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 twelve months endedDecember 31, 2022 , our assets under management decreased 10.5% from$32.3 billion to$28.9 billion . The business includes the management of funds of funds, and other investment funds, collectively referred to as the "Silvercrest Funds".Silvercrest L.P. has issued restricted stock units exercisable for 212,927. 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 position and results with ours. The interests of the limited partners' collective 32.6% partnership interest inSilvercrest L.P. as ofDecember 31, 2022 are reflected in non-controlling interests in our consolidated financial statements. This Item 7 generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSEC onMarch 2, 2022 .
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 2020 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 each of the quarters during the periodApril 1, 2020 throughDecember 31, 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. 38 -------------------------------------------------------------------------------- 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-K, 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 Year Ended December 31,
(in thousands except as indicated) 2022 2021 2020
Revenue $ 123,217 $ 131,603 $ 107,983
Income before other income (expense), net $ 38,562 $ 30,521 $ 22,281
Net income $ 30,793 $ 24,946 $ 17,478
Net income margin 25.0 % 19.0 % 16.2 %
Net income attributable to Silvercrest $ 18,828 $ 14,693 $ 9,960
Adjusted EBITDA (1) $ 32,021 $ 43,441 $ 30,296
Adjusted EBITDA margin (2) 26.0 % 33.0 % 28.1 %
Assets under management at period end (billions) $ 28.9 $ 32.3 $ 27.8
Average assets under management (billions) (3) $ 30.6 $ 30.1 $ 26.5
(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
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 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 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.
39
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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 funds 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) 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 Year Ended December 31,
(in billions) 2022 2021 2020
AUM concentrated in Discretionary Managed
Accounts $ 20.5 $ 24.6 $ 20.2
Average AUM For Discretionary Managed
Accounts $ 22.6 $ 22.4 $ 19.3
Discretionary Managed Accounts Revenue (in
millions) $ 114.3 $ 122.3 $ 99.1
Percentage of management and advisory fees
revenue 96 % 96 % 96 %
Private Funds
As of and for the Year Ended December 31,
(in billions) 2022 2021 2020
AUM concentrated in Private Funds $ 0.4 $ 0.5 $ 0.4
Average AUM For Private Funds $ 0.5 $ 0.5 $ 0.5
Private Funds Revenue (in millions) $ 4.4 $ 4.7 $ 4.6
Percentage of management and advisory fees
revenue 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 because they are invested in multiple strategies. 40 -------------------------------------------------------------------------------- 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 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 management fee was 0.40%, 0.44% and 0.41% for the years endedDecember 31, 2022 , 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 increased concentration in our equities strategies whose fee rates are higher than those of other investment strategies. 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 years endedDecember 31, 2022 , 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 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.
41
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The components of our compensation and benefits expenses for the years ended
For the Year Ended December 31,
(in thousands) 2022 2021 2020
Cash compensation and benefits (1)$ 70,461 $ 71,138 $ 61,720 Non-cash equity-based compensation expense 1,149 1,426 659 Total compensation expense$ 71,610 $ 72,564 $ 62,379 (1)
For the years ended
During 2022, 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 can be found in Note 16. "Equity-Based Compensation" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" 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 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 are recorded based on the equity method of accounting. The majority of our performance fees 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' interests inSilvercrest L.P. , we reflect their partnership interests as non-controlling interests in our 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") 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 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 receiving the remaining 20% in the form of ClassB Units ofSilvercrest L.P. in potential earn-out payments over the next four years. 42 -------------------------------------------------------------------------------- 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 662,713 ClassB Units inSilvercrest L.P. Of the$33.6 million paid in cash,$35.1 million represented consideration, partially offset by net closing credits due to the Company for reimbursable expenses from Cortina.
