SILVERCREST ASSET MANAGEMENT GROUP INC. Forward-Looking Statements
This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to: specific and overall impacts of the coronavirus (COVID-19) pandemic on our financial condition and results of operations; our ability to achieve our business objectives; our ability to successfully achieve the anticipated results of strategic transactions, including the integration of the operations of acquired assets and businesses; the retention and development of clients and other business relationships; disruptions or delays in our business operations, including without limitation disruptions or delays arising from political unrest, war, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; our ability to control costs; general economic conditions; fluctuation in operating results; changes in the securities markets; our ability to maintain compliance with the terms of our credit facility; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; risks related to data security of privacy breaches; and other risks detailed from time to time in our filings with theSEC . Our future financial performance could differ materially from the expectations of management contained herein. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. It is not possible to predict or identify all such risks, but may become material in the future. We undertake no obligation to release revisions to these forward-looking statements after the date of this report. Overview We are a full-service wealth management firm focused on providing financial advisory and related family office services to ultra-high net worth individuals and institutional investors. In addition to a wide range of investment capabilities, we offer a full suite of complementary and customized family office services for families seeking a comprehensive oversight of their financial affairs. During the three months endedSeptember 30, 2021 , our assets under management remained flat at$31.0 billion . During the nine months endedSeptember 30, 2021 , our assets under management increased by 11.5% from$27.8 billion to$31.0 billion . The business includes the management of funds of funds, and other investment funds, collectively referred to as the "Silvercrest Funds." As ofSeptember 30, 2021 ,Silvercrest L.P. has issued Restricted Stock Units exercisable for 170,854 Class B units which entitle the holders thereof to receive distributions fromSilvercrest L.P. to the same extent as if the underlying Class B units were outstanding. Net profits and net losses ofSilvercrest L.P. will be allocated, and distributions fromSilvercrest L.P. will be made, to its current partners pro rata in accordance with their respective partnership units (and assuming the Class B units underlying all restricted stock units are outstanding). The historical results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations include those ofSilvercrest L.P. and its subsidiaries. As the general partner ofSilvercrest L.P. , we control its business and affairs and, therefore, consolidate its financial results with ours. The interests of the limited partners' collective 33.2% partnership interest inSilvercrest L.P. as ofSeptember 30, 2021 are reflected in non-controlling interests in our Condensed Consolidated Financial Statements. COVID-19 Pandemic The emergence of the coronavirus (COVID-19) around the world, and particularly inthe United States , presents significant risks to us, not all of which we are able to fully evaluate or foresee at the current time. While the COVID-19 pandemic did not materially affect our financial results and business operations in the first fiscal quarter endedMarch 31, 2020 , economic and health conditions inthe United States and across most of the globe changed rapidly since the end of the first quarter and into the second fiscal quarter endedJune 30, 2020 . Demand for our services continues despite the current capital markets and overall economic environment. Such current demand may not continue and/or demand may decrease from historical levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. The COVID-19 pandemic affected our operations in the each of the five quarters during the periodApril 1, 2020 throughSeptember 30, 2021 and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on our business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of our management and employees, client behavior, and on the overall economy. The scope and nature of these impacts, most of which are beyond our control, continue to evolve, and the outcomes of these impacts are uncertain. 31 -------------------------------------------------------------------------------- Our revenue is highly correlated to securities markets. As a result, we expect that our assets under management and revenue levels will be negatively impacted, on an incremental basis, by the effect of the COVID-19 pandemic on securities markets. The decrease in assets under management for the three months endedMarch 31, 2020 had an impact on our revenue for the second quarter endedJune 30, 2020 because most of our revenue is billed in advance based on the value of assets under management on the last day of the preceding calendar quarter. We continue to fully operate with our management and employees working remotely and we have had business continuity plans in place which we were able to seamlessly activate upon actions taken by various governmental authorities suggesting that businesses recommend that their employees work from home as a result of the pandemic. Due to the above circumstances and as described generally in this Form 10-Q, management cannot predict the full impact of the COVID-19 pandemic on the Company's earnings and operations nor to economic conditions generally. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.
Key Performance Indicators
When we review our performance, we focus on the indicators described below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands except as indicated) 2021 2020 2021 2020
Revenue $ 33,461 $ 27,182 $ 97,799 $ 79,568
Income before other income
(expense), net $ 8,181 $ 4,949 $ 21,211 $ 18,920
Net income $ 6,354 $ 3,480 $ 16,350 $ 13,952
Net income margin 19.0 % 12.8 % 16.7 % 17.5 %
Net income attributable to
Silvercrest $ 3,723 $ 2,059 $ 9,610 $ 8,081
Adjusted EBITDA (1) $ 10,345 $ 8,119 $ 30,430 $ 22,999
Adjusted EBITDA margin (2) 30.9 % 29.9 % 31.1 % 28.9 %
Assets under management at period
end (billions) $ 31.0 $ 24.4 $ 31.0 $ 24.4
Average assets under management
(billions) (3) $ 31.0 $ 24.1 $ 29.4 $ 24.8 (1) EBITDA, a non-GAAP measure of earnings, represents net income before
provision for income taxes, interest income, interest expense, depreciation
and amortization. We define Adjusted EBITDA as EBITDA without giving effect
to items including, but not limited to, professional fees associated with
acquisitions or financing transactions, gains on extinguishment of debt or
other obligations related to acquisitions, losses on disposals or abandonment
of assets and leaseholds, severance and other similar expenses, but including
partner incentive allocations, prior to our initial public offering, as an
expense. We use this non-GAAP financial measure to assess the strength of our
business. These adjustments and the non-GAAP financial measures that are
derived from them provide supplemental information to analyze our business
from period to period. Investors should consider these non-GAAP financial
measures in addition to, and not as a substitute for, financial measures in
accordance with GAAP. See "Supplemental Non-GAAP Financial Information" for
a reconciliation of non-GAAP financial measures.
(2) Adjusted EBITDA margin, a non-GAAP measure of earnings, is calculated by
dividing Adjusted EBITDA by total revenue.
(3) We have computed average assets under management by averaging assets under
management at the beginning of the applicable period and assets under
management at the end of the applicable period.
Revenue
We generate revenue from management and advisory fees, performance fees and
allocations, and family office services fees. Our management and advisory fees
are generated by managing assets on behalf of separate accounts and acting as
investment adviser for various investment funds. Our performance fees and
allocations relate to assets managed in external investment strategies in which
we have a revenue sharing arrangement and in funds in which we have no
partnership interest. Our management and advisory fees and family office
services fees income is recognized through the course of the period in which
these services are provided. Income from performance fees and allocations is
recorded at the conclusion of the contractual performance period when all
contingencies are resolved. In certain arrangements, we are only entitled to
receive performance fees and allocations when the return on assets under
management exceeds certain benchmark returns or other performance targets.
