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 endedJune 30, 2022 , our assets under management decreased by 8.0% from$31.2 billion to$28.7 billion . During the six months endedJune 30, 2022 , our assets under management decreased by 11.1% from$32.3 billion to$28.7 billion . The business includes the management of funds of funds, and other investment funds, collectively referred to as the "Silvercrest Funds." As ofJune 30, 2022 ,Silvercrest L.P. has issued Restricted Stock Units exercisable for 120,772 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 31.8% partnership interest inSilvercrest L.P. as ofJune 30, 2022 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 has not materially affected us to date, economic and health conditions inthe United States and across the globe have changed rapidly since the end of 2020. Although demand for our services has continued 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 each of the nine quarters during the periodApril 1, 2020 throughJune 30, 2022 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. 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 Six Months
Ended June 30, Ended June 30,
(in thousands except as indicated) 2022 2021 2022 2021
Revenue $ 32,173 $ 33,101 $ 65,683 $ 64,338
Income before other income (expense),
net $ 11,900 $ 7,342 $ 27,339 $ 13,030
Net income $ 9,473 $ 5,661 $ 21,869 $ 9,996
Net income margin 29.4 % 17.1 % 33.3 % 15.5 %
Net income attributable to Silvercrest $ 5,770 $ 3,335 $ 13,338 $ 5,887
Adjusted EBITDA (1) $ 9,163 $ 10,429 $ 19,413 $ 20,085
Adjusted EBITDA margin (2) 28.5 % 31.5 % 29.6 % 31.2 %
Assets under management at period end
(billions) $ 28.7 $ 31.0 $ 28.7 $ 31.0
Average assets under management
(billions) (3) $ 30.0 $ 30.0 $ 30.5 $ 29.4
(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.
32
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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 Months As of and for the Six Months
Ended June 30, Ended June 30,
(in billions) 2022 2021 2022 2021
AUM concentrated in Discretionary
Managed Accounts $ 19.9 $ 22.4 $ 19.9 $ 22.4
Average AUM For Discretionary Managed
Accounts $ 21.6 $ 21.9 $ 22.3 $ 21.3
Discretionary Managed Accounts Revenue
(in millions) $ 30.0 $ 30.7 $ 61.2 $ 59.7
Percentage of management and advisory
fees revenue 96 % 96 % 96 % 96 %
Private Funds
As of and for the Three Months As of and for the Six Months
Ended June 30, Ended June 30,
(in billions) 2022 2021 2022 2021
AUM concentrated in Private Funds $ 0.5 $ 0.5 $ 0.5 $ 0.5 Average AUM For Private Funds
$ 0.5 $ 0.5 $ 0.5 $ 0.5
Private Funds Revenue (in millions) $ 1.1 $ 1.2 $ 2.3 $ 2.4
Percentage of management and advisory
fees revenue 4 % 4 % 4 % 4 %
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 0.44% for the three months endedJune 30, 2022 and 2021, respectively. Our average annual management fee was 0.43% and 0.44% for the six months endedJune 30, 2022 and 2021, 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 six months endedJune 30, 2022 and 2021.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 incentive fees.
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
•
the level of management fees from funds that utilize sub-advisors will affect the amount of sub-advisory fees.
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.
34
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The components of our compensation expense for the three and six months ended
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands) 2022 2021 2022 2021
Cash compensation and benefits (1) $ 17,695 $ 18,182 $ 36,126 $ 35,362
Non-cash equity-based compensation expense 276 293 504 762
Total compensation expense $ 17,971 $ 18,475 $ 36,630 $ 36,124
(1)
For the three months ended June 30, 2022 and 2021, $8,323 and $9,010 ,
respectively, of partner incentive payments were included in cash compensation
and benefits expense in the Condensed Consolidated Statements of Operations. For
the six months ended June 30, 2022 and 2021, $16,950 and $17,014 , respectively,
of partner incentive payments were included in cash compensation and benefits
expense in the Condensed Consolidated Statements of Operations.