In addition, the Purchase Agreement provides for up to an additional
The foregoing description of the Purchase Agreement is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Purchase Agreement, which is attached as Exhibit 2.1 to the Form 8-K filed by Silvercrest onApril 15, 2019 . OnDecember 13, 2018 , we executed an Asset Purchase Agreement (the "Neosho Asset Purchase Agreement") by and among the Company,Silvercrest L.P. ("SLP"),Silvercrest Asset Management Group LLC ("SAMG LLC ") andNeosho Capital LLC ("Neosho" or the "Seller"), andChristopher K. Richey ,Alphonse I. Chan ,Robert K. Choi andVincent G. Pandes , each such individual a principal of Neosho, to acquire certain assets of Neosho. The transaction contemplated by the Neosho Asset Purchase Agreement closed onJanuary 15, 2019 and is referred to herein as the "Neosho Acquisition". Information regarding the Cortina and Neosho Acquisitions can be found in Note 3. "Acquisitions" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" of this filing. Operating Results Revenue Our revenues for the years endedDecember 31, 2022 , 2021 and 2020 are set forth below: For the Years Ended December 31, 2022 vs. 2021 2022 vs. 2021 (in thousands) 2022 2021 ($) (%) Management and advisory fees$ 118,725 $ 126,976 $ (8,251 ) (6.5 )% Performance fees and allocations 2 86 (84 ) (97.7 )% Family office services 4,490 4,541 (51 ) (1.1 )% Total revenue$ 123,217 $ 131,603 $ (8,386 ) (6.4 )% For the Years Ended December 31, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Management and advisory fees$ 126,976 $ 103,775 $ 23,201 22.4 % Performance fees and allocations 86 - 86 100.0 % Family office services 4,541 4,208 333 7.9 % Total revenue$ 131,603 $ 107,983 $ 23,620 21.9 % 43
-------------------------------------------------------------------------------- The growth in our assets under management fromJanuary 1, 2020 toDecember 31, 2022 is described below: Assets Under Management Non- (in billions) Discretionary Discretionary Total As of January 1, 2020 $ 18.8 $ 6.3$ 25.1 (1) Gross client inflows 3.8 0.4 4.2 Gross client outflows (3.5 ) (0.3 ) (3.8 ) Net client flows 0.3 0.1 0.4 Market appreciation 1.5 0.8 2.3 As of December 31, 2020 $ 20.6 $ 7.2$ 27.8 (1) Gross client inflows 5.7 0.5 6.2 Gross client outflows (5.5 ) (0.5 ) (6.0 ) Net client flows 0.2 - 0.2 Market appreciation 4.3 - 4.3 As of December 31, 2021 $ 25.1 $ 7.2$ 32.3 (1) Gross client inflows 4.4 2.0 6.4 Gross client outflows (5.8 ) (0.5 ) (6.3 ) Net client flows (1.4 ) 1.5 0.1 Market depreciation (2.8 ) (0.7 ) (3.5 ) As of December 31, 2022 $ 20.9 $ 8.0$ 28.9 (1) (1)
Less than 5% of assets under management generate performance fees.
PROPRIETARY EQUITY PERFORMANCE 1, 2 ANNUALIZED PERFORMANCE AS OF 12/31/2022 INCEPTION 1-YEAR 3-YEAR 5-YEAR 7-YEAR INCEPTION
Large Cap Value Composite 4/1/02 -11.6 8.3 9.0 12.0 9.2 Russell 1000 Value Index -7.5 6.0 6.7 9.1 7.4 Small Cap Value Composite 4/1/02 -10.8 6.2 4.9 9.3 10.1 Russell 2000 Value Index -14.5 4.7 4.1 8.2 7.5 Smid Cap Value Composite 10/1/05 -14.8 4.4 4.9 9.6 9.1 Russell 2500 Value Index -13.1 5.2 4.8 8.3 7.2 Multi Cap Value Composite 7/1/02 -17.3 6.0 6.3 9.8 9.3 Russell 3000 Value Index -8.0 5.9 6.5 9.1 8.0 Equity Income Composite 12/1/03 -7.3 5.4 6.9 10.9 11.0 Russell 3000 Value Index -8.0 5.9 6.5 9.1 8.1 Focused Value Composite 9/1/04 -18.4 2.5 3.5 7.9 9.3 Russell 3000 Value Index -8.0 5.9 6.5 9.1 7.8 Small Cap Opportunity Composite 7/1/04 -16.0 6.3 7.7 10.5 10.4 Russell 2000 Index -20.4 3.1 4.1 7.9 7.5 Small Cap Growth Composite 7/1/04 -25.0 11.4 12.4 14.4 10.6 Russell 2000 Growth Index -26.4 0.6 3.5 7.1 7.6 Smid Cap Growth Composite 1/1/06 -32.8 10.3 13.5 14.6 10.5 Russell 2500 Growth Index -26.2 2.9 6.0 9.0 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 bySilvercrest Asset Management Group LLC ("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 advisory fees and any other expenses it may incur in the management of the investment advisory account.SAMG LLC's standard 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 theGlobal Investment Performance Standards (GIPS®). 44 -------------------------------------------------------------------------------- 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 smallest 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.
