Silvercrest Asset Management Group (SAMG) Q4 2021 Earnings Call Transcript

Silvercrest Asset Management Group (SAMG 0.61%)
Q4 2021 Earnings Call
Mar 03, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Silvercrest Asset Management Group Inc. Q4 and year-end 2021 earnings conference call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.

Before we begin, let me remind you that today's call will contain certain statements made regarding our future performance that 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 that 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'd now like to turn the conference call over to Rick Hough, chairman and CEO of Silvercrest. Please go ahead.

Rick Hough -- Chairman and Chief Executive Officer

Thank you very much. We're pleased to report another strong quarter and year financial results for Silvercrest with new high earnings marks. The firm's discretionary assets under management, which drive our revenue, increased by $2.6 billion or 11.6% during the fourth quarter of 2021 to $25.1 billion as of December 31st, 2021. For the full year, discretionary AUM increased by $4.5 billion, or 21.8%, to $25.1 billion as of the end of the year.

The firm's total AUM concluded the quarter and the year at $32.3 billion, that was up 16.2% and 4.2% for the year and during the fourth quarter, respectively. Those increases were driven by both strong markets as well as our net organic flows into the business. Silvercrest also concluded our quarter with $33.8 million in revenue and quarterly adjusted EBITDA of $13 million. We delivered 2021 revenue of $131.6 million and adjusted EBITDA of $43.4 million, representing year-over-year increases of 21.9% and 43.4%, respectively.

Our adjusted diluted earnings per share increased by 47.7% during 2021 to $1.89 per adjusted diluted share. And the firm's adjusted EBITDA margin was 33% for 2021 as compared with 28% for 2020. Silvercrest maintained strong relative performance across all of its investment capabilities. As a result, our new business opportunities remain robust for our new high net worth, institutional, and OCIO businesses.

Also during the fourth quarter, Silvercrest repurchased approximately 6,000 shares of Class A common stock for approximately 94,000 pursuant to a previously announced share repurchase program at the end of July last year. Scott, if you could start going through the financials, that would be great. And then we'll follow up with questions. Thanks.

Scott Gerard -- Chief Financial Officer

Great. Thanks, Rick. So as disclosed in our earnings release for the fourth quarter, discretionary AUM as of the end of 2021 was $25.1 billion, and total AUM as of year ended '21 was $32.3 billion. Revenue for the fourth quarter was $33.8 million and reported consolidated net income for the quarter was $8.6 million.

Revenue for the fourth quarter was approximately $33.8 million. This represented approximately a 19% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation and net client inflows in discretionary AUM. Expenses for the fourth quarter were $24.5 million, representing approximately a 2% decrease from expense of $25.1 million for the same period last year.

This increase -- I'm sorry, this decrease is primarily attributable to decreases in compensation expenses and general and administrative expenses of $0.5 million and $0.1 million, respectively. Compensation expense decreased by $0.5 million or approximately 3% to $17.7 million for the three months ended December 31st, 2021, from $18.2 million for the fourth quarter of 2020. The decrease was primarily attributable to decreases in the accrual for bonuses and benefits expense partially offset by increases in salary expense as a result of merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding. General and administrative expenses decreased by $0.1 million or approximately 1% to $6.8 million for the fourth quarter of 2021 from $6.9 million for Q4 in 2020.

This was primarily attributable to decreases in the fair value adjustments to the contingent consideration related to the Cortina and Neosho acquisitions of $0.8 million, occupancy and related costs, partially offset by increases in portfolio and systems expense, and travel and entertainment expense. Reported consolidated net income was $8.6 million for the quarter as compared to $3.5 million in 2020. Reported net income attributable to Silvercrest or the Class A shareholders for the fourth quarter of 2021 was approximately $5.1 million or $0.53 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 $13 million or 38.5% of revenue for the fourth quarter of 2021, compared to $7.3 million or 25.7% of revenue for the fourth quarter of 2020.

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 $8.6 million for the fourth quarter 2021 or $0.59 and $0.58 per adjusted basic and adjusted diluted earnings per share, 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 had unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted earnings per share. Looking at the full year, revenue for all of 2021 was approximately $131.6 million, which represented approximately a 22% increase over revenue of $108 million for 2020.