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The discretionary investment management agreements for our separately managed
accounts do not have a specified term. Rather, each agreement may be terminated
by either party at any time, unless otherwise agreed with the client, upon
written notice of termination to the other party. The investment management
agreements for our private funds are generally in effect from year to year, and
may be terminated at the end of any year (or, in certain cases, on the
anniversary of execution of the agreement) (i) by us upon 30 or 90 days' prior
written notice and (ii) after receiving the affirmative vote of a specified
percentage of the investors in the private fund that are not affiliated with us,
by the private fund on 60 or 90 days' prior written notice. The investment
management agreements for our private funds may also generally be terminated
effective immediately by either party where the non-terminating party
(i) commits a material breach of the terms subject, in certain cases, to a cure
period, (ii) is found to have committed fraud, gross negligence or willful
misconduct or (iii) terminates, becomes bankrupt, becomes insolvent or
dissolves. Each of our investment management agreements contains customary
indemnification obligations from us to our clients. The tables below set forth
the amount of assets under management, the percentage of management and advisory
fees revenues, the amount of revenue recognized, and the average assets under
management for discretionary managed accounts and for private funds for each
period presented.
Discretionary Managed Accounts
As of and for the Three As of and for the Nine Months
Months Ended September 30, Ended September 30,
(in billions) 2021 2020 2021 2020
AUM concentrated in Discretionary
Managed Accounts $ 22.0 $ 17.5 $ 22.0 $ 17.5
Average AUM For Discretionary
Managed Accounts $ 22.2 $ 17.2 $ 21.1 $ 17.9
Discretionary Managed Accounts
Revenue (in millions) $ 31.2 $ 25.0 $ 90.9 $ 73.1
Percentage of management and
advisory fees revenue 97 % 95 % 96 % 95 %
Private Funds
As of and for the Three As of and for the Nine Months
Months Ended September 30, Ended September 30,
(in billions) 2021 2020 2021 2020
AUM concentrated in Private Funds $ 0.5 $ 0.4 $ 0.5 $ 0.4
Average AUM For Private Funds $ 0.5 $ 0.4 $ 0.5 $ 0.5
Private Funds Revenue (in millions) $ 1.1 $ 1.2 $ 3.5 $ 3.5
Percentage of management and
advisory fees
revenue 3 % 5 % 4 % 5 %
Our management and advisory fees are primarily driven by the level of our assets
under management. Our assets under management increase or decrease based on the
net inflows or outflows of funds into our various investment strategies and the
investment performance of our clients' accounts. In order to increase our assets
under management and expand our business, we must develop and market investment
strategies that suit the investment needs of our target clients and provide
attractive returns over the long term. Our ability to continue to attract
clients will depend on a variety of factors including, among others:
• our ability to educate our target clients about our classic value
investment strategies and provide them with exceptional client service;
• the relative investment performance of our investment strategies, as
compared to competing products and market indices;
• competitive conditions in the investment management and broader financial
services sectors;
• investor sentiment and confidence; and
• our decision to close strategies when we deem it to be in the best
interests of our clients.
The majority of management and advisory fees that we earn on separately managed accounts are based on the value of assets under management on the last day of each calendar quarter. Most of our management and advisory fees are billed quarterly in advance on the first day of each calendar quarter. Our basic annual fee schedule for management of clients' assets in separately managed accounts is: (i) for managed equity or balanced portfolios, 1% of the first$10 million and 0.60% on the balance, (ii) for managed fixed income only portfolios, 0.40% on the first$10 million and 0.30% on the balance, (iii) for the municipal value strategy, 0.65%, (iv) for Cortina's equity portfolios, 1% on the first$25 million , 0.90% on the next$50 million and 0.80% on the balance and (v) for outsourced chief investment officer portfolios, 0.40% on the first$50 million , 0.32% on the next$50 million and 0.24% on the balance. Our fee for monitoring non-discretionary assets can range from 0.05% to 0.01%, but can also be incorporated into an agreed-upon fixed family office service fee. The majority of our client relationships pay a blended fee rate since they are invested in multiple strategies. 33
-------------------------------------------------------------------------------- Management fees earned on investment funds that we advise are calculated primarily based on the net assets of the funds. Some funds calculate investment fees based on the net assets of the funds as of the last business day of each calendar quarter, whereas other funds calculate investment fees based on the value of net assets on the first business day of the month. Depending on the investment fund, fees are paid either quarterly in advance or quarterly in arrears. For our private funds, the fees range from 0.25% to 1.5% annually. Certain management fees earned on investment funds for which we perform risk management and due diligence services are based on flat fee agreements customized for each engagement. Average annual management fee is calculated by dividing our actual annualized revenue earned over a period by our average assets under management during the same period (which is calculated by averaging quarter-end assets under management for the applicable period). Our average annual management fee was 0.43% and 0.45% for the three months endedSeptember 30, 2021 and 2020, respectively. Our average annual management fee was 0.44% and 0.43% for the nine months endedSeptember 30, 2021 and 2020, respectively. Changes in our total average management fee rates are typically the result of changes in the mix of our assets under management and the concentration in our equities strategies whose fee rates are higher than those of other investment strategies. Management and advisory fees are also adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the previous quarter-end market value of the portfolio. These cash flow-related adjustments were insignificant for the three and nine months endedSeptember 30, 2021 and 2020.Silvercrest L.P. has authority to take fees directly from external custodian accounts of its separately managed accounts.
Our management and advisory fees may fluctuate based on a number of factors, including the following:
• changes in assets under management due to appreciation or depreciation of
our investment portfolios, and the levels of the contribution and
withdrawal of assets by new and existing clients;
• allocation of assets under management among our investment strategies,
which have different fee schedules;
• allocation of assets under management between separately managed accounts
and advised funds, for which we generally earn lower overall management
and advisory fees; and
• the level of our performance with respect to accounts and funds on which
we are paid performance fees and allocations.
Our family office services capabilities enable us to provide comprehensive and integrated services to our clients. Our dedicated group of tax and financial planning professionals provide financial planning, tax planning and preparation, partnership accounting and fund administration and consolidated wealth reporting among other services. Family office services income fluctuates based on both the number of clients for whom we perform these services and the level of agreed-upon fees, most of which are flat fees. Therefore, non-discretionary assets under management, which are associated with family office services, do not typically serve as the basis for the amount of family office services revenue that is recognized.
Expenses
Our expenses consist primarily of compensation and benefits expenses, as well as general and administrative expense including rent, professional services fees, data-related costs and sub-advisory fees. These expenses may fluctuate due to a number of factors, including the following:
• variations in the level of total compensation expense due to, among other
things, bonuses, awards of equity to our employees and partners of
factors; and
• the level of management fees from funds that utilize sub-advisors will
affect the amount of sub-advisory fees.
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Compensation and Benefits Expense
Our largest expense is compensation and benefits, which includes the salaries, bonuses, equity-based compensation and related benefits and payroll costs attributable to our principals and employees. Our compensation methodology is intended to meet the following objectives: (i) support our overall business strategy; (ii) attract, retain and motivate top-tier professionals within the investment management industry; and (iii) align our employees' interests with those of our equity owners. We have experienced, and expect to continue to experience, a general rise in compensation and benefits expense commensurate with growth in headcount and with the need to maintain competitive compensation levels.
The components of our compensation expense for the three and nine months ended
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands) 2021 2020 2021 2020
Cash compensation and benefits (1) $ 18,414 $ 14,950 $ 53,775 $ 43,761
Non-cash equity-based compensation
expense 344 192 1,107 456
Total compensation expense $ 18,758 $ 15,142 $ 54,882 $ 44,217 (1) For the three months ended
respectively, of partner incentive payments were included in cash
compensation and benefits expense in the Condensed Consolidated Statements of
Operations. For the nine months ended
and $20,055 , respectively, of partner incentive payments were included in
cash compensation and benefits expense in the Condensed Consolidated
Statements of Operations.
