Good morning, everyone, and welcome to the Silvercrest Asset Management Group Inc. third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please see our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. Before we begin, let me remind you that during today's call, certain statements made regarding our future performance are forward-looking statements. They are based on current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from the statements that are made. Those factors are disclosed in our filings with the SEC under the caption Risk Factors.
For all such forward-looking statements, we claim the protections provided by the Private Securities Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of the date hereof, and Silvercrest assumes no obligation to update them. I would now like to turn the conference call over to Rick Hough, Chairman and CEO of Silvercrest. Sir, please go ahead.
Thank you very much, and thanks for joining us today for our third quarter results. Volatile market conditions continued to affect Silvercrest assets under management in the third quarter of 2022. The firm's discretionary AUM, which drives revenue, decreased to $19.4 billion as of the end of the third quarter from $22.5 billion as of the end of the same period in 2021. The firm's third quarter 2022 revenue decreased year-over-year to $29 million from $33.5 million. Total AUM now stands at $27.4 billion. The firm's quarterly Adjusted EBITDA was approximately $8.2 million, an annualized Adjusted EBITDA run rate of $32.8 million. Silvercrest's third quarter 2022 Adjusted EBITDA margin was 28.1%, a healthy margin in light of declining AUM and the associated revenue.
Silvercrest added relationships during the third quarter, and new accounts partially offset outflows for taxes and rebalancing. Silvercrest's suite of proprietary equity capabilities have maintained solid performance, and our sub-advisory relationships continued to add assets during the third quarter of 2022. Silvercrest also launched a Large Cap Value unit investment trust during the quarter. Silvercrest repurchased approximately 286,000 shares of Class A common stock for approximately $5.2 million during the third quarter. Market volatility and uncertainty create long-term opportunities that have typically benefited the high quality of Silvercrest capabilities, and we look forward to more stable markets in the future. On November 1, the company's board of directors declared a quarterly dividend of $0.18 per share of Class A common stock.
That dividend will be paid on or about December sixteenth to shareholders of record as of the close of business on December ninth. Scott will now go through the financial stats, and then we'll take questions.
Great. Thanks, Rick. Again, as disclosed in our earnings release for the third quarter, discretionary AUM as of September 30 of this year was $19.4 billion, and total AUM as of the same period was $27.4 billion. Revenue for the quarter was $29 million, and reported consolidated net income for the quarter was $5.6 million. More detail about the third quarter. Again, revenue was approximately $29 million. That represented approximately a 13% decrease over revenue of approximately $33.5 million for the same period last year. This decrease was driven primarily by market depreciation and net client outflows in discretionary AUM. Expenses for the third quarter were $21.9 million, representing approximately a 13% decrease from expenses of $25.3 million for the same period last year.
This decrease was primarily attributable to decreases in compensation and benefits expense of $2.5 million and general and administrative expenses of $0.9 million. Compensation and benefits expense decreased by $2.5 million or approximately 13% to $16.3 million for the three months ended September 30 of this year from $18.8 million for the three months ended the same period a year ago. The decrease was primarily attributable to a decrease in the accrual for bonuses, partially offset by an increase in salaries and benefits expense as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by $0.9 million to $5.7 million for the three months ended September 30 of this year from $6.5 million for the same period a year ago.
This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the Cortina acquisition of $1 million and a decrease in trade errors, partially offset by an increase in travel and entertainment expense. Reported consolidated net income was $5.6 million for the quarter as compared to $6.4 million in the same period last year. Reported net income attributable to the Silvercrest or the Class A shareholders for the third quarter of this year was approximately $3.4 million or $0.35 per basic and diluted Class A share.
Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core non-recurring items, was approximately $8.2 million or 28.1% of revenue for the quarter, compared to $10.3 million or 30.9% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items and income tax expense, assuming a corporate rate of 26%, was approximately $5 million for the quarter, or $0.35 and $0.34 per adjusted basic and diluted earnings per share, respectively. Adjusted earnings per share is equal to 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 EPS.
