Alrighty, let's get started. Okay, up next, I'm very pleased to welcome Scott Adelson, Houlihan Lokey's CEO and a member of the firm's board of directors. Scott has been at Houlihan Lokey for over 30 years, and previously he served as the co-president of Houlihan Lokey and global co-head of corporate finance. In that role, he built corporate finance from the ground up.
In addition, we have Eric Siegert, co-chairman of Houlihan Lokey and global co-head of the firm's restructuring group. Eric's also been at the firm for more than 30 years and has worked on over 100 restructuring transactions, including many of the world's largest and most complex. Scott and Eric, we really appreciate your time. Thanks for being here with us.
Thrilled to be here. Thanks for having us.
Excellent. Okay, Scott, let's start with you. You've only fairly recently taken over as CEO, although obviously, as I mentioned, the corporate finance you sort of built from the ground up, and you know, I have a $1.5 billion of revenue this fiscal year, so pretty impressive growth. What surprised you most in the new job, and what are you most excited about for the next three to five years?
You know, there's a group of us who've been running the place for a really long time, for decades, and really it hasn't changed. We change seats at the table, and that's about it. S o the same business strategy that we have had in the past is the one we have going forward, and I am just playing a slightly different role than I did before, but not really. I get to spend more time with you now.
I appreciate it. Okay, so, so if we think about the growth trajectory, I think, you know, Scott Beiser has said in the past that the long-term target was sort of 7%-10% top-line growth per year, but you've obviously had success and grown far faster than that. Then what is the growth algorithm that you see for the firm from here in terms of revenue, senior MDs, or whatever KPIs you're looking at? T hen what are the businesses where you see stronger or less strong growth from here?
You know, I really think we look at all three of our businesses and see tremendous growth opportunity. Obviously, there when you look at the corporate finance business, we've been able to grow both organically and inorganically, and we think that will continue. When we look at the portfolio, the FVA business, same thing, although that is a mix of more cyclical and less cyclical businesses.
B ut overall, we expect that to grow, but probably not as rapidly as our corporate finance business. T hen Restructuring is a long-term grower due to just the amount of debt that is in the world and the amount of complexity in balance sheets around the world. S o from that perspective, it will cycle and a little less on the acquisition side. It's much more organic growth, but we do still expect to see it grow over the long term as well.
Great. So one more for you, Scott, and I'll bring Eric in here as well. You've hired a lot of bankers in the different businesses. Maybe you could just talk about across each of the three where you see the best two or three areas to invest right now.
Say that question one more time.
Yeah, where do you see the best opportunities to invest in each of the three businesses?
In each, I mean, if you look at it, we really think about it from a Corporate Finance standpoint. Our industry groups, we have about 170 dedicated sub-verticals today, and we continue to think that there's a meaningful opportunity to grow that. Actually, I believe there's probably hundreds and hundreds more sub-sectors that we can build out a nd so that is clearly probably one of the biggest focuses.
The other is our Capital Markets area. That has been one of the fastest growing parts of our business, and we expect that to continue to be one of the fastest growing parts of our business. On the FVA side, particularly the Portfolio Valuation business, that is creating third-party marks for alternative assets around the world a nd we think that increasingly there will be demand by investors for third-party marks. S o continue to really like that.
T hen restructuring, I mean, one of the greatest exports of the United States that nobody talks about is complicated balance sheets. A s we continue to export those complicated balance sheets around the world, there will be more restructuring all over the world, and we want to be there to take advantage of it. One of our most recent expansions in restructuring was in Brazil, for example, and that is a great example of that.
Okay. One thing that's different from for Houlihan Lokey versus a lot of the peers is your long track record of successful acquisitions. Well, just acquisitions generally, but also, you know, great success in doing them. I think what's interesting is that most of the deals have been in corporate finance and not so much in the other two segments, although you obviously just announced an FVA deal recently, and frankly, this year was also very active here.
So maybe you could just talk about why acquisitions work so well for Houlihan Lokey. Can you continue following the same playbook? Then, Eric, I'd love to get your perspective on the feasibility of deals in restructuring going forward.
