Q1 2024 Silvercrest Asset Management Group Inc Earnings Call

Participants

Richard Hough; Chairman of the Board, President, Chief Executive Officer; Silvercrest Asset Management Group Inc

Scott Gerard; Chief Financial Officer; Silvercrest Asset Management Group Inc

Sandy Mehta; Analyst; Evaluate Research Ltd

Christopher Marinac; Analyst; Janney Montgomery Scott LLC

Chris Sakai; Analyst; Singular Research Inc

Presentation

Operator

Good morning and welcome to the Silvercrest Asset Management Group Inc. first quarter 2044 earnings conference call. (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.
I would now like to turn the conference over to Rick 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 and 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 to provide customized advice and service to our well over 600 ultra-high net worth individuals and institutions. I've 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 dedicated to careers at building this firm because of the excellent investment returns we've generated for our clients over time and our superior client service, our assets 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 never know that none of their own internal investment management. We have 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 OCIOTs for clients tell us that our asset allocation, advice and investment returns have consistently been better than better than many of our peer organizations. One of our key value propositions is delivering institutional-quality investment capabilities to our high 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 hear it. So we're going to 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 employees here own over 30% of our outstanding shares. And many of us, including me, have most of our own family assets managed Silvercrest's.
So we are well aligned both on the upside and downside with both our clients and our shareholders. We think Silvercrest has 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 for working with us in the future.
Now I'd like to update you on our company's progress in 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 gain.
While we continue to expect uncertain economic and market environment. Silvercrest has never had more business opportunities for initiatives underway. I think 2024 and '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 a higher interim percentage of revenue for compensation, and we will adjust compensation accruals to match those important investments in the business.
Since you guys just announced as of yesterday, hiring a new team to expand an international 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's discretionary assets under management increased $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 and the first quarter of 2023 on discretionary AUM and totally on increased by 6.6% and 15.4% respectively, while top line revenue increased by 2.9% from the end of the first quarter last year.
Most metrics of the business are down due to higher expenses, primarily related to compensation expense, Silvercrest's pipeline of new institutional business opportunities and 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 OCI and capabilities as a high end wealth and asset management firm, Silvercrest serves families and institutions from across the globe.
Despite headline news international tensions, we continue to see substantial new opportunities globally for our firm with our high-quality capabilities, coupled with superior client service that I mentioned in the opening of my remarks that I'll turn this over to Scott Gerard for some comments on our financials, and then we'll turn to your questions. Thank you.

Scott Gerard

Thanks, Hough. 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 $0.5 million 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 billion 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 total shares outstanding to compute diluted adjusted EPS.
Looking at the balance sheet, total assets were approximately $170.2 million as at March 31 of this year compared to $199.6 million as of the end of 2023. Cash and cash equivalents were approximately $39.7 billion as of March 31st of this year, compared to $70.3 million at the end of last year.
Cash and cash equivalents at the end of the first quarter, net of our annual compensation payouts. Total borrowings as of March 31 for this year were $1.8 billion 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'll go into Q&A.

Richard Hough

Thank you, Scott.

Question and Answer Session

Operator

(Operator Instructions) Sandy Mehta, Evaluate Research.

Sandy Mehta

Yes, good morning, Rick and Scott. On the mark, the pipeline jumped or there are quite a bit what the what caused the pipeline to jump so suddenly?

Richard Hough

Bear with me as I answer questions, you may have noticed from Asia 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 at 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 a client referrals now that we've done a great job.
The OCIO asset allocation and manager selection, a 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 from 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 in it. It now stands in total in excess of that at $2 billion.

Sandy Mehta

Okay. And on the international strategy side, could you talk a little bit about how much you have an existing assets? You know, the length of existing track record and how many senior personnel portfolio managers you have? And then with these new hires on 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, um, which is there are several based out of our San Diego office. When that firm joined us in 2019, ARM has about $300 million. It's a fairly small in the deeper value space. They have global small-cap international value and emerging markets up at the $300 million or in the international value.
Obviously, small cap is important as well. Our total assets are higher than that. I'm just mentioning it from a immediate institutional perspective in that small and it's a fantastic team actually that their performance is great. The performance precede Silvercrest, but at Silvercrest as from 2019, and they've done extremely well on a relative basis versus their respective benchmarks and the new team that has joined us really focuses primarily on Global Value Equity.
It is much more of a relative value capability and 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, et cetera, that it will book 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 that grows their assets.

Sandy Mehta

I had a former Global sorry, go ahead.

Richard Hough

I'm 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 on that over the next couple of quarters.

Sandy Mehta

As a former Global Fund Manager. I wish I wish you all success. Thank you.

Richard Hough

Thank you.

Operator

Christopher Marinac, Janney Montgomery Scott.

Christopher Marinac

Hey, 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 from those very difficult questions to be honest, because there's a lot of variability on how much gets pulled through. It's a high percentage come by. 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% on 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 $1 billion.
Yes, sure. You can 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 size chunks of $50 million, giving you a percentage like 70% or 80% would be a lot better for looking into the future. So I hope you understand that I'm not going to give you a number on that, just because of we're always pretty conservative number one.
And number two, 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 years to three years, our pipeline actually was reduced substantially primarily because it was going to take more than six months. We pull things out of the pipeline for that reason, some. So I think that 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

I'm sure. And I just had a follow-up on the EBITDA margin and kind of how you see that evolve?