To the extent dilutive, we add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted Adjusted EPS. Looking at the nine months, revenue was approximately $94.7 million, which represented a 3% increase over revenue of approximately $97.8 million for the same period last year. This decrease was driven primarily by market depreciation, partially offset by net client inflows in discretionary AUM. Expenses for the nine months ended September 30 of this year were $16.3 million, representing approximately a 21% decrease from expenses of $76.6 million for the same period last year. This decrease was primarily attributable to decreases in both compensation and benefits expense and general and administrative expenses of $2 million and $14.3 million, respectively.
Compensation expense decreased by $2 million or approximately 4% to $52.9 million for the nine months ended September 30 of this year from $54.9 million for the same period last year. The decrease was primarily attributable to decreases in the accrual for bonuses and equity-based compensation expense 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 as a result of merit-based increases and newly hired staff. General and administrative expenses decreased by $14.3 million or approximately 66% to $7.4 million for the nine months ended September 30 of this year from $21.7 million for the same period last year.
This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina acquisition of $15.5 million, occupancy and related costs and trade errors, partially offset by increases in travel and entertainment expense, professional fees, and portfolio and systems expense. Reported consolidated net income was $27.5 million for the nine months ended September 30th of this year. This compared to $16.4 million in the same period last year. Reported net income attributable to Silvercrest for the nine months ended this year was approximately $16.8 million or $1.70 per basic and diluted Class A share.
Adjusted EBITDA was approximately $27.6 million or 29.1% of revenue for the nine months ended September thirtieth of this year, compared to $30.4 million or 31.1% of revenue for the same period last year. Adjusted net income was approximately $17.5 million for the nine months ended this year or $1.22 and $1.19 per adjusted basic and diluted EPS, respectively. Quickly looking at the balance sheet, total assets as of September thirtieth were $205.1 million, compared to $229.3 million as of the end of last year. Cash and cash equivalents were approximately $67.4 million at September thirtieth. This compared to $85.7 million at the end of last year.
As of September 30th of this year, total borrowings were $6.3 million, and total Class A stockholders' equity was approximately $87.1 million as of September 30th of this year. That concludes my remarks. I'll turn it over to Rick now for Q&A.
Thanks, Scott. Look forward to questions. Thank you.
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Sumeet Mody from Piper Sandler. Please go ahead with your question.
This is Brandon Van Heyde on for Sumeet. Just a couple of questions for you. First, outflows continued higher than we expected at $570 million in the quarter. I know you had a lot of tax-related outflows last quarter. Could you just tell us how much it leaked into the third quarter, and if there's any uptick in sort of your normal flow profile?
You know that the data on our flows is pretty lumpy for the high net worth audience, and is not all that predictable. I can't characterize it. It's too short a period of time. There were more tax payments in the third quarter, for those who pay in the third quarter, as you might expect. I can't characterize that in terms of trends, though. We did have an uptick, as I said, in new relationships. Some of the outflows were rebalancing. You know, I really have no more color for you beyond those observations.
Got it. Thanks. A question on modeling just your comp expenses. How should we think about the comp ratio for the full year and the true-up you expect in the fourth quarter? Should we expect to see the full year accrue to that 55% level, or given the revenue dynamics, could we see that come in higher than that this quarter?
Well, we accrue for 55%. There's no way to predict what's gonna happen in the fourth quarter, that's so heavily influenced by markets. A lot of our comp is directly determined on a formula basis. It does trend down with revenue and markets. The nine months of last year compared to the nine months of this year in terms of revenue is down, I think, 3%. That's not a dramatic change. We can also end up with performance fees potentially in the fourth quarter, which adds some volatility. At this point in time, there's no good visibility until into how we will compare to the 55% when we ultimately true things up. Some years we've been a little below. We were quite a bit below last year.