Yeah, I think that it's been part of our culture for a very long time, even before going public, and it is part of a culture of just growth that we have had for a very long time a nd I think that we bring in a mentality to acquisitions that it's culture first. In any professional service business, which is what we are in, it is our assets go up and down the elevator every night, and we really do focus on how important culture is.
S o every acquisition, the first, second, and third screen is on cultural fit. I think that we will continue to have that focus regardless of what part of the business it is and what part of the world it is a nd we also talk about the fact that when we complete a transaction, we are just buying the right to attempt to win the hearts and minds of those individuals. S o we take that very seriously, and so far it's been working okay.
I guess I would start by saying you never say never, right? But we really haven't historically thought about restructuring as a market where we can be deploying capital in sort of an acquisition-oriented way. We've grown organically over the years internally. I've made this comment to a couple of people today. I think roughly 80% of the MDs in our restructuring group started with Houlihan as analysts.
So we really hire at the junior level, promote from within. Scott's example of Brazil is a good one. We are looking to expand into a new geography. I think that is somewhere where we would look at potential acquisitions or outside hires. But in, you know, in our core markets, I think we'll just kind of continue to grow organically is more likely the case.
The only other thing I'd add to that is probably it's a very fragmented market on the Corporate Finance side and even on the FVA side as well. So that the opportunity set that we can look for is very large.
So, Scott, one thing that I think I've observed in working with you over the past, you know, year or so, or I guess six months, has been that you have a unique focus on data, and that's in corporate finance. It seems like that's something that maybe you're applying to FVA as well with the PSL deal. Maybe you could just talk about generally your views on, you know, the use of data in growing the business and then maybe just aspirations for FVA in the context of that deal.
Happy to do that. S o I am analytical in how I think about things and understand the value of data. I do think that Houlihan Lokey is incredibly fortunate in the volume of deals that we do and the amount of data that we are able to capture due to that volume.
W hether in addition to just the number of companies that we touch as a result of our FVA business, gathering all that information, which really organized correctly, gives us a data moat that we think is quite interesting, enabling us to make better decisions on our client's behalf as well as in running our business overall.
I really do think also in a more AI-driven world, your ability to organize that data and analyze that data that is differentiated from what is available in the marketplace as a whole is going to be very beneficial. If you take a look at the acquisition, the PSL acquisition is a good example of that. This is an acquisition that fits within, our FVA business has a product called portfolio valuation.
This is something that is focused on structured products within the portfolio valuation area, and it is basically a combination of people and technology that is what we use a meaningful amount of technology in our portfolio valuation business. There's just a next level. They are able to do valuations and come up with the same or similar results with a fraction of the amount of human capital, which is beneficial.
It's not just where it applies within Portfolio Valuation, but where it may apply over time. In addition to that, they also are in the business of actually not just doing project-oriented valuations, but also doing valuing entire security sets and then allowing people to buy effectively individual pieces of data from them. S o t hat is a different way of thinking about a revenue model as well.
Great. Okay. So maybe we can just turn to the businesses. I actually maybe want to start with Restructuring. I'm not sure we've ever had a restructuring banker on stage in this conference, so it's exciting to have you here, Eric.
Continue , exactly.
Yeah, yeah, yeah. Maybe just a little bit of texture on your business. When you look at it today, it's obviously evolved. How much of it is on the creditor side today versus debtor? How has that evolved over time? T hen if you could just give us maybe a little bit of texture on the liability management mix, versus the traditional Chapter 11 side of the business.
Sure. We were definitely born a creditor advisory shop. That was our bread and butter. In many ways, we're still known as that, and I think it's a great reputational tool for us in the market. But technically speaking, we actually have more debtor business now than we have creditor business.
It's roughly 50/50, but I think the last time I checked, it was like 52/48, something like that, and I think it's good to have a mix like that. You know, when we're pitching a creditor- side business, we're not shy about our roots, and we will champion that aggressively. We are advocates for creditors when we need to be.
