Q4 2023 Silvercrest Asset Management Group Inc Earnings Call

Participants

Rick Hough; Chairman, CEO & President; Silvercrest Asset Management Group Inc.

Scott Gerard; CFO; Silvercrest Asset Management Group Inc.

Feddie Strickland; Analyst; Janney Montgomery Scott LLC

Chris Sakai; Analyst; Singular Research

Sandy Mehta; Analyst; Evaluate Research Ltd.

Presentation

Operator

Good morning and welcome to the Silvercrest Asset Management Group, Inc fourth quarter and full year 2023 earnings conference call. All participants will be in listen only. (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 and Andrei 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 has Chairman and CEO of Silvercrest. Please go ahead give that.

Rick Hough

Thank you very much, and good morning to our Q4 and year end 2023 results. After the volatile and difficult market environment of 2022 we hope 2023 would lead to improved markets, helping to recover both Silvercrest's discretionary assets under management as well as our top line revenue. The year 2023 was unusual equity market gains were highly concentrated in a handful of large cap technology companies as a result of such narrow leadership and economic uncertainty.
During the third quarter 2023 earnings call, I had stated we could face challenging market conditions at Silvercrest for yet another year. During the fourth quarter of 2023, company participation in equity market gains, broaden significantly progress has continued into 2024 setting the stage for a better environment for our business.
During the fourth quarter of 2023, Silvercrest's discretionary AUM rose by 1.4 billion or 6.8% to $21.9 billion. Silvercrest's total AUM increased by $2.1 billion or 6.7% to $33.3 billion during the fourth quarter. For 2023, Silvercrest's discretionary AUM increased by $1 billion or 4.8%.
Our total AUM increased during 2023 by 15% or $4.4 billion to $33.3 billion from $28.9 billion at the end of 2022. The total 2023 increase was attributable to market appreciation of $3.8 billion and client net inflows of $0.6 billion or $600 million.
Silvercrest's revenue for the year, however, significantly lagged increases in assets under management due to broad market gains concentrated in the fourth quarter of 2023. Silvercrest primarily billed quarterly in advance. Revenue decreased by $5.8 million or 4.7% to $117.4 million for 2023 from $123.2 million for 2022.
This decrease was driven by market depreciation in prior years, partially offset by market appreciation and net inflows during 2023. Revenue for the fourth quarter of 2023 was flat year over year. Our financial results in the fourth quarter also were negatively affected by adjustments to total compensation for 2023 with total recurring cash compensation as a percentage of revenue rising to 59% from Silvercrest's typical interim accrual rate of 55%. Silvercrest completed the year with adjusted EBITDA of $26.9 million or 22.9% of revenue, down from $32 million or 26%.
Turning to revenue. Adjusted diluted earnings per share for 2023 was $1.12, down from $1.35 in 2022. For the fourth quarter, adjusted EBITDA was $2.6 million or 9% of revenue down from $4.4 million or 15.6% of revenue in the fourth quarter of 2022, both affected by fourth quarter adjustments. Adjusted diluted earnings per share for the fourth quarter was $0.07, down from $0.15 in the fourth quarter of 2022. With the AUM increases during the fourth quarter and so far in 2024, we expect a better environment in 2024.
So we've got a pipeline of new business opportunities have significantly improved since the fourth quarter of 2023. While the institutional search environment remains slow, Silvercrest actionable institutional business pipeline has increased to $735 million. Silvercrest's Outsourced Chief Investment Officer, or OCIO AUM has risen to $1.7 billion, which includes a new small college endowments.
The OCIIO pipeline has increased to $585 million, and our consultant relationships have strengthened. Silvercrest has never been busy with its new initiatives. We're focused on those new opportunities as well as investments to drive growth in the business, including value added hires Scott, that concludes my opening remarks. If you could cover financials.
Thanks, Ray.

