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Edited Transcript of SAMG earnings conference call or presentation 10-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Silvercrest Asset Management Group Inc Earnings Call

New York Mar 10, 2017 (Thomson StreetEvents) -- Edited Transcript of Silvercrest Asset Management Group Inc earnings conference call or presentation Friday, March 10, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rick Hough

Silvercrest Asset Management Group Inc. - Chairman & CEO

* Scott Gerard

Silvercrest Asset Management Group Inc. - CFO

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Conference Call Participants

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* Andrew Disdier

Sandler O'Neill - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen and welcome to the Silvercrest Asset Management Group's fourth-quarter and year-end 2016 earnings call.

(Operator Instructions)

As a reminder, today's conference may be recorded. Before we begin, let me remind you that during today's call Silvercrest will make forward-looking statements pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding future events and developments and Silvercrest future performance, as well as management's current expectations, beliefs, plans, estimates or projections relating to the future are forward-looking statements. These forward-looking statements are only predictions based on current expectations and projections about future events.

These forward-looking statements are subject to a number of risks and uncertainties and there are important factors that could cause actual results, level of activity, performance or achievements to differ materially from the statements made. Among these factors are fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Silvercrest brand and other factors disclosed in the Company's filings with the SEC, including those factors listed under the caption entitled Risk Factors in the Company's annual report on form 10-K for the year ended December 31, 2016, filed with the SEC.

In some cases these statements can be identified by forward-looking words such as belief, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative or plural of these words and other similar expressions. These forward-looking statements are predictions based on Silvercrest's current expectations an its projections about future events. All forward-looking statements made on this call are made as of the date hereof and Silvercrest assumes no obligation to update these forward-looking statements.

I'd now like to introduce your host for today's conference, Mr. Rick Hough, Chairman and CEO. Sir, please go ahead.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [2]

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Thank you, good morning. Welcome to our fourth-quarter and year-end 2016 call. Silvercrest continued its history of delivering strong organic growth in both its core family business and institutional business during the fourth quarter ended December 31, 2016. Silvercrest added approximately $100 million in newly committed client accounts and assets and we continue to remain very proud of our ability to maintain our history of organic growth.

Our strong investment performance during the fourth quarter contributed additional growth of approximately $500 million in discretionary assets. Combined with our organic growth, during the fourth quarter, discretionary assets increased approximately $600 million to $13.8 billion as of December 31, 2016, a 14% increase in our discretionary assets under management for the calendar year.

The Firm has continued its growth while maintaining our fee basis for assets under management and margins and investing in the business for future growth. Importantly, Silvercrest's proprietary value equity strategies continued strong performance with outstanding results for 2016. Each of the Firm's six primary equity strategies have outperformed their relevant benchmarks for nearly all measured periods, as well as since inception. We're enormously proud of this achievement during a time when many active managers have struggled on a relative basis.

We believe Silvercrest's growth, our culture, premier brand and the fast-growing RIA business makes it a desirable business partner. And to that end, we remain optimistic about complementing our organic growth with accretive acquisitions to add both professional talent and to broaden our high-net-worth network of clients.

With that, I'll turn the call over to Scott Gerard, our CFO, who will go through the financials for the fourth quarter as well as the year, and then we'll take questions. Scott?

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Scott Gerard, Silvercrest Asset Management Group Inc. - CFO [3]

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Thanks, Rick. As disclosed in our earnings release for the fourth quarter, again, discretionary AUM as of December 31, 2016 was $13.8 billion and total AUM as of the same date was $18.6 billion. Revenue for the fourth quarter was $21.2 million and reported consolidated net income for the quarter was $2.5 million.

So looking at the quarter, year-over-year now, fourth-quarter revenue of $21.2 million represented approximately a 10% increase over revenue of $19.2 million for the same period last year. This increase was driven primarily by growth in our management and advisory fees as a result of increased AUM.

Expenses for the fourth quarter were $17.9 million, representing approximately a 17% increase from expenses of $15.3 million for the same period last year. This increase was primarily attributable to increases in compensation and benefits expense of $2.5 million.

So comp increased primarily because of higher equity-based compensation expense as a result of restricted stock grant units that were primarily made in August of 2005. And then there were some additional grants that were made in May 2016. We also had increased salary expense as a result of both merit-based increases and increased headcount due to the Jamison and Capicelli acquisitions. And we had an increase in the accrual for year-end bonuses.

General and administrative expenses for the quarter basically remain flat at $4.2 million as compared to the fourth quarter last year. We had increases to our G&A as a result of a change in the fair value of earn-out arrangements related to the Milbank and Jamison acquisitions and we increased our accounts receivable reserve in line with increased revenue. These were offset by decreases to both professional fees and sub-advisory fees.

