Silvercrest Asset Management Group Inc.

Good morning, and welcome to the Silvercrest Asset Management Group Inc. Quarter 1, 2021, earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a 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 the future performance are forward-looking statements. They are based on the 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. such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference over to Rick Huff, Chairman and CEO of Silvercrest. Please go ahead.

Thanks very much for the introduction. Welcome to the first quarter results of 2021 for Silvercrest. Having been founded in the spring of 2002, Silvercrest has now begun its 20th year in business, which will culminate in our 20th anniversary celebration in April of 2022 next year. Silvercrest's founders and partners embarked on an entrepreneurial journey to create the foremost wealth and asset management boutique in the United States. We're very proud of having created an enduring firm founded on bedrock principles as well as a strong and proud culture. We remain dedicated to putting our clients first and creating a business that serves its clients with highly regarded institutional quality capabilities for generations. We've concluded the first quarter of 2021 and begin our 20th year in business with new highs in our asset management, revenue, and adjusted EBITDA. Silvercrest's discretionary AUM, which drives revenue, increased 6.3% from the fourth quarter of 2020 to reach $21.9 billion, which is an increase as well of 47% year-over-year from the first quarter of 2020. The firm's total AUM grew to $29 billion by the end of the first quarter of 2021. Silvercrest concluded the first quarter of this year with $31.2 million in revenue and and the firm's quarterly adjusted EBITDA was $9.7 million, or an annualized adjusted EBITDA run rate of $38.8 million. Adjusted diluted earnings per share increased 16.7% year-over-year to $0.42 per adjusted diluted share. The firm's first quarter 2021 adjusted EBITDA margin was 30.9%. With strong relative performance, Silvercrest, Institutional equity new business opportunities continue to grow across Silvercrest's suite of proprietary equity capabilities. Our new sub-advisory relationships added assets in the first quarter of 2021. We are optimistic about our growth prospects for this business with a robust new business pipeline. Silvercrest's organically built outsource chief investment officer offering continues to grow and its pipeline of opportunities has increased as well. That business more than doubled during 2020, and we hope to cross the important billion-dollar AOM threshold during 2021. We've hired new high-net-worth portfolio management professionals for the wealth management business and will continue to add new talent, both to maintain a high level of client service and to grow the business. Silvercrest has a track record of growing new talent and will continue to do so. We believe our brand, culture, capabilities, and technological innovation make Silvercrest a premier partner for select businesses and professionals. Regardless of the environment, Silvercrest will continue to seek to effectively deploy capital to complement organic growth. Upon launching our 20th year, we remain a mature and tested team with a long-term vision intent on building the business upon a sustainable and enduring platform. As with industry consolidation 20 years ago, there's now unprecedented change in technology, asset management, and there are ways of consolidation once again that threaten the business models dedicated to the best interests of the client. We have a lot to accomplish to continue building the premier wealth and asset management boutique in the nation. Silvercrest has implemented a successful long-term organic growth plan, and we plan to continue that growth trajectory in high cash flow generation, both organically and through careful strategic acquisitions. On May 4, 2021, our Board of Directors declared a quarterly dividend of $0.16 per share of Class A common stock. And that dividend will be paid on or about June 18th of this year to shareholders of record as of the close of business on June 11th. With those introductory remarks, I will now turn it over to Scott Gerard to review the financials, and then we will open it up for questions.

