May 10, 2021
Operator
Good morning, and welcome to the Silvercrest Asset Management Group Inc. Quarter 1 2021 Earnings Conference Call.
Please note, this event is being recorded. Before we begin, let me remind you that during today's call, certain made statements regarding the future performance are forward-looking statements.
They are based on the 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 the filings with the SEC under the caption Risk Factors.
For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of date hereof, and Silvercrest assumes no obligation to update them.
Rick Hough
Great. Thanks very much for the introduction.
Welcome to the first quarter results of 2021 for Silvercrest. Having been founded in the spring of 2002, Silvercrest has now begun its 20th year in business, which will culminate in our 20th anniversary celebration in April of 2022 next year.
Silvercrest's founders and partners embarked on an entrepreneurial journey to create the foremost wealth and asset management boutique in the United States. We're very proud at having created an enduring firm founded on bedrock principles as well as a strong and proud culture.
We remain dedicated to putting our clients first and creating a business that serves its clients with highly regarded institutional quality capabilities for generations. We concluded the first quarter of 2021 and begin our 20th year in business with new highs in our asset management, revenue and adjusted EBITDA.
Silvercrest's discretionary AUM, which drives revenue, increased 6.3% from the fourth quarter of 2020 to reach $21.9 billion, which is an increase as well of 47% year-over-year from the first quarter of 2020. The firm's total AUM grew to $29 billion by the end of the first quarter of 2021.
Silvercrest concluded the first quarter of this year with $31.2 million in revenue, and the firm's quarterly adjusted EBITDA was $9.7 million or an annualized adjusted EBITDA run rate of $38.8 million. Adjusted diluted earnings per share increased 16.
7% year-over-year to $0.42 per adjusted diluted share. The firm's first quarter 2021 adjusted EBITDA margin was 30.9%.
With strong relative performance, Silvercrest's institutional equity new business opportunities continue to grow across Silvercrest's suite of proprietary equity capabilities. Our new sub-advisory relationships added assets in the first quarter of 2021.
We are optimistic about our growth prospects for this business with a robust new business pipeline. Silvercrest's organically built Outsourced Chief Investment Officer offering continues to grow, and its pipeline of opportunities has increased as well.
That business more than doubled during 2020, and we hope to cross the important $1 billion AUM threshold during 2021. We've hired new high net worth portfolio management professionals for the wealth management business and will continue to add new talent, both to maintain a high level of client service and to grow the business.
Silvercrest has a track record of growing new talent and will continue to do so. We believe our brand, culture, capabilities and technological innovation make Silvercrest a premier partner for select businesses and professionals.
Regardless of the environment, Silvercrest will continue to seek to effectively deploy capital to complement organic growth.
Scott Gerard
Thanks, Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2021, was $21.9 billion, and total AUM as of March 31, 2021, was $29 billion.
Revenue for the quarter was $31.2 million, and reported consolidated net income for the quarter was $4.3 million. Looking more specifically at the quarters year-over-year, again, the first quarter revenue was approximately $31.2 million.
That represented a 10% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM.
Expenses for the first quarter were $25.5 million. That represented approximately a 62% increase from expenses of $15.8 million for the same period last year.
This increase was primarily attributable to increases in G&A expenses and compensation and benefits expense of $7.9 million and $1.9 million, respectively. Comp and benefits expense increased by $1.9 million or approximately 12% to $17.
6 million for the 3 months ended March 31 of this year. That was an increase from $15.7 million for the 3 months ended March 31 of last year.
The increase was primarily attributable to increases in the accrual for bonuses, salaries and benefits expense, primarily as a result of merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding. G&A increased by $7.9 million to $7.9 million for the 3 months ended March 31 of this year from $43,000 for the 3 months ended March 31 of last year.
Rick Hough
Thanks very much, Scott. We're now available to take questions at this time.
Thanks.
Operator
Our first question comes from Sumeet Mody with Piper Sandler.
Sumeet Mody
Just wanted to maybe start with the institutional pipeline. Can you update us on that 6 months, the actionable pipeline today?
How much of that is related to OCIO? And then can you update us on the current size of the OCIO platform and kind of your confidence level of reaching that $1 billion threshold this year as well?