This increase, again, was driven primarily by market appreciation and net client inflows in discretionary AUM. Expenses for 2021 were $101.1 million. This was an 18% increase from expenses of $85.7 million for 2020. This increase was primarily attributable to increases in compensation and benefits expenses of $10.2 million and general and administrative expenses of $5.2 million.

Compensation expense increased by $10.2 million or approximately 16% to $72.6 million for 2021 from $62.4 million for 2020. The increase was primarily attributable to increases in the accrual for bonuses, salaries, and benefits expense primarily as a result of merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding. General and administrative expenses increased by $5.2 million or approximately 22% to $28.5 million for 2021 from $23.3 million for 2020. This was primarily attributable to increases in the fair value of contingent consideration related to the Cortina acquisition of $4.6 million and portfolio and systems expense, partially offset by a decrease of $0.3 million in the fair value of contingent consideration related to the Neosho acquisition and lower occupancy and related costs.

Reported consolidated net income was $24.9 million for 2021, as compared to $17.5 million for 2020. Reported net income attributable to Silvercrest or to Class A shareholders for 2021 was approximately $14.7 million or $1.52 per basic and diluted Class A share. Adjusted EBITDA was approximately $43.4 million or 33% of revenue for 2021 compared to $30.3 million or 20.1% of revenue for 2020. Adjusted net income was approximately $28.1 million for 2021 or $1.95 and $1.89 per adjusted basic and diluted EPS, respectively.

Quickly looking at the balance sheet. Total assets were approximately $229.3 million as of December 31st, 2021, compared to $213.8 million as of year-end 2020. Cash and cash equivalents at the end of 2021 were approximately $85.7 million, and this compared to $62.5 million at the end of 2020. Total borrowings as of the end of 2021 were $9 million.

And lastly, total Class A stockholders' equity was approximately $80.4 million at the end of 2021. That concludes my remarks. I'll turn it over to Rick for Q&A.

Rick Hough -- Chairman and Chief Executive Officer

Thanks, Scott. We're now ready for some questions at this time.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Sumeet Mody from Piper Sandler. Please go ahead with your question.

Sumeet Mody -- Piper Sandler -- Analyst

Thanks. Good morning, Rick. Good morning, Scott. Congrats on the quarter.

Just wanted to start with a question regarding the discretionary AUM inflows from existing clients in the quarter. Can you break down that $684 million kind of in net cash inflows for us? What drove that activity in the quarter there? And maybe talk about expectations around tax season this year, how you expect that to impact the flows in the first or second quarter.

Rick Hough -- Chairman and Chief Executive Officer

Sure. So with regards to the fourth quarter, it was pretty balanced between our different segments of the business, both institutional and high net worth. We had some new institutional mandates that either started funding or were funded in the fourth quarter, and we had some nice high net worth inflows. So fairly balanced overall with a tilt for both the year and the quarter toward, overall, toward high net worth.

Certainly, if you look at the complete and total year, I would say, it is tilted toward high net worth versus the institutional business, which is nice to see that kind of balance. With regards to upcoming taxes, of course, we often see outflows depending on what kind of gains have been realized with strong markets. It's a little hard for us to predict. It's very lumpy.

We didn't see as much as I would have expected necessarily last year. That well may mean that we have meaningful outflows for taxes in this year. I don't know that, but we've had a sustained period of good markets, meaningful capital gains, and income for people. Also, keep in mind, people are playing quarterly estimated taxes.

They have some outflows also in September, but it is a double tax period. And I would suggest that there could be some meaningful outflows this year.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. That's helpful. Thanks.

Just kind of following up on that, on the strong flows in the quarter, I know it was balanced. But on the institutional side, can you maybe update us on the actionable pipeline today? I know you guys ended last quarter at $1.8 billion, but just wondering if you could talk about the progress there given that kind of flow.

Rick Hough -- Chairman and Chief Executive Officer

Yeah. Sure. So yes, that's right. I think it was just about $1.77 billion last time I updated you.

Currently, it stands at $1.76 billion. Keep in mind, that doesn't mean a lack of progress. The fact that it's the same, it means that we've refilled the pipeline after we've made some wins, right? So some of those things we actually came in the door, organically, recently. So the pipeline remains very strong.