Year Ended
Our total revenue decreased by$8.4 million , or 6.4%, to$123.2 million for year endedDecember 31, 2022 , from$131.6 million for year endedDecember 31, 2021 . This decrease was driven by market depreciation and net client outflows in discretionary assets under management. Assets under management decreased by$3.4 billion , or 10.5%, to$28.9 billion atDecember 31, 2022 from$32.3 billion atDecember 31, 2021 . Our decrease in assets under management for the year endedDecember 31, 2022 was attributable to a decrease in discretionary assets under management of$4.2 billion , partially offset by an increase in non-discretionary assets under management of$0.8 billion . The decrease in our discretionary assets under management was driven by market depreciation and net client outflows. With respect to our discretionary assets under management, equity assets decreased by 15.9% during the year endedDecember 31, 2022 and fixed income assets increased by 4.7% during the same period. With respect to our discretionary assets under management, most of our decrease came from our smid growth, multi cap growth, REIT and core international strategies with composite returns of -32.7%, -26.6%, -26.3%, and -26.0%, respectively, for the year endedDecember 31, 2022 . Compared to the year endedDecember 31, 2021 , there was an increase of$0.2 billion of client inflows, an increase of$7.8 billion in market depreciation and an increase of$0.3 billion in client outflows. Our market depreciation during the year endedDecember 31, 2022 constituted a 12.1% rate of decrease in our total assets under management compared toDecember 31, 2021 , as compared to our market appreciation during the year endedDecember 31, 2021 which constituted a 13.3% rate of increase in our total assets under management compared toDecember 31, 2020 . Sub-advised fund management revenue increased by$0.1 million for the year endedDecember 31, 2022 as compared to the prior year. Proprietary fund management revenue decreased by$0.4 million for the year endedDecember 31, 2022 as compared to the prior year as a result of market appreciation. As ofDecember 31, 2022 , the composition of our assets under management was 72% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 28% in non-discretionary assets which represent assets on which we provide portfolio reporting but do not have investment discretion.
Family office services revenue remained flat at
Performance fee revenue was
Year Ended
Our total revenue increased by$23.6 million , or 21.9%, to$131.6 million for year endedDecember 31, 2021 , from$108.0 million for year endedDecember 31, 2020 . This increase was driven by net client inflows and market appreciation in discretionary assets under management. 45 -------------------------------------------------------------------------------- Assets under management increased by$4.5 billion , or 16.2%, to$32.3 billion atDecember 31, 2021 from$27.8 billion atDecember 31, 2020 . Our increase in assets under management for the year endedDecember 31, 2021 was attributable to an increase in discretionary assets under management of$4.5 billion . Non-discretionary assets under management remained flat year over year. The increase in our discretionary assets under management was driven by market appreciation and net client inflows. With respect to our discretionary assets under management, equity assets increased by 18.1% during the year endedDecember 31, 2021 and fixed income assets increased by 6.6% during the same period. With respect to our discretionary assets under management, most of our increase came from our REIT, energy infrastructure, multi cap value and large cap value strategies with composite returns of 38.6%, 36.9%, 32.9% and 31.5%, respectively, for the year endedDecember 31, 2021 . Compared to the year endedDecember 31, 2020 , there was an increase of$2.0 billion of client inflows, an increase of$2.0 billion in market appreciation and an increase of$2.2 billion in client outflows. Our market appreciation during the year endedDecember 31, 2021 constituted a 13.3% rate of increase in our total assets under management compared toDecember 31, 2020 , as compared to our market appreciation during the year endedDecember 31, 2020 which constituted a 8.3% rate of increase in our total assets under management compared toDecember 31, 2019 . Sub-advised fund management revenue decreased by$0.1 million for the year endedDecember 31, 2021 as compared to the prior year. Proprietary fund management revenue increased by$0.2 million for the year endedDecember 31, 2021 as compared to the prior year as a result of market appreciation. As ofDecember 31, 2021 , the composition of our assets under management was 78% in discretionary assets, which includes both separately managed accounts and proprietary and sub-advised funds, and 22% in non-discretionary assets which represent assets on which we provide portfolio reporting but do not have investment discretion.
Family office services revenue increased by
Performance fee revenue increased from$0 for the year endedDecember 31, 2020 to$0.1 million for the year endedDecember 31, 2021 . These performance fees are primarily related to external investment strategies in which we have a revenue sharing arrangement.