During the three and six months ended June 30, 2021 , Silvercrest L.P. granted
restricted stock units ("RSU") to existing Class B unit holders. During the
three and six months ended June 30, 2021 , 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.
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 35 --------------------------------------------------------------------------------
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,$35.1 million represented consideration, partially offset by net closing credits due to the Company for reimbursable expenses from Cortina.
In addition, the Purchase Agreement provides for up to an additional
The foregoing description of the Purchase Agreement is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Purchase Agreement, which is attached as Exhibit 2.1 to the Form 8-K filed by Silvercrest onApril 15, 2019 . OnDecember 13, 2018 , we executed an Asset Purchase Agreement (the "Neosho Asset Purchase Agreement") by and among the Company,Silvercrest L.P. ("SLP"),Silvercrest Asset Management Group LLC ("SAMG LLC ") andNeosho Capital LLC ("Neosho" or the "Seller"), andChristopher K. Richey ,Alphonse I. Chan ,Robert K. Choi andVincent G. Pandes , each such individual a principal of Neosho, to acquire certain assets of Neosho. The transaction contemplated by the Neosho Asset Purchase Agreement closed onJanuary 15, 2019 and is referred to herein as the "Neosho Acquisition". Information regarding the Cortina and Neosho Acquisitions can be found in Note 3. "Acquisitions" in the "Notes to Condensed Consolidated Financial Statements" in "Item 1. Financial Statements" of this filing.
Operating Results
Revenue
Our revenues for the three and six months endedJune 30, 2022 and 2021 are set forth below: For the Three Months Ended June 30, 2022 vs. 2022 vs. (in thousands) 2022 2021 2021 ($) 2021 (%) Management and advisory fees$ 31,103 $ 31,982 $ (879 ) (2.7 )% Performance fees 2 - 2 100.0 % Family office services 1,068 1,119 (51 ) (4.6 )% Total revenue$ 32,173 $ 33,101 $ (928 ) (2.8 )% For the Six Months Ended June 30, 2022 vs. 2022 vs. (in thousands) 2022 2021 2021 ($) 2021 (%) Management and advisory fees$ 63,551 $ 62,187 $ 1,364 2.2 % Performance fees 2 - 2 100.0 % Family office services 2,130 2,151 (21 ) (1.0 )% Total revenue$ 65,683 $ 64,338 $ 1,345 2.1 % 36
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The growth in our assets under management during the three and six months ended
Assets Under Management
(in billions) Discretionary Non-Discretionary Total
As of March 31, 2021 $ 21.9 $ 7.1 $ 29.0
Gross client inflows 1.2 0.2 1.4
Gross client outflows (1.3 ) (0.3 ) (1.6 )
Net client flows (0.1 ) (0.1 ) (0.2 )
Market appreciation 1.1 1.1 2.2
As of June 30, 2021 $ 22.9 $ 8.1 $ 31.0 (1)
As of March 31, 2022 $ 23.8 $ 7.4 $ 31.2
Gross client inflows 1.2 1.7 2.9
Gross client outflows (2.1 ) (0.1 ) (2.2 )
Net client flows (0.9 ) 1.6 0.7
Market depreciation (2.5 ) (0.7 ) (3.2 )
As of June 30, 2022 $ 20.4 $ 8.3 $ 28.7 (1)
As of January 1, 2021 $ 20.6 $ 7.2 $ 27.8
Gross client inflows 2.5 0.3 2.8
Gross client outflows (2.9 ) (0.4 ) (3.3 )
Net client flows (0.4 ) (0.1 ) (0.5 )
Market appreciation 2.7 1.0 3.7
As of June 30, 2021 $ 22.9 $ 8.1 $ 31.0 (1)
As of January 1, 2022 $ 25.1 $ 7.2 $ 32.3
Gross client inflows 2.6 1.8 4.4
Gross client outflows (3.6 ) (0.1 ) (3.7 )
Net client flows (1.0 ) 1.7 0.7
Market depreciation (3.7 ) (0.6 ) (4.3 )
As of June 30, 2022 $ 20.4 $ 8.3 $ 28.7 (1)
(1)Less than 5% of assets under management generate performance fees or allocations.