Some years we've been spot on or just a bit above. We've always hovered around it. At this point in time, I don't see a material difference to what we've seen in past years.
Okay, great. That's helpful. Thank you. Yeah, last one for me. We like seeing you guys take advantage of the dip with a solid level of buybacks in the quarter at over $500 million. How should we think about your appetite just going forward and how you prioritize the repurchases? Is it more of a regular cadence planned ahead, or should we expect you to be more opportunistic depending on the market environment, Lent?
Yeah. I think, given the amount that is left, that we have set aside for buybacks, we have stated very clearly that we wanted to get that money to work in repurchasing shares. Obviously, in an environment like this, it's more of an opportunity to do so. Since we're committed to it, you can expect to see more buybacks going forward. We've been active in the market, as you saw. We are sensitive to price, of course. It is the use of shareholder capital. But at current levels and below, we've seen that it's still having significant value for shareholders to accrete them in this way.
Great. Thank you.
You're welcome.
Our next question comes from Sandy Mehta from Evaluate Research. Please go ahead with your question.
Yes. Good morning. A couple of questions. Do you have a pipeline or a flows number in terms of the actionable pipeline?
I'm not sure what you're asking, Sandy. What line?
The actionable pipeline.
Oh, actionable pipeline. I'm sorry.
Yeah.
Some of the audio, in fact, the last caller too, is just a touch fuzzy for us in this room. We're just listening very hard. Yes, the actionable.
Yeah. No, no problem.
Yeah. The actionable pipeline is $1.43 billion this quarter. That is for U.S. value, U.S. growth, international, as well as OCIO. That has come down from what we announced last quarter. The primary reason it's come down is because of wins. That's good. The pipeline remains strong, but the wins that we had recently have drawn that pipeline down a bit. We would expect that, because as you know, we define the pipeline very, very tightly, as invite only RFP, invite only searches and where we're in the finals. We have a high hit rate on that pipeline.
The second question is, could you comment a little bit further on this, the launching of the Large Cap Value unit investment trust? What is the opportunity in that? And also, you know, value as an asset class, value has significantly outperformed growth this year, and it's held up in a bear market, as it should. It doesn't always, but it has this year. Does that help you in terms of marketing or are you seeing more interest because of that? Thank you.
You know, that pipeline for U.S. value has actually come down just a touch, but again, that's because of wins. We are looking for long-term partnerships in working with our consultants. I can't say that the environment of value outperforming growth has meant an increase in activity there recently. The outperformance of growth versus value was so sustained and so long, well over a decade, as you know, that it takes a while, I think, for consultants and allocators to shift their attention towards the thing that has been working lately. Again, we don't necessarily wanna be getting investors just because they've noticed the asset class starting to perform on a relative basis.
We'd much rather them coming in for the quality of what we're doing, the risk management of what we're doing, the preservation of capital, the outperformance on a relative basis, which we've always had. I do think on the margins it will help if it is sustained. I can't say I've seen that yet. With regards to the trust, you know, that's just a lot better format than setting up a mutual fund. When you have a capital that is pooled in that way, a vehicle for investors where that's a useful way to get exposure into our strategies, it just provides another avenue for growth. You know, we can open it up to, of course, other strategies.
We're starting with large-cap value, and I expect that we'll have mandates in the fourth quarter to get that going. Of course, once you have capital, that provides you more of an opportunity to grow it into the future.
Great. Thank you so much.
You're welcome.
Our next question comes from Feddie Strickland from FIG Partners. Please go ahead with your question.
Thanks. It's actually Janney that never asks the company, but anyway.
Oh.
Good morning.
Hey. Hey, good morning. How are you?
I'm good. I was just wondering, I know you talked about the overall actionable pipeline. Can you speak a little bit specifically to the OCIO business and just kind of what's going on there, both domestic versus international? I know you had some European clients onboarding. I was also just curious if there's more of those in the pipeline.