Scott. Thanks, Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31st, 2021, was $21.9 billion. and total AUM as of March 31st, 2021, was $29 billion. Revenue for the quarter was $31.2 million, and reported consolidated net income for the quarter was $4.3 million. Looking more specifically at the quarters year over year, again, the first quarter revenue was approximately $31.2 million. That represented a 10% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation partially offset by net client outflows in discretionary AUM. Expenses for the first quarter were $25.5 million. That represented approximately a 62% increase from expenses of $15.8 million for the same period last year. This increase was primarily attributable to increases in G&A expenses and compensation and benefits expense of $7.9 million and $1.9 million respectively. Comp and benefits expense increased by $1.9 million or approximately 12% to $17.6 million for the three months ended March 31st of this year. That was an increase from $15.7 million for the three months ended March 31st of last year. The increase was primarily attributable to increases in the accrual for bonuses salaries and benefits expense primarily as a result of merit-based increases, annually hired staff, and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. P&A increased by $7.9 million to $7.9 million for the three months ended March 31st of this year from $43,000 for the three months ended March March 31st of last year. This was primarily driven by increases in the fair value of contingent consideration related to the Cortina acquisition of $8.3 million. In addition, there were some increases in occupancy and related expenses and professional fees, which were partially offset by decreases in travel and entertainment expense as a result of the pandemic and portfolio and systems expense. Reported consolidated net income was $4.3 million for the quarter as compared to $9.7 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter of this year was approximately $2.6 million or $0.26 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 and non-recurring items, was approximately $9.7 million or 30.9% of revenue for the quarter compared to $8.2 million or 29% of revenue for the same period last 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 $6.2 million for the quarter compared or 43 cents and 42 cents per adjusted basic and diluted earnings per share respectively. 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 add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS. Taking a quick look at the balance sheet, total assets were approximately 192.2 million as of March 31st of this year, compared to 213.8 million as of the end of last year. Cash and cash equivalents were approximately 42.6 million at March 31st, 2021. This compared to 62.5 million at December 31st of last year. Keep in mind our cash at March 31st of this year is net of 2020 related incentive compensation paid during the first quarter of 2021. Total borrowings as of March 31st of this year were $11.7 million and total class A stockholders equity was approximately $71.8 million as of the end of the first quarter of this year. That concludes my remarks. I'll turn the call over to Rick for a Q&A. Thanks very much, Scott. We're now

be able to take questions at this time. Thanks.

We will now begin the question and answer session. To ask a question, you may press star then one on your phone. If you're using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Suneet Mahdi with Piper Sandler. Please go ahead.

Hey, thanks. Good morning, guys. Just wanted to maybe start with the institutional pipeline. Can you update us on that six months, the actionable pipeline today? How much of that is related to OCIO? And then can you update us on the current size of the OCIO platform and kind of your confidence level of reaching that one billion threshold this year as well?

Yeah. We don't normally break out the pipeline for OCA separately from all of the institutional business, but that pipeline has grown, and I don't want to get into this every quarter. I'd rather just talk about the institutional business as a whole. But we see $800 million in reach for it's climbing up towards that in terms of total AUM, and the pipeline has grown, and I have a high confidence that we'll cross that billion-dollar threshold. With regards to the rest of the institutional business, including OCIO, the actionable six-month pipeline, which we very conservatively measure, that includes invite-only searches and what we're in, semifinals, finals. Those have grown substantially. As of the beginning of the first quarter, the pipeline was $1.34 billion, as you may recall. And it now stands at $1.8 billion. And that's grown completely across our product suite, OCIO, U.S. Value, U.S. Growth International.

That's great. I just wanted to touch on the organic growth in the quarter as well. Between the closed accounts and the net cash outflows, it looks like about 500,000 of outflows there. Can you unpack that a little bit and How much was related to taxes at all, and should we expect the second quarter to see more kind of a normalized tax outflow in that quarter as well?

Right. So that gets complicated. It's very hard to get our arms around what the taxes may look like and when they actually flow. It tends to be something that we see more in the second quarter than the first. We actually had a very good business development quarter in terms of our new accounts. and additional monies into the firm from our high-net-worth clients. And, in fact, it was pretty good on the institutional business. The negative outflow that we see this quarter is solely effectively due to the closing of the AMG mutual fund that we have advised. AMG, as you may well know from the news, decided to, terminate all of its external managers despite our good performance. Silvercrest was among them. And I'm really not going to comment more on that beyond it. It's in the hands of our outside counsel.

Got it. Okay. And the last one for me. I'll hop back in the queue. I noticed you guys did not increase the dividend this year. I'm wondering if you could elaborate on the strategy of the payout. Are you kind of maintaining a minimum yield or kind of aiming for a target of And then maybe just talk about the capital allocation a little bit more broadly. You know, is the focus still kind of targeted hiring and team lift outs or are you kind of having some more positive conversations on the M&A side at all as well?