37
--------------------------------------------------------------------------------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 of June 30, 2022 ANNUALIZED PERFORMANCE
INCEPTION 1-YEAR 3-YEAR 5-YEAR 7-YEAR INCEPTION
Large Cap Value Composite 4/1/02 -6.7 9.0 10.9 11.1 9.1
Russell 1000 Value Index -6.8 6.9 7.2 7.7 7.3
Small Cap Value Composite 4/1/02 -9.7 7.5 6.0 7.6 10.1
Russell 2000 Value Index -16.3 6.2 4.9 6.4 7.6
Smid Cap Value Composite 10/1/05 -10.5 6.4 6.7 8.7 9.3
Russell 2500 Value Index -13.2 6.2 5.5 6.5 7.1
Multi Cap Value Composite 7/1/02 -10.7 7.5 8.4 9.3 9.4
Russell 3000 Value Index -7.5 6.8 7.0 7.6 7.9
Equity Income Composite 12/1/03 -6.2 5.2 8.1 9.7 10.8
Russell 3000 Value Index -7.5 6.8 7.0 7.6 8.0
Focused Value Composite 9/1/04 -11.8 3.8 6.1 8.2 9.7
Russell 3000 Value Index -7.5 6.8 7.0 7.6 7.7
Small Cap Opportunity Composite 7/1/04 -22.1 5.8 7.6 8.6 10.3
Russell 2000 Index -25.2 4.2 5.2 5.9 7.5
Small Cap Growth Composite 7/1/04 -33.0 10.0 11.2 11.3 10.3
Russell 2000 Growth Index -33.4 1.4 4.8 5.0 7.6
Smid Cap Growth Composite 1/1/06 -35.1 12.5 13.8 11.9 10.6
Russell 2500 Growth Index -31.8 3.7 7.5 7.1 8.7
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 SAMG LLC , a 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. SAMG LLC's standard management 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. SAMG LLC is an independent
investment advisory and financial services firm 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.
Three Months Ended
Our total revenue decreased by$0.9 million , or 2.8%, to$32.2 million for the three months endedJune 30, 2022 , from$33.1 million for the three months endedJune 30, 2021 . This decrease was driven by market depreciation and net client outflows in discretionary assets under management. Total assets under management decreased by$2.3 billion , or 7.4%, to$28.7 billion atJune 30, 2022 from$31.0 billion atJune 30, 2021 . Compared to the three months endedJune 30, 2021 , there was an increase in market depreciation of$5.5 billion and an increase in client outflows of$0.6 billion partially offset by an increase of$1.6 billion in client inflows. During the three months 38 -------------------------------------------------------------------------------- endedJune 30, 2022 , fromMarch 31, 2022 , there was a decrease of$3.4 billion in discretionary assets under management and an increase of$0.9 billion in non-discretionary assets under management. The decrease in assets under management as ofJune 30, 2022 as compared toMarch 31, 2022 was primarily due to market depreciation during the quarter endedJune 30, 2022 , partially offset by net client inflows. Sub-advised fund management revenue flat at$0.3 million for the three months endedJune 30, 2022 andJune 30, 2021 . Proprietary fund management revenue decreased by$0.1 million for the three months endedJune 30, 2022 as compared to the same period in the prior year. With respect to our discretionary assets under management, equity assets experienced a decrease of 14.3% during the three months endedJune 30, 2022 and fixed income assets decreased by 1.8% during the same period. For the three months endedJune 30, 2022 , most of the decrease in equity assets came from our SMID growth, small cap growth and core international strategies with composite returns of -24.5%, -22.8% and -20.5%, respectively. As ofJune 30, 2022 , the composition of our assets under management was 71% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 29% 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
June 30,
2022 2021
Total AUM as of March 31, $ 31.2 $ 29.0
Discretionary AUM:
Total Discretionary AUM as of March 31, 23.8 21.9
New client accounts/assets (1) 0.1 -
Closed accounts (2) - -
Net cash inflow/(outflow) (3) (1.0 ) (0.1 )
Non-discretionary to Discretionary AUM (4) - -
Market (depreciation)/appreciation (2.5 ) 1.1
Change to Discretionary AUM (3.4 ) 1.0
Total Discretionary AUM at June 30, 20.4 22.9
Change to Non-Discretionary AUM (5) 0.9 1.0
Total AUM as of June 30, $ 28.7 31.0
(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.