The following table represents a further breakdown of our assets under
management for the years ended
For the Years Ended December 31,
(in billions) 2022 2021 2020
Total AUM as of January 1, $ 32.3 $ 27.8 $ 25.1
Discretionary AUM:
Total Discretionary AUM as of January 1, 25.1 20.6 18.8
New client accounts/assets 0.5 0.5 0.6 (1)
Closed accounts (0.1 ) (0.4 ) (0.2 ) (2)
Net cash (outflow)/inflow (1.8 ) 0.1 (0.1 ) (3)
Non-discretionary to Discretionary AUM - - - (4)
Market (depreciation)/appreciation (2.8 ) 4.3 1.5
Change to Discretionary AUM (4.2 ) 4.5
1.8
Total Discretionary AUM at December 31, 20.9 25.1
20.6
Change to Non-Discretionary AUM 0.8 - 0.9 (5) Total AUM as of December 31,$ 28.9 $ 32.3 $ 27.8 (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
46
--------------------------------------------------------------------------------Expenses
Our expenses for the years endedDecember 31, 2022 , 2021 and 2020, are set forth below: For the Years Ended December 31, 2022 vs. 2021 2022 vs. 2021 (in thousands) 2022 2021 ($) (%) Compensation and benefits (1)$ 71,610 $ 72,564 $ (954 ) (1.3 )% General and administrative 13,045 28,518 (15,473 ) (54.3 )% Total expenses$ 84,655 $ 101,082 $ (16,427 ) (16.3 )% For the Years Ended December 31, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%) Compensation and benefits (1)$ 72,564 $ 62,379 $ 10,185 16.3 % General and administrative 28,518 23,323 5,195 22.3 % Total expenses$ 101,082 $ 85,702 $ 15,380 17.9 % (1)
For the years ended
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 years endedDecember 31, 2022 . 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 Consolidated Statement of Operations.
Year Ended
Total expenses decreased by$16.4 million , or 16.3%, to$84.7 million for the year endedDecember 31, 2022 from$101.1 million for the year endedDecember 31, 2021 . This decrease was attributable to a decrease in compensation and benefits expense of$1.0 million and a decrease in general and administrative expenses of$15.4 million . Compensation and benefits expense decreased by$1.0 million , or 1.3%, to$71.6 million for the year endedDecember 31, 2022 from$72.6 million for the year endedDecember 31, 2021 . The decrease was primarily attributable to a decrease in the accrual for bonuses of$2.3 million and a decrease in equity based compensation expense of$0.3 million due to a decrease in the number of unvested restricted stock units and unvested non-qualified stock options outstanding, partially offset by an increase in salaries and benefits expense of$1.7 million primarily as a result of merit-based increases and newly-hired staff. General and administrative expenses decreased by$15.4 million , or 54.3%, to$13.0 million for the year endedDecember 31, 2022 from$28.5 million for the year endedDecember 31, 2021 . The decrease was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina Acquisition of$17.5 million , occupancy and related costs of$0.2 million and trade errors of$0.3 million . These decreases were partially offset by increases in professional fees of$0.6 million , portfolio and systems expenses of$0.3 million , travel and entertainment costs of$1.1 million , charitable donations of$0.1 million , office expenses of$0.1 million , training and conference expenses of$0.1 million , telephone and internet costs of$0.1 million and an increase in the fair value of contingent consideration related to the Neosho Acquisition of$0.1 million . Information regarding acquisitions can be found in Note 3. "Acquisitions" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" of this filing.
Year Ended
Total expenses increased by$15.4 million , or 17.9%, to$101.1 million for the year endedDecember 31, 2021 from$85.7 million for the year endedDecember 31, 2020 . This increase was attributable to an increase in compensation and benefits expense of$10.2 million and an increase in general and administrative expenses of$5.2 million . Compensation and benefits expense increased by$10.2 million , or 16.3%, to$72.6 million for the year endedDecember 31, 2021 from$62.4 million for the year endedDecember 31, 2020 . The increase was primarily attributable to an increase in the accrual for bonuses of$7.8 million , an increase in salaries expense of$1.6 million primarily as a result of merit-based increases and newly-hired staff and an increase in equity based compensation expense of$0.8 million due to an increase in the number of unvested restricted stock units and unvested non-qualified stock options outstanding. 47 -------------------------------------------------------------------------------- General and administrative expenses increased by$5.2 million , or 22.3%, to$28.5 million for the year endedDecember 31, 2021 from$23.3 million for the year endedDecember 31, 2020 . The increase was primarily attributable to increases in the fair value of contingent consideration related to the Cortina Acquisition of$4.6 million , professional fees of$0.1 million , portfolio and systems expenses of$0.4 million , sub-advisory and referrals fees of$0.1 million , insurance costs of$0.1 million , marketing and advertising costs of$0.1 million , administrative costs of$0.1 million and charitable donations of$0.1 million . These increases were partially offset by decreases in the fair value of contingent consideration related to the Neosho Acquisition of$0.3 million and occupancy and related costs of$0.1 million . Information regarding acquisitions can be found in Note 3. "Acquisitions" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" of this filing. Other Income (Expense), Net For the Years Ended December 31, 2022 vs. 2021 2022 vs. 2021 (in thousands) 2022 2021 ($) (%) Other income (expense), net$ 260 $ 190 $ 70 36.8 % Interest income 24 7 17 242.9 % Interest expense (416 ) (383 ) (33 ) 8.6 % Equity income from investments (31 ) 1,534 (1,565 ) -102.0 % Total other income (expense), net$ (163 ) $ 1,348 $ (1,511 ) -112.1 % For the Years Ended December 31, 2021 vs. 2020 2021 vs. 2020 (in thousands) 2021 2020 ($) (%)