We also think, on the flip side, we also think that it gives us a really good perspective of how companies should be thinking about engaging with creditors because of our familiarity with that side of the stack. There is a bit of a, I think, on your question about liability management versus traditional restructuring. I'd back up and I'd say really, and I said this a bunch today because I keep everyone loves to talk about liability management. It's like the hot buzzword.
Liability management is an out-of-court restructuring. It's just another form of restructuring. What has led to the proliferation of that sort of out-of-court initiative is the fact that so many of the credit agreements and indentures that were issued in the last sort of three to five years have so many, so much ability to move assets, to drop assets down.
So the ability to do things out of court often unilaterally, so without engaging with creditors, has increased. So there is an increase in business flow. We don't really look at it as how much we're doing in liability management versus how much, you know, we're doing in restructuring. I don't know that I break the business out that way.
But I think, you know, if you look at 50/50, that gives you a pretty strong sense that we're doing a fair bit of transactions in out-of-court context. A lot of those do end up in Chapter 11 for implementation purposes. So if you consider that liability management, you consider that restructuring. I don't know if that answers your question, but that's kind of how I think about it.
Yeah, that makes sense. So, you know, I think liability management is restructuring, but it's also part of this continuum of capital markets advisory growth. So maybe you could just talk about the outlook for the restructuring business, you know, in the near term, next couple of years, and liability management within that. T hen how do you think about that handoff between, you know, quote-unquote bad liability management and good capital markets advisory?
So, we pitch a lot of deals jointly with capital markets. It's often unclear at the outset which way it's going to pivot. Most sponsors or boards of directors is going to want it to pivot toward a capital markets solution. So they kind of start with that. Many times they evolve to another place.
A lot of liability management or out-of-court restructurings are really designed to kick the can and create optionality for the shareholders b ut a lot of them don't work. It's kind of a free option for the shareholder because if it does not work, the cost of that transaction is borne by the creditors. If it works, then they get the upside. So why not? So they'll take some risks. They'll take some aggressive positions to try and extend their option.
A lot of those come back to us. In the near term, I think we're going to see a lot of the liability management transactions, again. In a lot of times when you were the advisor in the first one, you'll probably be the advisor in the second one. The other thing that we're seeing, which adds to the growth, long-term growth that Scott was referring to.
In it used to be, you know, there in a restructuring deal, there'd be somebody advising the creditor and somebody advising the company. Now with these huge capital structures and, you know, first lien, second lien, all these different positions, there's multiple advisors hired in each deal.
So now you've got multiple advisors in each deal, and the deal's starting to occur on a recurring basis on top of the fundamental growth that occurs in the industry just because leverage is going up. So that's a lot of sort of building on building of transactional activity that we will capitalize on.
Okay, so if we just, if we think five to 10 years ahead, it sounds like your view is that the restructuring market, you know, including in and out of court, should actually continue to grow potentially.
100%. So I think about it. I f you kind of drew a squiggly line like that and kind of called that your cycle going forward, if you drew a regression through that line, it would have an upward- sloping curve. That's our long-term growth. I can't. It's hard for me to predict those little cycles between, but if I say between now and 10 years from now, you know, we might be twice as big.
Wow. Okay. That's a lot of growth. Maybe just a couple just more narrow ones here. When you think about the business today, you know, I think we don't have quite as much visibility as you do. What are there sectors, geographies that are really stressed, that are seeing more liability management than others, or is it sort of more broad-based right now?
This time around, it seems a bit more diversified. You know, you think back to the oil and gas, the retail, the real estate. This one seems like a pretty good mix. If I had to pick a single industry, I might pivot to healthcare, but not in any, you know, by any means an overwhelming way. I think it's fortunately it's got two characteristics to it.
It's mixed across industry, and it's not a spike like COVID or the 2008 crisis. It seems like this has some longevity to it, and I would take longevity with a moderate default rate over you know a short period with a double-digit default rate, as for instance.