Six Months Ended
Our total revenue increased by$1.4 million , or 2.1%, to$65.7 million for the six months endedJune 30, 2022 , from$64.3 million for the six months endedJune 30, 2021 . This increase was driven by net client inflows partially offset by market depreciation. Total assets under management decreased by$2.3 billion , or 7.4%, to$28.7 billion atJune 30, 2022 from$31.0 billion atJune 30, 2021 . Compared to the six months endedJune 30, 2021 , there was an increase in market depreciation of$8.0 billion and an increase of$0.6 billion in client outflows, partially offset by an increase of$1.6 billion in client inflows. During the six months endedJune 30, 2022 , fromDecember 31, 2021 , there was a decrease of$4.7 billion in discretionary assets under management and an increase of$1.1 billion in non-discretionary assets under management. The decrease in assets under management as ofJune 30, 2022 as compared toDecember 31, 2021 was primarily due to market depreciation during the period, partially offset by net client inflows during the period. Sub-advised fund management revenue decreased by$0.1 million for the six months endedJune 30, 2022 as compared to the same period in the prior year. Proprietary fund management revenue decreased by$0.1 million for the six months endedJune 30, 2022 as compared to the same period in the prior year. With respect to our discretionary assets under management, equity assets experienced a decrease of 17.2% during the six months endedJune 30, 2022 and fixed income assets decreased by 6.9% during the same period. For the six months endedJune 30, 2022 , most of the decrease in equity assets came from our SMID growth, small cap growth and focused opportunity strategies with composite returns of -34.6%, -31.8% and -29.1%, respectively. As ofJune 30, 2022 , the composition of our assets under management was 71% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 29% in non-discretionary assets which represent assets on which we provide portfolio reporting but do not have investment discretion. 39 --------------------------------------------------------------------------------
The following table represents a further breakdown of our assets under
management as of the six months ended
Six Months Ended
June 30,
2022 2021
Total AUM as of January 1, $ 32.3 $ 27.8
Discretionary AUM:
Total Discretionary AUM as of
0.2 0.2
Closed accounts (2) - (0.3 )
Net cash inflow/(outflow) (3) (1.2 ) (0.3 )
Non-discretionary to Discretionary AUM (4) - -
Market (depreciation)/appreciation (3.7 ) 2.7
Change to Discretionary AUM (4.7 ) 2.3
Total Discretionary AUM at June 30, 20.4 22.9
Change to Non-Discretionary AUM (5) 1.1 0.9
Total AUM as of June 30, $ 28.7 $ 31.0 (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.