During 2021 and 2020, Silvercrest L.P. granted restricted stock units ("RSU") to
existing Class B unit holders. During 2021 and 2020, Silvercrest L.P. granted
non-qualified options ("NQO") to an existing Class B unit holder. Information
regarding restricted stock units and stock options can be found in Note 16.
"Equity Based Compensation" in the "Notes to Condensed Consolidated Financial
Statements" in "Item 1. Financial Statements" of this filing.
General and Administrative Expenses
General and administrative expenses include occupancy-related costs, professional and outside services fees, office expenses, depreciation and amortization, sub-advisory fees and the costs associated with operating and maintaining our research, trading and portfolio accounting systems. Our costs associated with operating and maintaining our research, trading and portfolio accounting systems and professional services expenses generally increase or decrease in relative proportion to the number of employees retained by us and the overall size and scale of our business operations. Sub-advisory fees will fluctuate based on the level of management fees from funds that utilize sub-advisors.
Other Income
Other income is derived primarily from investment income arising from our investments in various private investment funds that were established as part of our investment strategies. We expect the investment components of other income, in the aggregate, to fluctuate based on market conditions and the success of our investment strategies. Performance fees and allocations earned from those investment funds in which we have a partnership interest have been earned over the past few years as a result of the achievement of various high-water marks depending on the investment fund. These performance fees and allocations are recorded based on the equity method of accounting. The majority of our performance fees and allocations over the past few years have been earned from our fixed income-related funds.
Non-Controlling Interests
We are the general partner ofSilvercrest L.P. and control its business and affairs and, therefore, consolidate its financial results with ours. In light of the limited partners' interest inSilvercrest L.P. , we reflect their partnership interests as non-controlling interests in our Condensed Consolidated Financial Statements. Provision for Income Tax We are subject to taxes applicable to C-corporations. Our effective tax rate, and the absolute dollar amount of our tax expense will be offset by the benefits of the tax receivable agreement entered into with our Class B stockholders. 35 --------------------------------------------------------------------------------
Acquisitions
OnApril 12, 2019 , we entered into an Asset Purchase Agreement (the "Purchase Agreement") withCortina Asset Management, LLC , aWisconsin limited liability company ("Cortina"), and certain interest holders of Cortina (the "Principals of Cortina") to acquire, directly or through a designated affiliate, substantially all of the assets of Cortina relating to Cortina's business of providing investment management, investment advisory, and related services. Subject to the terms and conditions set forth in the Purchase Agreement, we agreed to pay to Cortina an aggregate maximum amount of$44.9 million , 80% of which was agreed to be paid in cash at closing by us, and 20% of which was agreed to be paid by us in the form of issuance and delivery to certain Principals of Cortina at closing of ClassB Units inSilvercrest L.P. , in each case subject to certain adjustments as described in the Purchase Agreement. In addition, the Purchase Agreement provides for up to an additional$26.2 million to be paid 80% in cash with certain Principals of Cortina receiving the remaining 20% in the form of ClassB Units ofSilvercrest L.P. in potential earn-out payments over the next four years. OnJuly 1, 2019 , the acquisition was completed pursuant to the Purchase Agreement. At closing, the Company paid to Cortina an aggregate principal amount of$33.6 million in cash, andSilvercrest L.P. paid an additional$9.0 million in the form of issuance and delivery to certain Principals of Cortina of 662,713 ClassB Units inSilvercrest L.P. Of the$33.6 million paid in cash,$35.1 million represented consideration, partially offset by net closing credits due to the Company for reimbursable expenses from Cortina.
In addition, the Purchase Agreement provides for up to an additional
The foregoing description of the Purchase Agreement is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Purchase Agreement, which is attached as Exhibit 2.1 to the Form 8-K filed by Silvercrest onApril 15, 2019 . OnDecember 13, 2018 , we executed an Asset Purchase Agreement (the "Neosho Asset Purchase Agreement") by and among the Company,Silvercrest L.P. ("SLP"),Silvercrest Asset Management Group LLC ("SAMG LLC ") andNeosho Capital LLC ("Neosho" or the "Seller"), andChristopher K. Richey ,Alphonse I. Chan ,Robert K. Choi andVincent G. Pandes , each such individual a principal of Neosho, to acquire certain assets of Neosho. The transaction contemplated by the Neosho Asset Purchase Agreement closed onJanuary 15, 2019 and is referred to herein as the "Neosho Acquisition". Information regarding the Cortina and Neosho Acquisitions can be found in Note 3. "Acquisitions" in the "Notes to Condensed Consolidated Financial Statements" in "Item 1. Financial Statements" of this filing.
Operating Results
Revenue
Our revenues for the three and nine months endedSeptember 30, 2021 and 2020 are set forth below: For the Three Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 ($) 2021 vs. 2020 (%) Management and advisory fees$ 32,248 $ 26,148 $ 6,100 23.3 % Performance fees 86 - 86 100.0 % Family office services 1,127 1,034 93 9.0 % Total revenue$ 33,461 $ 27,182 $ 6,279 23.1 % For the Nine Months Ended September 30, (in thousands) 2021 2020 2021 vs. 2020 ($) 2021 vs. 2020 (%) Management and advisory fees$ 94,435 $ 76,554 $ 17,881 23.4 % Performance fees 86 - 86 100.0 % Family office services 3,278 3,014 264 8.8 % Total revenue$ 97,799 $ 79,568 $ 18,231 22.9 % 36
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The growth in our assets under management during the three and nine months ended
Assets Under Management
Non-
(in billions) Discretionary Discretionary Total
As of June 30, 2020 $ 17.3 $ 6.5 $ 23.8
Gross client inflows 0.8 0.1 0.9
Gross client outflows (0.9 ) (0.1 ) (1.0 )
Net client flows (0.1 ) - (0.1 )
Market appreciation 0.7 - 0.7
As of September 30, 2020 $ 17.9 $ 6.5 $ 24.4 (1)
As of June 30, 2021 $ 22.9 $ 8.1 $ 31.0
Gross client inflows 1.1 0.1 1.2
Gross client outflows (1.3 ) (0.1 ) (1.4 )
Net client flows (0.2 ) - (0.2 )
Market (depreciation)/appreciation (0.2 ) 0.4 0.2
As of September 30, 2021 $ 22.5 $ 8.5 $ 31.0 (1)
As of January 1, 2020 $ 18.8 $ 6.3 $ 25.1
Gross client inflows 2.6 0.3 2.9
Gross client outflows (2.4 ) (0.2 ) (2.6 )
Net client flows 0.2 0.1 0.3
Market (depreciation)/appreciation (1.1 ) 0.1 (1.0 )
As of September 30, 2020 $ 17.9 $ 6.5 $ 24.4 (1)
As of January 1, 2021 $ 20.6 $ 7.2 $ 27.8
Gross client inflows 3.6 0.4 4.0
Gross client outflows (4.2 ) (0.4 ) (4.6 )
Net client flows (0.6 ) - (0.6 )
Market appreciation 2.5 1.3 3.8
As of September 30, 2021 $ 22.5 $ 8.5 $ 31.0 (1)
(1) Less than 5% of assets under management generate performance fees or
allocations.
