Hi, good morning. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. The use of photography or recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. We are pleased to have with us John Weinberg, CEO of Evercore and Chairman of the Board. John, thanks so much for joining us.
Very happy to be here.
Let's start off with a question on the big picture strategy. You've been CEO essentially for three years now, co-CEO in 2021, full CEO beginning in 2022. It feels like we've been through a full M&A cycle in those three years. We had a record high 2021, followed by lower industry activity over the last year and a half. Does the current environment change your strategy for the firm at all?
Well, first of all, I'd say it's a lot more fun doing it when the market is really hot. Having said that, I really believe that the strategy that we have embarked on is absolutely the right thing for us to continue with and stay the course. We have really tried to make sure that we've taken some very basic building blocks with respect to how we do it. It's clients, it's products, it's excellent execution, and it's talent, and we want to stay with that. We have several initiatives which we've had over the last couple of years, which we are continuing to drive. One of them is expanding and enhancing our client footprint. We really believe that we need to build out our client footprint. There's much more to do.
There's white space, which I think we really feel like there's a really, a significant amount of white space, whether that's Europe, whether that's some places in the United States and industry groups, whether it's in financials. There's just a lot of white space for us to fill, and we're working on that very hard. In addition to white space, there's also client initiatives. We have built our financial sponsors group significantly. We continue to invest in our Private Capital Advisory group, and we have tremendous opportunity in aspects of things like covering big cap companies and really starting to build that out even more, and also making sure that we're focusing on our sell side business. We are going to broaden and deepen our products.
We've really continued to focus on that, whether that's building out, for example, infrastructure finance, as well as our Equity Capital Markets. We continue to really invest in that. We think we've got a real opportunity there, as well as Debt Capital Markets. Finally, the other thing that we spend a lot of time in is understanding where the fast growth markets are and making sure that we are funding those with the right talent and the right focus.
Great. A lot of priorities to dig into. Maybe we can just start by digging first into the M&A environment. It's the biggest piece of your revenue base, and during earnings, you mentioned that activity was starting to pick up in the first part of the first quarter, and then in March, as we all know, we had three bank failures. CEO confidence, you know, was impacted by that. Can you update us on what you've been seeing in the M&A markets in April, May, June?
Sure. As you know, the announcements have been off 40% plus, and that certainly has an impact. In addition, there has been an elongation of deal closings with respect to having after those announcements. The market continues to just bump along, and there's real opportunity for it to turn around. We don't see any very near-term growth. We think that that will probably sustain. This lag, I think, is actually having an impact. We expect that this will, in the near term, impact the market as well as also our near-term financial results. The other thing I would say, though, which is really important about this, is that there's a lot of activity been below the surface with respect to merger activity.
I think what we're seeing internally is real pickup in activity with our deal teams. We think that there's just so much that's really being prepared. We think companies are doing their homework. We think sponsors are trying to load up and be ready. I think there is a growing view that the market will turn. Nobody knows when, obviously, but people want to be ready for it, so we're seeing a lot of activity beneath the scenes on that. The other thing that we're seeing is that the capital markets continue to get a little bit better. Not a lot better, but a little better. I think that's really hopefully foreshadowing that when things turn, they'll turn quickly.
I think the biggest message from our standpoint for us is that we see real activity building inside, and our backlogs are still very strong. We're gonna, you know, we're gonna watch this off. Strong backlog, lots of activity.
What, in your view, will it take to get M&A going again? You've been, you know, in this industry a long time. When we think through it from our seats, we see equity markets that have been pretty okay over the last few months. S&P, you know, is at some multi-month high now, and the Fed looks like it's preparing to pause. Maybe we get one or two more rate hikes. You know, is that enough to get things picking up on a sustainable trend?
I don't think there's anything, any catalyst to get things going immediately. I do think, though, that what really needs to happen is there needs to be some stability and some view that things have actually become a little bit more visible. I think people are waiting to see the Fed doing, you know, really giving an indication that they're getting close to being done, really getting done. I think there's also a view that people wanna see that there's an understanding of what the recession's gonna be. I don't think that there needs to be a complete, you know, sunny day for the markets to turn and for mergers to turn.