Expenses
Our expenses for the three and six months endedJune 30, 2022 and 2021 are set forth below: For the Three Months Ended June 30, 2022 vs. 2022 vs. (in thousands) 2022 2021 2021 ($) 2021 (%) Compensation and benefits (1)$ 17,971 $ 18,475 $ (504 ) (2.7 )% General, administrative and other 2,302 7,284 (4,982 ) (68.4 )% Total expenses$ 20,273 $ 25,759 $ (5,486 ) (21.3 )% For the Six Months Ended June 30, 2022 vs. 2022 vs. (in thousands) 2022 2021 2021 ($) 2021 (%) Compensation and benefits (1)$ 36,630 $ 36,124 $ 506 1.4 % General, administrative and other$ 1,714 15,184 (13,470 ) (88.7 )% Total expenses$ 38,344 $ 51,308 $ (12,964 ) (25.3 )% (1) For the three months endedJune 30, 2022 and 2021,$8,323 and$9,010 , respectively, of partner incentive payments were included in cash compensation and benefits expense in the Condensed Consolidated Statements of Operations. For the six months endedJune 30, 2022 and 2021,$16,950 and$17,014 , respectively, of partner incentive payments were included in cash compensation and benefits expense in the Condensed Consolidated Statements of Operations. 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 six months endedJune 30, 2022 and 2021. 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 decreased by$5.5 million , or 21.3%, to$20.3 million for the three months endedJune 30, 2022 from$25.8 million for the three months endedJune 30, 2021 . This decrease was attributable to a decrease in compensation and benefits expense of$0.5 million and a decrease in general, administrative and other expenses of$5.0 million . 40 -------------------------------------------------------------------------------- Compensation and benefits expense decreased by$0.5 million , or 2.7%, to$18.0 million for the three months endedJune 30, 2022 from$18.5 million for the three months endedJune 30, 2021 . The decrease was primarily attributable to a decrease in the accrual for bonuses of$0.9 million partially offset by an increase in salaries and benefits of$0.4 million primarily as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by$5.0 million , or 68.4%, to$2.3 million for the three months endedJune 30, 2022 from$7.3 million for the three months endedJune 30, 2021 . This was primarily attributable to a decrease in the adjustment to the fair value of contingent consideration related to the Cortina Acquisition of$5.7 million , a decrease in trade errors of$0.2 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 travel and entertainment expenses of$0.5 million due to the easing of restrictions related to the coronavirus pandemic, an increase in portfolio and systems expense of$0.2 million , an increase in professional fees of$0.2 million and an increase in shareholder related expenses of$0.1 million .
Six Months Ended
Total expenses decreased by$13.0 million , or 25.3%, to$38.3 million for the six months endedJune 30, 2022 from$51.3 million for the six months endedJune 30, 2021 . This decrease was attributable to a decrease in general, administrative and other expenses of$13.5 million , partially offset by an increase in compensation and benefits expense of$0.5 million . Compensation and benefits expense increased by$0.5 million , or 1.4%, to$36.6 million for the six months endedJune 30, 2022 from$36.1 million for the six months endedJune 30, 2021 . The increase was primarily attributable to an increase in salaries and benefits of$1.0 million primarily as a result of merit-based increases and newly hired staff, partially offset by a decrease in the accrual for bonuses of$0.2 million and a decrease in equity-based compensation expense of$0.3 million due to a decrease in the number of vested and unvested restricted stock units and unvested non-qualified stock options outstanding. General and administrative expenses decreased by$13.5 million , or 88.7%, to$1.7 million for the six months endedJune 30, 2022 from$15.2 million for the six months endedJune 30, 2021 . This was primarily attributable to a decrease in the adjustment to the fair value of contingent consideration related to the Cortina Acquisition of$14.5 million and a decrease in occupancy and related costs of$0.2 million primarily due to a decrease in cleaning and maintenance costs and a decrease in trade errors of$0.2 million , partially offset by an increase in travel and entertainment expenses of$0.6 million due to the easing of restrictions related to the coronavirus pandemic, an increase in portfolio and systems expense of$0.4 million , an increase in professional fees of$0.2 million , an increase in shareholder related expense of$0.1 million and an increase in sub-advisory referral fee expense of$0.1 million .
Other Income (Expense), Net
For the Three Months Ended June 30,
2022 vs.
(in thousands) 2022 2021 2022 vs. 2021 ($) 2021 (%)
Other income (expense), net $ 7 $ 8 $ (1 ) (12.5 )%
Interest income 3 2 1 50.0 %
Unrealized gain (loss) (1 ) - (1 ) 100.0 %
Interest expense (83 ) (97 ) 14 (14.4 )%
Total other income (expense), net $ (74 ) $ (87 ) $ 13 (14.9 )%
For the Six Months Ended June 30,
2022 vs.
