it bumped up in the fourth quarter, if I recall.

Got it. That's very helpful. Thanks. And just to follow up, when you mentioned about the large cap capability expanding over time, would you prefer to do that organically through your own initiatives, or would you do something external, or could it be a combination of both?

When you say doing something external, you mean like purchasing or acquiring a large cap growth manager? No, we're much more likely to do that organically. So our strategy, and I don't know if we've spoken on a previous call, so it's great to take your questions. Thanks. Part of the strategy when we joined together with Cortina was to acquire a highly culturally compatible group of equity analysts and professionals where we had extremely high confidence in their strategy. And they checked all their boxes. The second key thing to them was that they specialized in smaller cap issues as a team. And as you know, that's often a capacity-constrained capability. So that was enticing to try to grow the business by looking at that. But the next piece that we were looking at is that it would also give us a solid team to then bring in a large cap specialist with great experience building a large cap capability and growth to join with the infrastructure and analyst team we already have in place. So that it would mirror, in many respects, a look at what we've done here at Silvercrest already with our value capabilities. We have six analysts there. They're generalists. They cover a universe of let's call it 110 stocks, but they're about, and you can split what they're following up into various market caps. So an organic growth initiative by hiring into an infrastructure with credibility is a great way for us to go, and that's what we will be looking to do.

Great. That's good background. Thank you very much for sharing that.

Yep. Thanks for the question. Appreciate it. Nice to hear from you.

Our next question comes from Chris Sakai with Singular Research. Please go ahead. Good morning.

Hi. Good morning. Good morning. Just if you could help me understand, I guess for this quarter, AUM was higher than a year ago, but a year ago revenue and earnings was higher. If you could help me understand what's going on there, that'd be great.

Scott, do you want to take that in terms of revenue and AUM?

Yeah, so what happened is that there's been, despite the fact that markets have been up subsequent to the first quarter of this year, there's still a bit of a residual effect in that, you know, throughout the year, we're, uh, you know, we're steadily getting back, uh, to, you know, asset levels and, you know, revenue levels to where they were a year ago. So, um, so, you know, absence of pandemic, you know, the markets, uh, you know, had, you know, potentially, you know, uh, been more normalized, uh, there would have been, you would have seen a more disparity there, but, uh, But that's really what's occurred from a revenue standpoint.

I'll add to that that if you take out market effect, that the organic growth in the business since then has been quite good, even compared to past years. In fact, this year alone in our new account, new client acquisition, we're already running ahead of total year assets in 2017 and 2018. X acquisitions were on track to match 2019, and we've actually had lower outflows from our accounts over the past, call it four quarters, I'm including Q4 of 2019. So you're looking at almost only a market effect. Keep in mind, Lou Bill, quarterly in advance. So the market downturn that we saw in the first quarter effectively crushed our second quarter revenue, et cetera. So it's almost entirely that effect.

The other thing is keeping in mind for the third quarter, which was primarily based on June 30th asset values of this year, we had a bit of a different mix in our AUM. compared to June 30th of a year ago. So, you know, that coupled with the other items, you know, contributed to the delta.

Okay. All right. Well, thanks for that.

You're welcome. Sure.

Again, if you have a question, please press star then 1. Our next question comes from Sumit Modi with Piper Sandler. Please go ahead.

Just following up on kind of the M&A side of things, just wanted to get your point of view on the conversations you guys have had from the acquirer side. Have you gotten any interest also secondarily on buyers looking at Silvercrest as well?

Yeah, so on the first side, we're always talking and looking at different businesses. I had Actually, despite the effect of the market downturn on our revenues, since all things being equal, if it had stayed steady, we would be even more substantially up, but due to other growth in the business. But from an M&A perspective, actually the down markets would have created an opportunity, I think, for firms like Silvercrest with substantial dry powder and a high quality operation culture and brand to take more advantage versus companies that are using a lot of leverage to enter the wealth market. Everyone thinks that the role of strategy is something that's potentially successful with these boutiques. As you know, I'm a bit of contrarian on that strategy in the marketplace and we haven't seen I think in many cases reasonable levels for a lot of businesses that are not growing or growing very very slowly without enough scale or succession planning among other issues. There are boutiques that want a very special culture that are investment oriented the way Silvercrest is that desire a lot more from a transaction than a check, and we continue to have regular conversations as a well-known player in the business. But again, we're not going to do a deal that isn't going to be meaningfully accretive to shareholders or progress the organization as a whole, which is to say we're not going to do a deal for the sake of doing a deal. That was what was one of the special things about terrific people and that deal was a creative right out of the gate and and that's what we strive to achieve not necessarily out of the gate but in a short period of time on the other side of the table sure we talked to firms all the time about opportunities at Silvercrest this is a premier brand and company and we are always looking at our options with the board And I think that's been true when we were a private company over the past 20 years, and it's true as being a public company. Nothing unusual about that.

Okay, great. Thank you. And then just a last one for me, kind of a clean-up here, but around the $151 million of new client assets and discretionary AOM, can you give us maybe a breakout of what those assets were comprised of?

Yeah, so close to half of that was OCIO. We also have from existing accounts net cash flows in and out. So the 150 in new client accounts is when the account is opened. But during the quarter or subsequent quarters, there can be cash flows in from a new account. And that's counted in our net cash in and out of accounts. So very often that number is understated from the reality of what is flowing in with new business. But it's the best way for us to capture it and to keep our numbers clean and to be able to compare apples to apples over time. But if you just take that number, approximately half of it is OCIO. The other half is family wealth. New business in the institutional space was quite low during the past two quarters. We've reported that. It's not surprising given what we've said about action from consultants and what's happening in the pipeline. It should be noted as well that, of course, with the V-shaped rebound in the markets means there's less shakeout and changing of managers. We saw that in the financial crisis 12 years ago. It takes a while for that opportunity to come to light. Had the markets created greater dispersion among some managers, that would also create more opportunities. But certainly the pandemic is unusual. So again, on the net organic flows into the business, primarily family wealth and OCIO.

Okay, great. Thank you, guys.

You're welcome, Samir.

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

Thanks. Appreciate you joining us for the third quarter of 2020. We look forward to reporting to you at the end of the year. Given the pandemic environment, we're pleased in particular that we have been able to organically grow the business and sustain that despite the working environment that we have. And the new opportunities that we see in the institutional business, as well as the new thresholds in the OCIO business, we think look good for the business going forward. And we'll talk to you in another quarter. Thanks so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.