Scott Gerard

Thanks for being as disclosed in our earnings release for fourth quarter discretionary AUM as of the end of 2023 was $21.9 billion and total AUM as of the same period was $33.3 billion. Revenue for the quarter was $28.5 million and reported consolidated net loss for the quarter was $0.6 million. Revenue for the fourth quarter was approximately $28.5 million was flat for the same period in the prior year.
Expenses for fourth quarter were $29.5 million, representing approximately 21% increase from expenses of $24.4 million for the same period last year. This increase was primarily attributable to an increase in compensation and benefits expense of $4 million and general and administrative expenses of $1.2 million.
Compensation and benefits again increased by $4 million or approximately 21% to $22.7 million for the fourth quarter from $18.7 million for the same period last year. The increase was primarily attributable to increases in bonuses of $3.5 million, salaries and benefits of $0.3 million, primarily as a result of merit-based increases and newly hired staff. And an increase in equity based compensation of $0.2 million due to the granting of additional restricted stock units.
General and administrative expenses increased by $1.1 million or approximately 20.8% to $6.8 million for the fourth quarter from $5.7 million for the same period in the prior year. This was primarily attributable to an adjustment to the fair value of contingent consideration related to the Cortina acquisition of $0.8 million recorded during the three months ended December 31st, 2022, an increase in the adjustment to the fair value of contingent consideration related to the OGIO acquisition of $0.3 million and also increases in occupancy-related costs and charitable donations, partially offset by a decrease in professional fees.
Reported consolidated net loss was $0.6 million for the quarter as compared to $3.3 million of net income in the same period in the prior year. Reported net loss attributable to Silvercrest or the Class A shareholders for Q4 2023 was approximately $0.4 million or $0.05 and $0.04 per basic and diluted Class A share, respectively.
Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore nonrecurring items was approximately $2.6 million or 9% of revenue for the fourth quarter compared to $4.4 million or 15.6% of revenue for the same period in the prior year.
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 $1 million for the quarter or $0.08 and $0.07 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 RSUs and nonqualified stock options to total shares outstanding to compute diluted adjusted EPS.
Looking at the full year, revenue for the year was approximately $117.4 million, and that represented a 4.7% decrease from revenue of $123.2 million for the same period last year. This decrease was driven by market increased market depreciation in prior years, partially offset by market appreciation and net client inflows during 2023.
Expenses for the year ended December 31, 2023 were $98.6 million, representing approximately 16% increase from expenses of $84.7 million for the same period last year. This increase was primarily attributable to increases in compensation and benefits expense of $1 million and general and administrative expenses of $12.9 million.
Compensation and benefits expense was approximately 1% higher at $72.6 million for 2023 compared to $71.6 million in 2022. The increase was primarily attributable to increases in equity-based compensation expense of $0.5 million due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding and an increase in salaries and benefits expense of $1.3 million, primarily again as a result of merit-based increases and newly hired staff, partially offset by a decrease in the accrual for bonuses of $0.8 million.
General and administrative expenses increased by $12.9 million to $26 million for 2023 compared to $13 million in 2022. The increase was primarily attributable to increases in the fair value of contingent consideration related to the Cortina and the acquisitions of $11.8 million and $0.3 million respectively, also increases in portfolio and systems expense, occupancy and related costs, marketing costs, depreciation and amortization and office expense.
These increases were partially offset by lower professional fees, sub-advisory and referral fees and telephone and Internet costs. Reported consolidated net income was $15.2 million for 2023 compared to $30.8 million in the same period in the prior year. Reported net income attributable to Silvercrest for the year ended 12/31/23 was approximately $9.1 million or $0.96 per basic and diluted Class A. share.
Adjusted EBITDA was approximately $26.9 million or 22.9% of revenue for 2023 compared to $32 million or 26% of revenue for 2022.
Lastly, adjusted net income was approximately $16.1 million for 2023 or $1.16 and $1.12 per adjusted basic and diluted EPS, respectively.
Quickly, looking at the balance sheet, total assets as of the end of 2023 were $199.6 million compared to $212.7 million at the end of 2022.
Cash and cash equivalents were approximately $70.3 million at the end of '23 compared to $77.4 million at the end of 2022. Total borrowings as of the end of 2023 were $2.7 million. Total Class A stockholders' equity was approximately $82.7 million at the end of 2023.
That concludes my financial remarks. I'll turn it over to Rick for Q&A.

