Silvercrest Asset Management (SAMG): A 4% Dividend Yield For an Asset Manager Focused on Super Wealthy Families and Institutions
Silvercrest Asset Management (SAMG) is an investment manager. It looks cheap if you expect it – as has been the case in the past – to do a good job of keeping its clients and keeping those clients keeping about as much money with them as before. However, most publicly traded asset managers are cheap stocks, because they have experienced – and investors probably expect them to continue to experience – redemptions. In some ways, Silvercrest looks a bit closer to Truxton (TRUX) – another stock I wrote-up – than it does to some of the asset managers that just run mutual funds for the general investing public. Silvercrest’s client base is a mix of ultra-wealthy – their top 50 clients average $290 million in assets each at Silvercrest – families (2/3rds of the business) and institutions (1/3rd of the business). These clients are put into a mix of homegrown investment options and outsourced investments. For all clients, the average is closer to about $30 million. However, as you’d expect – most of the assets under management are with their top 50 clients (who, again, each average close to $300 million in assets with Silvercrest).
Silvercrest charges mostly asset-based fees. These average a bit less than 0.6% of assets under management. Unlike Truxton, Silvercrest is not a private bank. It offers other services. But, these are a small part of the business, aren’t growing very fast, and aren’t something I’m going to discuss much here. So, Silvercrest might sit midway between the kind of publicly traded asset managers you’re more familiar with (say GAMCO) and a private bank / trust business like Truxton. I don’t think it’s entirely comparable to one or the other.
There’s a write-up over at Value Investors Club on this stock. It’ll be a little different from what I discuss here. So, I recommend reading that. But, there’s not going to be a ton of information in there that I don’t also cover. This is because both my write-up of Silvercrest and that Value Investors Club write-up look like they’re nearly 100% based on reading the company’s 10-K. The company does earnings calls. You should read the transcripts. It might give you a little bit better feel for the sales process and things like that. The company also puts out an annual report (on its website) that includes a shareholder letter not found in the 10-K (the rest of the annual report is just the 10-K).
As of the last 10-Q (September 30th, 2020) the company had $24 billion in asset under management. However, that is for the consolidated entity Silvercrest L.P. which is 35% owned by employees of the company and only 65% owned by public shareholders in the entity I’m writing about here.
So, as a stockholder, you really only have an interest in $16 billion of that AUM.
Silvercrest has a diagram to explain this. But, it’s worth going over here. The publicly traded company owns about 2/3rds of the L.P. So, outside shareholders get 2/3rds of the economics of this business and 1/3rd goes to employees who have a stake in the L.P. The company manages $24 billion and charges 0.6% of AUM on average – so, that’s $16 billion times 0.60 equals “look-through” AUM of $16 billion for outside shareholders on which fees of 0.6% of $10 billion work out to be $96 million. Reported revenue is higher, because it’s the consolidated revenue you are seeing (which means it includes revenue attributable to the “B” shares held by employees). The fees tend to be a bit below 0.6% on average. And then there are about 9.5 million “A” shares. So, the A shares are each backed by about $10 of sales and about $1,600 to $1,700 of AUM per share. The stock price is around $15 right now.
So, SAMG’s Class “A” shares (what you can buy) trade at about 1.5 times sales and about 1% of AUM.
Is that a good deal? That number (price/AUM) is why I said this thing looks cheap on the surface. Whether it really is or isn’t cheap depends on how AUM grows or shrinks over time. But, given the economics of this business – a price/AUM of at least 2% would normally be justified. And, if it’s a sticky and predictably growing base of AUM, prices well over 2% of AUM could still work out well for owners.
Growth is very valuable here.
That makes appraising the stock more difficult. Even 1% of AUM is too much to pay for an asset base about to be headed out the door. But, even 3% of AUM isn’t too much to pay for an asset base sure to compound for many years to come. The reason for this is that growth is basically free from an earnings retention perspective. All earnings at an asset manager can be paid out in cash dividends. Growth is just your return on top of that. At most companies, earnings retention is the “cost of capital” used to fund growth. There is no cost of capital for growth at an asset manager, because no additional capital investment is needed to grow assets. So, if you knew an asset manager would grow for many years to come – it’d be silly to pass on the opportunity to buy it at 1% of AUM. In that sense, Silvercrest is cheap.
But, is that the right way to look at this asset manager? Obviously, the market does not look at many asset managers that way. There are a ton of low-priced asset management stocks out there.
What makes Silvercrest different?
The company’s in-house offerings skew towards stocks and in particular value stocks. Their largest single strategy (at 30% of assets in the company’s own strategies – it’d be less in terms of total assets under management) is small cap value. Some of these strategies may be size constrained. That one is. The company can’t keep growing that small-cap value strategy and keep getting good returns.