Okay. T hen last one is just on private credit becoming a greater part of cap structures and just, you know, credit creation. What does that mean for the longer-term restructuring opportunity?
I don't know that it increases deal flow so much, but to the extent that it increases overall leverage, and I think it might do that. I think you're going to have loans being made by that credit provider that wouldn't otherwise be made, so it probably forces more debt into the capital markets, but once that debt's deployed, it really does not matter so much who owns it. It matters what the, you know, fundamentals are of the business and what the leverage, you know, ratios sort of look like, and what capital is available to replace that capital in the future.
Great. Okay. Let's turn back to you, Scott, in terms of the M&A side of the business. At a high level, you've seen a lot of M&A cycles over the decades you've been at Houlihan. How supportive is the macro backdrop right now for that recovery?
So everything that we are seeing right now, it has been getting better quarter- by- quarter for the last few quarters, and it is trending in that direction, a nd with-
You did this on purpose .
You can't open it. You need somebody to.
Hold on.
You loosened it.
You will note that Scott is somewhat smaller than Eric.
Smaller hand.
Stature.
It's been getting better kind of quarter by quarter a nd we saw a marked improvement, if you will, after Labor Day, where things started going into the market at a more regular pace. But still, the velocity which transactions are occurring once they get started is still a bit elongated. T hat is getting better again, but it's not back to normal.
Having said that, now you layer in the election where you are, the term everybody is using seems to be animal instincts are picking up, and everybody is feeling much better psychologically about doing deals. There clearly is meaningful pent-up demand for deals to occur, and everybody's backlogs support a meaningful pickup in the amount of M&A activity a nd we are no different on that.
Excellent. Maybe just on the post-election backdrop, broad deregulation does seem to be a hope, you know, across a variety of sectors. What is your view on the deregulatory impulse? You know, I guess how much would you expect that to catalyze maybe strategic and sponsor M&A separately?
I think when you break it up, and one is the antitrust issues, right? I mean, that doesn't affect us as much as some of our public peers. We're most of our deals don't rise to having a problem with the antitrust.
On the other hand, just a regulatory environment overall being reduced certainly would help a number of businesses and, in theory, increase people's margins and a greater willingness to do deals. At this point, to me, it is much more of just the landscape as we look at it appears to be changing as a result of the new administration.
I n that changing landscape, you have people looking at their portfolios and saying, "I don't like that asset as much as I did, and I like this one a little more," and t hose changes and that new thought process occurring in regulatory is part of it, and tariffs are part of it, and everything that is being talked about is just causing people to rethink. T hat movement that will result as of that rethinking is where we will benefit.
If we kind of look at it, there's winners and losers-
Yeah.
-and we benefit from both.
Absolutely.
Makes a ton of sense. Tariffs, I would say, which you just alluded to, is a harder one, I think, for us to, to figure out in terms of what the impacts are. Is it good? Is it bad?
Depends who you are.
Depends who you are. But do you think it catalyzes more M&A activity, less M&A activity, more structure? You know, I think it's just hard for us to say it's absolutely bad or absolutely good, a nd we've heard different things today even.
I think that Eric said it perfectly. I think that it will create winners and losers, right? It's back to that changing landscape to me. It will change the landscape a nd as a result of that changing landscape, you will have some winners, you will have some losers, but more importantly, from our perspective, you will have people changing their views on what assets they like and don't like, and therefore what ones they want to hold and which ones they want to sell.
It does strike me that however they're rolled out and whatever volumes they're rolled out, there does seem that there should be some inflationary pressure as a result of it, which ultimately you would think would impact rates and maybe cause rates to stop the decline that we've been seeing, and that has a profound impact on all aspects of our business.
Yeah. So that was actually my next question, which is if we do see the steeper long end of the curve, even if we see so I guess there's a scenario where you have higher long rates, short rates maybe continue to come down to some extent. How does that impact the ecosystem?
So from a corporate finance standpoint, I'll let you answer restructuring. History would say it has a lot less to do with rates and a lot more to do with the availability of capital in our market. When you have a rapidly rising interest rate environment where people know that they can deploy capital tomorrow for more than today, that causes capital to freeze up, and that is difficult to do deals in.