Sorry, you were on mute as we were listening. The European clients are not OCIO. They are wealthy families that we're talking to. We've always had exposure to Europe in Switzerland, Netherlands, Germany significantly. I think you're referring we're talking to Polish families as a result of Russia's invasion of Ukraine. That's not OCIO unless they were just going to be an enormously large family office. That's a traditional wealth management relationship where people are looking for exposure in the U.S. dollar, U.S. markets and diversification away from Europe for you know structural reasons. There's more to come there. We're talking to multiple families. I don't tend to distinguish that a lot from the U.S. market.
We've always kind of had a global footprint. It just happens to be growing, which I do like. Ultimately, any new client means the potential for new referrals, which is exactly what's happening in that particular case. With regards to OCIO, that is largely a U.S. business. It's certainly where our focus is within the pipeline right now. The actionable pipeline for OCIO is almost $700 million, just shy of that. I think it's $670 or thereabouts of that $1.43 billion in total pipeline. It's a substantial part of our total pipeline of potential new business. The amount of AUM within the OCIO business has come down a bit with the markets as you might expect. It's been hovering just below $1 billion.
We were well over $1 billion before the markets came down. I hope that provides enough color. We should expect to hear whether we've won a couple mandates that we are quite close or in the finals very soon. That should happen in the fourth quarter.
Got it. I appreciate the clarification on the European clients there.
Sure.
was just curious to what you're thinking with regards to the dividend. Are more dividend increases possible, or do you prefer to spend retained earnings elsewhere? You know, are you more focused on the buyback right now? Is the dividend increase possible, I guess, is the question.
Yeah. Ultimately, you know, the amount of cash flow that goes out, the pay ratios is important to us, and we watch it when we're determining our dividend policy. We've long said we think it's important to pay our shareholders for holding the stock on a very regular basis with a meaningful dividend, and to prudently increase it in a way over time that can be sustained even with much more dramatic pullbacks in markets than we've had this year. Our dividend is sitting at a level where that is in fact the case. As you know, we increased it last quarter. We will continue to do so, assuming the revenue and the cash flow of this firm can continue to support it.
We don't have a dividend target per se. I think it's at a good level right now. It pays quite well. We'll just assess that next year. The pattern, if you've looked at it, is basically an annual increase. Whether we do that or not next year, it kind of depends where we sit. I can't predict that, of course. The buyback was approved, you know, well over a year ago. It'll be, I think, two years come second quarter or end of the first quarter, I can't remember which, next year. You know, I haven't been necessarily refilling the kitty since we announced it. We haven't even spent what we have. Obviously we've been accruing more cash since we did that.
If our stock continues to be a relative value, which it is, and we don't have a use of cash for appropriate acquisition or other investment. We will reassess that, depending on where we are with the current buybacks that we've been executing. As the first caller asked, you know, what are we going to just steadily buy back? What's the plan? I've committed to getting that money to work, so you can expect we will continue to be active in the markets. You know, I haven't necessarily. I set aside the cash, already did that. That is another thing I will look at next year around the same time that we made the decision originally.
Got it. Just one more question. Just thinking about the pricing for investment firms and their longer term radar. How much, you know, has volatility been a factor there for those companies? And do you think that that's changed their calculus at all on whether or not they would wanna look for a partner?
I do think the market is changing a bit in two different ways. That's a great question. I don't get to talk about this very much. I do think it's been clear how I felt about the acquisition market as well as the number of firms that would be compatible, fit well with Silvercrest. It's smaller than one might think when you're looking for an ultra-high-net-worth business that's run well, that we feel we can organically grow, that it's culturally compatible and is in geographic areas that would be desirable for our brand. I'm noticing two things. One is that the deals that are getting done in the wealth management space are undergoing more scrutiny by buyers for a couple of different reasons.