It's stable. That's a good thing because this is a highly actionable pipeline. It's finals, semifinals, or invite-only, where we feel we have a strong chance of winning a mandate. So you're seeing it stayed the same because we won mandates, and I expect that going forward.

In particular, it should be noted, I think you may have in your research note yesterday that we had strong investment returns across all of our capabilities and our long-term track record as well, as a result, remains very strong. So that bodes well for that institutional business. It also bodes well for the high net worth clients. This firm is an investment firm.

It's an asset management company. 70% of the business may be well, but you've got to deliver to your clients at the end of the day. The institutional clients keep us really honest there. The high net worth can go anywhere.

It's a business with very low barrier to entry, and so the strong performance across the board is extremely helpful in both businesses.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. And then just one last one I could sneak in here on the cash comp ratio. It kind of came in a little bit below our expectations for the quarter and year.

I think 53.6% for the year, that was over 300 basis points below 2020, kind of below that previous expected run rate of around 55%. So just wondering if you could update us on expectations for this year. You'd expect to accrue something maybe in the range of 2021 levels or, kind of all else equal, should we kind of expect a reversion back to that 55% range?

Rick Hough -- Chairman and Chief Executive Officer

Right. So I would look toward revision. It may not be 55%, but that is what we model ourselves. We've long said that's a general target for the company.

Some years, we go a bit over as we did last year partly due to markets of 2020 that declined, that affected a year revenue later. The firm has consistently made sure to not eat the economics in total when we do grow the company beyond what it takes to support the personnel here. And we just had a super-strong year, and we're able to move well ahead of what we really need to pay in comp. So that's a -- we're going to do that as we have in the past.

The other thing I would point out is that I have consistently said we will continue to make investments in the business, which primarily needs personnel, people who grow the business. We did that. We have been doing that. I have projected hitting EBITDA a little harder than I have, and we did do that.

We've just been able to grow faster than the cost of expanding our opportunities. Obviously, that's something we also hope to do. So I think you've got a reasonable target there. I do think it would not be reasonable to think that we're going to run 53.6% over the next calendar year.

Some years, we get a little, some years we get a little, and this was a big get a little. So I hope that helps. If there are any more questions around that, I'm happy to talk further.

Sumeet Mody -- Piper Sandler -- Analyst

Great. Thanks for taking my questions.

Operator

Our next question comes from Chris Sakai from Singular Research. Please go ahead with your question.

Chris Sakai -- Singular Research -- Analyst

Hi. Good morning. Just a question, I guess, heading into 2022, what's your view on acquisitions?

Rick Hough -- Chairman and Chief Executive Officer

It's the same that I've had for the past piece of years, honestly. We have plenty of opportunities. We are very particular about the kind of cultures we're going to bring into this firm and the reasons for bringing together a business. We are not going to engage in pure financial engineering.

We have to do deals that we think will have long-term accretive value to the firm and to our shareholders, and that's been very hard to do in this current market. We want to see synergies with our company. We want to see cultural compatibility. We want to have a clear understanding of how we're going to grow that business into the future.

All of those things in order to continue the strong organic growth of this company are very important, and it's been very challenging to find that in this current marketplace. We are talking to companies all the time and continue to do so. And when the opportunity is right, just as it was with our great Milwaukee colleagues, when we acquired Cortina in 2019, we will jump on the opportunity.

Chris Sakai -- Singular Research -- Analyst

OK. Great. And then could you comment on, I guess, the amount of hiring as far as portfolio managers go in the fourth quarter?

Rick Hough -- Chairman and Chief Executive Officer

We did no hiring in the fourth quarter of new portfolio managers. The hiring I referred to that could have potentially affected the percentage of revenue paid in compensation as well as its effect on, of course, our EBITDA margin was a reference to hiring we've done over the past few years. We continue to look and we'll do more. We'd just been able to grow faster than those investments.

Chris Sakai -- Singular Research -- Analyst

OK. Great. Well, thanks.

Rick Hough -- Chairman and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Arnold Ursaner from -- who is a private investor. Please go ahead with your question.

Unknown speaker -- Private Investor

Good morning and thanks for taking my question. You just mentioned potential acquisitions. Are there asset categories that you have, you feel you need or would like to expand your overall portfolio? And then as a quick follow-up, you mentioned you'd like to be long-term accretive. How much dilution or earnings per share impact are you willing to take over a one- or two-year period? Thanks.