When you have a long-term higher or gradually rising interest rate environment and capital remains plentiful in the mid-cap space, deals still get done. It is much more on the corporate finance side about availability of that capital rather than the rate. Not the rate doesn't impact it, but just not as much as availability.
Yeah. On the restructuring side, availability absolutely affects it in a similar way. If the capital markets shut down, you can't refinance your debt maturities. That's just going to create deal flow for us. But similarly, you know, in an M&A transaction, the price of the deal can fluctuate based on interest rates.
The debt that's in a deal exists already at a set interest rate. The weighted average cost of that interest rate in most of the deals you're seeing now is what, 3%-4%, 4.5%, a nd all the deals that are being refinanced are 11%-12%. Y ou just take $1 billion of debt and you double your interest rate or triple your interest rate, and it has the impact it does a nd you can't, the market can't really adjust for it, right, b ecause it was done in a different time and a different place.
Right. That makes a lot of sense. Okay. So maybe let's just turn to the sponsor business in the M&A context. Given your relationships there, what is the latest on LPs demanding capital back? How is new fundraising going, especially in the mid-market space? I think there's a lot of debate on whether the fundraising trends are as robust for those mid-market sponsors and therefore that impacts their willingness to transact, and then just generally appetite for transactions.
Yeah. I think a couple of things. You saw for the first time really in this cycle a divergence in the various constituencies trying. You had the LP saying, "We want our money back." You had the GP saying, "I want to give them their money back." You have the deal partner in charge of the deals coming up with reasons why it may not be the time for them to sell because maybe their carry hadn't kicked in yet.
So they were pushing back, and maybe management was pushing back as well. That caused a slowdown, if you will. If you take a look at that, a number of institutions have created committees so that you don't have that anymore, or they're finding solutions to these new problems.
Clearly, there is an ecosystem that exists where the LPs need to get their money back so they can redeploy it into new funds or into secondary funds of those same institutions, a nd all of that ecosystem has slowed down. There's no doubt about it. Having said that, there is no indication on our end that investors are walking from the alternative asset class broadly defined.
They are, but they need to get the capital back to redeploy it a nd it is not frozen the way it was for a period of time. Our primary business is up and working again, not at all-time levels by any means, but it is back up and working unlike a year ago when it was really much more frozen.
Okay. I think you may have answered, you know, at least a part of this question, but in terms of, you know, the quantum of capital available. But in the zero-rate environment in 2021, 2022, sponsors were 40%, almost 40% of the M&A market, which is well above the long-term average, is 30%, right now we're below 30%. So how do you think about normalized private equity activity, without a zero-rate environment?
You know, I mean, we tend to get very focused on what's happening here in the United States where the private equity market is a bit more mature. 20 years ago, I remember going to Europe and being told I didn't understand. Private equity wouldn't work in Europe, that they had companies that stayed in family hands longer than we've been a country in the United States. We just didn't get it.
S ure enough, I believed in it then, and it has come up, a nd obviously, private equity is now a very large business in Europe and will continue. I go to parts of Asia today, and I get told effectively the same story. Private equity is growing around the world, and that I do not see slowing down as a long-term trend in any way.
It will ebb and flow in the United States and obviously going to do more deals in a free interest rate environment when you're relying on leverage than you will in a higher interest rate environment. But the long-term idea of professional management, owning companies and being a better competitor, effectively is something that it's just fundamental.
So one other aspect of the sponsor ecosystem has been secondaries and continuation funds. You recently completed an acquisition in that space. LPs want capital back. This is one way to deliver that capital back. As the M&A markets and IPO markets have started to improve, has that diminished at all the appetite for secondaries? T hen I guess when you take a step back and you see all this capital coming into the secondary space, is there any concern that you could see returns diminish in the space?