There are several concerns here.
One, the company could be run to benefit its employees instead of its owners. A lot of compensation (about 50% of the employee compensation you see in the income statement) is variable stuff tied to incentive bonuses and the like. This may decrease in times of poor performance. But, it’s also subject to increase if the folks running the company feel compensation hikes are needed. So, your effective ownership of the assets under management can get diluted in percentage terms over time. This will be a drag on stock returns. The only question is how big a drag. Right now, I’m presenting things to you in a static view – employees get one-third and you get two-thirds of the company – but, this may not always be the case.
Two, you’re effectively investing in a stock and (to a lesser extent) bond and hedge fund and private equity portfolio. While you don’t directly own the underlying assets under management – the revenue of the public company is nearly 100% tied to the AUM of the asset manager. So, a 10% decrease in the stock portfolio of clients will translate into like a 10% decrease in the earning power of the public company. Basically, if you buy an asset manager when the underlying assets clients are invested in are cheap – you benefit from the eventual rise in market value. When you buy an asset manager when the underlying assets clients are invested in are expensive – you suffer from the eventual decline in market value.
Fees track AUM. Earnings track fees. And the price of the stock you’re buying tracks earnings.
So, the market risk you’re taking here is really the same as the clients themselves.
The economics are better for you – because, you’re using other people’s money to make your profit. But, really, that is no different from an insurance company. So, the same risk applies here as it did to Investors Title Company (ITIC). If you’re buying into an overvalued investment portfolio today – you’ll see a drag on future results. The only way to offset this is to insist on paying a lower price/AUM for a company where AUM consists of overvalued stocks. In other words, pay lower price-to-AUMs for an asset manager when stocks are expensive and be willing to pay higher price-to-AUMs for an asset manager when stocks are cheap. I know this goes against everyone’s instincts. But, it is theoretically the correct way to buy and hold these things. Still, if you are paying half the price you should pay for an asset manager today – you’ll do fine even if stocks are generally twice as expensive as they’d normally be. The greatest danger in a stock like this would be doing the reverse. You could get very bad results if you pay an especially high multiple of fees, AUM, etc. at the same time that stocks and bonds are trading at especially high multiples. So, be extra careful not to overpay for an asset manager when the overall market is expensive.
There’s another risk here. It’s an odd one. I’m not sure how much this company can grow organically. And I’m not sure how much it’d shrink in bad times.
This is because the performance record of their investment strategies has been too good.
That might sound like a high-class problem to have – but, it means that we’re looking at strategies that have outperformed their benchmarks (admittedly, often “value” benchmarks) over the last 3-years, 7-years, etc. and since inception. That’s not a very good test of an asset manager. The stickiness of clients isn’t tested in good times. It’s tested when you underperform. Every strategy underperforms sometimes. So, building a long-term compounding machine for the public company can’t be solely based on outperformance of the investment strategy. You really want other things making clients sticky. Maybe Silvercrest has those other things. But, it’s hard to tell – because, it’s easy to keep clients when you’re outperforming your benchmarks.
Like I said, some of those other “sticky” factors may be present here. Silvercrest does provide family office type services. And they claim that 5 of their top 10 clients make some (but not always total) use of these services. The company charges relatively low direct fees (about 0.6% or less) on average.
However, those low fees are to be expected for two reasons. One, the client sizes are very large. So, big clients expect volume type discounts. Silvercrest gets discounts itself when it puts some client money with outside managers. Two, there are usually other fees the client is being charged besides what Silvercrest is charging. For example, Silvercrest does put some money (not most, but some) with outside managers – especially for things it doesn’t specialize in (so, not stocks). Another example is the institutional money that Silvercrest manages. The company’s AUM is now about one-third institutional. These institutions come with consultants, etc. There are other fees clients may be paying – so, the 0.6% number is not comparable to what you as a much lower net worth individual investor might be used to seeing on mutual funds, index funds, and the like.
Also, a portion of Silvercrest’s AUM is indirectly sourced. Over 80% is direct. But, some isn’t. I don’t know if these indirectly sourced assets, assets of the nine companies it has acquired over the years, and assets supplied by institutional investors are as sticky as original family money from some of the company’s earlier clients. It may be. But, in a period of outperformance for the strategies Silvercrest runs – we really have no way of knowing.
Obviously, bad investment performance is a big risk here. If the company’s strategies badly underperform benchmarks for a time this could cause a reduction in winning new institutional clients, a reduction in assets under management with existing clients, and even the loss of existing clients.
Silvercrest claims it has had a 98% client retention rate over a lot of years now.