Rick Hough

Great. Thank you, Scott, and look forward to talking to anyone on the call. Thanks.

Question and Answer Session

Operator

(Operator Instructions) Feddie Strickland, Janney Montgomery Scott.

Feddie Strickland

Hey, thanks and good morning. But just wanted to start on on expense trends. Understand the revenue drop in Q4 impacted the ratios, G&A and compensation. I mean, should we expect a more normal year for those ratios as we look into this year.

Rick Hough

With regards to two ARM and thanks for joining us for a solid report this morning. Just as a comment, I think it was pretty close to to getting up getting the situation right with regards to 2024, certainly as we enter it and build for the first quarter.
Based on the increase Q4 that we saw with the broader market participation, you would expect the compensation ratio to come back down towards our normalized 55% as progress is made that set. We are making investments in the business and new personnel adds depending on when those occur during the year, it could affect that ratio.
And if market progress were to stop. It would affect that ratio or if you've got something in the pipeline. So the expectation is it would go in that direction. But we plan to invest in the business. And you may recall that I have commented in several calls about the need to make investments in personnel to grow the business and that that would hit earnings and EBITDA. When I did that, really what you're seeing in 2023 is a market effect in addition to some new investments that are not yet at the ratio that we strive to achieve for the Company, both in terms of contributing a compensation as well as EBITDA. What I think we will consider doing is increasing that ratio in 2024 and accrue at a different level.
I don't know what that will be yet. It will not be 59%. I can tell you that, but it will be higher than our typical 55%. We don't like making big adjustments in the fourth quarter to normalize the year. It sometimes that works and everyone's favor. You may recall the fourth quarter adjustment for 2021 was was was very significant in the other direction. I think our ratio that quarter was 52% or 53%, maybe we've been below 52. I don't quite recall, but it was in that range, Uhm-hmm.
So I think given the investments we plan to make and just my general comments of carrying over from last quarter about the economic environment, I think it would be prudent for us to accrue at a higher rate, even if on a steady-state basis for the business without them without significant new investments we would target and do target that 55% cash compensation ratio. So we haven't changed the business model. What we're looking to do, it's really more about being realistic about where we are with them with the market's hope that's not too long winded, but I think that deserves a very thorough explanations.

Feddie Strickland

No, that's very helpful. I appreciate that. And just switching gears for a second. I appreciate the color on this. The IO pipeline sounds like there's still some solid momentum there, plenty of potential. And do you have an idea of how much OCIO could be as a percentage of total AUM just over the next four or five years? Is there a specific goal you have in mind and big picture there.

Rick Hough

Yes. I mean, my specific goal is for that to be a few to several billion. I know that's a bit of a range, but I could see us crossing well over $2 billion this year. If things go well, just the pipeline alone is $585 million, up from $400 million last quarter. And it's always been my goal for it to be in that range. When we're talking about total assets to use to use the metric you just gave of $33 billion, you know, then the total within a reasonable period of time could well be, you know, 15% of total a well.
In terms of discretionary AUM, which is down at 28 -- where we at. Sorry, I lost my my data here from at any rate you would be it would be a higher share of that in our let's call it 20% or something like that. But that will take it a couple of few years to get to $21.9 billion sorry, the diluted base.
So you know, if we can get to if we can increase, I expect to, let's say, double it over the next in two years or so, you know, that's going to be a meaningful part of our a lap when one important part about OCIO. is that there are a lot of consultants and players that are virtually giving the business away. We don't view it as an economic model. And we're being very selective about the institutions we work with who want a partner who wants a Spok solutions who want discretionary management and so in doing that, we're maintaining a reasonable fee basis that looks more like our institutional business, but it also means our passing on some really low fee basis business that we don't think progresses, things that takes a lot of effort for very little reward. The sum total of that means that we will grow steadily, but more slowly if we were just trying to win everything out there.

