Silvercrest Asset Management Group Inc. Q3 FY2024 earnings call

• Supportive markets and improving economic conditions helped Silvercrest's assets under management growth during Q3 2024, with discretionary AUM increasing by $1.0 billion. - Broader company market participation throughout Q3 2024 benefited the diversified wealth management business and Small Cap institutional business. - Silvercrest’s pipeline of new institutional business opportunities increased by 20% during Q3 2024 to $1.2 billion, with the pipeline not yet including potential mandates for the new Global Equity strategy. - The firm has been investing in the future growth of the business, resulting in higher total compensation, and expects to make more hires to drive future growth.

Discretionary AUM increased by $1.0 billion during the quarter to $22.6 billion, primarily due to rising markets, representing a 5% increase since the second quarter and a 10% year-over-year increase since Q3 2023. Total AUM at the end of the third quarter was $35.1 billion, up 13% year-over-year from Q3 2023. Revenue for the quarter was $30.4 million, with net income for the quarter being $3.7 million. Expenses increased year-over-year due to higher compensation and benefits, and general and administrative expenses.

• Optimistic about securing significant organic net flows over the next two quarters. - Total AUM increased year-over-year by 13% from Q3 2023. - Total asset flows and market increases were a net positive for the firm and should drive an increase in fourth-quarter revenue. - Pipeline of new business opportunities is robust, with potential for significant inflows from the Global Equity strategy and other areas.

Q: On the global strategies, could you provide some more details on the opportunity in terms of inflows, also in terms of the staffing? Have you fully staffed up the team, including the business development officers, as well as other new strategies that you've been developing several over the last few years? An update on the outlook for that in terms of inflows, and also an OCIO update, please.

A: Okay. Let me start with the global equity strategy. We have hired most of the primary portfolio management team of analysts and those executing the strategy. We have also hired administration and have trading covered, but that will be probably expanding a bit more. I could see us hiring another analyst. I think we're in the market for that now. With regards to business development, at this stage, we're well covered by our internal capabilities. And of course, the rest of the infrastructure at the firm to support a team like that is already here. We were able to attract this high-quality team in part because of the robustness of the infrastructure that we've built, oriented towards the institutional business across compliance, trading, operations, technology, etcetera, strong financial controls, you name it. So we're getting close. Obviously, the key parts were the expensive parts early on when that team joined us in, I believe, the second quarter. We have spent the past few months not only making sure that we were ready to take on a significant amount of business, but introducing the capability to significant asset allocators globally. The opportunity is absolutely enormous for us. The team and its past has managed billions and billions of dollars, number one, so they have experience doing it and are well known in the marketplace. Number two, if you look at asset flows in the business, global equity, at least if you look at the international stage, is the highest in-demand capability right now. That is where a lot of flows are going, that and private equity. Third, when you look at the large families and institutions outside of the U.S., they very much want exposure to global equities. They do not divide the marketplace in quite the same way that we do in the United States, where we make much stronger distinctions between different asset classes in equity markets with the biggest exposure in the United States. So this gives us a really credible capability in talking to those larger families outside of the U.S., which as you know, has been an increasing part of our business. I have not included the potential for global equity in our pipeline. I announced in my introductory remarks that we have a pipeline now of $1.2 billion. That is up 20% or $200 million basically from the second quarter where we stood at $1 billion. So anything that would flow over the next couple of quarters into the global equity would be in addition to the pipeline of $1.2 billion. Obviously, since I spoke extensively about my expectations in my opening remarks, I'm very, very optimistic for quite significant inflows over the next two quarters, to the extent that we could even see nice organic, net organic flows for 2024, as a result of those flows. But we will keep you posted, and of course put out a press release when we think that is going to come to fruition. On the pipeline, I think I mentioned previously, of the last quarter, that the value equity pipeline had really reduced, but that has picked back up which is really nice to see. Our growth pipeline is smaller than it was in the second quarter and that is because we won a couple of really meaningful mandates. So that's really good news and the OCIO portion of the $1.2 billion pipeline stands at about $600 million. That portfolio, to answer your final question is about $1.6 billion in total right now.

Q: On the global strategies, could you provide some more details on the opportunity in terms of inflows, also in terms of the staffing? Have you fully staffed up the team, including the business development officers, as well as other new strategies that you've been developing several over the last few years? An update on the outlook for that in terms of inflows, and also an OCIO update, please.

