Silvercrest Asset Management Group Inc. (NASDAQ:SAMG) Q1 2024 Earnings Call Transcript

Silvercrest Asset Management Group Inc. (NASDAQ:SAMG) Q1 2024 Earnings Call Transcript May 3, 2024

Silvercrest Asset Management Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Silvercrest Asset Management Group Incorporated First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. Before we begin, let me remind you that during today’s call, certain statements made regarding our 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 our filings with the SEC under the caption Risk Factors. For all 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 the date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference over to Richard Hough, Chairman and CEO of Silvercrest. Please go ahead.

Richard Hough: Thank you, very much and good morning. Welcome to our first quarter 2024 earnings conference call. Usually, I read my business update for the quarter, but I thought it’d be helpful this morning, it’s been a while, to really talk about what Silvercrest does and highlighting the nature of our firm strategically. Silvercrest is an independent wealth management firm and we combine top quality investment expertise with high levels of customer service. Our customer facing investment professionals who provide customized advice and service to our well over 600 ultrahigh net worth individuals and institutions, have consistently enjoyed annual customer retention rates of over 98%, and most of our revenues come from recurring management fees.

We also have great employee retention with very little turnover and people have dedicated their careers at building this firm. Because of the excellent investment returns we’ve generated for our clients over time and our superb client service, under management have grown from $4 billion to $30 billion over the last 20 years. Unlike many of our wealth management competitors who are 100% open architecture, which is to say they have none of their own internal investment management. We have a strong investment culture at Silvercrest focused on building, supporting, retaining, training really strong intellectual capital on behalf of our clients. We employ over 30 institutional grade investment professionals to manage equity and fixed income portfolios.

These in house investment teams all employ fundamental company and security analysis and most of our proprietary strategies have excellent long-term investment track records. Our in-house investment teams also provide valuable input and feedback to our asset allocation, third party manager selection and OCIO teams. Our clients tell us that our asset allocation advice and investment returns have consistently been better than many of our peer organizations. One of our key value propositions is delivering institutional quality investment capabilities to our high-net-worth clients. We have built the firm in order not only to deliver institutional quality, but our proof of thesis is that we have institutional clients. And about 30% of our assets under management are now managed on behalf of organizations, consultants and others who are professional investors.

This is proof of thesis about what our clients are getting. I’d also like to highlight that my colleagues and I here at Silvercrest have one job, which is investing our clients’ assets well. We’re not part of a large global investment bank with highly levered balance sheet and the executives and employees here own over 30% of our outstanding shares and many of us, including me, have most of our own family assets managed at Silvercrest. So, we are well aligned both on the upside and downside with both our clients and our shareholders. We think Silvercrest is one of the best wealth management firms in the world, so please don’t hesitate to reach out to me, Scott Gerard or any of my colleagues if you’d like to discuss becoming a client or working with us in the future.

Now I’d like to update you on our company’s progress for the first quarter of 2024. Supportive equity markets in the first quarter set the stage for a much better environment for our business, continuing progress that began in the fourth quarter of 2023 as the market broadened its gains. While we continue to expect uncertain economic and market environment, Silvercrest has never had more business opportunities or initiatives underway. I think 2024 into 2025 will prove to be one of the most formative years in the history of Silvercrest. We’re focused on those new opportunities as well as investments to drive future growth in the business, including value added hires. As part of those initiatives, Silvercrest is accruing higher interim percentage of revenue for compensation and we will adjust compensation accruals to match those important investments in the business.

Silvercrest just announced, as of yesterday, hiring a new team to expand its international and global equity investment capabilities as well as our global outreach. The team will complement Silvercrest’s existing international team and capabilities for a more diversified robust offering. The team brings significant investment expertise, a proven track record and experience managing significant equity mandates on behalf of large institutions around the world. Primarily due to the supportive market, Silvercrest discretionary assets under management increased by $0.8 billion during the quarter or 3.7% to $22.7 billion. The firm’s total AUM increased by $1.2 billion to end the first quarter at $34.5 billion. Year-over-year, from the first quarter of 2023, our discretionary AUM and total AUM increased by 6.6% and 15.4%, respectively.