Other income (expense), net
(53 ) -21.8 %
Interest income 7 13 (6 ) -46.2 %
Interest expense (383 ) (563 ) 180 -32.0 %
Equity income from investments 1,534 898 636 70.8 %
Total other income (expense), net
757 128.1 %
48--------------------------------------------------------------------------------
Year Ended
Other income (expense), net decreased by$1.5 million , or 112.1% to($0.2) million for the year endedDecember 31, 2022 from$1.3 million for the year endedDecember 31, 2021 . There was a$0.2 million adjustment to the fair value of our tax receivable agreement liability as ofDecember 31, 2022 . The adjustment in fair value was a result of a reduction in the future effective corporate tax rates at the federal level and inNew York City as a result of law changes. Equity income from investments decreased by$1.6 million in 2022 as compared with the same period in the prior year as a result of decreased performance fee allocations. Interest expense increased for the year endedDecember 31, 2022 as compared to the prior year as a result of higher interest rates owed on borrowings under the credit facility. Interest income increased as a result of higher balances in interest-bearing accounts during the year.
Year Ended
Other income (expense), net increased by$0.8 million , or 128.1% to$1.4 million for the year endedDecember 31, 2021 from$0.6 million for the year endedDecember 31, 2020 . There was a$0.1 million adjustment to the fair value of our tax receivable agreement liability as ofDecember 31, 2021 . The adjustment in fair value was a result of a reduction in the future effective corporate tax rates at the federal level and inNew York City as a result of law changes. Equity income from investments increased by$0.6 million in 2021 as compared with the same period in the prior year as a result of increased performance fee allocations. Interest expense decreased for the year endedDecember 31, 2021 as compared to the prior year as a result of interest owed on borrowings under the credit facility. Interest income decreased as a result of lower balances on notes receivable as a result of scheduled repayments.
Provision for Income Taxes
Year Ended
The provision for income taxes was$7.6 million and$6.9 million for the years endedDecember 31, 2022 and 2021, respectively. Our provision for income taxes as a percentage of income before provision for income taxes for the year endedDecember 31, 2022 and 2021 was 19.8% and 21.7%, respectively.
Year Ended
The provision for income taxes was$6.9 million and$5.4 million for the years endedDecember 31, 2021 and 2020, respectively. Our provision for income taxes as a percentage of income before provision for income taxes for the year endedDecember 31, 2021 and 2020 was 21.7% and 23.6%, respectively. 49 --------------------------------------------------------------------------------
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 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 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 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 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
deferred equity units and performance units 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 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 measures in
addition to, and not as a substitute for, financial measures prepared in
accordance with GAAP.
50
--------------------------------------------------------------------------------
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).
Adjusted EBITDA
Year Ended December 31,
2022 2021 2020
Reconciliation of non-GAAP financial
measure:
Net income $ 30,793 $ 24,946 $ 17,478
GAAP Provision for income taxes 7,606 6,923 5,394
Delaware Franchise Tax 200 200 200
Interest expense 416 383 563
Interest income (24 ) (7 ) (13 )
Depreciation and amortization 3,883 3,923 3,968
Equity-based compensation 1,149 1,126 659
Other adjustments (A) (12,002 ) 5,947 2,047
Adjusted EBITDA $ 32,021 $ 43,441 $ 30,296
Adjusted EBITDA Margin 26.0 % 33.0 % 28.1 %
Adjusted Net Income and Adjusted Earnings
Per Share
Reconciliation of non-GAAP financial
measure:
Net income $ 30,793 $ 24,946 $ 17,478
GAAP Provision for income taxes 7,606 6,923 5,394
Delaware Franchise Tax 200 200 200
Other adjustments (A) (12,002 ) 5,947 2,047
Adjusted earnings before provision for
income taxes 26,597 38,016 25,119
Adjusted provision for income taxes: Adjusted provision for income taxes (26% assumed tax rate) (6,915 ) (9,884 ) (6,531 ) Adjusted net income$ 19,682 $ 28,132 $ 18,588 GAAP net income per share (B): Basic and diluted$ 1.92 $ 1.52 $ 1.05 Adjusted earnings per share/unit (B): Basic$ 1.40 $ 1.95 $ 1.29 Diluted$ 1.35 $ 1.89 $ 1.28 Shares/units outstanding: Basic Class A shares outstanding 9,560 9,869
9,651
Basic Class B shares/units outstanding 4,545 4,594
4,722
Total basic shares/units outstanding 14,105 14,463
14,373
Diluted Class A shares outstanding (C) 9,592 9,891
9,659
Diluted Class B shares/units outstanding (D) 5,011 5,017
4,883
Total diluted shares/units outstanding 14,603 14,908 14,542
(A) Other adjustments consist of the following:
Year Ended December 31,
2022 2021 2020