Yeah, thanks. And excuse the length of perhaps this answer. So, correct, we didn't raise the dividend again. We've kind of reached the yield on our stock that we think is highly favorable and in that it might be pushing on the string to continue increasing that dividend and therefore distributions at this time. We have had a policy of both consistently increasing the dividend in the past as well as being very conservative with the amount of cash that we're upstreaming in order to pay that dividend. And while cash flows are very robust, and as you've seen, we're reaching all-time highs with regards to that, for the company. We just feel like the amount that we're paying out of dividends is highly favorable, and we have other uses for the capital instead at this time. And so we do have conversations going on, of course, on the M&A front. That's always been a constant here. No prediction on when one could fall, but you may recall in 2019, all of a sudden we had a tremendous amount of cash to put to use when we joined with our great colleagues in Milwaukee. And that can happen at any time, and it's pretty important for a company of this size. So yes, that's a definite potential use of cash that we're keeping our eye on. In terms of, obviously, hires do affect our cash flow, but not necessarily the large cash reserves that we have on the balance sheets. And so we are looking strongly at other alternatives for use of cash that could include ways of returning capital to shareholders, including buybacks, instead of just the dividend. And that's a conversation that the board has on a regular basis and is considering as part of our capital allocation strategy.

Okay, great. Thanks, Rick.

Our next question is going to come from Sandy Mehta with Evaluate Research. Please go ahead.

Good morning. Congratulations on the strong results. And in terms of some of the – you mentioned new portfolio management professionals were hired. Could you give some more color in terms of are they more on the client relationship side, marketing side, or are they on the new strategy side, possible new products or strategies?

Yeah, thanks, Andy. So it's actually on both fronts. You may recall that we launched a new large-cap and multi-cap growth strategy with our great colleagues in Milwaukee. We felt that they have a robust analyst team that has been proven to provide really great results, and we see the opportunity to go up in the market cap spectrum. So we hired a very talented senior portfolio manager to lead that product development with the team there. and large and multi-cap, Andy Young. And that hire was towards the end of last year. Again, we opened that strategy up for investing as of January 1st, both multi-cap and large cap. On the other side, more of the hires have occurred both at the junior level, mid-career, kind of early career level to become full-fledged portfolio managers. On the high net worth side, at our firm, we don't have people we just call relationship managers. Our portfolio managers have a lot of responsibility for the actual investment work on behalf of our clients. They are investment professionals. They are not, as I like to say, they are not show ponies who are good at taking people to lunch. So we call them portfolio managers because they deserve that title. More of the hiring has been occurring on that side. We've hired... a few over the past year, year and a half. We have more that we're speaking to, and I would expect more hires this year. It should be noted that despite those hires, the growth of the firm has allowed us to be pretty conservative with regards to the percentage of revenue that we're paying out in compensation. Despite the growth in headcount, we've been able to maintain that ratio on a pretty stable basis. And so my comments earlier this morning had to do with those hires over the past year, maybe a bit longer, depending who you look at, and the prospects for more occurring this year. The growth in the first quarter X, what happened with AMG, was actually pretty good. And some of that growth, of course, was due to the fact that we've got new talent here. So it's a broad statement across the firm, but the weight of it was to the high net worth side, especially considering that we acquired new portfolio management from the equity analysis side only a year and a half ago.

So the hiring of Andy Young and the other people in Milwaukee, you mentioned large cap growth. Would that be a new strategy then?

So the Milwaukee hiring was basically Andy Young because we already have the analyst team to support the effort. But, yes, it's a new strategy. We launched it in January 1st of this year. Okay, great. Okay.

Thank you.

You're welcome, Sandy.

And, again, if you have a question, please press star and then 1 to join the queue. And the next question comes from Christopher Maranac of Johnny Montgomery Scott. Please go ahead.