While top line revenue increased by 2.9% from the end of the first quarter of last year. Most metrics of the business are down due to higher expenses primarily related compensation expense. Silvercrest’s pipeline of new institutional business opportunities have more than doubled since the fourth quarter of 2023. The firm’s total new business pipeline now stands at $2 billion which is up substantially from $700 million in the fourth quarter. We expect near term positive flows to result from those opportunities for both our institutional equity and OCIO capabilities. As a high-end wealth and asset management firm, Silvercrest serves families and institutions from across the globe despite headline news of international tensions. We continue to see substantial new opportunities globally to affirm with our high-quality capabilities, coupled with superior client service that I mentioned in the opening of my remarks.

With that, I’ll turn this over to Scott Gerard for some comments on our financials, and then we’ll turn to questions. Thank you.

Scott Gerard: Thanks, Rick. As disclosed in our earnings release, for the first quarter, discretionary AUM as of March 31, 2024, was $22.7 billion and total AUM as of the same period was $34.5 billion. Revenue for the quarter was $30.3 million and reported consolidated net income for the quarter was $4.9 million. Revenue for the quarter increased year-over-year by $0.8 million or 2.8%, primarily driven by increased discretionary AUM resulting from market appreciation, partially offset by net client outflows. Expenses for the quarter increased year-over-year by $1.7 million or 7.4%, primarily driven by increased compensation and benefits expense and to a lesser extent increased general and administrative expenses. Compensation and benefits expense for the quarter increased year-over-year by $1.2 million or 7.1% of revenue, primarily due to an increase in the accrual for bonuses.

Based on the increased recurring cash compensation ratio over the past two years, due in part to the investment in the next generation of associates to drive future growth, we increased the amount of the interim variable compensation accrual. Also, compensation and benefits expense for the quarter increased year-over-year as a result of increases in salaries due to merit-based increases. General and administrative expenses increased by $0.5 or approximately 8.3% primarily due to increases in travel and entertainment expenses, occupancy and related costs, professional fees and increased depreciation and amortization expense. Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter was approximately $3 million or $0.32 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore, nonrecurring items, was approximately $7.5 million or 24.6% of revenue for the quarter. Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items, and income tax expense, assuming a corporate rate of 26%, was approximately $4.7 million for the quarter or $0.34 and $0.33 per adjusted basic and diluted EPS, respectively. Adjusted EPS 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 nonqualified stock options to the total shares outstanding to compute diluted adjusted EPS.

Looking at the balance sheet, total assets were approximately $170.2 million as of March 31st of this year compared to $199.6 million as of the end of 2023. Cash and cash equivalents were approximately $39.7 million as of March 31st this year compared to $70.3 million at the end of last year. Cash and cash equivalents at the end of the first quarter is net of our annual compensation payouts. Total borrowings as of March 31st for this year were $1.8 million and total Class A stockholders’ equity was approximately $83.9 million as of the end of the first quarter. That concludes my remarks and now we can go into Q&A.

Richard Hough: Thank you, Scott.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Sandy Mehta with Evaluate Research. Please go ahead.

Sandy Mehta: Yes. Good morning, Rick and Scott. The pipeline jumped quite a bit. What caused the pipeline to jump so suddenly?

Richard Hough: Yes, thanks. And bear with me as I answer questions. You may have noticed in my interim a little hoarse, struggling with some spring allergies. The pipeline grew substantially primarily because we are now included in a lot more consultant searches for the OCIO team than we had been. In building that initiative, you may recall in the past that I’ve talked about our need to really cultivate those search firms that specialize in the OCIO space. It takes time to do that and we’ve made really, really nice progress there. The other thing that has happened with the OCIO pipeline is that we’re getting more client referrals now that we’ve done a great job. The OCIO Asset Allocation and Manager Selection portfolio, which gets reported in databases, is well ahead of its benchmark in the institutional space as well.