Rick Hough -- Chairman and Chief Executive Officer

On your first question, the firm is a hybrid model. We're not a pure open architecture firm like many of our wealth management RIA competitors, which is to say they are choosing outside managers for their clients. We have both that model, which is entirely what our OCIO business is based on. It's also used in order to complete a total asset allocation on behalf of our clients.

And then, of course, we have the internal capabilities that we deliver across both the value and growth spectrum at the firm. We're an asset management firm, as our name says, Silvercrest Asset Management. The fact that we are delivering institutional-quality asset management to our high net worth clients is extremely important and is a differentiator for the firm. So I appreciate the question about what else we may be looking for.

Honestly, at this time, I think we've got a pretty full suite of capabilities that we need to do. We're not going to pretend to try to do everything well internally. We have fixed income, both taxable and munis. We have high-yield fixed income.

We have value equity across the market cap spectrum. We have growth now with our Milwaukee colleagues, which was a long-term objective for this firm, and we just found just the right high-quality group. We have international. And we've got plenty of capacity in those capabilities, and they fulfill the main asset allocation buckets that we're concerned about.

There's a lot of other potential capabilities out there, but we're not going to go off in a whole lot of different branches. So it's unlikely we look for more asset management capabilities. I think if we find the right acquisitions, it's going to be on the high net worth side at this time. With regards to an earnings per share hit, I look to make our deals fairly accretive in a fairly short period of time.

As you saw with our Milwaukee deal, it is accretive right away. If you looked at the last couple of wealth management deals we did, they were accretive within a couple of years. And it really depends on the nature of the company, what we see in terms of its total value. I would hesitate to give you a specific number around that earnings hit.

I think there are too many moving parts for me to directly target that in a comment.

Unknown speaker -- Private Investor

I applaud you for using earn-outs for at least a portion of the compensation of companies you acquire. I had another question. You had a modest increase in net adds. But what caught my eye is, you had about $6 billion of departures.

Is there a common thread on the assets that left you?

Rick Hough -- Chairman and Chief Executive Officer

You're looking at gross flows, which is a confusing metric that the SEC has us report ever since we went public. Those flows could merely be the changing of assets within the firm. We did not have $6 billion leave the firm. That is a gross number.

It could just be a switch from one equity strategy to another or fixed income to equity or what have you. What matters is the net flows, which was nicely positive for 2021 and for the fourth quarter. I know that's confusing. We do have a table that provides the net flow information in the 10-K.

Unknown speaker -- Private Investor

Thank you. And then my final question relates to share repurchases. Do you have or does the board have a policy of attempting to use share repurchase to offset option creep?

Rick Hough -- Chairman and Chief Executive Officer

We announced a share repurchase program last year. That was in part and only in part to offset some dilution. We don't have a firm policy on that. Obviously, it's a tool in the toolbox that we're happy to use.

It's been a bit frustrating, I'll admit, spending the share repurchase program that we announced due to volume constraints. We'll be looking at that. Obviously, given the results of last year and where we are positioned with the company, we continue to have a robust cash flow and to build cash either for strategic purposes or another use, including our dividend, which remains high. It should be pointed out that despite acquisitions, other potential dilution, that this firm has accreted, adjusted, diluted earnings per share.

That is to say after any dilution, 21.3% on a CAGR basis over the past five years. That's the five-year CAGR, 21.3%. Over the past seven years, it's been 12% compounded. So we're aware of that.

We care a lot about it. And we're going to make use of that cash, either to accrete our shareholders appropriately when we don't see opportunities to return in dividends or to do an acquisition.

Unknown speaker -- Private Investor

Thank you. Keep performing well. Thanks.

Rick Hough -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead with your question.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Hey. Thanks. Good morning. Rick, I may have missed it earlier in the call.

The longer-term goal on the EBITDA margin, is that changing at all, just given the success you experienced in 2021?

Rick Hough -- Chairman and Chief Executive Officer

It's not really changing. I think you're going to have times where we have spurts of growth either due to the market organic growth. I mean our organic growth last year was, on a net basis, one of the best we've had in the past 9. I just -- we have to continually reinvest in the business, as I said.