(in thousands) 2022 2021 2022 vs. 2021 ($) 2021 (%)Other income (expense), net$ 15 $ 15 $ - - Interest income 4 4 - - Unrealized gain (loss) (1 ) - (1 ) 100.0 % Interest expense (161 ) (202 ) 41 (20.3 )%
Total other income (expense), net
40 (21.9 )%
Three Months Ended
Total other income (expense) net increased by$13 thousand to other expense of$74 thousand for the three months endedJune 30, 2022 from other expense of$87 thousand for the three months endedJune 30, 2021 primarily due to a decrease in interest expense as a result of the level of borrowings under our credit facility. 41 --------------------------------------------------------------------------------
Six Months Ended
Total other income (expense) net increased by$40 thousand to other expense of$143 thousand for the six months endedJune 30, 2022 from other expense of$183 thousand for the six months endedJune 30, 2021 primarily due to a decrease in interest expense as a result of the level of borrowings under our credit facility.
Provision for Income Taxes
Three Months Ended
The provision for income taxes was$2.4 million and$1.6 million for the three months endedJune 30, 2022 and 2021, 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 endedJune 30, 2022 and 2021 was 19.9% and 22.0%, respectively.
Six Months Ended
The provision for income taxes was$5.3 million and$2.9 million for the six months endedJune 30, 2022 and 2021, 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 six months endedJune 30, 2022 and 2021 was 19.6% and 22.2%, respectively. 42 --------------------------------------------------------------------------------
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 theDelaware 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 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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Reconciliation of non-GAAP financial
measure:
Net income $ 9,473 $ 5,661 $ 21,869 $ 9,996
GAAP Provision for income taxes 2,353 1,594 5,327 2,851
Delaware Franchise Tax 50 50 100 100
Interest expense 83 97 161 202
Interest income (3 ) (2 ) (4 ) (4 )
Depreciation and amortization 970 993 1,927 1,961
Equity-based compensation 276 293 504 462
Other adjustments (A) (4,039 ) 1,743 (10,471 ) 4,517
Adjusted EBITDA $ 9,163 $ 10,429 $ 19,413 $ 20,085
Adjusted EBITDA Margin 28.5 % 31.5 % 29.6 % 31.2 %
Adjusted Net Income and Adjusted
Earnings Per Share
Reconciliation of non-GAAP financial
measure:
Net income $ 9,473 $ 5,661 $ 21,869 $ 9,996
GAAP Provision for income taxes 2,353 1,594 5,327 2,851
Delaware Franchise Tax 50 50 100 100
Other adjustments (A) (4,039 ) 1,743 (10,471 ) 4,517
Adjusted earnings before provision for
income taxes 7,837 9,048 16,825 17,464
Adjusted provision for income taxes:
Adjusted provision for income taxes
(26% assumed tax rate) (2,038 ) (2,352 ) (4,375 ) (4,541 )
Adjusted net income $ 5,799 $ 6,696 $ 12,451 $ 12,923
GAAP net income per share (B):
Basic and diluted $ 0.58 $ 0.35 $
1.35
Adjusted earnings per share/unit (B): Basic$ 0.40 $ 0.46 $ 0.86 $ 0.89 Diluted$ 0.39 $ 0.45 $ 0.83 $ 0.87 Shares/units outstanding: Basic Class A shares outstanding 9,911 9,670 9,911 9,670 Basic Class B shares/units outstanding 4,603 4,782 4,603 4,782 Total basic shares/units outstanding 14,514 14,452 14,514 14,452 Diluted Class A shares outstanding (C) 9,943 9,690 9,943 9,690 Diluted Class B shares/units outstanding (D) 4,977 5,206
4,977 5,206 Total diluted shares/units outstanding 14,920 14,896 14,920 14,896
44
--------------------------------------------------------------------------------(A)
Other adjustments consist of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Acquisition costs (a) $ 11 $ 20 $ 27 $ 331
Other (b) (4,050 ) 1,723 (10,498 ) 4,186
Total other adjustments $ (4,039 ) $ 1,743 $ (10,471 ) $ 4,517
(a)
For the three months ended June 30, 2022 , represents insurance costs of $11
related to the acquisition of Cortina. For the six months ended June 30, 2022 ,
represents insurance costs of $22 and professional fees of $5 related to the
acquisition of Cortina. For the three months ended June 30, 2021 , represents
insurance costs of $11 and professional fees of $9 related to the acquisition of
Cortina. For the six months ended June 30, 2021 , represents equity-based
compensation expense of $300 related to restricted stock unit grants issued to
two associates hired as part of the Cortina Acquisition in conjunction with
their admission to Silvercrest L.P. , insurance costs of $22 and professional
fees of $9 related to the acquisition of Cortina.
