Good morning and welcome to the Silvercrest Asset Management Group Inc. Q2 2024 Earnings Conference Call. [Operator Instructions] Please note, this 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 protection provided by the 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 over to Rick Hough, Chairman and CEO of Silvercrest. Please go ahead.

Thank you so much, and thank you for joining us for the Second Quarter Earnings Call of 2024. Generally supportive markets and economic conditions continued their progress since the fourth quarter of 2023, but market leadership remained unusually narrow during the second quarter. Large Cap growth primarily drove higher markets, a persistent trend of the market's recovery since 2022. Other segments, including large-cap value and small cap, actually declined during the second quarter, which negatively affected Silvercrest's assets. It's important to note that Silvercrest's U.S. value strategies and U.S. small-cap growth strategies continue to perform well on a relative basis. Broader market participation benefits Silvercrest long term due to the firm's diversified wealth management business and the firm's exposure to the small-cap institutional business. The markets have more recently broadened during the quarter, and if sustained, should improve Silvercrest's future assets under management and our growth. Silvercrest's discretionary AUM decreased $1.1 billion during the quarter to $21.6 billion, primarily due to the loss of institutional mandates. New client accounts and relationships during the quarter were modest but positive. Total AUM at the end of the second quarter was $33.4 billion, an increase modestly at 4.7% year-over-year from the second quarter of 2023. Quarterly revenue year-over-year increased $1.3 million or 4.2%. Silvercrest has been investing in the future growth of the business, including on higher compensation. As a result, while top line revenue has increased, most metrics of the business are down due to higher expenses. On our last call, I mentioned that Silvercrest has never had more business opportunities underway. We have made and will continue to make investments to drive future growth in the business, including value-added hires. During the second quarter, we announced the hiring of a high-quality, well-known global equity investment team to complement our international strategies.…

Thanks, Rick. Again, as disclosed in our earnings release for the second quarter, discretionary AUM as of June 30th of this year was $21.6 billion and total AUM as of the same period was $33.4 million. Revenue for the quarter was $31 million and reported consolidated net income for the quarter was $4.4 million. Looking further into the quarter, revenue increased year-over-year by $1.3 million or 4.2%, primarily driven by increased discretionary AUM resulting from market appreciation partially offset by net client outflows. Expenses for the quarter increased year-over-year by $2.5 million or 10.6%, primarily driven by increased compensation and benefits expense and, to a lesser extent, increased general and administrative expenses. Compensation and benefits expense for the quarter increased year-over-year by $1.7 million or 10.4%, primarily due to an increase in the accrual for bonuses. Based on the increased recurring cash compensation ratio over the past 2 years, due in part to the investment in the next generation of portfolio managers and other associates, we increased the amount of the interim variable compensation accrual to potentially narrow the adjustment in the fourth quarter. Also, compensation and benefits expense for the quarter increased year-over-year as a result of increases in salaries due to merit-based increases. General and administrative expenses increased by $0.7 million or approximately 11.3%, primarily due to increases in professional fees and recruiting expenses. Reported net income attributable to Silvercrest or the Class A shareholders for the second quarter was approximately $2.7 million or $0.28 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore and nonrecurring items, was approximately $7.2 million or 23.3% of revenue for the quarter. Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring…

Thank you, Scott. We're available now for questions.

[Operator Instructions] And today's first question comes from Sandy Mehta with Evaluate Research.

Yes, good morning. Rick and Scott, relative performance has been strong. So what exactly are you hearing from consultants and institutional clients? And what is causing the minor outflows?

Thank you. So yes, relative performance has been strong, thankfully. In particular, where we've seen some attrition in the value book, if you look at the trends over the past 2 years or so, some of it is due to fully funded plans, so that's a shift in allocation, not really something you can do about. We did a great job, and that just happens. There were some long-term clients, so that occurred. The particular outflow that we saw in the second quarter this year was a very large institution that consolidated, their managers have been removed most of them. They had done this 2 years ago, and we made the cut then, but they brought a lot of their money management internally to them. So that was an unusual change for an institution of this type. We worked with them a very long time. And as you point out, our performance for them was quite good. So look, that kind of thing is just going to happen in the business. We have had, in certain places, very short-term performance, relative underperformance, but that's reversed. We've stayed in close touch with our institutions. And I can safely say we have not lost institutional business due to performance. We have also seen inflows, and we did last quarter, it just did not offset the outflow from that institutional investor from wealth investors and others. That has been a net positive for the firm. There is a tremendous amount of tension, as you might expect, more so on growth, just given the momentum and growth in the market. The value pipeline is very anemic and low right now. It's just not in favor. That will change. These things come in cycles. There just has to be something of a regime change in the markets. People do need to be allocated towards value. And you might even argue the more growth runs, the more they ought to. But of course, that hasn't been the case for a very sustained period of time as we all know. Small cap remains to be a very favorable asset class. Small cap value portfolio is very strong. Some of the capacity that we have can be filled with higher revenue-paying clients. Small cap growth has been very strong. We have an excellent pipeline there, so that bodes well. And then to finish up, I think, a comprehensive answer for you, the new global team -- equity team that I mentioned in my remarks that we've hired is in the middle of some of the strongest flows that are happening right now from consultants and institutions when you look outside the United States. That is a very strong heavy demand for that capability.