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The following chart summarizes the performance 1, 2 of each of our principal equity strategies relative to their appropriate benchmarks since inception:
PROPRIETARY EQUITY PERFORMANCE
as ofSeptember 30, 2021 ANNUALIZED PERFORMANCE INCEPTION 1-YEAR 3-YEAR 5-YEAR 7-YEAR INCEPTION
Large Cap Value Composite 4/1/02 31.5 12.7 14.9 13.2 9.9 Russell 1000 Value Index 35.0 10.1 10.9 9.3 7.9 Small Cap Value Composite 4/1/02 51.1 8.6 10.7 11.1 11.0 Russell 2000 Value Index 63.9 8.6 11.0 10.2 8.7 Smid Cap Value Composite 10/1/05 49.3 9.0 12.1 12.1 10.5 Russell 2500 Value Index 54.4 8.9 10.5 9.5 8.3 Multi Cap Value Composite 7/1/02 36.6 11.6 13.5 12.3 10.4 Russell 3000 Value Index 36.6 9.9 10.9 9.4 8.6 Equity Income Composite 12/1/03 31.6 8.4 11.5 11.3 11.7 Russell 3000 Value Index 36.6 9.9 10.9 9.4 8.7 Focused Value Composite 9/1/04 28.8 7.8 10.7 10.7 10.8 Russell 3000 Value Index 36.6 9.9 10.9 9.4 8.5
Small Cap Opportunity Composite
16.4 14.9 12.3 Russell 2000 Index 47.7 10.5 13.5 11.9 9.4
Small Cap Growth Composite
24.1 19.4 13.3 Russell 2000 Growth Index 33.3 11.7
15.3 13.2 10.2
Smid Cap Growth Composite
27.5 20.5 14.1
Russell 2500 Growth Index 32.0 16.0 18.2 14.9 11.5
1 Returns are based upon a time weighted rate of return of various fully
discretionary equity portfolios with similar investment objectives,
strategies and policies and other relevant criteria managed by
subsidiary of Silvercrest. Performance results are gross of fees and net of
commission charges. An investor's actual return will be reduced by the
management and advisory fees and any other expenses it may incur in the
management of the investment advisory account.
and advisory fees are described in Part 2 of its Form ADV. Actual fees and
expenses will vary depending on a variety of factors, including the size of a
particular account. Returns greater than one year are shown as annualized
compounded returns and include gains and accrued income and reinvestment of
distributions. Past performance is no guarantee of future results. This
report contains no recommendations to buy or sell securities or a
solicitation of an offer to buy or sell securities or investment services or
adopt any investment position. This report is not intended to constitute
investment advice and is based upon conditions in place during the period
noted. Market and economic views are subject to change without notice and may
be untimely when presented here. Readers are advised not to infer or assume
that any securities, sectors or markets described were or will be profitable.
created to meet the investment and administrative needs of individuals with
substantial assets and select institutional investors. SAMG LLC claims
compliance with the Global Investment Performance Standards (GIPS®).
2 The market indices used to compare to the performance of our strategies are
as follows:
The Russell 1000 Index is a capitalization-weighted, unmanaged index that
measures the 1000 largest companies in the Russell 3000. The Russell 1000 Value
Index is a capitalization-weighted, unmanaged index that includes those Russell
1000 Index companies with lower price-to-book ratios and lower expected growth
values.
The Russell 2000 Index is a capitalization-weighted, unmanaged index that
measures the 2000 smallest companies in the Russell 3000. The Russell 2000 Value
Index is a capitalization-weighted, unmanaged index that includes those Russell
2000 Index companies with lower price-to-book ratios and lower expected growth
values. The Russell 2000 Growth Index is a capitalization-weighted, unmanaged
index that includes those Russell 2000 Index companies with higher price-to-book
ratios and higher forecasted growth.
The Russell 2500 Index is a capitalization-weighted, unmanaged index that
measures the 2500 smallest companies in the Russell 3000. The Russell 2500 Value
Index is a capitalization-weighted, unmanaged index that includes those Russell
2000 Index companies with lower price-to-book ratios and lower expected growth
values. The Russell 2500 Growth Index is a capitalization-weighted, unmanaged
index that includes those Russell 2500 Index companies with higher price-to-book
ratios and higher forecasted growth.
The Russell 3000 Value Index is a capitalization-weighted, unmanaged index that
measures those Russell 3000 Index companies with lower price-to-book ratios and
lower forecasted growth.
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Three Months Ended
Our total revenue increased by$6.3 million , or 23.1%, to$33.5 million for the three months endedSeptember 30, 2021 , from$27.2 million for the three months endedSeptember 30, 2020 . This increase was driven by market appreciation in discretionary assets under management, partially offset by net client outflows. Total assets under management increased by$6.6 billion , or 27.0%, to$31.0 billion atSeptember 30, 2021 from$24.4 billion atSeptember 30, 2020 . Compared to the three months endedSeptember 30, 2020 , there was an increase of$0.3 billion in client inflows, partially offset by a decrease in market appreciation of$0.5 billion and an increase of$0.4 billion in client outflows. During the three months endedSeptember 30, 2021 , fromJune 30, 2021 , there was a decrease of$0.4 billion in discretionary assets under management and an increase of$0.4 billion in non-discretionary assets under management. The increase in assets under management as ofSeptember 30, 2021 as compared toJune 30, 2021 was primarily due to market appreciation during the quarter endedSeptember 30, 2021 , partially offset by net client outflows. Sub-advised fund management revenue decreased by$0.2 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. Proprietary fund management revenue increased by$0.1 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. With respect to our discretionary assets under management, equity assets experienced a decrease of 2.6% during the three months endedSeptember 30, 2021 and fixed income assets increased by 0.5% during the same period. For the three months endedSeptember 30, 2021 , most of the decrease in equity assets came from our small cap concentrated, international small cap value and emerging markets ADR strategies with composite returns of (3.30%), (2.79%) and (2.75%), respectively. As ofSeptember 30, 2021 , the composition of our assets under management was 73% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 27% in non-discretionary assets which represent assets on which we provide portfolio reporting but do not have investment discretion.
The following table represents a further breakdown of our assets under
management as of the three months ended
Three Months Ended
September 30,
2021 2020
Total AUM as of June 30, $ 31.0 $ 23.8
Discretionary AUM:
Total Discretionary AUM as of June 30, 22.9 17.3
New client accounts/assets (1) 0.1 0.1
Closed accounts (2) (0.1 ) -
Net cash inflow/(outflow) (3) (0.2 ) (0.2 )
Non-discretionary to Discretionary AUM (4) - -
Market (depreciation)/appreciation (0.2 ) 0.7
Change to Discretionary AUM (0.4 ) 0.6
Total Discretionary AUM at
0.4 -
Total AUM as of September 30, $ 31.0 $ 24.4 (1) Represents new account flows from both new and existing client relationships.
(2) Represents closed accounts of existing client relationships and those that
terminated.
(3) Represents periodic cash flows related to existing accounts.
(4) Represents client assets that converted to Discretionary AUM from
Non-Discretionary AUM.
(5) Represents the net change to Non-Discretionary AUM.