Acquisition costs (a) $ 37 $ 363 $ 350
Severance 13 10 -
Other (b) (12,052 ) 5,574 1,697
Total other adjustments $ (12,002 ) $ 5,947 $ 2,047
(a)
In 2022, represents insurance costs of $22 and professional fees of $15 related
to the acquisition of Cortina. In 2021, represents equity-based compensation 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 $45 and professional fees of $18 related to
the Cortina Acquisition. In 2020, represents
51
--------------------------------------------------------------------------------
legal and other professional fees of
(b)
In 2022, represents a fair value adjustment to the Cortina contingent purchase price consideration of ($11,781 ), a fair value adjustment to the Neosho contingent purchase price consideration of ($299 ), an adjustment to the fair value of the tax receivable agreement of ($202 ), an ASC 842 rent adjustment of$192 related to the amortization of property lease incentives, expenses related to obtaining a business license of$26 , system implementation costs of$6 and expenses related to the Coronavirus pandemic of$6 . In 2021, represents a fair value adjustment to the Cortina contingent purchase price consideration of$5,670 , an ASC 842 rent adjustment of$192 related to the amortization of property lease incentives and expenses related to the Coronavirus pandemic of$191 , partially offset by a fair value adjustment to the Neosho contingent purchase price consideration of ($365 ) and an adjustment to the fair value of our tax receivable agreement of ($114 ). In 2020, represents expenses of$22 related to office renovations, an ASC 842 rent adjustment of$192 related to the amortization of property lease incentives, professional fees related to a new audit requirement of$13 , a fair value adjustment to the Cappiccille contingent purchase price consideration of$126 , a fair value adjustment to the Cortina contingent purchase price consideration of$1,100 , a fair value adjustment to the Jamison contingent purchase price consideration of$70 a fair value adjustment to the Neosho contingent purchase price consideration of ($75 ), an adjustment to the fair value of our tax receivable agreement of ($186 ) and expenses related to the Coronavirus pandemic of$435 .
(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 21,704 unvested restricted stock units at
2022 and 2021, respectively. (D) Includes 212,927 and 170,854 unvested restricted stock units and 252,904 and
252,904 non-qualified stock options at December 31, 2022 and 2021,
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, 2022 , the revolving credit facility was further amended to extend the maturity date toJune 18, 2023 and amended to replace LIBOR terms with 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 ofDecember 31, 2022 and 2021, we had$6.3 million and$9.0 million outstanding under the term loan. We were in compliance with the covenants under the credit facility as ofDecember 31, 2022 and 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. Seasonality typically affects cash flow since the first quarter of each year, includes as a source of cash, the prior year's annual performance fee payments, 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. 52 --------------------------------------------------------------------------------
The following table sets forth certain key financial data relating to our
liquidity and capital resources as of
Years Ended December 31,
(in thousands) 2022 2021 2020
Cash and cash equivalents $ 77,432 $ 85,744 $ 62,498
Accounts receivable $ 9,118 $ 8,850 $ 8,341
Due from Silvercrest Funds $ 577 $ 428 $ 1,018
We anticipate that distributions to the principals 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
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 $8.9 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.
53
--------------------------------------------------------------------------------Cash Flows
The following table sets forth our cash flows for the years endedDecember 31, 2022 , 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, distributions received from investments in investment funds, and cash paid as part of business acquisitions. Financing activities consist primarily of contributions from partners, distributions to partners, the issuance and payments on partner notes, other financings, and earnout payments related to business acquisitions. Years Ended December 31, (in thousands) 2022 2021
2020
Net cash provided by operating activities
(956 ) (908 ) (626 )
Net cash used in financing activities (30,739 ) (20,124 ) (16,554 )
Net change in cash $ (8,312 ) $ 23,246 $ 9,666
Operating Activities
Year Ended
Operating activities provided$23.4 million and$44.3 million for the years endedDecember 31, 2022 and 2021, respectively. This difference is primarily the result of increases in net income of$5.8 million , deferred tax expense of$3.1 million , operating lease liabilities of$0.9 million , a decrease in equity income from investments of$1.6 million and distributions received from investment funds of$0.6 million . These increases were partially offset by a change in the TRA liability of$0.1 million , a change in prepaid and other assets of$2.9 million , and decreases in accounts receivable of$0.5 million due to timing of payments received from clients, non-cash lease expense of$1.5 million , equity-based compensation expense of$0.3 million , accounts payable and accrued expenses of$17.8 million , primarily due to a change in the fair value of contingent consideration related to the Cortina Acquisition and accrued compensation of$9.8 million .