Thanks. Good morning. Rick and Scott, just wanted to cover the EBITDA margin and to what extent there was any seasonal factors that just made it so strong this quarter.

Yeah, I'll let Scott take that. We've been consistently bumping up or, you know, maybe at our best going just over me address it more broadly afterwards.

Yeah, how are you? For the first quarter of this year, there are certain expense benefits that we've had, such as travel and entertainment expense and other client-related expenses that have been, continue to be superficially low due to the pandemic. So, on an incremental basis, those definitely help the margin. Sometimes they're is some other seasonality in the first quarter regarding our audit expense because it's based on the level of provision of service. So the lion's share of our annual audit takes place during the first quarter. So that will definitely have an impact to some extent. But, you know, this year it was consistent through, because of the environment.

Just generally speaking about our EBITDA margin, if you look historically, our best margins tend to just go over 30%, often driven by performance fees in the fourth quarter, because that's just a great guinea with no associated expenses. I have long said that in this business, if you're reinvesting and growing the business, it's hard to maintain much above 30 or 30 on an ongoing basis. And that if you're really investing in the business, you might knock that down a few clicks. I used to say in the past, hey, maybe we have to have a 24%, 25% EBITDA margin as we make investments in future growth so that more than pays for itself. Given the growth of the company over time, since I first started saying that, it's probably not four or five. basis points that may be only a couple now because just the size of the cash flow is that much larger. So I would consider this trending towards the high side for us, and I wouldn't be surprised to see that cycle down just a bit as we make investments, especially in personnel.

Yeah, and just to state the obvious, as... the country opens up more and we have greater access to meet with clients and once more travel commences, those type of expenses I would expect to increase to more normalized levels. And that too leads to growth.

It's very important that we get out there and see new prospects. I did mention the high net worth pipeline, but we've seen more and more activity toward the end of this first quarter leading into the second. and thinking about things as their lives change with the rest of the country.

Great. That's super helpful. Thanks very much. And I guess one other question I had is, you know, given sort of recent events system in general asset management industry in the first quarter, you know, is there a greater focus on compliance when some external events happen and, therefore, that actually supports the OCIO business that you're trying to do?

So I don't know if it's a real change in compliance that's driving it, but there's definitely a long-term trend of board members who are acting as fiduciaries on behalf of either institutions, whether that's an endowment, a nonprofit, pension fund, to be much more aware of their fiduciary duties to their clients and to outsource the investment function to professionals so that they have somebody to hold accountable for the performance and actions that are being undertaken on behalf of the investment pool or clients. And that trend is not just one that's been with us now for quite some time. I would argue it's accelerating. And it's accelerating in part because I think with technological tools, the ability for... for these kinds of portfolios to be much more profound, I think more and more boards are finding that they can't do it on their own, quite frankly, or engage the kind of professionals internally that are required to compete in this marketplace and are therefore looking more and more to outside people with proven track records. The compliance burdens on our business itself, apart and separate from the OCIO business, has always been a backdrop. Thank goodness we've always had the critical mass and professional team here to handle that. You don't like to have a competitive advantage due to that, but certainly in a boutique-driven RIA world that we compete in, it is one for us because we have the scale to take that on more easily than others. And, of course, we're watching very carefully with the change in administrations on what that might mean. I myself am on the Executive Committee of the Investment Advisory Association, which is the industry group for our IAs, and that's a very important component of what we do. But I wouldn't say that's driving business one way or the other. It may, at the margins, push some smaller firms to seek a larger home like Silvercrest. That's always been in the background. I would say that's not a new or accelerating trend either.

Got it. Great. Thanks for taking my questions. I appreciate it. Yeah, absolutely.

Sure. Again, if you would like to ask a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Rick Huff for any closing remarks.

Great. Thanks very much for joining us today and for the good questions. Overall, the business was quite strong in the first quarter, of course, bolstered by very strong markets as well. And as we see the country open back up and our ability to get back into the field, meeting with either consultants or families about our business, we're pretty optimistic about the pipeline we see this year as we begin our 20th year in business. Thanks so much for joining us.

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