A: Okay. Let me start with the global equity strategy. We have hired most of the primary portfolio management team of analysts and those executing the strategy. We have also hired administration and have trading covered, but that will be probably expanding a bit more. I could see us hiring another analyst. I think we're in the market for that now. With regards to business development, at this stage, we're well covered by our internal capabilities. And of course, the rest of the infrastructure at the firm to support a team like that is already here. We were able to attract this high-quality team in part because of the robustness of the infrastructure that we've built, oriented towards the institutional business across compliance, trading, operations, technology, etcetera, strong financial controls, you name it. So we're getting close. Obviously, the key parts were the expensive parts early on when that team joined us in, I believe, the second quarter. We have spent the past few months not only making sure that we were ready to take on a significant amount of business, but introducing the capability to significant asset allocators globally. The opportunity is absolutely enormous for us. The team and its past has managed billions and billions of dollars, number one, so they have experience doing it and are well known in the marketplace. Number two, if you look at asset flows in the business, global equity, at least if you look at the international stage, is the highest in-demand capability right now. That is where a lot of flows are going, that and private equity. Third, when you look at the large families and institutions outside of the U.S., they very much want exposure to global equities. They do not divide the marketplace in quite the same way that we do in the United States, where we make much stronger distinctions between different asset classes in equity markets with the biggest exposure in the United States. So this gives us a really credible capability in talking to those larger families outside of the U.S., which as you know, has been an increasing part of our business. I have not included the potential for global equity in our pipeline. I announced in my introductory remarks that we have a pipeline now of $1.2 billion. That is up 20% or $200 million basically from the second quarter where we stood at $1 billion. So anything that would flow over the next couple of quarters into the global equity would be in addition to the pipeline of $1.2 billion. Obviously, since I spoke extensively about my expectations in my opening remarks, I'm very, very optimistic for quite significant inflows over the next two quarters, to the extent that we could even see nice organic, net organic flows for 2024, as a result of those flows. But we will keep you posted, and of course put out a press release when we think that is going to come to fruition. On the pipeline, I think I mentioned previously, of the last quarter, that the value equity pipeline had really reduced, but that has picked back up which is really nice to see. Our growth pipeline is smaller than it was in the second quarter and that is because we won a couple of really meaningful mandates. So that's really good news and the OCIO portion of the $1.2 billion pipeline stands at about $600 million. That portfolio, to answer your final question is about $1.6 billion in total right now.

Q: Just a question on adjusted EBITDA margin. Are you still trying to get it back to 27% in the long-term?

A: Yes, long-term, this is a business that as a mature business runs into the upper 20s as an EBITDA margin. And so, yes, that's what we're aiming for. I was very clear over the past year and a half, two years, however, that we would be hitting earnings. We would be hitting EBITDA in order to set up the next stage of our company's growth. And also to be super prudent about the next generation and redundancy in the business, we have a history of very successfully transitioning the business to the next generation. And when I joined the firm, I'm an example of that, as are many of my colleagues. But going back 10 years, there was a gap in the middle between very senior people and very junior. We've really filled that in well, but we've also been able to successfully hire and then build new capabilities. The OCIO team would be an example of that, where we've been able to organically grow something from scratch. Let's not forget that I've mentioned in the past, it's not just about this global equity team. In order to win large mandates and serve the biggest families, it's all the rest of the infrastructure. And as you grow, you have to put a little bit more investment in that and then grow into it. You have to be credible that you have a very robust institutional quality offering if you are going to talk to families with a couple hundred million dollars. And as we've grown in capacity fills, we have to invest in all aspects of the business in order to set the stage for the next piece of growth. We've also announced, I think in the second quarter, that we were green fielding an organic growth opportunity in Atlanta. We have our full MAS license in Singapore. We have clients there now. We have employees. That is going to be important as we look at different time zones in dealing with not only clients, but trading opportunities and global equity. So, this is a very broad, and we're investing in other business development. This is a very broad-based effort that we have always been successful at growing into. In the past, we didn't necessarily make as large investments and we were able to grow quickly through those investments. So there may have been a slight hiccup or a pull down in EBITDA, but we grew through it so it wasn't even noticeable. This, we're getting ahead of it just a bit, as I forecast that we would, but I'm quite optimistic that we're going to see the fruits of this over the next year.

Q: One question as well, for your new hiring, is this – can you give an idea, are you hiring salaries at market rates or are you hiring at higher than market rates? Can you give us an idea of that?

A: I would argue that we're hiring people at competitive rates. We do not need to overpay to attract people to our firm. This is an incredible place to work with a very strong culture. We have very low employee turnover. People really commit their careers here and we're very proud of that. When you have that kind of entrepreneurial environment where people have a lot of autonomy and purpose, you have to be competitive to get the best talent, but you certainly don't need to overpay.