Good morning, and welcome to Lazard's third quarter and 9-month 2021 earnings conference call. This call is being recorded. Currently, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by the zero on your touch-tone phone. At this time, I would like to turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.
Thank you and good morning. Welcome to Lazard's earnings call for the third quarter and first 9 months of 2021. I'm Alexandra Deignan, the company's Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release in an investor presentation, which you can access on our website.
A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website.
Lazard assumes no responsibility for the accuracy or completeness of forward-looking statements and assumes no duty to update these forward-looking statements. In today's discussion, it also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance.
A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Evan Russo, our Chief Financial Officer. Evan will start the discussion with an overview of our financial results, then Ken will provide his perspective on the outlook for our business. After that, we will open the call to questions. Now I'll turn the call over to Evan.
Good morning. Today, we reported record operating revenue for the third quarter and first 9 months of 2021, reflecting strong results across the firm. Third 1/4 revenue was a record $702 million, up 23% from a year ago. Revenue for the first 9 months was a record $2.2 billion, up 30% year-over-year. In Financial Advisory, record third quarter revenue of $381 million increased 24% from last year's period, reflecting broad-based activity across sectors, market cap, and regions.
Advisory revenue was driven primarily by M&A completion in the Americas and in Europe. A high percentage of these were in the $1 billion-$10 billion range. Private equity-related activity is increasing. Year-to-date, our advisory revenue from transactions involving financial sponsors has more than doubled.
Our private capital advisory franchise continues to show strength as we advise financial sponsors globally on fundraising and innovative secondary market solutions. As we've noted on previous calls, restructuring activity has been relatively subdued, reflecting the high level of liquidity across markets. Our sovereign and capital markets advisory businesses remain active, advising governments and corporations on financing, capital structure, and shareholder strategy.
Overall, our advisory activity is at an all-time high, and we currently expect record fourth 1/4 revenue for Financial Advisory, with strong momentum going into 2022. Asset Management third quarter operating revenue of $311 million increased 19% from last year's period, reflecting a larger base of assets under management. Average AUM reached a record high of $278 billion for the third quarter, 23% higher than a year ago and 1% higher on a sequential basis.
As of September 30, we reported AUM at 1/4 end of $273 billion, 20% higher than last year's period and 2% lower on a sequential basis. The decrease was primarily driven by negative foreign exchange movement of $3.3 billion and net outflows of $2.3 billion, partly offset by market appreciation of $0.8 billion.
The 1/4's net outflows were primarily from equities, partly offset by net inflows in fixed income and alternatives. Gross inflows continued to be healthy across our platforms. As of October 22, AUM increased to approximately $279 billion, driven primarily by market appreciation of $6.6 billion and positive foreign exchange movement of $0.9 billion, partly offset by net outflows of $1.1 billion. Our pattern of investment performance has been good this year.
Approximately 2-1/3s of our composite strategies are outperforming their benchmarks on a one-year basis. Our recent investments in thematic, fixed income, and alternative platforms, as well as their performance, position them well for growth. We see significant opportunities for growth in both of our businesses. In Asset Management, we continue to invest in people, technology, and our distribution effort, as well as the development of new and existing funds and the scaling up of our platforms.
These include the recent addition of a long-short equity team focused on the technology, media, and telecom sector, the launch of a global investment-grade convertible bond fund, and a new quantitative small-cap fund. In addition, we have recently made senior hires in global marketing, in ESG and sustainability, and to support the expansion of U.S. and European distribution.
We continue to see substantial opportunities to recruit talented investment teams, adding strategies that are complementary to our existing platforms. In Financial Advisory, we are executing on our growth strategy with an elevated pace of strategic recruiting, especially in high-growth sectors such as biopharma, fintech, alternative energy, and private capital.
While we continue to focus on internal promotions, year-to-date, we have made more than 20 senior hires, including MDs and senior advisors. Now turning to expenses. Even as we invest for growth, we remain focused on cost discipline. Our adjusted Non-Compensation ratio for the third quarter was 16.6% compared to 18.1% in last year's third quarter. Non-compensation expenses were 13% higher than the same period last year, reflecting increased business activity and technology investments.
We continue to accrue compensation expense at a 59.5% adjusted compensation ratio in the third quarter. Regarding taxes, our adjusted effective tax rate in the third quarter was 25.1%. For the first 9 months of the year, it was 26.2%. We continue to expect this year's annual effective tax rate to be in the mid-20% range.