(b)
For the three months endedJune 30, 2022 , represents a fair value adjustment to the Cortina contingent purchase price consideration of ($4,100 ), an ASC 842 rent adjustment of$48 related to the amortization of property lease incentives and expenses related to the Coronavirus pandemic of$2 . For the six months endedJune 30, 2022 , represents a fair value adjustment to the Cortina contingent purchase price consideration of ($10,600 ), an ASC 842 rent adjustment of$96 related to the amortization of property lease incentives and expenses related to the Coronavirus pandemic of$6 . For the three months endedJune 30, 2021 , represents a fair value adjustment to the Cortina contingent purchase price consideration of$1,600 , an ASC 842 rent adjustment of$48 related to the amortization of property lease incentives and expenses related to the Coronavirus pandemic of$75 . For the six months endedJune 30, 2021 , represents a fair value adjustment to the Cortina contingent purchase price consideration of$3,900 , an ASC 842 rent adjustment of$96 related to the amortization of property lease incentives and expenses related to the Coronavirus pandemic of$190 .
(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 31,974 and 19,877 unvested restricted stock units at
(d)
Includes 120,772 and 170,854 unvested restricted stock units and 252,904
unvested non-qualified options at
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, 2022 , the revolving credit facility was further amended to extend the maturity date toJune 18, 2023 and amended to replace LIBOR terms with its successor, the Secured Overnight Financing Rate ("SOFR"). 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 SOFR rate plus 2.80 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. OnFebruary 15, 2022 , the credit facility was amended and restated to reflect changes to various definitions and related clauses with respect to our subsidiaries. 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 ofJune 30, 2022 , we had$7.2 million outstanding under the term loan. As ofJune 30, 2022 , there were no borrowings outstanding on the revolving credit facility. We were in compliance with the covenants under the credit facility as ofJune 30, 2022 . 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 of
As of
June 30, December 31,
(in thousands) 2022 2021
Cash and cash equivalents $ 67,558 $ 85,744
Accounts receivable $ 8,988 $ 8,850
Due from Silvercrest Funds $ 2,029 $ 428
We anticipate that distributions to the limited partners of Silvercrest 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 in Silvercrest L.P. As a result, we will depend upon
distributions from Silvercrest L.P. to pay any dividends to our Class A
stockholders. We expect to cause Silvercrest 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 in Silvercrest L.P. that occurred concurrently
with the consummation of our initial public offering, and the future exchanges
of Class B units of Silvercrest L.P. , are expected to result in increases in our
share of the tax basis of the tangible and intangible assets of Silvercrest 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 of Silvercrest 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, in U.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 not Silvercrest
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 of Silvercrest 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 of Silvercrest L.P. in respect of our purchase of Class B units from
them will aggregate approximately $9.4 million . Future payments to current
principals of Silvercrest L.P. and future holders of Class B units in respect of
subsequent exchanges would be in addition to these amounts and are expected to
be substantial. We intend to fund required payments pursuant to the tax
receivable agreement from the distributions received from Silvercrest L.P.