Feddie Strickland

Understood. And just one last one real quick, just curious in terms of M&A acquiring other asset managers, have you seen pricing shift at all there?

Rick Hough

I've seen that shift a bit from the there are players who have sort of exited temporarily. It seems the really aggressive acquisition that we were seeing in the past, and it continues to be pretty hot, especially at the smaller retail end of things. The multiples definitely have come down, but I would argue they've come down more in term deal in deal terms than they have in, say, the nominal multiple that's put out of business because if you shift more to earn-outs for certain performance goals over a period of years, the nominal multiple on EBITDA for the business may still look the same. But in effect on a discounted at rate and reality, it could well be very different. So if you want to use the analogy of sports contracts, right, that those big top multiples are being hit if there is growth, if you win the Super Bowl, whatever it might be. So in practical terms that come down, even if they've only slightly come down in terms of the headline nominal number, I think sports analogies always helps.

Operator

Chris Sakai, Singular Research.

Chris Sakai

Just I had a question on bonuses. How are they calculated and what can we expect in this quarter and in the year?

Rick Hough

So there's a mix of the firm. Obviously, you have a lot of people who are on discretionary, some compensation plans. You have equity teams and investment teams that are tightly related both to their their AUM revenue as well as to performance. I've mentioned before, for example, that our growth team in Milwaukee has had absolutely outstanding performance that increases their compensation versus the amount of revenue that you're getting on AUM, portfolio managers are tightly linked to AUM revenue as well as the pool overall will grow when you make new hires and that those new hires are ahead of any AUM or revenue growth.
The real story here is investing in our partners and to maintain the business in the face of some declining revenue and difficult environment that we've been in for some time, what you're not seeing is an increase in the bonus pool, what you're seeing is an increase in the ratio to revenue. Our bonus pools were actually down across the firm this year.

Chris Sakai

Okay, thanks for that. And can you help me understand as far as the AUM and revenues concerned, I'm looks like you had higher AUM a year ago, but about the same revenue. Is that just because of the mix and a win?

Rick Hough

If you looked at our AUM a year ago, we were it ended with $28.9 billion in total AUM, and we ended 2023 with $33.2 billion in AUM. So it's actually up as it was discretionary. So a lot of that is mix. But keep in mind, there was a significant change in the fourth quarter that really had a lot to do with increasing that AUM. We have not we don't bill in arrears. We don't bill in the stub period. The money comes in. So the Q4 increase that you see in discretionary AUM is really a first Q 2024 item because we bill quarterly in advance four days in the year, really matter to us, and that's the end of each quarter. So you really are years set by where we are as of September 30th, 2023. And as you know, there's a lot of market appreciation as well as <unk> new business in the fourth quarter of 2023 four.

Operator

(Operator Instructions) Sandy Mehta, Evaluate Research.

Sandy Mehta

Yes, good morning. In your comments, you mentioned that the market, the overall equity markets have been broadening out a little bit in the fourth quarter and as well as Q. one. The Fed is done raising rates and now they're likely to lower rates on the financial stocks have done well in the last few months, which is a big component of value indices.
So can you talk a little bit more about I think you mentioned that the pipeline going forward or the marketability, it probably is improving. Can you talk about where you see in terms of marketing efforts going forward in this in this environment with a broadening market, do you see more traction going forward? Thank you.