I really believe it's, as much as anything, people understanding where things are, the uncertainty to be reduced, and people to get some confidence that the conditions they're dealing with will be stable. I think that will actually drive the activity. I think there's a real pent-up demand on the merger side. I think that what people are waiting for is, once the stability is there, people are gonna really start looking at it carefully and be more aggressive.
You mentioned visibility on recession as being a driver. As investors think through the wide variety of economic outcomes that we're facing, is it better for M&A to have a recession that comes with rate cuts, you have a better maybe financing environment, or a soft landing that comes with higher for longer rates?
You know, I think that there have been strong market conditions in each of those rate environments. I think it really is less to do with the absolute rate environment and much more to do with stability. I think what I said before, which I really genuinely believe, is people just wanna understand the conditions they're dealing with. Boards really think that they can get confident, they will get confident because they want to drive strategy, as long as they understand the conditions. Frankly, a lot of boards are always looking at how are shareholders gonna react to deals. Obviously, no board wants to do a deal where shareholders are not looking for it, and for some reason, backing up in terms of their commitment and confidence level.
More than anything, it's really about understanding environments becoming more stable, and then I think you'll see a lot more activity. I don't think the rates will necessarily drive the merger activity.
Got it. Digging in a little bit on sponsors versus strategic.
Mm-hmm.
How should we think through the outlook for sponsor activity? Fundraising activity has been, you know, pretty light, but on the other hand, this group needs to put capital to use over time as part of their business model. How long can this group sit on the sidelines?
Well, they can continue to sit on the sidelines, but they don't want to. They've got $3.6 trillion of capital sitting there, ready to go. They have limited partners who want liquidity, so there's a real impetus for them to start acting. A lot of these sponsors wanna raise money again, and the only way to really be able to raise money is if they show some real activity in their portfolios, and then returning capital, then they'll be able to do something. I think there's a real desire on the sponsor level to move forward. What I've seen anecdotally is that sponsors are doing a lot of work. They've identified the companies that they're interested in, they've identified the sectors they wanna play in, and as they've been waiting for this, they are ready to go.
Sponsors may not lead the recovery, but I think they will accelerate very fast once it starts. Some of it has to do with the financing markets. Even though the financing markets are open, they seem to be a little bit more labored right now. The more those open up, the more sponsors are gonna feel confident. I think that what you will find is that when the market begins to open up, sponsors will work very, very quickly, and they'll look at things. The difference between buyers' and sellers' expectations, I think it has actually shrunk. I think that there is a little bit more realism in terms of buyers and sellers and expectations for properties. I actually think it's lining up for real recovery. It's just a question of when the gun goes off.
In a worst-case situation, how long can this group sit on the sidelines? Could it be, you know, multi-year or potentially, you know, 1 year max? How should we think through the bear case there?
Well, it's really hard to say how long. I do think that there's a real desire and impetus to move. If we said they need to wait another year, I think most of the groups would be just fine waiting, because what they need to do is they need to show when they do start putting capital to work, that 1, they're doing good deals, and if they're selling businesses, that they've sold for reasonable returns. As much as anything, this is becoming a very results-driven market in that people who are raising money... What we're seeing in our Private Capital Advisory businesses is that sponsors are being scrutinized very, very carefully by limiteds on whether they're actually doing good deals. Our group is thinking that this is gonna become an increasing bifurcation.
The very successful groups will be able to raise money, and those groups that aren't as successful will not be able to. There's a tremendous influx of middle market and slightly bigger than middle market, sponsors that are actually trying to raise money now, a tremendous number. What that's gonna drive is a much more selectivity. I think what that's gonna say is those sponsors who can, will wait for the right opportunity because they won't get a second chance if they do a couple of bad deals, and then all of a sudden, the limiteds won't wanna put money to work. I think it's I think they'll be relatively patient. I don't think there's any groups that are out there saying, "We absolutely, positively have to do it immediately, and therefore, we'll sacrifice." I think everybody's waiting.
If the market begins to turn, I think you'll see people really get energized.
What about regional differences? What are you seeing in U.S. pipeline versus Europe?
Well, the first quarter of this year, Europe had a very good quarter for us. I think that what you'll see right now is that whereas there were better conditions in Europe last year and also in the first quarter this year, I think Europe is really becoming a lot more similar to the U.S. I think that liquidity in the U.S. is quite good right now, and there's a lot of people who have capital. Europe also, but I think it's stronger probably in terms of demand in the United States than Europe. Really, I think they're pretty similar right now in terms of people waiting on the sidelines, people watching carefully, the capital markets not being as buoyant as one would want to really have a recovery.