Reported consolidated net income was $2.5 million for the quarter and this compared to $2.2 million in the same period last year, being 2015. Reported net income attributable to Silvercrest for the Class A shareholders for the fourth quarter of 2016 was $1.3 million or $0.15 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and both non-core and non-recurring items, was approximately $5.9 million or 27.8% of revenue for the quarter, compared to $5.8 million or 30% of revenue for the same period in the prior year.

Adjusted net income, which we define as net income without giving effect to non-core, non-recurring items and income tax expense assuming a corporate rate of 40%, was $2.6 million for the quarter or $0.20 per adjusted basic share and $0.19 per adjusted diluted share. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS. And to the extent dilutive, we add unvested deferred equity units, restricted stock units and performance units to the total shares outstanding in order to compute diluted adjusted EPS.

Looking at the full year, revenue for 2016 was $80.3 million, representing approximately a 7% increase over revenue of $75.1 million for the same period in the prior year. This increase, again, was driven primarily by growth in our management and advisory fees as a result of increased AUM.

Expenses for the year ended December 31, 2016 were $65.6 million, representing approximately a 13% increase from expenses of $58.2 million for the same period in the prior year. Again, this increase is primarily attributable to increased comp expense of $6.1 million and an increase to G&A expenses of $1.3 million.

Comp and benefits, again, increased because of higher equity-based comp for the same reason as discussed for the quarter. Increased salary expense as a result of both merit-based increases and, again, increased headcount due to the Jamison and Capicelli acquisitions. Lastly our bonus accrual for the year also went up.

G&A expenses increased primarily because of increased investment research costs and increase to our AR reserve due to increased revenue. Increases to the fair value of earn-out payments related to both the Milbank and Jamison acquisitions and increased amortization expense as a result of intangibles that were acquired as part of the Jamison deal. And lastly, sub-advisory and referral fees increased as well.

Reported consolidated net income for the year was approximately $10 million and that compared to $11.1 million for the prior year. Reported net income attributable to Silvercrest, or again the Class A shareholders for 2016, was approximately $5 million or $0.62 per basic and diluted Class A share. Adjusted EBITDA was approximately $22.5 million or 28% of revenue for 2016. And this compared to $21.9 million or 29.1% of revenue for the prior year. Adjusted Net Income was $9.8 million for 2016, or $0.76 per adjusted basic share and $0.72 per adjusted diluted share.

Taking a quick look at the balance sheet. Total assets as of the end of 2016 were $112.3 million. This compared to assets at the end of 2015 of $108.2 million.

Cash and cash equivalents were approximately $37.5 million at the end of 2016 and this compared to cash at the end of 2015 of $31.6 million. Notes payable was approximately $2.5 million at December 31, 2016 and this compared to $4.5 million as of the end of 2015. One last item, total Class A stockholders equity as of the end of 2016 was approximately $47.3 million.

That concludes my remarks and discussion of the financials. I'll turn it back over to Rick and then we'll go into Q&A.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [4]

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Great. Thanks very much, Scott. I think we're ready for questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Andrew Disdier, Sandler O'Neill.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [2]

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Good morning, Andrew.

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Andrew Disdier, Sandler O'Neill - Analyst [3]

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Hey, good morning, Rick. Good morning, Scott.

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Scott Gerard, Silvercrest Asset Management Group Inc. - CFO [4]

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Good morning.

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Andrew Disdier, Sandler O'Neill - Analyst [5]

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First one is on distribution. I saw the institutional discretionary AUM bucket saw nice growth year over year from about $2.2 billion to $3.3 billion. Could you talk about those drivers and update us with where you could see the SMID Cap and the equity income reception going out forward?

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [6]

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Sure. First of all, a lot of that increase is due to the fact that we've laid the ground work now for several years and have very tight consultant relationships that continue to build business. Secondly, one thing we've talked about in the past, in particular in 2014 and 2015 that we definitely saw happen come to fruition in 2016, and in particular in the fourth quarter, is growth in the ASTON/Silvercrest Small Cap fund as well as with our Morgan Stanley UMA accounts grew very nicely.

Despite the good results, actually there was a bit of a headwind for us in the institutional business throughout the year, but saw for sure in the fourth quarter. I can only assume we'll see it to some extent this year for the first quarter, and that is, with a very strong equity performance for our consultant relationships, a lot of the institutional business is rebalancing. So as we win accounts due to that strong performance, which is certainly a major reason we've been doing well, we're also seeing some outflows offsetting the strong growth as our performance is better than other equity managers or other asset classes.