Richard Hough

I right. Thank you. So the EBITDA margin, when we are in a steady state business, that's really growing nicely. It's anywhere from 27% to call it 32% at the very highest and which we saw at the end of 2021 to get that high usually requires performance fees. We haven't had performance fees since the end of 2021. Performance fees almost all go to the bottom line in our great boost to cash flow and therefore, EBITDA from because when we're investing in the business and growth is slower.
You're going to see that EBITDA get hit. We saw that happen in 2023, 2022. And of course, we're accruing more for compensation, this year's results. We did see an uptick, as you know, from the first quarter of last year to first quarter of this year. I think I can't really give you a good projection.
What will happen with that EBITDA? Because we have pointed out that we are going to hit EBITDA. We're going to hit earnings to invest in new personnel I think I provided a lot of guidance on that last year here. We are we're doing it. This is just one example of this team, but the timing of the growth of the of the assets and revenue that would increase EBITDA is not entirely.
No. So to tell you what direction that may go for the rest of the year? I can't I can't really forecast for you in the past when we made these investments at, say, 28% EBITDA margin, 29%, often 27%, we were growing faster than those investments. So in effect, those investments, we're hitting some with the narrow market last year, the slower progress from the unsupported market, as you know, in 2022 from what we're doing with regards to those investments is more apparent in our EBITDA.
I just think it has been very important for me to be very straightforward as it was last year. About what we're doing and that this ultimately in a normalized environment will drive higher EBITDA margins. I do seek to push the company back into the mid to high 20% EBITDA margins, but that's going to take a bit. We have to see this business come in. We have to see the pipeline I just talked about come to fruition.

Christopher Marinac

Understood, and very helpful background. Thanks very much.

Operator

(Operator Instructions) Chris Sakai, Singular Research.

Richard Hough

Good morning, Chris.

Chris Sakai

Hi, good morning. On mall, should we be thinking about the growth of nondiscretionary assets under management versus the growth of discretionary assets under management in the coming quarters?

Richard Hough

I would first of all, I've always asked investors to focus on our discretionary assets under management, primarily because that has a direct link to revenue. There is a lagging effect with regards to that revenue that I think is important to take into consideration and because we bill quarterly in advance. And of course, there are four days in the year, which is to say the end of each quarter that we report revenue on.
And so the effect you would see, for example, the increase in discretionary assets under management from the first quarter of last year will fully be realized until the second quarter of this year because we're billing quarterly in advance. So that's just one important point. I'd like anyone listening to keep in mind, our nondiscretionary assets under management are linked to our discretionary assets under management and that they are assets for clients.
However, very often they are project flat fees associated with our very strong reporting capabilities, tracking of assets, very often the illiquids for our clients' portfolio analysis of mandates and also OCIO. So some of the OCIO. assets aren't nondiscretionary and exact capability grows. You'll see growth in the nondiscretionary assets, which is a good thing.
But there's been a lot of new reporting assets for some of our very, very largest and most important clients that has been bumping that number up, and it's an extremely valuable capability to them. We have really excellent leading edge reporting platform and data warehouse that's being used a lot by our clients.
And so what you're seeing, I think is that we're both vastness of the firm's capabilities and you're also seeing a rise in alternative investment activity in illiquid holdings on our clients, combined with OCIOI. to healthy side of the business, even if it is not strong link to revenue and the way I just discussed the discretionary asset.

Chris Sakai

Okay. Thanks for that on. How should we be thinking about compensation and benefits expense in the coming quarters?

Richard Hough

Well, as you know, we adjusted it to 58% or 57%, sorry, in the first quarter after we had the adjustment in the fourth quarter of last year. That is including the new team we just announced in May include a couple of other initiatives. We have a new business development person who joined us from among, among other initiatives.
We think we have a little room for some more hires, but it may not be enough. We'll see and we'll just adjust that going forward as we find our way our at the right level, given the investments we're making in the past where we have been accruing at 55%, that was more than comfortable given the faster growth of the Company in good market years that we saw it in 2021.
We ended the year fully down at 52%, something like that?

Scott Gerard

Yeah, 53%.

Richard Hough

53% which was unusual most years were right on top of the 55%. But as we get more aggressive in building the Company and growing, and we're going to have to accrue and change that. So if anything, it might go a little more up this year, to be honest, we'd like to avoid an adjustment in the fourth quarter. All things being equal, I'd rather just be flat and very predictable throughout a year with very little adjustment, but it doesn't always work that way.
And as I mentioned in my early remarks, I think the firm is at a very important inflection point on a tipping point. It's progress at its size and the kind of investments we're making. And so we would rather have a little more variability going forward as we do that and to explain that very clearly to you and other investors about why and how we're doing it.

Chris Sakai

Okay, great. Thanks for the answers.
(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks.

Richard Hough

Great. Thank you very much for joining us this morning and appreciate the questions. As long as up my mind, rather, you're paying attention my rounding prolonged introduction about what makes this firm special strategically in the marketplace for high-net-worth and institutional investors alike.
I think it's very important as we engage in more initiatives to grow the business that we keep those first principles in mind about how we built the company. As I also mentioned, I think this is going to be an incredibly formative years, given the number of initiatives you have given the number of initiatives that we have and the new professionals that we're bringing on board to build this company.
I look forward to giving you more information about that pipeline. And at the success, we expect those teams to well to enjoy on our behalf and on your behalf. Thank you very much.

Operator

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