Quarterly report pursuant to Section 13 or 15(d)

Investments and Fair Value Measurements

v3.21.2
Investments and Fair Value Measurements
9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Investments and Fair Value Measurements

4. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Investments

Investments include $53 and $914 as of September 30, 2021 and December 31, 2020, respectively, representing the Company’s interests in the Silvercrest Funds which have been established and managed by the Company and its affiliates. The Company’s financial interest in these funds can range in amounts up to 2% of the net assets of the funds. The Company applies the equity method to account for its interests in affiliated investment funds, despite the Company’s insignificant financial interest therein, because the Company exercises significant influence over and typically serves as the general partner, managing member, or equivalent of these funds. During 2007, the Silvercrest Funds granted the unaffiliated investors in each respective fund the right, by a simple majority of the fund’s unaffiliated investors, without cause, to remove the general partner or equivalent of that fund or to accelerate the liquidation date of that fund in accordance with certain procedures. At September 30, 2021 and December 31, 2020, the Company determined that none of the Silvercrest Funds were required to be consolidated. The Company’s involvement with these entities began on the dates that they were formed, which range from July 2003 to July 2014.

Fair Value Measurements

GAAP establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Level I: Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments in Level I include listed equities and listed derivatives.

 

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments which are generally included in Level II include corporate bonds and loans, less liquid and restricted equity securities, certain over-the counter derivatives, and certain fund of hedge funds investments in which the Company has the ability to redeem its investment at net asset value at, or within three months of, the reporting date.

 

Level III: Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in Level III generally include general and limited partnership interests in private equity and real estate funds, credit-oriented funds, certain over-the-counter derivatives, funds of hedge funds which use net asset value per share to determine fair value in which the Company may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date, distressed debt and non-investment grade residual interests in securitizations and collateralized debt obligations.  Liabilities that are included in Level III generally include contingent consideration related to the acquisition earnouts.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

At September 30, 2021 and December 31, 2020, the Company did not have any financial assets or liabilities that are recorded at fair value on a recurring basis, with the exception of the contingent consideration related to the acquisition earnouts.

Contingent Consideration

For business acquisitions, the Company recognizes the fair value of goodwill and other acquired intangible assets, and estimated contingent consideration at the acquisition date as part of purchase price. This fair value measurement is based on unobservable (Level 3) inputs.

The following table represents changes in the fair value of estimated contingent consideration for the year ended December 31, 2020 and the three and nine months ended September 30, 2021:

Balance at January 1, 2020

 

$

15,921

 

Additions to estimated contingent consideration

 

 

 

Payments of contingent consideration

 

 

(741

)

Non-cash changes in fair value of estimated contingent consideration

 

 

1,222

 

Balance at December 31, 2020

 

 

16,402

 

Additions to estimated contingent consideration

 

 

 

Payments of contingent consideration

 

 

(114

)

Non-cash changes in fair value of estimated contingent consideration

 

 

2,300

 

Balance at March 31, 2021

 

 

18,588

 

Additions to estimated contingent consideration

 

 

 

Payments of contingent consideration

 

 

(260

)

Non-cash changes in fair value of estimated contingent consideration

 

 

1,600

 

Balance at June 30, 2021

 

$

19,928

 

Additions to estimated contingent consideration

 

 

 

Payments of contingent consideration

 

 

(3,370

)

Non-cash changes in fair value of estimated contingent consideration

 

 

670

 

Balance at September 30, 2021

 

$

17,228

 

Estimated contingent consideration is included in accounts payable and accrued expenses in the Condensed Consolidated Statements of Financial Condition.  Payments of contingent consideration are included in earn-outs paid related to acquisitions in financing activities in the Condensed Consolidated Statements of Cash Flows.

In determining fair value of the estimated contingent consideration, the acquired business’ future performance is estimated using financial projections for the acquired business. These financial projections, as well as alternative scenarios of financial performance, are measured against the performance targets specified in each respective acquisition agreement. In addition, discount rates are established based on the cost of debt and the cost of equity. The Company uses the Monte Carlo Simulation Model to determine the fair value of the Company’s estimated contingent consideration.

The significant unobservable inputs used in the fair value measurement of the Company’s estimated contingent consideration are the forecasted growth rates over the measurement period and discount rates. Significant increases or decreases in the Company’s forecasted growth rates over the measurement period or discount rates would result in a higher or lower fair value measurement.

Inputs used in the fair value measurement of estimated contingent consideration at September 30, 2021 and December 31, 2020 are summarized below:

 

Monte Carlo Simulation Model

  

September 30,

2021

 

  

December 31,

2020

 

  

Fair Value
Hierarchy

 

Fair Value

  

$

17,228

 

  

$

16,402

 

  

 

Level 3

 

Forecasted growth rate

  

 

16.6

%

 

 

16.4

%  

  

 

 

 

Discount rate

 

 

10.1

%

 

 

11.7

%

 

 

 

 

 

Please refer to Note 3. Acquisitions for more details on contingent consideration related to acquisition earnouts.

At September 30, 2021 and December 31, 2020, financial instruments that are not held at fair value are categorized in the table below:

 

 

  

September 30, 2021

 

  

December 31, 2020

 

  

 

 

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Fair Value
Hierarchy

 

Financial Assets:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

65,930

 

 

$

65,930

  

  

$

62,498

  

  

$

62,498

  

  

 

Level 1

(1) 

Investments

 

$

53

 

 

$

53

 

 

$

914

 

 

$

914

 

 

 

N/A

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

$

9,900

 

 

$

9,900

 

 

$

12,600

 

 

$

12,600

 

 

 

Level 2

(3)

 

(1)

Includes $1,398 and $1,398 of cash equivalents at September 30, 2021 and December 31, 2020, respectively, that fall under Level 1 in the fair value hierarchy.

(2)

Investments consist of the Company’s equity method investments in affiliated investment funds which have been established and managed by the Company and its affiliates.  Fair value of investments is based on the net asset value of the affiliated investment funds which is a practical expedient for fair value, which is not included in the fair value hierarchy under GAAP.

(3)

The carrying value of borrowings under the revolving credit agreement approximates fair value, which is determined based on interest rates currently available to the Company for similar debt and the weighted average cost of capital of the Company.