Also, this is a people business. Silvercrest – the public company – is, poorly protected against key people at the company just up and leaving. As outsiders, we have little insight into whether this is a realistic risk. There could be little chance it’ll happen. I have no way of knowing.
Silvercrest mentions it has had people leave to go to competitors.
The other difficulty here is assessing the brand, the organization, etc. That’s hard to do. Silvercrest operates in areas of the investment management business about which Andrew and I know next to nothing. It is a less visible portion of the investment business.
And we can only analyze the past record for the years we have it.
The problem is that we have a combination of trends in the market for family offices, institutional investors, etc., overall market conditions, performance of value vs. other strategies, and relative performance of Silvercrest vs. its (mostly value) benchmarks that are all happening in the same year. Some of these would be headwinds for the company. Some of these would be tailwinds. For example, the kind of offerings the company has weren’t very well suited for the last decade in the market. But, the other items I named were mostly tailwinds. I wouldn’t say we can see a period of serious testing for this company since it went public.
Growth here has been okay but not great. I’ve seen a lot better in this industry. If you look at how the company has grown AUM, a lot of it has been through market appreciation. Net client inflows have been small. Over the last few years, this company maybe would grow 3-4% a year if the market had been flat. Unless it brings in a lot more institutional money, I’m not sure organic growth – apart from appreciation of AUM in the market – will add up to much here. This isn’t a tiny company anymore.
Now, the general rise in the market over time is a benefit to using other people’s money. Having a royalty stream tied to assets under management where those assets are stocks that rise 8-10% a year on average is what makes this a good business to be in. However, there will be periods – sometimes, 15-year periods possibly – where the nominal value of a stock portfolio will not increase at all. There is such a thing as a bear market, a sideways market, etc. In such markets, this could be a very low growth company.
It doesn’t make sense to assume growth here will be tied to anything other than organic growth in net existing client inflows, new client wins net of client losses, and market return of the underlying portfolios. The portfolios here are – compared to most of these kinds of super high net worth asset managers – skewed more towards stocks and skewed more toward value. I’d certainly rather be invested in a value stock manager than a bond manager. But, can we really expect market appreciation to add more than 5% a year to AUM over time measured from today’s market prices forward?
I’d say no.
So, if all goes well, maybe you get growth of 5% a year in the market plus 3% a year or so from a combination of new client wins and net inflows from existing clients (getting more of their business, Silvercrest often doesn’t manage all of a client’s money).
That’s a decent growth stock (8% a year). But, that’s if everything goes well. With companies like this, you also have to assume that a lot of that growth is going to be diluted away with these B shares being issued to employees of the firm. Like I say with investment banks, ad agencies, etc. – these things are run for employees first and shareholders second. You just have to accept that if you’re going to invest in any asset manager.
Based on the stock price and the past growth of this company – it’s attractive. You have something priced at a level that is equal to or less than the overall market (remember, the overall market is pricey). And yet it has historically grown much faster than the market. This is also a business – and an industry – where returns on capital are so high that growth is effectively free. As a result, growth (when combined with high returns on capital – that is, low earnings retention needs) creates a lot of value. So, if this company turns out to be a much bigger grower than I expect – it’ll turn out to be a terrific stock to own.
Another way of analyzing this thing could be to look at the dividend. For a variety of reasons, I think the dividend can give you some feel of management’s idea of what long-term normal earnings are. There isn’t a need to retain a lot of earnings. They do acquire things from time-to-time. But, that’s about it. Right now, the dividend is running at an annual rate of $0.64 a share.
That’s a yield of 4.3%.
That’s probably about the yield you could get on junk bonds right now. It’s a really good yield. And there is no indication to me that it’s an especially onerous dividend given the company’s cash and debt position, the rents it has to pay, fixed compensation expense, and likely AUM tied fees. If this is as sticky a business as it has appeared to be in the past – that’s actually a pretty high dividend that is likely to grow over time. If I was to value this one just based on the dividend, I’d have to admit there aren’t many – in fact, I don’t know if there are any – stocks with a dividend yield that high where the business prospects look as good as they do here. This may be one of the best businesses you can find today with a yield of 4% or higher.
Also, the dividend yield shows you don’t need a lot of growth here. Even if they could just manage 3-4% a year growth over time, that growth plus the dividend yield would be very competitive with the returns you can get in the market going forward. If they can get some market appreciation too – this could perform well. I’ve seen cheaper asset managers. But, I don’t know I’ve seen asset managers I liked better.
I don’t have a clear opinion on management here. Again, because of the client base this company serves – this isn’t a company I can get much scuttlebutt type information on.
And without some scuttlebutt, Silvercrest would be a hard stock purchase to ever pull the trigger on in a big way.