In terms of what we see going forward, as I mentioned in our last call, the institutional pipeline of potential new business was a little bit lower than it had been historically. We see that again now. We're still getting our great share of wins, but I would moderate our expectations compared to what they were, say, a year ago in terms of the institutional pipeline.

We are actively going out to market with our equity income and SMID Cap strategies. We remain hopeful that we're going to pick up some nice relationships there, especially sub-advisory relationships. As you may recall, starting in 2014 and 2015, we really started and I'd say really got some momentum going in 2015 to try to get the sub-advisory relationships. Because, of course, those are a growing pool of assets rather than a mere discretionary allocation. That marketing is going well and we'll just have to see how it turns out in 2017.

In addition, we're going out with a couple of other more refined or smaller strategies in terms of their appeal, such as in Focused, which is a concentrated equity portfolio, as well as with our REIT and MLP strategies. But those are a bit smaller in terms of the opportunity set, as compared with equity income in SMID, which have a lot more capacity but also which have performed extraordinarily well. We're very proud of the equity performance, as you can imagine, based on the results we've now reported for the year.

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Andrew Disdier, Sandler O'Neill - Analyst [7]

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Understood. Absolutely, the performance is very strong. Thinking on the opposite side of the spectrum, you let us know that last quarter, the Small Cap strategy, there was a soft close. Just wondering, the contributions, whether it be positive inflows or negative obviously outflows, how it impacted some of the underlying flow trends this quarter.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [8]

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Yes, so the total rebalancing our client withdrawals were, I think, about $59 million for the fourth quarter, So it's around that $60 million. We actually netted inflows of, total, even after those outflows, of around $62 million. And then market appreciation of those assets was about $278 million.

So you saw about an increased total of $340. But it was effectively $60 million out against a base of $120 million-something in. So that was a net of $62 million. That was rebalancing. The soft close really had no effect on that, per se. And we have left -- the reason it's a soft close is that Small Cap is open for a couple of institutional accounts that were promised capacity up to a certain number, as well as for a high-net-worth client base.

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Andrew Disdier, Sandler O'Neill - Analyst [9]

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Got it. In last call, it was only a few days out ahead of the US Presidential election and a lot has clearly changed since then. So you're starting to gain a little bit of visibility as far as President Trump's initiatives. One that I was thinking about is, how do you think potential tax reform could impact your client base, particularly the high-net-worth section? And taking it one step further, do you think flows could be positively impacted in such that you see more of a plow-back into some Silvercrest strategies?

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [10]

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So let me just tackle the Trump Administration. I think tax reform and tax changes are so complicated, given the different constituencies involved, that it's going to be a long time before you really see what that might mean. The 1986 tax reform took a good 1.5 or 2 years to get done. And this one is very significant. I think many commentators aren't expecting to see a whole lot until very late this year at best.

The emphasis also seems to be as much on corporate taxes. Obviously that would benefit us and other corporations very significantly. On the high-net-worth side where there's a little less attention to the extent our clients would have more discretionary assets to put to work, on balance that would obviously help our Firm to some extent.

But at this stage we're not really putting much stock into what the Trump Administration might do, either for our business or for our clients. I just think it's a little far off. We need to concentrate on what we have done, which is organically growing the business, until we really see what comes to fruition. So I wouldn't put much stock in that.

Where I think things do matter, which is what we've seen since the election with the increase in consumer confidence, business confidence, orders, the increase in the stock market, is as the market increases, it does draw attention and it does tend to incline investors to be more interested in equities than they have in the past. And so there is a potential for additional equity inflows, merely as a phenomenon of that optimism and a rising market.

Over the past six years, or seven now, since the end of the crisis, the interest in equities has been pretty muted. People have always been concerned and waiting for the other shoe to drop, across the board. And other managers, certainly in compared to Silvercrest, have struggled with flows into equities. I think that the new environment, on the anticipation of what may happen in a variety of ways, whether it's regulatory or tax, is potentially helpful for driving future equity flows, especially with such low interest rates.

I also think that, as we move to a more normalized economic environment -- and by that, I mean one with interest rates that are closer to what you might expect in a growing economy compared to what we've had over the past several years, it may provide the opportunity for equity markets to be a bit more favorable to active management. We've done very well, but that environment can only help us as well.

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Andrew Disdier, Sandler O'Neill - Analyst [11]

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Great, thank you for that. And then, moving on to the DOL. So we've discussed your preparation in order to comply with the rule in the past. Obviously we have seen some updates and proposals for the delay and seen some actual headlines about firms reversing courses on their past preparations.

So, two-part question for you. One, how do you plan on dealing and proceeding with the preparation? And then, two, do you think there are assets or potential clients that are sidelined, that are playing a wait-and-see game before committing capital to Silvercrest?