All right, let's shift to the regulatory environment. It's obviously tough to get some of the larger deals through the finish line. We see the headlines on some of those more high profile deals. Evercore plays across the spectrum, but you are more skewed to larger deals relative to some of the other boutiques. Does the regulatory environment impact your business model at all?
Well, first I'll say the regulatory environment is definitely impacting the merger market. There is definitely a view that, number one, companies need to be very careful as they're thinking about doing deals, especially big deals, because there is no question that antitrust and regulatory are watching every single deal and not afraid to challenge things. The other part is that deals that are in the same industries, they are often getting a second request, and that takes longer, so the elongation of the process really plays out. Having said that, for us as a firm, we do have some large deals, and we'd like to play in that area. I would say that we do a very large number of middle market deals.
In fact, I would say that a bigger part of our business is middle market deals than the larger deals, although we really like to cover the companies and do the larger deals. We're seeing a lot of middle market activity right now. Our sponsor business, which is, you know, up to 40% of our overall business, is often middle market, not huge. We're seeing activity, but I definitely think...
I think that we believe that we're not overly exposed, but I definitely would admit that the bigger deals are harder to do right now because there is this regulatory challenge, and every group who's really looking at mergers carefully has to actually really seriously consider that and figure out whether they're willing to take on the regulatory scrutiny.
Does the scrutiny impact CEO confidence at some of the smaller or mid-sized deals at all, or is it exclusively concentrated in the larger deals?
I think CEO confidence in the middle market deals is unhindered by the regulatory. I think the regulators are really very, very focused on the big deals that actually will change the market dynamics. I think the middle market deals are not nearly as impacted. I think that I think in every situation and every board meeting that I'm in, there is. Regulatory is never ignored, but it's a much bigger concern the bigger the deal and the more of a market-changing event it will be to do that deal. I think what you're seeing is that the middle market will probably be unaffected for the most part, versus the versus the bigger deals.
All right, let's shift to restructuring. There's a debate on whether this cycle might be idiosyncratic and that you would have restructuring and M&A rebound at the same time. Typically, these are countercyclical businesses. Is that a reasonable outlook, and how do you think about leaning into restructuring as business starts to pick up?
Well, I would say first, I don't think that they're mutually exclusive in terms of what they do, especially in today's market for restructuring. It's more situation specific than it is sector specific. There are companies that really need help. There's clearly reasons. You know, rates are higher for companies that are highly levered. There is a wall of maturities that are coming. There's a lot of restructuring. In our business, what we're seeing is that there's a really strong activity level, and I think our restructuring business is very much, you know, working full out right now. I think that the reason is because we've really built it out. We've, you know, originally, we were just a creditor business, a debtor business, now we are creditor business also.
We've also built in liability management in terms of our offering to clients, there are many clients who aren't going into or bankruptcy or even close to restructuring, who are actually looking for liability management advice, and we're giving that. Across the board, we have a much broader restructuring business, and they are actually doing quite well in every respect. I think we have one of the largest restructuring businesses, and I think we have a really high-quality group, and we've actually added to it in terms of our partners there. I think that what you're gonna see is our restructuring business continue to perform and recover. With respect to the first part of your question, which is, you know, can you have a strong merger part environment and a strong restructuring environment?
I absolutely think you can. I think that they, you know, the merger business is gonna recover because boards see strategy, and they're gonna move for it. I don't think that's gonna really impact what we're doing with respect to the restructuring business. I do think that this may be a more elongated cycle, because a lot of what we're dealing with here is that rates are higher, and they're not gonna go real, you know, much lower very quickly, and companies are having to deal with that. I think that also what you're seeing is that there are real maturity walls coming, and that's something that companies need to work for. Whether the merger business is hot or cold, it can be hot, and those factors will still be there.
We're seeing a lot of business that really does fall into those categories. I think our restructuring business will continue for quite some time, whether the market is strong or not.
Great. On ECM, it's been a goal to hit top 10 in ECM over time. Can you describe your progress here, and any update on when the ECM environment will turn around?