46
--------------------------------------------------------------------------------Cash Flows
The following table sets forth our cash flows for the six months endedJune 30, 2022 and 2021. Operating activities consist of net income subject to adjustments for changes in operating assets and liabilities, depreciation, and equity-based compensation expense. Investing activities consist primarily of acquiring and selling property and equipment, and cash paid as part of business acquisitions. Financing activities consist primarily of contributions from partners, distributions to partners, dividends paid on Class A common stock, the issuance and payments on partner notes, other financings, and earnout payments related to business acquisitions. Six Months Ended June 30, (in thousands) 2022 2021
Net cash (used in) provided by operating activities
1,951
Net cash used in investing activities (290 ) (396 ) Net cash used in financing activities (11,335 ) (10,422 ) Net change in cash$ (18,186 ) $ (8,867 ) Operating Activities
Six Months Ended
For the six months endedJune 30, 2022 and 2021, operating activities used$6.6 million and provided$2.0 million , respectively. This difference is primarily the result of a decrease in accrued compensation of$7.6 million , a decrease in distributions received from investment funds of$0.5 million , increased operating lease liabilities of$0.3 million , a decrease in equity-based compensation expense of$0.3 million , a decrease in prepaid and other expenses of$0.3 million and a decrease in accounts payable and accrued expense of$14.2 million primarily due to a change in the fair value of contingent consideration related to the Cortina Acquisition, partially offset by an increase in net income of$11.9 million , increased deferred tax expense of$2.5 million and increased non-cash lease expense of$0.3 million .
Investing Activities
Six Months Ended
For the six months endedJune 30, 2022 and 2021, investing activities used$0.3 million and$0.4 million , respectively. The primary use of cash during the six months endedJune 30, 2022 and 2021 was for the acquisition of furniture, equipment and leasehold improvements.
Financing Activities
Six Months Ended
For the six months endedJune 30, 2022 and 2021, financing activities used$11.3 million and$10.4 million , respectively. During the six months endedJune 30, 2022 and 2021, the Company repaid$1.8 million and$1.8 million , respectively, of principal on the term loan withCity National Bank . Distributions to partners during the six months endedJune 30, 2022 and 2021 were$6.2 million and$5.4 million , respectively. During the six months endedJune 30, 2022 and 2021, the Company paid dividends of$3.4 million and$3.1 million , respectively, to Class A shareholders. During the six months endedJune 30, 2022 and 2021, we made earnout payments of$0.1 and$0.3 million . During the six months endedJune 30, 2022 and 2021, we received payments from partners on notes receivable of$0.2 million and$0.2 million , respectively. 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 ofJune 30, 2022 andDecember 31, 2021 ,$7.2 million and$9.0 million , respectively, was outstanding under the term loan withCity National Bank . As ofJune 30, 2022 andDecember 31, 2021 , accrued but unpaid interest on the term loan withCity National Bank was$26 thousand and$25 thousand , respectively.
As of
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the six months endedJune 30, 2022 from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission onMarch 2, 2022 . 47 --------------------------------------------------------------------------------
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 once the performance fee has crystallized. As a result, there is no estimate or variability in the consideration when revenue is recorded. 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)
June 30, 2022 AUM $ 21.5 $ 3.8 $ 3.4 $ 28.7
December 31, 2021 AUM $ 25.3 $ 5.4 $ 1.6 $ 32.3 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
48
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The average value of our assets under management for the three and six months
ended June 30, 2022 was approximately $30.0 and $30.5 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 $3.0 and $3.1 billion , respectively,
for the three and six months ended June 30, 2022 , which would cause an
annualized increase or decrease in revenues of approximately $12.9 and $13.1
million , respectively, for the three and six months ended June 30, 2022 , at a
weighted average fee rate for the three and six months ended June 30, 2022 of
0.43% and 0.43%, respectively.
The average value of our assets under management for the year ended December 31,
2021 was approximately $30.1 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
$3.0 billion for the year ended December 31, 2021 , which would cause an
annualized increase or decrease in revenues of approximately $13.2 million for
the year ended December 31, 2021 , at a weighted average fee rate for the year
ended December 31, 2021 of 0.44%.
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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