Year Ended
Operating activities provided$44.3 million and$26.8 million for the years endedDecember 31, 2021 and 2020, respectively. This difference is primarily the result of increases in net income of$11.0 million , non-cash lease expense of$1.6 million , depreciation and amortization expense of$0.9 million primarily as a result of the Cortina Acquisition and the completion of renovations to our offices, equity-based compensation expense of$1.0 million , accounts payable and accrued expenses of$6.8 million , primarily due to a change in the fair value of contingent consideration related to the Cortina Acquisition and accrued compensation of$17.6 million . These increases were partially offset by an increase in equity income from investments of$1.5 million due to higher performance fee allocations, a change in the TRA liability of$0.1 million , and decreases in accounts receivable of$0.1 million due to timing of payments received from clients, deferred tax expense of$0.8 million , distributions received from investment funds of$0.9 million and operating lease liabilities of$1.2 million . Investing Activities
Year Ended
For the years endedDecember 31, 2022 and 2021, investing activities used$1.0 million and$0.9 million , respectively. The primary use of cash during 2022 and 2021was for the acquisition of furniture, equipment and leasehold improvements. 54 --------------------------------------------------------------------------------
Year Ended
For the years endedDecember 31, 2021 and 2020, investing activities used$0.9 million and$0.6 million , respectively. The primary use of cash during 2021 was for the acquisition of furniture, equipment and leasehold improvements. The primary use of cash during 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
Year Ended
For the years endedDecember 31, 2022 and 2021, financing activities used$30.7 million and$20.1 million , respectively. Dividends of$6.8 million and$6.4 million were paid during 2022 and 2021, respectively, to Class A shareholders. Payments received from partners on notes receivable was$0.2 million in each of 2022 and 2021. Distributions to partners ofSilvercrest L.P. of$7.9 million and$6.7 million were paid during 2022 and 2021, respectively. Repayment of borrowings under the credit facility was$2.7 million and$3.6 million in 2022 and 2021, respectively. Payments of contingent purchase price consideration totaled$4.6 million and$3.0 million in 2022 and 2021, respectively. During 2022 and 2021, approximately 476 thousand and 33 thousand shares of Class A common stock ofSilvercrest Asset Management Group Inc. were purchased at a cost of$8.8 million and$0.5 million , respectively.
Year Ended
For the years endedDecember 31, 2021 and 2020, financing activities used$20.1 million and$16.6 million , respectively. Dividends of$6.4 million and$6.1 million were paid during 2021 and 2020, respectively, to Class A shareholders. Payments received from partners on notes receivable was$0.2 million in 2021 and$0.3 million in 2020. Distributions to partners ofSilvercrest L.P. of$6.7 million and$6.3 million were paid during 2021 and 2020, respectively. Repayment of borrowings under the credit facility was$3.6 million in both 2021 and 2020. Payments of contingent purchase price consideration totaled$3.0 million and$0.7 million in 2021 and 2020, 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 of
As of
Contractual Obligations
As a "smaller reporting company" as defined in Item 10 of Regulation S-K, the Company is not required to provide this information.
Off-Balance Sheet Arrangements
We did not have any significant off-balance sheet arrangements as of
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues,
expenses and other income reported in the consolidated financial statements and
the accompanying notes. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under current
circumstances, our results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily available from
other sources. Actual results could differ from those estimates. Significant
estimates and assumptions made by management include the fair value of acquired
assets and liabilities, impairment of goodwill and intangible assets, revenue
recognition, equity based compensation, accounting for income taxes, and other
matters that affect the consolidated financial statements and related
disclosures. Accounting policies are an integral part of our consolidated
financial statements. An understanding of these accounting policies is essential
when reviewing our reported results of operations and our financial condition.
Management believes that the critical accounting policies and estimates
discussed below involve additional management judgment due to the sensitivity of
the methods and assumptions used.