It's a people business. We have to reward people for success, which we do. And it's just running ahead of my plans, which is a great fit. We -- I think a very well-run wealth management business can get the high-20s in EBITDA on a very consistent basis.

If you get performance fees, which we do and we don't budget for those, there was a nice number for that in 2021, that's going to bump up your EBITDA margin. Again, all things being equal, we can't depend on that. So you would have a slightly lower EBITDA margin, slightly lower if those fees were not to appear, for example, in 2022. The other thing to keep in mind is that we also have funds we weren't spending due to the pandemic, right, in G&A.

And we actually want that to go up because that means an investment in getting out there and in getting new business. So my views have not changed a lot. They've changed a little because, obviously, I have to hit EBITDA a little bit harder than I would have said a year or two years ago to bring that down even further.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Sounds good. And I presume that the expense is probably normalized to some extent, to your point, for this year?

Rick Hough -- Chairman and Chief Executive Officer

Yep. I think that's right.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

OK. And then can you also just update us on the outsourced CIO business and just sort of your progress? I know you've accomplished a lot in the last 12, 18 months. Just curious over the next chapter.

Rick Hough -- Chairman and Chief Executive Officer

Yeah. I appreciate that. As you know and just to remind everyone, we had a goal for $1 billion as of the end of 2021. We hit that goal in the third quarter, which is great.

Their performance, which is really based on their selection of outside managers and the asset allocation, remained very strong in and of itself. It compares extremely well in the OCIO indices that have been built, and so we remain well above $1 billion. The pipeline for the OCIO business, let me see here, it's over $600 million. And again, that's a meaningful pipeline like it is for the rest of our institutional business.

So I have a very positive outlook, as I have, going into 2022 with that pipeline and having achieved that goal of getting over $1 billion and makes us a credible entrance in the market -- entrant in the market.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. And then last question for me, Rick, is just the volatility we've seen in the last four to six weeks. Just going back to the history, how do you typically navigate those environments? Does that create any near-term noise for you?

Rick Hough -- Chairman and Chief Executive Officer

It creates a little near-term noise as it does for anyone. One -- there are a couple of virtues of this particular business. One, in just the way that we run the business, which is at the very long-term, stable view, that's very prudent, which is how we manage the business. It's also how we manage our client portfolios.

We are not tactical. We don't get caught up in the noise of the markets. We have done historically extremely well through periods of noise, whether that was the global financial crisis; the disruptions from Asia periodically that we had in the third and fourth quarters to some previous years; the downturn of the coronavirus market of 2019, gosh, it's hard to believe it was that long ago; and the current disruption in the markets, whether that's a fixation on inflation, interest rates or what's happening in Europe. Historically, our portfolios, our long-term vision, our high-quality emphasis of how we're selecting securities, and what we're looking to do is understood well by the clients, and there's a really steady hand on the tiller here at the firm.

So generally, we do well. And in fact, we often do on a relative basis extremely well. Any decline in markets in AUM, obviously, it's going to hit our revenue as it does any other firm. It's the biggest element in our revenue, right, and something we can't control.

It's why we're conservative with our management and careful with leverage as well as a business, which I think a lot of people lose sight of. The final thing is, we bill quarterly in advance at the end of the quarter. So we can also see intra-quarter noise. It really doesn't affect revenue unless it gets crystallized at the end of a quarter, really four days of the year matter for us.

That also smooths out some volatility. And then finally, of course, we have room to breathe given what we are reporting today. So it really doesn't concern me. I look out three to five years, and I feel very optimistic about the business.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. Thanks for taking the time to walk through that, I appreciate it. Thanks for all the feedback this morning.

Rick Hough -- Chairman and Chief Executive Officer

You're really welcome.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the conference call back over to Rick Hough for any closing remarks.

Rick Hough -- Chairman and Chief Executive Officer

Thanks. I really don't have much of a closing other than to say I appreciate you joining us. It was a great 2021 as well as fourth quarter. Really look forward to making additional strides in the business this year.

I'm deeply appreciative to all of our shareholders and for the great questions this morning. Thanks very much.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Rick Hough -- Chairman and Chief Executive Officer

Scott Gerard -- Chief Financial Officer

Sumeet Mody -- Piper Sandler -- Analyst

Chris Sakai -- Singular Research -- Analyst

Unknown speaker -- Private Investor

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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