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SAMG > SEC Filings for SAMG > Form 10-K on 20-Mar-2014All Recent SEC Filings

Show all filings for SILVERCREST ASSET MANAGEMENT GROUP INC.

Form 10-K for SILVERCREST ASSET MANAGEMENT GROUP INC.


20-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a premier, full-service wealth management firm focused on providing financial advisory and related family office services to ultra-high net worth individuals and endowments, foundations and other 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 ended December 31, 2013, our assets under management grew 40.2% from $11.2 billion to $15.7 billion.

As part of the reorganization of Silvercrest L.P. that occurred in connection with our initial public offering, Silvercrest became the general partner of Silvercrest L.P, our operating company. The business includes the management of funds of funds, and other investment funds, collectively referred to as the "Silvercrest Funds". In addition, the partnership units of all continuing partners of Silvercrest L.P. were converted to Class B units that have equal economic rights to our shares of Class A common stock. Silvercrest L.P. has issued deferred equity units exercisable for 175,298 Class B units which entitle the holders thereof to receive distributions from Silvercrest L.P. to the same extent as if the underlying Class B units were outstanding. Net profits and net losses of Silvercrest L.P. will be allocated, and distributions from Silvercrest 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 deferred equity 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 of Silvercrest L.P. and its subsidiaries. Following the completion of the reorganization of Silvercrest L.P., as the general partner of Silvercrest L.P., we control its business and affairs and, therefore, consolidate its financial results with ours. The interests of the limited partners' collective 38.0% partnership interest in Silvercrest L.P. as of December 31, 2013 and for the period from July 1, 2013 through December 31, 2013, are reflected in Non-controlling interests in our consolidated financial statements. As a result of the reorganization being completed at the end of the second quarter of 2013, the accompanying Consolidated Statement of Financial Position as of December 31, 2012 and the results of operations and cash flows for the years ended December 31, 2012 and 2011 are those of Silvercrest L.P. For the year ended December 31, 2013, our net income, after amounts attributable to non-controlling interests, represents, on a weighted average basis, approximately 49.8% of Silvercrest L.P.'s net income.

Key Performance Indicators

When we review our performance, we focus on the indicators described below:



                                                  For the Years Ended December 31,
  (in thousands except as indicated)              2013             2012          2011
  Revenue                                     $     60,051       $ 51,690      $ 42,787
  Income before other income (expense), net   $     16,532       $ 18,902      $ 14,446
  Net income                                  $     17,168       $ 19,720      $ 14,609
  Net income attributable to Silvercrest      $     13,690       $      -      $      -
  Adjusted EBITDA (1)                         $     17,324       $ 14,702      $ 10,839
  Adjusted margin (2)                                 28.9 %         28.4 %        25.3 %
  Assets under management at period end
  (billions)                                  $       15.7       $   11.2      $   10.1
  Average assets under management
  (billions) (3)                              $       13.5       $   10.7      $    9.7

(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.

(2) Adjusted EBITDA margin 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.


The discretionary investment management agreements for our separately managed accounts do not have a specified term. Rather, each agreement may be terminated by either party at any time, unless otherwise agreed with the client, upon written notice of termination to the other party. The investment management agreements for our private funds are generally in effect from year to year, and may be terminated at the end of any year (or, in certain cases, on the anniversary of execution of the agreement) (i) by us upon 30 or 90 days' prior written notice and (ii) after receiving the affirmative vote of a specified percentage of the investors in the private fund that are not affiliated with us, by the private fund on 60 or 90 days' prior written notice. The investment management agreements for our private funds may also generally be terminated effective immediately by either party where the non-terminating party
(i) commits a material breach of the terms subject, in certain cases, to a cure period, (ii) is found to have committed fraud, gross negligence or willful misconduct or (iii) terminates, becomes bankrupt, becomes insolvent or dissolves. Each of our investment management agreements contains customary indemnification obligations from us to our clients. The tables below set forth the amount of assets under management, the percentage of management and advisory fees revenues, the amount of revenue recognized, and the average assets under management for discretionary managed accounts and for private funds for each period presented.