In terms of this new global strategy and opportunity, can you quantify? I mean, looking out a few years without obviously making predictions, but is this a multibillion-dollar opportunity? Any guidance you can give on that or your expectations or hopes?

Yes. I'm careful with that, as you know, and pretty conservative. It's definitely a multibillion-dollar opportunity in the next few years, a very large opportunity. I would not want to get more specific than that. And if all goes well, given the potential for that capability, I think we'll be well on our way within the next few quarters, to be honest. But I have purposely not put that capability into our pipeline because it's new, and we're just developing and building that pipeline by meeting with potential allocators and consultants that would be making allocations to this mandate. One thing that is very encouraging to us as a firm, but also for that capability is that the relationships that have come along with this team include large consultants with whom we have not done much business, and that's exciting to develop new relationships that cannot only allocate to this new capability, but would certainly find our existing value and growth capabilities as well as our international capability and emerging markets capability worthy of allocations. We're out of the incubation period for the international and emerging markets capabilities we already had. This team complements that and those strategies have excellent long-term track records. In fact, one of them was just awarded one of the top performance awards from PSN for the last three rolling periods. So that all looks pretty positive.

Okay. And where are you in terms of OCIO assets now?

OCIO is about $1.5 billion. Some of that's come down a bit. The pipeline is pretty strong there. I think it's about -- it's almost $600 million. It's just under that, I believe. The good news about the OCIO pipeline is that it has been bigger, but it was dominated by a couple of very large potential mandates. The pipeline now is comprised of more variety of institutions. So it's a little bit more reliable before I would say when it was dominated by some bigger opportunities, it was either you got it and the pipeline crashed or you didn't, and it looked great. Here, there's a little more diversification. So it will be a little bit more dependable going forward, I think.

Okay. And one final question. You talked about higher compensation expenses and some of the key new hires. Is that something for modeling purposes? Are we looking at sort of higher compensation than normally you would guide us to this year and next year?

Yes, absolutely. Let's just stick to this year. I'll talk -- I'll mention next year. But I've been very clear in the past 2 or 3 years that we were going to be making investments in the business, both in technology as well as in new talent -- portfolio management teams, business development, and of course, I've hired this new global equity team. It's required to grow the company and so that's definitely above that sort of target 55% as a percentage of revenue that we've had for a very long time and have been right hovering around off and under in years of stronger growth. That is still my long-term target for the business. But while we make these investments and before we get flows that justify those investments, we're going to be running 57%, 58%, which we have been. And one reason I want to be clear about it is because we also want to avoid, to the extent we can, a large adjustment in the fourth quarter. As you know, we're accruing towards year-end compensation. We don't have control over the market and some other things. And then we have to true up and that was a large one, as you well know. In other years, there have been large adjustments that were very favorable. Most years, there isn't much of an adjustment at all. So I tried to be clear about that. That's where we are. I will update those numbers if justified, so that you will all have some visibility into the future. As for next year, it kind of depends where we see we are with the current investments, but it also depends on some of these flows that I expect to come in. Keep in mind, I can be hiring and grow faster than those compensation expenses. We actually did that just prior to the COVID period and into it, and we grew right through those expenses. Had we not grown, you would have seen higher compensation expenses as a percentage of revenue higher than what we're running right now with these investments. We just happen to grow faster than we were making the investments. So it was a bit hidden for our investors that was great. But that's not the situation we're in right now, especially when you're talking about such a narrow leadership in climbing markets. So it will be more evident that we need to grow into these compensation expenses. I hope that's very clear. Happy to talk more about it or as much as you need.

Our next question today comes from Christopher Marinac with Janney Montgomery Scott.

Good, Rich. How are you? Thanks for taking the question this morning for everybody. Just to go on to the last question, just to go one step further. So is it unusual to accrue extra salary and bonuses this time of year? Or is it normal or you're just doing a higher amount?

I would say it's normal. We -- I think last earnings call, certainly the ones before that -- the ones before that, I certainly mentioned I'd be doing this at some point and hit earnings in this way. I think I've talked about it for a couple of years. But I believe our last earnings call, Christopher, maybe who was the one before that, I specifically mentioned accruing more at this level. It is -- I would say it's not unusual. We kind of set the standard, and we want to make the adjustment as we hire now instead of a big adjustment later in the year. I'd rather you all see what is happening than stick to our standard 55% and then get to the fourth quarter and say, "Oh, oops, we made these investments we've been talking about. It's actually 58%" or whatever. So no, I don't think it's unusual. Scott will have a little more detail from his perspective. But I would also point out that, look, if I'm going to be off the mark with some other hires, I'm going to let everyone know. Go ahead, Scott.