Nine Months Ended
Our total revenue increased by$18.2 million , or 22.9%, to$97.8 million for the nine months endedSeptember 30, 2021 , from$79.6 million for the nine months endedSeptember 30, 2020 . This increase was driven by market appreciation in assets under management, partially offset by net client outflows. Total assets under management increased by$6.6 billion , or 27.0%, to$31.0 billion atSeptember 30, 2021 from$24.4 billion atSeptember 30, 2020 . Compared to the nine months endedSeptember 30, 2020 , there was an increase in market appreciation of$4.8 billion and an increase of$1.1 billion in client inflows, partially offset by an increase of$2.0 billion in client outflows. During the nine months endedSeptember 30, 2021 , fromDecember 31, 2020 , there was an increase of$1.9 billion in discretionary assets under management and an increase of$1.3 billion in non-discretionary assets under management. The increase in assets under management 39 -------------------------------------------------------------------------------- as ofSeptember 30, 2021 as compared toDecember 31, 2020 was primarily due to market appreciation during the period. Sub-advised fund management revenue decreased by$0.1 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year. Proprietary fund management revenue increased by$0.1 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year. With respect to our discretionary assets under management, equity assets experienced an increase of 10.0% during the nine months endedSeptember 30, 2021 and fixed income assets increased by 8.7% during the same period. For the nine months endedSeptember 30, 2021 , most of the increase in equity assets came from our energy infrastructure, REIT and small cap growth strategies with composite returns of 33.80%, 22.50% and 20.73%, respectively. As ofSeptember 30, 2021 , the composition of our assets under management was 73% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 27% in non-discretionary assets which represent assets on which we provide portfolio reporting but do not have investment discretion.
The following table represents a further breakdown of our assets under
management as of the nine months ended
Nine Months Ended
September 30,
2021 2020
Total AUM as of January 1, $ 27.8 $ 25.1
Discretionary AUM:
Total Discretionary AUM as of
0.3 0.5
Closed accounts (2) (0.4 ) (0.2 )
Net cash inflow/(outflow) (3) (0.5 ) 0.1
Non-discretionary to Discretionary AUM (4) - -
Market appreciation/(depreciation) 2.5 (1.1 )
Change to Discretionary AUM 1.9 (0.9 )
Total Discretionary AUM at
1.3 0.2
Total AUM as of September 30, $ 31.0 $ 24.4 (2) Represents new account flows from both new and existing client relationships.
(2) Represents closed accounts of existing client relationships and those that
terminated.
(3) Represents periodic cash flows related to existing accounts.
(4) Represents client assets that converted to Discretionary AUM from
Non-Discretionary AUM.
(5) Represents the net change to Non-Discretionary AUM.
Expenses Our expenses for the three and nine months endedSeptember 30, 2021 and 2020 are set forth below: For the Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Compensation and benefits (1)$ 18,758 $ 15,142 $ 3,616 23.9 % General, administrative and other 6,522 7,091 (569 ) (8.0 )% Total expenses$ 25,280 $ 22,233 $ 3,047 13.7 % For the Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Compensation and benefits (1)$ 54,882 $ 44,217 $ 10,665 24.1 % General, administrative and other 21,706 16,431 5,275 32.1 % Total expenses$ 76,588 $ 60,648 $ 15,940 26.3 %
(1) For the three months ended
respectively, of partner incentive payments were included in cash
compensation and benefits expense in the Condensed Consolidated Statements of
Operations. For the nine months ended
and $20,055 , respectively, of partner incentive payments were included in
cash compensation and benefits expense in the Condensed Consolidated
Statements of Operations.
40
-------------------------------------------------------------------------------- Our expenses are driven primarily by our compensation costs. The table included in "-Expenses-Compensation and Benefits Expense" describes the components of our compensation expense for the three and nine months endedSeptember 30, 2021 and 2020. Other expenses, such as rent, professional service fees, data-related costs, and sub-advisory fees incurred are included in our general and administrative expenses in the Condensed Consolidated Statements of Operations.
Three Months Ended
Total expenses increased by$3.0 million , or 13.7%, to$25.3 million for the three months endedSeptember 30, 2021 from$22.2 million for the three months endedSeptember 30, 2020 . This increase was attributable to an increase in compensation and benefits expense of$3.6 million , partially offset by a decrease in general, administrative and other expenses of$0.6 million . Compensation and benefits expense increased by$3.6 million , or 23.9%, to$18.8 million for the three months endedSeptember 30, 2021 from$15.2 million for the three months endedSeptember 30, 2020 . The increase was primarily attributable to an increase in the accrual for bonuses of$3.0 million , an increase in salaries and benefits of$0.4 million primarily as a result of merit-based increases, newly hired staff, and an increase in equity-based compensation expense of$0.2 million due to an increase in the number of vested and unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses decreased by$0.6 million , or 8.0%, to$6.5 million for the three months endedSeptember 30, 2021 from$7.1 million for the three months endedSeptember 30, 2020 . This was primarily attributable to a decrease in the adjustment to the fair value of contingent consideration related to the Cortina Acquisition of$1.0 million and a decrease in occupancy and related costs of$0.1 million primarily due to a decrease in cleaning and maintenance costs, partially offset by an increase in professional fees of$0.1 million , an increase in portfolio and systems expense of$0.2 and an increase depreciation and amortization expense of$0.1 million .
Nine Months Ended
Total expenses increased by$16.0 million , or 26.3%, to$76.6 million for the nine months endedSeptember 30, 2021 from$60.6 million for the nine months endedSeptember 30, 2020 . This increase was attributable to increases in compensation and benefits expense and general, administrative and other expenses of$10.7 million and$5.3 million , respectively. Compensation and benefits expense increased by$10.7 million , or 24.1%, to$54.9 million for the nine months endedSeptember 30, 2021 from$44.2 million for the nine months endedSeptember 30, 2020 . The increase was primarily attributable to an increase in the accrual for bonuses of$8.8 million , an increase in salaries and benefits of$1.1 million primarily as a result of merit-based increases and newly hired staff and an increase in equity-based compensation expense of$0.7 million due to an increase in the number of vested and unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses increased by$5.3 million , or 32.1%, to$21.7 million for the nine months endedSeptember 30, 2021 from$16.4 million for the nine months endedSeptember 30, 2020 . This was primarily attributable to an increase in the adjustment to the fair value of contingent consideration related to the Cortina Acquisition of$5.1 million , an increase in trade errors of$0.3 million , an increase in professional fees of$0.1 million , an increase in sub-advisory and referral fees of$0.1 million and an increase in insurance expense of$0.1 million partially offset by a decrease in travel and entertainment expenses of$0.2 million as a result of the coronavirus pandemic, a decrease in portfolio and systems expense of$0.1 million and a decrease in depreciation and amortization of$0.1 million . Other Income (Expense), Net For the Three Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Other income (expense), net$ 43 $ 8 $ 35 NM Interest income 1 2 (1 ) (50.0 )% Interest expense (92 ) (120 ) 28 23.3 % Total other income (expense), net$ (48 ) $ (110 ) $ 62 56.4 % For the Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Other income (expense), net$ 58 $ 23 $ 35 NM Interest income 5 12 (7 ) (58.3 )% Interest expense (294 ) (445 ) 151 33.9 % Total other income (expense), net$ (231 ) $ (410 ) $ 179 43.7 % 41
--------------------------------------------------------------------------------
NM - Not Meaningful
Three Months Ended
Total other income (expense) net increased by$62 thousand to other expense of$48 thousand for the three months endedSeptember 30, 2021 from other expense of$110 thousand for the three months endedSeptember 30, 2020 due to a decrease in interest expense as a result of the level of borrowings under our credit facility and an increase in other income.