Discretionary Managed Accounts



                                                            As of and for the Year Ended December 31,
(in billions)                                              2013               2012                2011
AUM concentrated in Discretionary Managed Accounts     $        9.3        $       7.1         $       6.2
Average AUM For Discretionary Managed Accounts         $        8.2        $       6.7         $       6.0
Discretionary Managed Accounts Revenue (in millions)   $       44.5        $      37.6         $      32.5
Percentage of management and advisory fees revenue              83%                 82 %                86 %

Private Funds



                                                         As of and for the Year Ended December 31,
(in billions)                                             2013                 2012               2011
AUM concentrated in Private Funds                    $         0.8          $       0.9           $ 0.8
Average AUM For Private Funds                        $         0.9          $       0.9           $ 0.8
Private Funds Revenue (in millions)                  $         9.0          $       8.5           $ 5.4
Percentage of management and advisory fees revenue             17%                   18 %            14 %

Our 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 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 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 and (iii) for the municipal value strategy, 0.65%. Our fee for monitoring non-discretionary assets can range from 0.05% to 0.01%, but can also be incorporated into an agreed-upon fixed family office service fee. The majority of our client relationships pay a blended fee rate since they are invested in multiple strategies.

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 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 0.44%, 0.43% and 0.39% for the years ended December 31, 2013, 2012 and 2011, 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 value of the portfolio. These cash flow-related adjustments were insignificant for the years ended December 31, 2013, 2012 and 2011. Silvercrest L.P. has authority to take fees directly from external custodian accounts of its separately managed accounts.

Our 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. We have experienced a steady increase in family office services fees over the past few years as more of our separately managed accounts relationships have taken advantage of these services. We have also been successful in attracting new clients who have engaged us primarily for our family office services.

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 Silvercrest L.P., changes in our employee count and mix, and competitive factors; and

the level of management fees from funds that utilize sub -advisors will affect the amount of sub- advisory fees.

Our professional services fees have increased as a result of being a public company.

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.

Following the consummation of our initial public offering, we account for partner incentive distributions as an expense in our Statement of Operations. Accordingly, this has the effect of increasing compensation expense relative to the amounts that have been recorded historically in our financial statements.


The components of our compensation expenses for the years ended December 31, 2013, 2012 and 2011 are as follows:

                                                   For the Year Ended December 31,
  (in thousands)                                  2013             2012          2011
  Cash compensation and benefits (1)           $    28,360       $  17,726     $ 16,495
  Distributions on liability awards (2)                 13              28           20
  Non-cash equity-based compensation expense         1,949           1,354          977
  Total compensation expense                   $    30,322       $  19,108     $ 17,492

(1) For the year ended December 31, 2013, $8,236 of partner incentive payments was included in cash compensation and benefits expense.

(2) Cash distributions on the portion of unvested deferred equity units that are subject to forfeiture are expensed when paid. The portion of unvested deferred equity units that can be settled in cash are classified as liability awards.

On February 29, 2012, February 28, 2011 and February 24, 2010, Silvercrest L.P. and Silvercrest GP LLC, our predecessor, granted equity-based compensation awards to certain of their principals based on the fair value of the equity interests of Silvercrest L.P. and Silvercrest GP LLC. Each grant included a deferred equity unit and performance unit, subject to forfeiture and acceleration of vesting. As a result of the reorganization of Silvercrest L.P. and the initial public offering, each 100 deferred equity units represent the unsecured right to receive 100 Class B units of Silvercrest L.P., subject to vesting over a four-year period beginning on the first anniversary of the date of grant. Each deferred equity unit, whether vested or unvested, entitles the holder to receive distributions from Silvercrest L.P. as if such holder held such unit. Upon each vesting date, a holder may receive the number of units vested or a combination of the equivalent cash value of some of the units and units, but in no event may the holder receive more than 50% of the aggregate value of the vested units in cash. To the extent that holders elect to receive up to 50% of the aggregate value of the vested units in cash, we could have less cash to utilize. We have accounted for the distributions on the portion of the deferred equity units that are subject to forfeiture as compensation expense. Equity-based compensation expense will be recognized on the February 29, 2012, February 28, 2011 and February 24, 2010 grant dates of the deferred equity unit and performance unit awards through February 29, 2016, February 28, 2015 and February 24, 2014, respectively.

Each performance unit represents the right to receive one Class B unit of Silvercrest L.P. for each two units of Silvercrest L.P. issued upon vesting of the deferred equity units awarded to the employee, in each case subject to the achievement of defined performance goals. Although performance units will only vest upon the achievement of the performance goals, they are expensed over the same vesting period as the deferred equity units with which they are associated because there is an explicit service period.

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.

As a result of the completion of our initial public offering, we will continue and expect to incur additional expenses as a result of being a public company for, among other things, directors and officers insurance, director fees, SEC reporting and compliance, including Sarbanes-Oxley compliance, transfer agent fees, professional fees and other similar expenses. These additional expenses have had, and will have the effect of reducing our net income.