Yes, Chris. Basically, we -- it's always been our policy and it's the prudent approach that based on estimates that we have, we monitor the variable comp adjustment accordingly. Given that we are in this mode of hiring, and it's a little bit more dynamic, it's required us to take a more introspective look and evaluate that ratio. So certainly, in this environment, it's prudent to adjust that quarterly.

That all makes sense. Just want to go back through the pipeline changing from March to June. It feels like you had maybe an unusually strong first quarter, and so you gave that back. But in the big picture, you still have a pipeline. It's still going to contribute positively. So I guess I just want to put the weight or maybe not as much weight on this pipeline change. Just wanted to kind of talk through that.

Okay. So are you -- do you mean the fact that it decreased or I just want to be -- okay. There have been times when we adjusted it downward not just because we have won or lost a mandate, but we're very rigorous about how we manage and measure it. And sometimes something that we're actively working on falls outside the 6-month window where we think the action will occur. And we'll take it out of the pipeline. This is a pipeline meant to be things that are very strong for the next 6 months. And so it can come down for that alone. The real reason it came down, not only did we get a couple of mandates, but it also had a really chunky one in there too and so you had a little more variation or variability in not getting one of them, which in fact happens, I believe, in the OCIO book. So it just -- that was not successful, came out of the pipeline. That's why I was commenting on the fact that the pipeline now is a little more diversified. It's not going to be kind of on or off, if you will, right, hot or cold. It's a little more dependable. If we win some and lose some, it's not going to dramatically move the pipeline in quite the same way. It is higher than the fourth quarter. And of course, we've seen it much lower than this. So it's a pretty stable strong one. The only thing I would note about it that's a little unusual is that there really isn't anything in the value pipeline right now that's usually a significant contributor to the overall pipeline. What we're really seeing it in is OCIO and growth as well as international and emerging markets. What I did not include, just to be clear again, is the potential in the global equity strategy for this team that we've just hired, the performance that was ported over to Silvercrest is excellent. The conversations with allocators have been superb. In fact, we just had marketing people come back from almost 2 weeks in Australia. As you know, those are very substantial pools of capital that are potentially interested in this kind of capability. I just don't want to put it into a pipeline until we get more of a feel of how that's developing. But overall, I would say to give more color on it, it's a strong pipeline, it's up from fourth quarter of last year very nicely, and it's a little more diversified in terms of the size of the mandates, which is actually helpful.

Understood, that's great. Last question for me just goes back to sort of the changes in the equity market the last sort of 4, 5 weeks that we've seen post June 30. Has any of that sort of resonated? And I know it's probably early to comment, but just kind of curious on how you have interpreted that here in recent weeks.

Yes, it's resonated. I think I was running around the halls here. It's very frustrating to see so-called strong markets and have such narrow leadership in a recovery after a weak equity year of 2022. And we can build a great business, have wonderful intellectual capital, but -- and meaningful size of assets, capital gain or loss in a given quarter or a year has a big effect on our revenue. And frankly, it's really frustrating when -- like last year, you're talking about seven stocks. The market broadens out in the fourth quarter. Okay, that's great. We went through it and then it narrows back down again. So the broadening out that we've seen was really welcome, is very helpful that we've seen in the third quarter. And then, of course, the other thing is to see small cap finally get it to do. Hopefully, that can stick. That's really important for our institutional business. We have superb small-cap capabilities across international growth and value. They maintain really good relative performance, it's capacity constrained, that's -- I mentioned that in my opening remarks. Those are very important to this firm from existing AUM and the revenue effect to potential future mandates. So seeing that regime change is really welcome. It's very good for our business. Your guess is as good as mine and whether or not that can be sustained, right? We've been waiting for small caps to catch up and improve their word for a very long time. We can get into why that may be in our economy with interest rates and all the rest. But the regime change, at least that we've seen recently, has been very welcome. I will say just one more comment, Chris. It's a little tiresome for there to be so much focus on the Fed instead of on fundamental businesses and earnings of companies and small cap companies. That's ultimately what has to happen. And yes, the Fed matters, of course, but it can't be all about that for a healthy economy and market. It's got to be ultimately about a growing economy and earnings. And we've just been in such an unusual period. I would argue even since the financial crisis, where certain values in the market, I would argue have been somewhat distorted and inverted, whether that's capital allocation or the nature of what asset classes are in favor. But that's enough of me on my soapbox. I hope that answers your question.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Rick Hough for any closing remarks.

Great. Thanks so much. Thanks for joining us. Look forward to updating you at the end of the third quarter. As I mentioned, we've got a very nice pipeline that's well diversified, and we're really excited about the new intellectual capital that we've attracted to this firm. It's top tier, it's compatible and complementary to the capabilities we already have here at the firm, opens up new opportunities for us in terms of visibility with significant asset allocators and families. And I'm generally excited about these investments, whether that's business development in the Southeast or this new equity team or some of the others that potentially come as we grow. So stay tuned. Look forward to updating you next quarter. Thanks so much.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful weekend.