Nine Months Ended
Total other income (expense) net increased by$179 thousand to other expense of$231 thousand for the nine months endedSeptember 30, 2021 from other expense of$410 thousand for the nine months endedSeptember 30, 2020 due to a decrease in interest expense as a result of the level of borrowings under our credit facility and an increase in other income.
Provision for Income Taxes
Three Months Ended
The provision for income taxes was$1.8 million and$1.4 million for the three months endedSeptember 30, 2021 and 2020, respectively. The change was primarily related to the tax effect of the change in the fair value of the contingent consideration related to the Cortina Acquisition and by increased profitability during the current period as compared to the prior year. Our provision for income taxes as a percentage of income before provision for income taxes for the three months endedSeptember 30, 2021 and 2020 was 21.9% and 28.1%, respectively.
Nine Months Ended
The provision for income taxes was$4.6 million and$4.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our provision for income taxes as a percentage of income before provision for income taxes for the nine months endedSeptember 30, 2021 and 2020 was 22.1% and 24.6%, respectively.
Supplemental Non-GAAP Financial Information
To provide investors with additional insight, promote transparency and allow for a more comprehensive understanding of the information used by management in its financial and operational decision-making, we supplement our Condensed Consolidated Financial Statements presented on a basis consistent withU.S. generally accepted accounting principles, or GAAP, with Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, and Adjusted Earnings Per Share which are non-GAAP financial measures of earnings.
• EBITDA represents net income before provision for income taxes, interest
income, interest expense, depreciation and amortization.
• We define Adjusted EBITDA as EBITDA without giving effect to the
franchise tax, professional fees associated with acquisitions or financing
transactions, gains on extinguishment of debt or other obligations related
to acquisitions, impairment charges and losses on disposals or abandonment
of assets and leaseholds, client reimbursements and fund redemption costs,
severance and other similar expenses, but including partner incentive
allocations, prior to our initial public offering, as an expense. We feel
that it is important to management and investors to supplement our
Condensed Consolidated Financial Statements presented on a GAAP basis with
Adjusted EBITDA, a non-GAAP financial measure of earnings, as this measure
provides a perspective of recurring earnings of the Company, taking into
account earnings attributable to both Class A and Class B shareholders.
• Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total
revenue. We feel that it is important to management and investors to
supplement our Condensed Consolidated Financial Statements presented on a
GAAP basis with Adjusted EBITDA Margin, a non-GAAP financial measure of
earnings, as this measure provides a perspective of recurring
profitability of the Company, taking into account profitability
attributable to both Class A and Class B shareholders.
• Adjusted Net Income represents recurring net income without giving effect
to professional fees associated with acquisitions or financing
transactions, losses on forgiveness of notes receivable from our
principals, gains on extinguishment of debt or other obligations related
to acquisitions, impairment charges and losses on disposals or abandonment
of assets and leaseholds, client reimbursements and fund redemption costs,
severance and other similar expenses, but including partner incentive
allocations, prior to our initial public offering, as an expense.
Furthermore, Adjusted Net Income includes income tax expense assuming a
blended corporate rate of 26%. We feel that it is important to management
and investors to supplement our Condensed Consolidated Financial
Statements presented on a GAAP
42
--------------------------------------------------------------------------------
basis with Adjusted Net Income, a non-GAAP financial measure of earnings,
as this measure provides a perspective of recurring income of the Company,
taking into account income attributable to both Class A and Class B
shareholders.
• Adjusted Earnings Per Share represents 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 Earnings Per Share, and to the extent
dilutive, we add unvested restricted stock units and non-qualified stock
options to the total shares outstanding to compute diluted Adjusted
Earnings Per Share. As a result of our structure, which includes a
non-controlling interest, we feel that it is important to management and
investors to supplement our Condensed Consolidated Financial Statements
presented on a GAAP basis with Adjusted Earnings Per Share, a non-GAAP
financial measure of earnings, as this measure provides a perspective of
recurring earnings per share of the Company as a whole as opposed to being
limited to our Class A common stock.
These adjustments, and the non-GAAP financial measures that are derived from
them, provide supplemental information to analyze our operations between periods
and over time. Investors should consider our non-GAAP financial measure in
addition to, and not as a substitute for, financial measures prepared in
accordance with GAAP.
43
--------------------------------------------------------------------------------
The following tables contain reconciliations of net income to Adjusted EBITDA,
Adjusted Net Income and Adjusted Earnings Per Share (amounts in thousands except
per share amounts).
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Reconciliation of non-GAAP financial
measure:
Net income $ 6,354 $ 3,480 $ 16,350 $ 13,952
GAAP Provision for income taxes 1,779 1,359 4,630 4,558
Delaware Franchise Tax 50 50 150 150
Interest expense 92 120 294 445
Interest income (1 ) (2 ) (5 ) (12 )
Depreciation and amortization 981 968 2,942 2,995
Equity-based compensation 345 193 807 456
Other adjustments (A) 745 1,951 5,262 455
Adjusted EBITDA $ 10,345 $ 8,119 $ 30,430 $ 22,999
Adjusted EBITDA Margin 30.9 % 29.9 % 31.1 % 28.9 %
Adjusted Net Income and Adjusted
Earnings Per Share
Reconciliation of non-GAAP financial
measure:
Net income $ 6,354 $ 3,480 $ 16,350 $ 13,952
GAAP Provision for income taxes 1,779 1,359 4,630 4,558
Delaware Franchise Tax 50 50 150 150
Other adjustments (A) 745 1,951 5,262 455
Adjusted earnings before provision
for income taxes 8,928 6,840 26,392 19,115
Adjusted provision for income taxes:
Adjusted provision for income taxes
(26% assumed tax rate) (2,321 ) (1,778 ) (6,862 ) (4,970 )
Adjusted net income $ 6,607 $ 5,062 $ 19,530 $ 14,145
GAAP net income per share (B):
Basic and diluted $ 0.38 $ 0.22 $
0.99
Adjusted earnings per share/unit (B): Basic$ 0.46 $ 0.35 $ 1.35 $ 0.98 Diluted$ 0.44 $ 0.35 $ 1.31 $ 0.97 Shares/units outstanding: Basic Class A shares outstanding 9,653 9,545 9,653 9,545 Basic Class B shares/units outstanding 4,815 4,828
4,815 4,828 Total basic shares/units outstanding 14,468 14,373 14,468 14,373
Diluted Class A shares outstanding (C) 9,675 9,553 9,675 9,553 Diluted Class B shares/units outstanding (D) 5,239 4,989 5,239 4,989 Total diluted shares/units outstanding 14,914 14,542 14,914 14,542
(A) Other adjustments consist of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Acquisition costs (a) $ 16 $ 38 $ 347 $ 318
Severance 10 - 10 -
Other (b) 719 1,913 4,905 137
Total other adjustments $ 745 $ 1,951 $ 5,262 $ 455
44
--------------------------------------------------------------------------------
(a) For the three months ended
the nine months ended
compensation expense of
to two associates hired as part of the Cortina Acquisition in conjunction
with their admission to
professional fees of
months ended
of
the nine months ended
professional fees of
of Cortina, and costs related to the integration of Cortina's operations of
(b) For the three months ended
adjustment to the Cortina contingent purchase price consideration of
ASC 842 rent adjustment of
incentives and expenses related to the Coronavirus pandemic of
nine months ended
the Cortina contingent purchase price consideration of
rent adjustment of
incentives and expenses related to the Coronavirus pandemic of
three months ended
of
adjustment to the Cortina contingent purchase price consideration of
and expenses related to the Coronavirus pandemic of
ended
renovations, an ASC 842 rent adjustment of
of property lease incentives, professional fees related to a new audit
requirement of
purchase price consideration of
contingent purchase price consideration of
the Jamison contingent purchase price consideration of
related to the Coronavirus pandemic of
(B) GAAP net income per share is strictly attributable to Class A
shareholders. Adjusted earnings per share takes into account earnings
attributable to both Class A and Class B shareholders.