The way I really think about it is obviously this is a room of public company investors a nd for a very long time, you've had an option to do many things between just outright buying and selling. I n the private marketplace, that really hasn't existed. You either bought a company or you sold a company and very little in between.
As the whole private equity environment matures, we're starting to develop new tools, new tools that will allow the GPs to better manage the balance sheets of the GP, the balance sheets of the underlying portfolio companies a nd that whole process, I think, is in its infancy. So I think the continuation vehicles of the world are just the very early stages of a much broader ecosystem that will continue to evolve over time.
Excellent. Okay. Maybe just turning to the expense space, I think your comp ratio guide has always been quite formulaic, a 61.5%. But, maybe you could just talk.
I like to think of it as discipline, not formulaic, but that's okay.
Discipline and formulaic. But anyway, so maybe you could just talk about the cost of hiring today and whether it has gone up as much as we see among large cap M&A bankers, and perhaps that's why you're able to hold to the 61.5%. T hen let's contemplate a downside scenario. What would it take for you to revisit that 61.5% comp ratio?
Let's take the first one because I can't even imagine the second one. The first part is really we are, if you look at all of our public peers, they are effectively hiring a very similar type of individual that will typically be coming out of a Bulge Bracket bank or one of the other peers that has a handful of very large cap clients typically or large sponsor clients that they do a regular amount of work for kind of year in and year out.
That is very different than who in mid-cap M&A we are looking at hiring. We tend to hire out of our private peers, out of very small boutiques where individuals have tremendous domain knowledge, but perhaps they're getting capped out.
They have been selling $100 million assets and they want to get a round trip on it, and they're not able to get that round trip because they don't have the global reach, they don't have the tangential industry knowledge, whatever the case may be. We are a way for them to unlock their knowledge and begin to monetize that knowledge that they actually have.
Our ability to attract those individuals as well as out of the larger institutions, but much more selectively, is just different. We are competing for a different type of talent. I think that answers the first question. The second question, I mean, look, I never say never. Having said that, we have run with a relatively fixed payout ratio for long before we were public.
That is just part of how we think about running our business. It's just, I mean, sure, there is some scenario where it would occur, but we've been at this for over 50 years and it hasn't occurred yet.
Okay. I know this is kind of more of a CFO question, but when you think about non-comps, obviously that's pretty different than what it was pre-COVID. There was also the COVID period, which was different again. So how do you think about the, the structure of your non-comp?
Y ou know, our non-comp expense is, we think about it on a headcount basis first and foremost, right? So we really think about non-comp per FTE as a way to think about it b ecause as we're adding headcount, it is very, that non-comp does tie. There are two competing dynamics going on.
On one hand, we do get certain economies of scale. As we get bigger, it should drive it down. On the other hand, there's clearly been inflationary pressures and things like TM&E that are competing against that. So it is finding that. But we do believe there are economies of scale in our size on our non-comp expense and would expect to see that over time with that regulating factor to it.
Great. All right. One last one for me, which is just on capital return. Obviously, we've talked a little bit about acquisitions already, but how are you thinking about the mix of acquisitions versus capital return? Y ou know, obviously your valuation's up substantially year to date, s o how are you thinking about the mix between buybacks and dividends at this point?
You know, our first is to our dividend, right? We're making sure we pay our dividend. Second is really we are focused on growing our business, and acquisitions is one way of doing that a nd we're very fortunate. We see a number of good opportunities out there, and we have demonstrated to ourself over and over again that they work and that they provide meaningful shareholder value. S o as long as we have those opportunities, that's going to be our second priority.
T hen our third priority is we do intend to maintain our share count, which we've done a pretty good job of doing over a long period of time. A lot of that is not always through open market buybacks, but we net settle as well. We're more focused on keeping that share count fairly constant or and we've been able to do that to the extent that we do all that and then have extra, we will do buybacks, b ut-
Excellent. Okay. So, you know, I wish we had another 35 minutes here, but, you know, we're basically out of time here. So I just want to thank you both for being here, and hopefully we can do it again next year.
Absolutely. Always a pleasure. Thanks for having us.
Thank you.