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

After the reorganization of Silvercrest L.P., we became the general partner of SLP and control its business and affairs and, therefore, consolidate its financial results with ours. In light of the limited partners' interest in SLP, we reflect their partnership interests as non-controlling interests in our Consolidated Financial Statements.


Provision for Income Tax

While Silvercrest L.P. has historically not been subject to U.S. federal and certain state income taxes, it has been subject to the New York City Unincorporated Business Tax. As a result of the reorganization of Silvercrest L.P. and the completion of our initial public offering, we became subject to taxes applicable to C-corporations. Our effective tax rate, and the absolute dollar amount of our tax expense, has increased as a result of this reorganization which will be offset by the benefits of the tax receivable agreement entered into with our Class B stockholders.

Acquisition

On March 28, 2013, we acquired certain assets of Ten-Sixty Asset Management,
LLC. Ten-Sixty Asset Management, LLC was a registered investment adviser that advised on approximately $1.9 billion of assets primarily on behalf of institutional clients. This strategic acquisition expands our hedge fund due diligence capabilities and continues the growth of our institutional business. Under the terms of the asset purchase agreement, we paid cash consideration at closing of $2.5 million and issued a promissory note to Ten-Sixty Asset Management, LLC for $1.5 million subject to adjustment. As of December 31, 2013, the aggregate principal amount of the promissory note is approximately $1.1 million which is payable in quarterly installments from June 30, 2014 through March 31, 2017 of $0.1 million each.

Operating Results

Revenue

Our revenues for the years ended December 31, 2013, 2012 and 2011 are set forth
below:



                                            For the Years Ended December 31,
(in thousands)                          2013                2012             2013 vs. 2012 ($)        2013 vs. 2012 (%)
Management and advisory fees            $   53,465      $       46,069      $              7,396                    16.1 %
Performance fees and allocations             1,830                 714                     1,116                   156.3 %
Family office services                       4,756               4,907                     (151)                   (3.1) %
Total revenue                           $   60,051      $       51,690      $              8,361                    16.2 %




                                      For the Years Ended December 31,
(in thousands)                        2012           2011         2012 vs. 2011 ($)       2012 vs. 2011 (%)
Management and advisory fees       $   46,069     $   37,869     $             8,200                    21.7 %
Performance fees and allocations          714             85                     629                   740.0 %
Family office services                  4,907          4,833                      74                     1.5 %
Total revenue                      $   51,690     $   42,787     $             8,903                    20.8 %

The growth in our assets under management from January 1, 2011 to December 31, 2013 is described below:

                                                          Assets Under Management
                                                                      Non-
(in billions)                                Discretionary        Discretionary         Total
As of January 1, 2011                       $           6.3      $           2.9      $      9.2
Gross client inflows                                    3.8                  1.5             5.3
Gross client outflows                                  (3.1 )               (1.2 )          (4.3 )
Market appreciation (depreciation)                      0.1                 (0.1 )             -
As of December 31, 2011                                 7.0                  3.1        10.1 (1)
Gross client inflows                                    6.7                  0.6             7.3
Gross client outflows                                  (6.3 )               (0.6 )          (6.9 )
Market appreciation                                     0.5                  0.1             0.6
As of December 31, 2012                                 8.0                  3.1        11.2 (1)
Gross client inflows                                    3.5                  2.5             6.0
Gross client outflows                                 (3.0)                (0.8)           (3.8)
Market appreciation                                     1.6                  0.7             2.3
As of December 31, 2013                     $          10.1      $           5.6      $  15.7 (1 )

(1) Less than 5% of assets under management generate performance fees.


Year Ended December 31, 2013 versus Year Ended December 31, 2012

Our total revenue increased by $8.4 million, or 16.2%, to $60.1 million for year ended December 31, 2013, from $51.7 million for year ended December 31, 2012. This increase was driven primarily by growth in our management and advisory fees as a result of increased assets under management.

Assets under management increased by $4.5 billion, or 40.2%, to $15.7 billion at December 31, 2013 from $11.2 billion at December 31, 2012. Compared to the year ended December 31, 2012, there was a decrease of $1.3 billion of client inflows, a decrease of $3.1 billion in client outflows, and an increase of $1.7 billion in market appreciation. Our market appreciation during the year ended December 31, 2013 constituted a 20.5% rate of increase in our total assets under management compared to December 31, 2012. Our growth in assets under management for the year ended December 31, 2013 was attributable to an increase of $2.1 billion and $2.5 billion in discretionary and non-discretionary assets under management, respectively, primarily related to the Ten-Sixty Asset Management, LLC acquisition. The growth in our discretionary assets under management was primarily driven by an increase in separately managed accounts. An increase in . . .

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