(C) Includes 21,704 and 8,242 unvested restricted stock units at
2021 and 2020, respectively.
(D) Includes 170,854 and 74,907 unvested restricted stock units and 252,904 and
86,764 unvested non-qualified options at September 30, 2021 and 2020,
respectively.
Liquidity and Capital Resources
Historically, the working capital needs of our business have primarily been met through cash generated by our operations. We expect that our cash and liquidity requirements in the next twelve months will be met primarily through cash generated by our operations. The challenges posed by the COVID-19 pandemic and the impact on our business and cash flows are evolving rapidly and cannot be predicted at this time. Consequently, we will continue to evaluate our liquidity and financial position on an ongoing basis. OnJune 24, 2013 , the subsidiaries ofSilvercrest L.P. entered into a$15.0 million credit facility withCity National Bank . The subsidiaries ofSilvercrest L.P. are the borrowers under such facility andSilvercrest L.P. guarantees the obligations of its subsidiaries under the credit facility. The credit facility is secured by certain assets ofSilvercrest L.P. and its subsidiaries. The credit facility consists of a$7.5 million delayed draw term loan that matures onJune 24, 2025 and a$7.5 million revolving credit facility that was scheduled to mature onJune 21, 2019 . OnJuly 1, 2019 , the credit facility was amended to increase the term loan by$18.0 million to$25.5 million , extend the draw date on the term loan facility toJuly 1, 2024 , extend the maturity date of the term loan toJuly 1, 2026 and increase the revolving credit facility by$2.5 million to$10.0 million . OnJune 17, 2021 , the revolving credit facility was further amended to extend the maturity date toJune 18, 2022 . The loan bears interest at either (a) the higher of the prime rate plus a margin of 0.25 percentage points and 2.5% or (b) the LIBOR rate plus 2.75 percentage points, at the borrowers' option. Borrowings under the term loan on or prior toJune 30, 2021 are payable in 20 equal quarterly installments. Borrowings under the term loan afterJune 30, 2021 will be payable in equal quarterly installments through the maturity date. The credit facility contains restrictions on, among other things, (i) incurrence of additional debt, (ii) creating liens on certain assets, (iii) making certain investments, (iv) consolidating, merging or otherwise disposing of substantially all of our assets, (v) the sale of certain assets, and (vi) entering into transactions with affiliates. In addition, the credit facility contains certain financial covenants including a test on discretionary assets under management, maximum debt to EBITDA and a fixed charge coverage ratio. The credit facility contains customary events of default, including the occurrence of a change in control which includes a person or group of persons acting together acquiring more than 30% of the total voting securities of Silvercrest. Any undrawn amounts under this facility would be available to fund future acquisitions or for working capital purposes, if needed. As ofSeptember 30, 2021 , we had$9.9 million outstanding under the term loan. As ofSeptember 30, 2021 , there were no borrowings outstanding on the revolving credit facility. We were in compliance with the covenants under the credit facility as ofSeptember 30, 2021 . Our ongoing sources of cash will primarily consist of management fees and family office services fees, which are principally collected quarterly. We will primarily use cash flow from operations to pay compensation and related expenses, general and administrative expenses, income taxes, debt service, capital expenditures, distributions to Class B unit holders and dividends on shares of our Class A common stock. 45 -------------------------------------------------------------------------------- Seasonality typically affects cash flow since the first quarter of each year includes, as a source of cash, payment of the prior year's annual performance fees and allocations, if any, from our various funds and external investment strategies and, as a use of cash, the prior fiscal year's incentive compensation. We believe that we have sufficient cash from our operations to fund our operations and commitments for the next twelve months. The following table sets forth certain key financial data relating to our liquidity and capital resources as ofSeptember 30, 2021 andDecember 31, 2020 . As of September 30, December 31, (in thousands) 2021 2020 Cash and cash equivalents$ 65,930 $ 62,498 Accounts receivable $ 9,386$ 8,341 Due from Silvercrest Funds $ 2,188$ 1,018 We anticipate that distributions to the limited partners ofSilvercrest L.P. will continue to be a material use of our cash resources and will vary in amount and timing based on our operating results and dividend policy. We pay and intend to continue paying quarterly cash dividends to holders of our Class A common stock. We are a holding company and have no material assets other than our ownership of interests inSilvercrest L.P. As a result, we will depend upon distributions fromSilvercrest L.P. to pay any dividends to our Class A stockholders. We expect to causeSilvercrest L.P. to make distributions to us in an amount sufficient to cover dividends, if any, declared by us. Our dividend policy has certain risks and limitations, particularly with respect to liquidity. Although we expect to pay dividends according to our dividend policy, we may not pay dividends according to our policy, or at all, if, among other things, we do not have the cash necessary to pay our intended dividends or our subsidiaries are prevented from making a distribution to us under the terms of our current credit facility or any future financing. To the extent we do not have cash on hand sufficient to pay dividends, we may decide not to pay dividends. By paying cash dividends rather than investing that cash in our future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise. Our purchase of Class B units inSilvercrest L.P. that occurred concurrently with the consummation of our initial public offering, and the future exchanges of Class B units ofSilvercrest L.P. , are expected to result in increases in our share of the tax basis of the tangible and intangible assets ofSilvercrest L.P. at the time of our acquisition and these future exchanges, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of tax that we would otherwise be required to pay in the future. We entered into a tax receivable agreement with the current principals ofSilvercrest L.P. and any future employee-holders of Class B units pursuant to which we agreed to pay them 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments thereunder. The timing of these payments is currently unknown. The payments to be made pursuant to the tax receivable agreement will be a liability of Silvercrest and notSilvercrest L.P. , and thus this liability has been recorded as an "other liability" on our Condensed Consolidated Statement of Financial Condition. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase in our share of the tax basis of the tangible and intangible assets ofSilvercrest L.P. The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable. Nevertheless, we expect that as a result of the size of the increases in the tax basis of our tangible and intangible assets, the payments that we may make under the tax receivable agreement likely will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased depreciation and amortization of our assets, we expect that future payments to the selling principals ofSilvercrest L.P. in respect of our purchase of Class B units from them will aggregate approximately$9.5 million . Future payments to current principals ofSilvercrest L.P. and future holders of Class B units in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial. We intend to fund required payments pursuant to the tax receivable agreement from the distributions received fromSilvercrest L.P. 46 --------------------------------------------------------------------------------
Cash Flows
The following table sets forth our cash flows for the nine months endedSeptember 30, 2021 and 2020. Operating activities consist of net income subject to adjustments for changes in operating assets and liabilities, depreciation, and equity-based compensation expense. Investing activities consist primarily of acquiring and selling property and equipment, and cash paid as part of business acquisitions. Financing activities consist primarily of contributions from partners, distributions to partners, dividends paid on Class A common stock, the issuance and payments on partner notes, other financings, and earnout payments related to business acquisitions. Nine Months Ended September 30, (in thousands) 2021 2020
Net cash provided operating activities $ 21,643 $ 10,105 Net cash used in investing activities
(630 ) (453 )
Net cash used in financing activities (17,581 ) (14,313 )
Net change in cash $ 3,432 $ (4,661 )
Operating Activities
Nine Months Ended
For the nine months endedSeptember 30, 2021 and 2020, operating activities provided$21.6 million and provided$10.1 million , respectively. This difference is primarily the result of an increase in net income of$2.4 million , increased non-cash lease expense of$1.1 million , an increase in accounts payable and accrued expense of$6.0 million primarily due to a change in the fair value of contingent consideration related to the Cortina Acquisition, an increase in equity-based compensation expense of$0.7 million and an increase in accrued compensation of$7.4 million . This was partially offset by a decrease in distributions received from investment funds of$0.9 million , an increase in accounts receivable of$2.4 million due to timing of payments received from clients, increased operating lease liabilities of$0.6 million , decreased deferred income taxes of$1.3 million , a decrease in depreciation and amortization of$0.1 million and an increase in prepaid expenses and other assets of$0.7 million .