Rick Hough

Yes, as you're welcome, Sandy, I don't necessarily see a high correlation between the broadening of the market and a more constructive environment and the pipeline opportunities. I think the pretty loosely correlated the market participation obviously has a big effect on revenue. What our assets look like, the general environment and economic or macro as well as where people are with their events. It's really what drives the pipeline.
In terms of the institutional pipeline, I mentioned that it was $735 million. That's really the only pipeline we measure. It's much harder to do it on the high-net-worth side, and that's up from $650 million that I've reported on in our last earnings call, we have several new searches, particularly in the small-cap space, small-cap growth, small-cap opportunity. We ended small-cap value, but I will say that it is a very despite that, that pipeline, it's a low anemic search environment generally, and we're seeing rebalancing in performance. I believe that we're in that is a bit of a headwind and the search for active management seems primarily focused right now on alternatives and whether that's credit or private equity. So despite the good pipeline, it's not a great search environment. We've seen it much better. We've had pipelines twice as big. It's not close to three types of space.
So that's constructive. It's good. I'm optimistic about this year with regards to our new business initiatives. But I think it's important to keep in mind despite the pipeline growing, it's somewhat of an anemic search environment on the high net worth side. That's a little bit more serendipitous. It can take a month to acquire a new client. It can take years and it's not a process associated with the high net worth business that I can measure as reliably as I can. The institutional pipeline. The institutional pipeline that we report to you all is very rigorously put together. It's only more word finals, semifinals or inflated searches and you can't quite do the same on the high-net-worth side.
For the high-net-worth side, we're seeing more and more activity come to us via the internet direct phone calls there are lots of good conversations. That's about the best color I can give you. I feel pretty good about the high-net-worth business this year. We also will be investing and investigating a pure business development roles for that business. Previously, we have tended to be business development entirely up to the portfolio managers and working with clients. But given the maturity of the firm and where we are, I think it's time for us to start focusing on pure business development roles. So we'll be looking at potentially to invest in that this year, which has to do with some of my comments on personnel.

Sandy Mehta

And you talked about the accrual rate on compensation as a percentage of revenue. Are you still overall targeting EBITDA margins on a normalized basis in the high 20s range?

Rick Hough

I think the business in a mature, steady, steady state environment without investments should be in that range on keep in mind as well that we're often in that range when we receive performance fees, the highest we ever hit, I think was 32% EBITDA margin in the fourth quarter for 2021 for that year, which is a great market here. But we also had very substantial performance fees, which largely go to the bottom line.
So that's in the mix and of course, we haven't had any the past two years so that they're also affects kind of total revenue that affects that compensation ratio. When you look at it on the the the compensation ratio in terms of the EBITDA margin, we target has been, as you know, 55%, which leads to that better margin, as we've discussed recently. However, we've also seen higher expenses for some of our fixed costs in this inflationary environment, which occurred at the same time as declining or flat markets. And that pressure is going to take a while to grow out of. So while we target that EBITDA margin, it won't be easy to hit near term.
I also said that as we invest in personnel, we could very well hit EBITDA and therefore earnings in order to propel growth. And we're not afraid to do that. And that's a possibility we've done in the past. We grew faster than those investments in part because of very constructive markets. That's not the environment we find ourselves in. So in fact, when we made those investments previously over the past several years, those increased costs were hidden from our investors because we were able to grow faster than the investments we're making. So that's why I'm looking at accruing at a higher rate this year it's going to take a while to continue growing out of this. As I said last quarter, I need to make these investments. I think it's good for the shareholders to continually grow the firm in this way. And then if I were to stop, I would absolutely expect both EBITDA and those margins to rise back to where they've been historically.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Rick Howe for any closing or Great.

Rick Hough

Thank you for joining us for our fourth quarter report as well as 2023 results. As I mentioned, some things we're looking constructively better, especially with the increases we saw in the fourth quarter, continuing in 2024. And many of our new business initiatives are just very active right now, which gives me some optimism for being able to continue to grow throughout this year, especially with the with the tailwinds of constructive markets. Look forward to talking to you next quarter, and I appreciate you dialing in and thanks.

Operator

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