So, we’re just getting more attention. And those mandates are large. So, you saw a very significant jump in the pipeline for that reason. Last quarter, the total pipeline for the firm across value growth and OCIO was on the lower side. We talked about that. It was about $650 million and it now stands in total in excess of $2 billion.

Sandy Mehta: Okay. And on the international strategy side, could you talk a little bit about how much you have in existing assets, the length of existing track record and how many senior personnel portfolio managers you have? And then with these new hires, what sort of strategy you anticipate? How many more strategies or plans do you anticipate?

Richard Hough: Right. So, the main strategy that I look at which is — there are several based out of our San Diego office when that firm joined us in 2019 has about $300 million. It’s fairly small in the deeper value space. They have global small cap international value in emerging markets, but the $300 billion are in the international value. Obviously, small cap is important as well. Total assets are higher than that. I’m just mentioning it from an immediate institutional perspective. And that’s small and it’s a fantastic team. Actually, their performance is great. The performance precedes Silvercrest, but at Silvercrest it’s from 2019 and they’ve done extremely well on a relative basis versus their respective benchmarks. The new team that has joined us really focuses primarily on global value equity.

It’s much more of a relative value capability and has virtually no overlap with the approach that the existing team has. And we expect given the flows internationally into global equity mandates especially from very large pools of sovereign wealth or other capital, retirement capital etc. that will bulk the entire complex at Silvercrest and allow us to compete much more effectively across the entire international book. So, we think it’s going to have a knock-on effect as the global equity team that just joined us rose their assets. I was just going to mention that the pipeline of $2 billion does not include the pipeline of this new team. That pipeline in and of itself is quite substantial. But since they’ve just joined us, I’m not going to quite measure it yet.

We’ll give you an update over the next couple of quarters.

Sandy Mehta: As a former Global Fund Manager, I wish you all the success. Thank you so much.

Operator: [Operator Instructions]. The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac: Thanks, good morning. Rick and Scott, can you remind us on the historical pull through of the pipeline and just in terms of percentage over time? I know it’s not necessarily the next quarter obviously but just wanted to get a sense of big picture how much should be pulled through. And then had a follow-up about the EBITDA margin and how you see that evolving this year?

Richard Hough: Yes. So, those are very difficult questions to be honest because there’s a lot of variability on how much gets pulled through. It’s a high percentage, but it varies a lot based on the size of the potential mandates that are in the pipeline and we’ve got some really big ones in there. And so, if I were to tell you something like 70% or 80%, that could give you a false expectation because just for argument’s sake, if you’ve got something in there that’s $700 million or a billion, sure you could do a percentage on it. But as you know, percentages when it comes down to one thing, it’s a small sample, right, versus the variability in a pool. Whereas if it were equal sized chunks of $50 million giving you a percentage like 70% or 80% would be lot better for looking into the future.

So, I hope you understand and I am not going to give you a number on that just because we’re always pretty conservative, number 1, and number 2, I think given the mix of the potential pipeline there, it could be misleading. I will restate the standards for that pipeline, which is that we are in finals or semifinals or we have been invited to submit an RFP and we expect a decision to be made in the next six months. And we’re very rigorous about that. I think it really is a good measure of the opportunities for the company. You may recall a couple of times over the past two to three years, our pipeline actually was reduced substantially primarily because it was going to take more than six months. We pulled things out of the pipeline for that reason.

So, I think that well covers how we look at the pipeline, how conservative it is. I would just say that, yes, we expect a high percentage, but I think the mix right now makes that uncertain. Did I address both questions?

Christopher Marinac: Sure. And I just had a follow-up on the EBITDA margin and kind of how you see that evolving.