Rick Hough
Yes. We don't normally break out the pipeline for OCIO separately from all of the -- from the institutional business, but that pipeline has grown.
And I don't want to get into this every quarter. I'd rather just talk about the institutional business as a whole.
But we're -- we see $800 million in reach where it's climbing up towards that in terms of total AUM. And the pipeline has grown, and I have a high confidence that we'll cross that $1 billion threshold.
With regards to the rest of the institutional business, including OCIO, the actionable 6-month pipeline, which we very conservatively measure. That includes invite-only searches and where we're in semifinals finals.
Those have grown substantially. As of the beginning of the first quarter, the pipeline was $1.34 billion, as you may recall.
And it now stands at $1.8 billion. And that's grown completely across our product suite, OCIO, U.S.
value, U.S. growth, international.
Sumeet Mody
That's great. I just wanted to touch on the organic growth in the quarter as well.
Between the closed accounts and the net cash outflows, it looked like about $500,000 of outflows there. Can you unpack that a little bit?
And how much was related to taxes at all? And should we expect the second quarter to see more kind of a normalized tax outflow in that quarter as well?
Rick Hough
Yes. It's -- right.
So that gets complicated. It's very hard to get our arms around what the taxes may look like and when they actually flow.
It tends to be something that we see more in the second quarter than the first. We actually had a very good business development quarter in terms of our new accounts and additional monies into the firm from our high net worth clients.
And in fact, it was pretty good on the institutional business. The negative outflow that we see this quarter is solely effectively due to the closing of the AMG mutual fund that we sub-advise.
AMG, as you may well know from the news, decided to terminate all of its external managers. Despite our good performance, Silvercrest was among them.
And I'm really not going to comment more on that beyond. It's in the hands of our outside counsel.
Sumeet Mody
Got it. Okay.
And then -- and the last one for me. I'll hop back in the queue.
I noticed you guys did not increase the dividend this year.
Rick Hough
Yes. Thanks.
And excuse the length of perhaps this answer. So you're correct.
We didn't raise the dividend again. We've kind of reached a yield on our stock that we think is highly favorable, in that it might be pushing on a string to continue increasing that dividend and therefore distributions at this time.
We have had a policy of both consistently increasing the dividend in the past as well as being very conservative with the amount of cash that we're upstreaming in order to pay that dividend. And while cash flows are very robust, and as you've seen, we're reaching all-time highs with regards to that, for the company, we just feel like the amount that we're paying out in dividends is highly favorable, and we have other uses for the capital instead at this time.
And so we do have conversations going on, of course, on the M&A front. That's always been a constant year.
No prediction of one could fall. But you may recall, in 2019, all of a sudden, we had a tremendous amount of cash to put to use when we joined with our great colleagues in Milwaukee.
And that can happen at any time, and it's pretty important for a company of this size. So yes, that's a definite potential use of cash that we're keeping our eye on.
In terms of -- obviously, hires do affect our cash flow but not necessarily the large cash reserves that we have on the balance sheet. And so we are looking strongly at other alternatives for use of cash that could include ways of returning capital to shareholders, including buybacks instead of just the dividend.
And that's a conversation that the Board has on a regular basis and is considering as part of our capital allocation strategy.
Operator
Our next question is going to come from Sandy Mehta with Evaluate Research.
Sandy Mehta
Congratulations on the strong results. And in terms of some of the -- you mentioned new portfolio management professionals were hired.
Could you give some more color in terms of are they more on the client relationship side, marketing side? Or are they on the new strategy side, possible new products or strategies?
Rick Hough
Yes. Thanks, Sandy.
So it's actually on both fronts. You may recall that we launched a new large-cap and multi-cap growth strategy with our great colleagues in Milwaukee.
We felt that they have a robust analyst team that has been proven to provide really great results, and we see the opportunity to go up in the market cap spectrum.
Sandy Mehta
So the hiring of Andy Young and the other people in Milwaukee, you mentioned large cap growth. Would that be a new strategy then?
Rick Hough
So the Milwaukee hiring was basically Andy Young because we already have the analyst team to support the effort. But yes, it's a new strategy.
We launched it in January 1 of this year.
Operator
And the next question comes from Christopher Marinac of Janney Montgomery Scott.
Christopher Marinac
Rick and Scott, just wanted to cover the EBITDA margin. And to what extent there was any external factors that just made it so strong this quarter?