One, obviously, the tailwinds of low interest rates and a bull market have changed the dynamics. It's a lot harder to make the financial engineering work, or to be confident in that financial engineering over a sustained period of time, especially when some buyers are using meaningful leverage against EBITDA, which I never thought was all that prudent in this business at the level some buyers were going. That's number one. We're seeing more earn outs, which we've always done in those deals. We're seeing a much closer scrutiny of the true organic growth of companies, which is much lower than I think many market observers understand in this business. I'm seeing a bit more prudence around whether a company can organically grow in the future.
On the selling side, you know, the same thing is happening, but it does put more strain on businesses. A lot of smaller companies we look at are eating a lot of their economics, if not all of it. Lowering revenue puts constraints on the business and calls into question the sustainability of being able to invest for future growth, which in this business, at least on the wealth side, means more bodies. At the margins, I think that could help. I haven't seen it yet, though, to be honest. Again, part of that is how selective we're going to be about the right fit for this company in order to grow into the future. I am having conversations, as I always have said I have. There are opportunities for us.
I do get the sense that it might be a bit moving our way, but it's a sense. It's something I can't put my finger on in a really firm way. Certainly asset management, which comparatively has been a bit out of favor, certainly has come down even more so as compared to wealth, for obvious reasons. It's just much more leveraged to the market and much more sensitive to performance. Thankfully, as you look at our company, our equity performance across the board, whether you're looking at growth or value, has done extremely well.
Got it. That's really helpful. I appreciate all the color. Thanks for taking the question.
Absolutely.
Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Christopher Sakai from Singular Research. Please go ahead with your question.
Hi, good morning.
Morning.
You mentioned getting uptick in new relationships. Can you comment on how many you added?
Yeah. I normally don't comment, Chris, on how many. I'll just say it was several.
Okay. Can you provide some color on the environment out there for adding new relationships? What are you guys seeing?
For us, you know, it's a referral relationship business, and it's lumpy. I've never reported a pipeline, for example, for the wealth management business as a result. For one thing, it's extremely hard for us to measure a pipeline that we have a lot of confidence in terms of it ultimately resulting in business. It's a much longer tail in the conversations with most families. We can be talking even to some relationships, you know, for a couple of years or more, until something is realized. Just the fact we're talking to family is not really enough for me to build a pipeline.
Unlike the institutional equity business, where we have a process driven by consultants or RFPs by professional allocators, and we can very clearly measure where we stand in the likelihood of us ultimately gaining business. We just can't do that with wealth. It's extremely hard to characterize. I can tell you that generally speaking, periods of disruption and volatility in the markets do have wealthy clients starting to talk to their friends. That is to say, people who could refer business to us about what's happening and what's happening in their portfolios.
High levels of client service, our ability to talk to our clients, reach out to them, help them understand their allocations, why we're positioned the way we are, what is happening to the performance of their portfolios in a proactive way, helps distinguish the relationship as compared perhaps with a large bank or brokerage or maybe even a competitor who's not doing that. Those are very important things to high net worth clients. These volatile markets is an opportunity not just for us to perform well, but for us to help our clients with regards to the softer things in the business that really do matter in a relationship.
Our experience, at least coming out of the global financial crisis in periodic disruptions, is that these do have people looking around and thinking about how their wealth is being managed. Ultimately it does lead to an increase in business. It doesn't necessarily happen at the time of the volatility. It tends to be once the markets come back on an upswing, there's more comfort in the economy, et cetera. You know, if I'm going to speculate about that, Chris Skye, I would say that this, we've got to work through this for a while before I really, really see that happen. Again, it's a lumpy business without a pipeline, so pretty hard to characterize.
Okay. Thanks for that.
Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the conference back over to Rick Hough for any closing remarks.
Thanks. I just wanna show my appreciation here and thank everyone for joining us for our third quarter call. I appreciated the questions. I was able to give some pretty good color as compared to some other calls and look forward to talking to you all at the end of the fourth quarter. Thanks.
With that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.