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--------------------------------------------------------------------------------Business Combinations
We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the estimated fair values determined by management as of the acquisition date. We measure the fair value of contingent consideration at each reporting period using a probability-adjusted discounted cash flow method based on significant inputs not observable in the market and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in earnings. In relation to our acquisitions of Milbank and Jamison, the fair value of the contingent consideration was based on discounted cash flow models using projected EBITDA for each earnout period. The discount rate applied to the projected EBITDA was determined based on our weighted average cost of capital and considered that the overall risk associated with the payments was similar to the overall risks of our business as there is no target, floor or cap associated with the contingent payments. In relation to the Neosho acquisition, the fair value of the contingent consideration was based on discounted cash flow models using projected revenue from each earnout period. The discount rate applied to the projected revenue was determined based on the weighted average cost of capital of the Company and took into account that the overall risk associated with the payments was similar to the overall risks of the Company as there is no target, floor of cap associated with the contingent payments. In relation to the Cortina Acquisition, the income approach was used to determine the fair value o the contingent consideration by estimating a range of likely outcomes and payouts given these outcomes. The potential payouts were estimated using a Monte Carlo simulation and discounted back to their present values using a risk-free discount rate adjusted to account for the Company's credit or counterparty risk to arrive at the present value of the contingent consideration payments. The discount rate for the contingent consideration payment was based on the revenue cost of capital for Cortina's revenue. The excess of the purchase price over the fair value of the identifiable assets acquired, including intangibles, and liabilities assumed is recorded as goodwill. The Company generally uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.Goodwill Goodwill is not amortized but is evaluated for impairment at least annually, onOctober 1st of every year, or whenever events or circumstances indicate that impairment may have occurred. We account forGoodwill under Accounting Standard Codification ("ASC") No. 350, "Intangibles -Goodwill and Other," which provides an entity the option to first perform a qualitative assessment of whether a reporting unit's fair value is more likely than not less than its carrying value, including goodwill. In performing its qualitative assessment, an entity considers the extent to which adverse events or circumstances identified, such as changes in economic conditions, industry and market conditions or entity specific events, could affect the comparison of the reporting unit's fair value with its carrying amount. If an entity concludes that the fair value of a reporting unit is more likely than not less than its carrying amount, the entity is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and, accordingly, measure the amount, if any, of goodwill impairment loss to be recognized for that reporting unit. We utilized this option when performing our annual impairment assessment in 2022, 2021 and 2020, and concluded that our single reporting unit's fair value was more likely than not greater than its carrying value, including goodwill.
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.
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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)
December 31, 2022 AUM $ 22.4 $ 3.6 $ 2.9 $ 28.9
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 this annual report.
The average value of our assets under management for the year endedDecember 31, 2022 was approximately$30.6 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$3.1 billion for the year endedDecember 31, 2022 , which would cause an annualized increase or decrease in revenues of approximately$12.3 million for the year endedDecember 31, 2022 , at a weighted average fee rate for the year endedDecember 31, 2022 of 0.40%. The average value of our assets under management for the year endedDecember 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 endedDecember 31, 2021 , which would cause an annualized increase or decrease in revenues of approximately$13.2 million for the year endedDecember 31, 2021 , at a weighted average fee rate for the year endedDecember 31, 2021 of 0.44%.
Equity-Based Compensation
Restricted Stock Units and Stock Options
On
Information regarding restricted stock units and stock options can be found in Note 16. "Equity-Based Compensation" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" of this filing. Tax Receivable Agreement In connection with our initial public offering and reorganization ofSilvercrest L.P. that was completed onJune 23, 2013 , we entered into a tax receivable agreement with the partners ofSilvercrest L.P. that requires it to pay them 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax that it actually realizes (or is deemed to realize in the case of an early 57 -------------------------------------------------------------------------------- termination payment by it, or a change in control) as a result of the increases in tax basis and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement or attributable to exchanges of shares of Class B common stock for shares of Class A common stock. The payments to be made pursuant to the tax receivable agreement are a liability of Silvercrest and notSilvercrest L.P. The actual amount and timing of any payments under these agreements will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income Silvercrest generates in the future and the tax rate then applicable and the portion of Silvercrest's payments under the tax receivable agreement constituting imputed interest or depreciable basis or amortizable basis.
Income Taxes
Silvercrest L.P. , our operating company, is not subject to federal and state income taxes, since all income, gains and losses are passed through to its partners. Our operating company is subject to New York City Unincorporated Business Tax. We, including our affiliated incorporated entities, are subject to federal and state corporate income tax, which requires an asset and liability approach to the financial accounting and reporting of income taxes. With respect to our incorporated entities, the annual tax rate is based on the income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Judgment is required in determining the tax expense and in evaluating tax positions. The tax effects of an uncertain tax position ("UTP") taken or expected to be taken in income tax returns are recognized only if it is "more likely-than-not" to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize estimated interest and penalties related to UTPs in income tax expense.
We recognize the benefit of a UTP in the period when it is effectively settled. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination.
Recently Issued Accounting Pronouncements
Information regarding recent accounting developments and their impact on Silvercrest can be found in Note 2. "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data" of this filing.
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