Investing Activities
Nine Months Ended
For the nine months endedSeptember 30, 2021 and 2020, investing activities used$0.6 million and$0.5 million , respectively. The primary use of cash during the nine months endedSeptember 30, 2021 was for the acquisition of furniture, equipment and leasehold improvements. The primary use of cash during the nine months endedSeptember 30, 2020 was for the acquisition of furniture, equipment and leasehold improvements mostly related to the renovation of our office space inNew York City . Financing Activities
Nine Months Ended
For the nine months endedSeptember 30, 2021 and 2020, financing activities used$17.6 million and used$14.3 million , respectively. During the nine months endedSeptember 30, 2021 and 2020, the Company repaid$2.7 million and$2.7 million , respectively, of principal on the term loan withCity National Bank . Distributions to partners during the nine months endedSeptember 30, 2021 and 2020 were$6.8 million and$6.5 million , respectively. During the nine months endedSeptember 30, 2021 and 2020, the Company paid dividends of$4.7 million and$4.6 million , respectively, to Class A shareholders. During the nine months endedSeptember 30, 2021 and 2020, we made earnout payments of$3.0 million and$0.7 million , respectively. During the nine months endedSeptember 30, 2021 and 2020, we received payments from partners on notes receivable of$0.2 million and$0.3 million , respectively. During the nine months endedSeptember 30, 2021 , we purchased approximately 27 thousand shares of Class A common stock ofSilvercrest Asset Management Group Inc. at a cost of$0.4 million . We anticipate that distributions to principals ofSilvercrest L.P. will continue to be a material use of our cash resources, and will vary in amount and timing based on our operating results and dividend policy. As ofSeptember 30, 2021 andDecember 31, 2020 ,$9.9 million and$12.6 , respectively, was outstanding under the term loan withCity National Bank . As ofSeptember 30, 2021 andDecember 31, 2020 , accrued but unpaid interest on the term loan withCity National Bank was$27 thousand and$0 , respectively.
As of
47
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the nine months endedSeptember 30, 2021 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission onMarch 4, 2021 .
Revenue Recognition
Investment advisory fees are typically billed quarterly in advance at the beginning of the quarter or in arrears after the end of the quarter, based on a contractual percentage of the assets managed. Family office services fees are also typically billed quarterly in advance at the beginning of the quarter or in arrears after the end of the quarter based on a contractual percentage of the assets managed or upon a contractually agreed-upon flat fee arrangement. Revenue is recognized on a ratable basis over the period in which services are performed. We account for performance-based revenue in accordance with ASC 606-10-32, Accounting for Management Fees Based on a Formula, by recognizing performance fees and allocations as revenue only when it is certain that the fee income is earned and payable pursuant to the relevant agreements. In certain arrangements, we are only entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets. We record performance fees and allocations as a component of revenue. Because the majority of our revenues are earned based on assets under management that have been determined using fair value methods and since market appreciation/depreciation has a significant impact on our revenue, we have presented our assets under management using the GAAP framework for measuring fair value. That framework provides a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs based on company assumptions (Level 3). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument's fair value measurement. The three levels within the fair value hierarchy are described as follows:
• Level 1-includes quoted prices (unadjusted) in active markets for
identical instruments at the measurement date. The types of financial
instruments included in Level 1 include unrestricted securities, including
equities listed in active markets.
• Level 2-includes inputs other than quoted prices that are observable for
the instruments, including quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets
that are not active, or inputs other than quoted prices that are
observable for the instruments. The type of financial instruments in this
category include less liquid and restricted securities listed in active
markets, securities traded in other than active markets, government and
agency securities, and managed funds whose net asset value is based on
observable inputs.
• Level 3-includes one or more significant unobservable inputs. Financial
instruments that are included in this category include assets under
management primarily comprised of investments in privately held entities,
limited partnerships, and other instruments where the fair value is based
on unobservable inputs.
The table below summarizes the approximate amount of assets under management for
the periods indicated for which fair value is measured based on Level 1, Level 2
and Level 3 inputs.
Level 1 Level 2 Level 3 Total
(in billions)
September 30, 2021 AUM $ 22.6 $ 6.7 $ 1.7 $ 31.0
December 31, 2020 AUM $ 20.5 $ 4.7 $ 2.6 $ 27.8 As substantially all our assets under management are valued by independent
pricing services based upon observable market prices or inputs, we believe
market risk is the most significant risk underlying valuation of our assets
under management, as discussed under the heading "Risk Factors" in our annual
report on Form 10-K for the year ended
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The average value of our assets under management for the three and nine months
ended September 30, 2021 was approximately $31.0 billion and $29.4 billion ,
respectively. Assuming a 10% increase or decrease in our average assets under
management and the change being proportionately distributed over all our
products, the value would increase or decrease by approximately $3.1 billion and
$2.9 billion for the three and nine months ended September 30, 2021 ,
respectively, which would cause an annualized increase or decrease in revenues
of approximately $13.4 million and $13.0 million for the three and nine months
ended September 30, 2021 , respectively, at a weighted average fee rate for the
three and nine months ended September 30, 2021 of 0.43% and 0.44%,
respectively.
The average value of our assets under management for the year ended December 31,
2020 was approximately $26.5 billion . Assuming a 10% increase or decrease in our
average assets under management and the change being proportionately distributed
over all our products, the value would increase or decrease by approximately
$2.7 billion for the year ended December 31, 2020 , which would cause an
annualized increase or decrease in revenues of approximately $10.8 million for
the year ended December 31, 2020 , at a weighted average fee rate for the year
ended December 31, 2020 of 0.41%.
Recently Issued Accounting Pronouncements
Information regarding recent accounting developments and their impact on the Company can be found in Note 2. "Summary of Significant Accounting Policies" in the "Notes to Condensed Consolidated Financial Statements" in this filing.
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