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [12]

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So, let me answer the DOL rule first. We were, as we've discussed, far less affected by the DOL rule around being a fiduciary for a [risk] account than the large players in that space who tend to be broker-dealers. And part of the reason, of course, is because we are an RIA, and we've always been a fiduciary and only act in a fiduciary capacity. So any preparation we did, which there was some due to that, was pretty minor.

The additional rules that could have come along with it could have had a greater effect on us. But since we haven't seen them, I wouldn't expect to see a big change for our business. It certainly makes things more helpful as, if things had gone through, we would have definitely seen the prospect of higher regulatory expense and costs. We've seen plenty over the past several years, so that's just one more relief.

Where we would have really had to separate some of the clear advice we were providing on a fiduciary basis from the equity capabilities we have in-house, which by the way, act as a fiduciary as well on behalf of our clients, that's off the table, so it's really a future expense that we're not going to see that we could have on top of regulatory expenses we've already experienced.

I don't think that particular rule-making has held our prospective clients on the sidelines. So I also don't think that necessarily frees up more money for us. I think the other factors I mentioned in my prior answer are more meaningful for our own equity flows.

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Andrew Disdier, Sandler O'Neill - Analyst [13]

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Great, thank you. And then, just a couple modeling questions. With regards to performance fees, definitely captured some nice upside there. I understand the majority of the performance fees, they are a function of the muni bond asset class and --

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [14]

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That's right.

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Andrew Disdier, Sandler O'Neill - Analyst [15]

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-- looking at performance prior to the election, the Bloomberg Barclays muni bond index was up about 3%. But the final tally gains were wiped away at the end of the year with only finished up 25 basis points. So could you provide a little clarification around that?

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [16]

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Sure. The partnership that has performance fees associated with, here at Silvercrest, is a high-yield municipal strategy, which is investing in essential services and communities, healthcare, retirement living, education, water, et cetera, and it does not use any leverage. So the index you referenced is really more applicable to a plain vanilla municipal strategy, not as compared with our high yield which has a much higher yield to maturity and a longer duration as well. So the appropriate index there would be the high-yield indices.

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Andrew Disdier, Sandler O'Neill - Analyst [17]

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Thank you for that. And then, finally looking at comp. It came in a little higher than I was expecting. I noticed there were a lot of non-core expenses, but any color there would be helpful.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [18]

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Yes, and I saw your note this morning, thank you for that. Cash compensation as a percentage of revenue ended the year with 55.6%. The performance fees and the municipal fund are unfortunately reported as part of our equity income on our P&L. So that has to be added in to the figures to boost revenue a little bit more than I think a lot of people calculate. Historically, the Firm has hovered anywhere from right on 55% to about 57% the past few years. We were pretty satisfied with 55.6%. It's very close to the 55%. Some of that slight increase that we're targeting is due to investments in the business and hiring people for future growth.

Remember, revenue for the year, even ending 12/31, is not -- we're only billing four days a year. And we're going to be hiring during that for future growth, so it's not like we had $80 million in revenue going into 2016. We grew through it and it grew payroll with it. If we had been static and not made any investments, which of course we don't want to do, because we do want to continue growing the Firm for investors, we would have been below 55% this year. We go into 2017 on that higher revenue base. It just hasn't caught up. The revenue is just a quarter off of what our hiring is, if you think of it that way, because of the 12/31 billing date. Does that make sense?

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Andrew Disdier, Sandler O'Neill - Analyst [19]

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Yes. Understood.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [20]

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And we're hovering around that 60% mark that we've talked about in the past when you include the equity incentive comp that we provided in 2015.

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Andrew Disdier, Sandler O'Neill - Analyst [21]

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Understood. That's it for me. Thank you for taking the questions, gentlemen.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [22]

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You're very welcome.

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Operator [23]

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(Operator Instructions)

I'm showing no further phone questions at this time. I'd like to turn the call back to Mr. Hough for any closing remarks.

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Rick Hough, Silvercrest Asset Management Group Inc. - Chairman & CEO [24]

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Great, well thank you very much for joining us this morning. We're, again, very proud of our results for the calendar year. The organic flows and growth in this business have now had seven years of positive flows which, I think, is quite remarkable, given the headwinds that many active managers and wealth managers have faced since the crisis. It concludes our fourth straight year, with three years of being a public company and a stub year as a public company.

So we're very proud of those results. And in particular, driven by very strong equity performance delivered by our equity team as you saw at the end of the year, by our high-yield municipal team, a very unique strategy that's highly desirable to high-net-worth investors seeking income. And the teamwork here at Silvercrest, we have a wonderful culture and we're excited about the future in 2017. Thank you very much.

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Operator [25]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.