Silvercrest Asset Management is retesting the IPO waters in an offering designed to buy out its largest outside investor, Microsoft cofounder Paul Allen’s Vulcan Capital Management.
The IPO runs counter to the trend set by two publicly traded wealth management firms, National Financial Partners and Edelman Financial, both of which opted to exit the public arena and go private over the last year. But if the IPO is successful, it could set the stage for other large wealth management firms like Focus Financial Partners to go public in the future.
Silvercrest, a New York-based RIA firm, had explored going public in the fall of 2012 but called off the IPO then for several reasons, including Hurricane Sandy.
Silvercrest was formed by many of the partners of the wealth management arm of Wall Street investment bank Donaldson Lufkin Jenrette and today resembles a multifamily office. After DLJ was sold to Credit Suisse in 1999, many of the DLJ partners became disillusioned with the new parent, Silvercrest CEO Moffett Cochran told Private Wealth magazine in the January/February 2011 issue. At one point in the 1990s, DLJ managed almost $40 billion in client assets and reportedly boasted a client list that included folks as diverse as conservative luminary William F. Buckley Jr. and Silicon Valley entrepreneurs.
In the spring of 2002 Cochran and others formed Silvercrest and tried to recreate the old DLJ culture, going so far as to track down some of the firm’s old furniture stashed away in warehouses. Silvercrest bears some resemblances to Brown Advisors, formed by former partners of Alex. Brown & Co. after that firm was acquired by Deutsche Bank. Both Alex. Brown and DLJ enjoyed front row seats to much of the wealth creation in the tech boom of the 1990s as they benefitted from underwriting many IPOs in that era.
Paul Allen’s Vulcan Capital bought a 30 percent equity interest in Silvercrest from Rosemont Investment Partners in 2007. Though many of Allen’s private equity investments blew up in the Great Recession, Silvercrest remained remarkably profitable, according to the S-1. Silvercrest reported net income of $2.4 million in 2008 and $8.1 million in 2009.
Those are excellent results for a wealth management firm, but they still represented a footnote in Allen’s sprawling private equity empire, which included cable operator Charter Communications that went bust in a multibillion dollar bankruptcy. According to sources, Allen fired most of the top management at Vulcan after the recession and brought in a new team.
In Financial Advisor’s 2013 RIA survey, Silvercrest reports that it managed $9.9 billion in assets at the end of 2012. Its average client has approximately $25 million with the firm and sources say its fees are about $100,000 per client. For 2012, the firm earned net income of $19.7 million on revenues of $51.7 million. Just over $46 million in revenues came from management and advisory fees, while $4.9 million came from family office services.
For an RIA/multifamily office, these numbers place Silvercrest near the top of the profession’s elite. Still, for a prospective public company, the business is quite small. Most investment bankers say a company needs at least $50 million of EBITDA to attract an institutional following. That makes Silvercrest a potential microcap stock, or “an emerging growth company” under the federal securities law that will be “subject to reduced public reporting requirements,” as the S-1 says. When his firm went private, Ric Edelman observed that the stock traded by appointment.
Of course, Edelman’s client base consisted primarily of middle-class and mass-affluent Americans, whereas Silvercrest’s clients rank among America’s wealthiest citizens. Most wealth managers operate in a sweet spot with a clientele averaging $1 million to $10 million in assets that lies far below Silvercrest.
One of the more striking figures in the S-1 is the compensation of top management. Only one member of the team earns in the seven figures. According to the firm’s ADV, Silvercrest LP owns more than 75 percent of the firm’s equity, which would imply that Vulcan has gradually reduced its position since 2007.
Combined salaries and equity principal income of top execs at wealth management firms of Silvercrest’s scale typically are north of $2 million. This prompted one observer to suspect that the firm is reengineering its compensation system, with principals swapping salary, bonus and partner income for shares.
That’s a perfectly normal strategy for a business converting from private to public ownership and it’s hard to criticize financial services executives for voluntarily taking big pay cuts. Indeed, it looks downright altruistic and admirable when compared to some Wall Street executives like former Bear Stearns CEO Jimmy Cayne, who paid himself more than $500 million in the five years before his firm went bankrupt.
However, it does raise questions about the sustainability of the firm’s comp plan for future executives who, in all likelihood, will own much smaller equity stakes in Silvercrest than the current team. For prospective investors, it also raises the question of whether the firm’s profits aren’t being inflated by low salaries and bonuses below industry standards.
In a business where the assets go up and down in the elevator every night, the biggest expense is paying the principals. Relatively modest executive compensation should help the IPO garner a higher multiple, providing the firm with more funds to buy out Allen and Vulcan. The structure also theoretically puts the firm’s management on the same side of the table as future investors. Sandler O’Neill and Raymond James are listed as lead underwriters of the IPO.
Still, one wonders whether Silvercrest would be doing the IPO if Vulcan didn’t want to unload its position. Nonetheless, if the offering is successful, it could open the door for other firms seeking to raise public capital. Wall Street knows that the RIA space is one of the fast-growing sectors within the financial services business and it is a much more desirable long-term business than, say, pay-day loans. Moreover, when one looks at a market-capitalization matrix of the financial services business, investors face few attractive options in the small-cap financial services arena.