Rick Hough
Yes. I'll let Scott take that.
We've been consistently bumping up or maybe at our best going just over 30%, but I'll let Scott address the seasonality, and then I may address it more broadly afterwards.
Scott Gerard
Yes. For the first quarter of this year, there are certain expense benefits that we've had, such as travel and entertainment expense and other client-related expenses, that have been -- continue to be superficially low due to the pandemic.
So on an incremental basis, those definitely help the margin. Sometimes, there is some other seasonality regarding -- in the first quarter regarding our audit expense because it's based on the level of provision of service.
The lion's share of our annual audit peaks placed during the first quarter. So that will definitely have an impact to some extent.
But this year, and it was consistent through 2020 as well, there are a lot of client-related expenses and travel expenses that just are at really low levels because of the environment. Just generally -- yes, and just generally speaking about our EBITDA margin.
If you look historically, our best margins tend to just go over 30%, often driven by performance fees in the fourth quarter because that's just a great guinea with no associated expenses. I have long said that in this business, if you're reinvesting and growing the business, it's hard to maintain much above 30% or 30% on an ongoing basis.
And that if you're really investing in the business, you might not get down a few clicks. I used to say in the past, hey, maybe we have to have a 24%, 25% EBITDA margin as we make investments in future growth that, that more than pays for itself.
Given the growth of the company over time, since I first started saying that, it's probably not 4 or 5 basis points. It may be only a couple now because -- just the size of the cash flow is that much larger.
So I would consider this trending towards the high side for us, and I wouldn't be surprised to see that cycle down just a bit as we make investments, especially in personnel.
Rick Hough
Yes. And just to state the obvious, as the country opens up more and we have greater access to meet with clients and once more travel commences those type of expenses, I would expect to increase to more normalized levels.
Scott Gerard
And that, too, leads to growth. It's very important that we get out there and seeing new prospects.
I did mention the high net worth pipeline, but we've seen more and more activity towards the end of this first quarter, leading into the second quarter. And I think it's partly a reflection of people opening up and thinking about things as their lives change with the rest of the country.
Christopher Marinac
Great. That's super helpful.
And I guess one other question I had is, given sort of recent events system and general asset management industry in the first quarter, is there a greater focus on compliance when some external events happen, and therefore, that actually supports the OCIO business that you're trying to do?
Rick Hough
So I think -- I don't know if it's a real change in compliance that's driving it, but there is definitely a long-term trend of Board members who are acting as fiduciaries on behalf of either institutions, whether that's an endowment, a nonprofit, pension fund, to be much more aware of their fiduciary duties to their clients and to outsource the investment function to professionals so that they have somebody to hold accountable for the performance and actions that are being undertaken on behalf of the investment pool or clients. And that trend is not just one that's been with us now for quite some time.
I would argue, it's accelerating. And it's accelerating, in part, because I think with technological tools, the ability for sophistication for these kinds of portfolios to be much more profound, I think more and more Boards are finding that they can't do it on their own, quite frankly, or engage the kind of professionals internally that are required to compete in this marketplace and are therefore looking more and more to outside people with proven track records.
The compliance burdens on our business itself, apart and separate from the OCIO business. There's always been a backdrop.
Thank goodness, we've always had the critical mass and professional team here to handle that. You don't like to have a competitive advantage due to that.
But certainly, in a boutique-driven RIA world that we compete in, it is one for us because we can -- we have the scale to take that on more easily than others. And of course, we're watching very carefully with the change in administrations on what that might mean.
I myself, I'm on the Executive Committee of the Investment Adviser Association, which is the industry group for RIAs, and that's a very important component of what we do. But I wouldn't say that's driving business one way or the other.
It may, at the margins, push some smaller firms to seek a larger hall like Silvercrest that's always been in the background. I would say that's not a new or accelerating trend either.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks.
Rick Hough
Great. Thanks very much for joining us today and for the good questions.
Overall, the business was quite strong in the first quarter, of course, bolstered by very strong markets as well. And as we see the country opened back up and our ability to get back into the field, meeting with either consultants or families about our business, we're pretty optimistic about the pipeline we see this year as we begin our 20th year in business.
Thanks so much for joining us.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.