The ECM environment's a little bit better, and I think you've seen that there have been some significant deals that have been done over the last several weeks. Our ECM business is continuing to strengthen. In the 10 biggest deals this year, we were in, as a bookrunner, 5, and we were active bookrunner in 3. We just recently acted as lead left bookrunner, active, for GE HealthCare. Our business continues to strengthen. We are more diverse than we've ever been. We are also working harder to really make sure that we are delivering real advice before the deal to clients. Our league table has gone from 18 this time last year, 12 and 12 months, to number 10 this year, currently as we stand.
You know, we really think it's a continuing real opportunity for us. There's still a lot to build out for us, and I think that for us, we need to continue to bring in some very strong people in our hiring pipeline. We've got some very strong people that we're looking carefully at. I think that, you know, the ISI combination of research and the capability that we're building and the reputation that we're building by doing some of the bigger deals are continuing to build, to give us opportunities and at that, to really win business. In terms of the equity market, generally, the equity market will, I think, recover quickly when there is certainty.
I know there's a theme that I keep saying here, which is certainty and clarity, and I really believe that the equity market is looking for that. I think the equity market is absolutely ready to put money to work. I think that there is. Many of the investors here speak even more articulately about how the money goes to work and how quickly. I really see that in the people that we're talking to and the business that we're doing and the deals that we're doing, the buyers on the buy side are quite discerning, but they're very anxious to put money into really good opportunities, they're really ready to go, there's a lot of capital on the sidelines ready to be put to work.
I think it's a question of when it starts.
You mentioned the strategic importance of ISI. Can you help walk us through the equities business and the research franchise and how important growth is there?
Well, we're very careful. I mean, we think we have an excellent research area. Evercore ISI, as you know, was for the first time on an individualized basis, we were number 1 this year, and that clearly is great for the franchise, and it gets attention. We're very proud of what they've accomplished, and we intend to continue to invest to uphold the excellence of that organization. We're careful about how we grow it, because clearly, what we need to make sure is that it's impactful to our clients, and it's not just out for the rankings.
We care about our rankings, and we really want to continue to be looked upon as being excellent, and that we want to be very, very helpful to the investor group, who really like to depend on us. Our capabilities in terms of sales and trading and the ways that we go about that are improving. We have more and more confidence. We're able to give better and better advice. We're involved in different and new businesses like converts and convert trading, direct listings, and all those things are part of what we're doing. I'm feeling quite comfortable that the business continues to grow and mature and improve. We're very careful about how we take on business and make sure that when we do take on business, we do it with excellence.
I think it's, I think the franchise is actually in good shape and actually, improving.
Great. A couple of questions on expenses and hiring.
Okay.
You mentioned on my opening question that you're leaning into certain areas and hiring. You mentioned on the earnings call that we're in a strong recruiting market for top talent despite the weak M&A market. Can you talk through how Evercore is approaching hiring new senior talent in this market?
Yes. It's been a really good market for mining great talent. One of the things that we've always said is that we really will only recruit A and A plus talent. ...This year, for many different reasons, we've had access to some really extraordinary people. I think that, we're continuing to see that, we will continue to hire. Our view on hiring is that we really make sure that we're hiring into areas where we think we can have an impact very quickly, where we can really assist clients, and where our franchise will be able to deliver really good service.
I think that what's happened is that there's been a point of view that we're able to actually deliver a really good product, a very good brand, and there are many bankers who really want to be a part of it. We've had a wealth of inquiries in terms of people wanting to come over. We're in the middle of really working through this pipeline. You know, we've been quite successful at bringing people in. In the first quarter, we brought in 4 new people, and we continue to build. I'm very optimistic that the people that we are talking to and the people that we are beginning to bring in are gonna really add tremendous value.
I think that the quality level that we're seeing right now is really extremely high.
How flexible can you be on comp in this environment? And is there any update on how we should think about your comp ratio for the rest of the year?
Of course. As I said, in the 1st quarter, we brought in 4 new people. We continue to have a very strong pipeline of people that we are talking to and also bringing in. Our view is that we will be at the top or above the top of our stated goals of 4-8 people. That, I think, is really a function of the fact that we have such incredibly high talent that we're talking to right now.
It's one of those opportunities that I say internally is it's somewhat of a, you know, a generational opportunity, in that there are some really good people who really want to come over, who really want to be a part of it, and we've got to basically make sure that we're thinking about that. What that will do, along with respect to comp ratio, comp ratio is dependent on revenue levels. It's dependent on how much money you spend when you're bringing in very high-quality people. And also the market for talent generally, especially in the middle ranks. In this case, I think we've...
You know, what we're looking at is that we probably will be in a position, along with the challenges of the market, that our comp ratio will see pressure because we have such strong talent and the revenue pressure on the with respect to challenges in the financial markets will put some pressure on. We will see some pressure on our comp ratio.
When you're leaning in and hiring, is there any specific industry or geography where you're more leaning in?
We continue to look at the techs, whether it's FinTech or biotech, cleantech, regular tech. We also see really strong opportunities in financial sponsors. We see real opportunities in terms of things like project finance. There's some, there's some really strong people throughout the system. What we're doing is we are, number one, really looking at it through a lens of really several different factors. One is, where do we need people? The second is, where are the very high-quality people that we're seeing coming in, and do we have a room for them? The third are the sectors that we really aren't covering. For example, something like business services, which we don't cover, if there's some high-quality people there, we will look at that.
I'd say generally, what we're doing is we're taking very seriously that we have to be responsible about how we bring in people, but if we have really strong people who we think are gonna really add value and revenue and help us drive our growth, we're actually stretching.
Is the hiring more focused on the senior level or junior level?
More in the senior level right now. We have a very strong group of junior-level people. We have to make sure that we don't starve the engine. We have to make sure that we're really making sure that we continue to, number one, train, promote, and really support our junior people. We are looking at a lot of, really, we're looking at senior people who can really add value and bring in real revenue.
Great. On capital return, can you just give an update on your capital return strategy, and how you think about capital return in these less certain times?
Sure. In terms of capital return, we continue to follow our philosophy, which is that all capital that we don't need to invest in our business, we will return to shareholders. In the last two years, we've returned about $1.5 billion in terms of repurchase and dividends. What we have always done is to be very conscious of making sure that in a balancing way, where we balance what we need for capital and then the timing of that we return it. That $1.5 billion has really been almost a third of our market cap over the last two years.
In the last quarter, we have returned $230 million, which really takes care of a lot of the stock that we've issued with respect to compensation as well as RSUs. We are continuing to be very focused on repurchasing and paying dividends and making sure that what we do is to return the capital that we don't need at any point in time. You'll see right now we have a very strong capital base and liquidity, but that's more because we're waiting through this period of uncertainty. We very much intend to return all capital that we don't need to invest immediately in the business. That'll be something that we're gonna be watching.
What about M&A? Any appetite for Evercore doing M&A?
We never say never. Right now we feel really good about our model and our growth prospects, we're not looking for any. We've clearly looked at some of the deals where the kiosks and smaller businesses are out and about, we've never not looked at things. We really haven't seen anything that's more attractive than the money that we can invest in our business right now. We really like our business. We really think we've got an opportunity to continue to improve and move, right now we're gonna stay very disciplined and very focused.
Just a broad question to wrap up. As you think through, you know, the biggest opportunities and challenges for Evercore going forward, what are you most looking forward to, and what are some of the risks that maybe keep you up at night?
Well, I'm really looking forward to the market recovering...
Yeah.
actually starting to really make sure that we're going through very difficult business selection decisions and all those things, because that's a lot more fun than the market that we're in right now. I'm really excited about seeing our model play out. We've really got some really extraordinary people. We have built out our businesses and continued to build them out over the last year and a half, and I think that when the market turns, I think we're really ready. I think we will actually be right where we want to be. It's gonna be in our sweet spot. We've always come through these kinds of opportunities and come out of these situations as a firm better than when we went in, and we're very much hoping that we're positioned to do that now.
In terms of things I worry about, you know, I'm always worrying about people. You know, I think that one of the most important parts of running an investment bank is to make sure that we're responsive to our people, that we continue to be in a really extraordinary and aspirational place to work, and that all of our people feel like they're given the opportunity to succeed. Being able to motivate them, pay them appropriately, promote them appropriately, and to really make sure they're reinforced and feel a real part of the team, is really one of the things that I spend a tremendous amount of my time on.
Great. Well, John, thank you so much for your time today.
Thank you. Thank you, all.