Lazard continues to generate strong cash flow, which supports return of capital to shareholders. In the third quarter, we returned $103 million, which included $52 million in share repurchases. During the 1/4, we bought back 1.1 million shares of our common stock at an average price of $46.01 per share. As of September thirtieth, our total outstanding share repurchase authorization was $314 million.
Kenneth will now provide perspective on our outlook.
Thank you, Evan. Market conditions remain excellent for both of our businesses. In the U.S., economic growth is generally robust, and a strong recovery appears likely to continue into next year. In Europe, recovery remains on track as business conditions normalize. The strength of economic demand combined with pandemic-related labor shortages is leading to supply chain disruptions and growing concerns about inflation, and these developments are driving a new set of discussions with CEOs, boards, and institutional investors.
As travel restrictions ease, we are having more in-person meetings and reinforcing the personal engagement that's so important to both sides of our business. The M&A environment continues to be as good as we've seen, and we are as active as we've ever been. The forces driving global strategic activity remain in place. Technology-driven disruption continues to be a catalyst for M&A across industries.
The global drive to reduce carbon emissions is an emerging catalyst, and an abundance of private capital alongside strategic capital continues to drive activity. On the investor side, demand for risk assets with a growing focus on sustainability continues to create opportunities for active managements to drive alpha. Our Asset Management franchise is providing clients with a growing and innovative array of investment strategies and customized solutions.
The investments we've been making in both our businesses position us well for further growth. We continue to invest in people, resources, and technology to enhance our market capabilities, geographic reach, and sector-specific expertise. We remain focused on serving our clients well while managing the firm for profitable growth and shareholder value over the long run. Now let's open the call to questions.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Richard Ramsden with Goldman Sachs.
Good morning, guys. Kenneth, I know you talked about a recovery in M&A in Europe last time you spoke. Can you just update us on whether that has accelerated into the third quarter? Then could you just expand a little bit on your comments around concerns around inflation and supply chain disruptions driving discussions with clients? Is that likely to impact M&A restructuring or both in your view? Thanks a lot.
Sure. First on Europe, I think the recovery in Europe, by and large, is underestimated in the U.S. by most observers, both from an economic standpoint as well as in terms of activity levels. We're seeing a record level of activity, at least for our business across Europe right now, which is very encouraging. As far as inflation is concerned, look, there are 2 camps here.
One which is essentially inflation's transitory, weaker economic growth is going to alleviate some of the pressures, the supply chain issues will diminish, and the Fed will be able to control it. Largely speaking, the bond market, until recently, was more or less in that camp. I think the other camp is, the supply chain is here to.
Supply chain disruptions are gonna last longer. Consumer demand is driving up prices. The Fed is behind the eight ball on this, and that we're in for a longer period of inflation. Frankly, I think the debate is wide open at the moment, and we're gonna have a better feel for that as we enter into early next year. You know, the second 1/4 weakness, perhaps some weakness in China, you could argue on one hand is gonna keep it in check. On the other hand, clearly the supply chain disruptions, as we heard last night from Amazon and Apple, are concerning.
Okay. All right, thanks a lot.
Thank you. Our next question comes from Manan Gosalia with Morgan Stanley.
Hi, good morning. Can you expand on your comments that, you know, advisory activity is at an all-time high and, full year should be a record? You know, while this 1/4 was a record for third quarter revenues, it was lighter compared to peers, but, then again, you had a very strong second 1/4, and I think you had a similar dynamic going from the first to the second 1/4. I just wanted to assess, you know, how much of this is timing more than anything else.
Sure. Hi, Manan, it's Evan. Let me start there. Look, I think at the end of the day, what we're saying is we're, as Ken's pointed out, we've got a high level of activity across the firm. There's lots of business activity. As you mentioned, we had a great second 1/4 coming in. It's a record third quarter for us. Lots of positives coming out, and we just see a terrific outlook for us on the business side.
What's shaping up, you know, as you can see from the visible pipelines that you guys see out there, you can certainly see that things are very busy here, and we're expecting to have a, you know, at this point in time, we currently expect there to be a record for Q4 for Financial Advisory for us, and then strength into 2022 as well.
I think this is a, you know, this is just a continuation of what we've seen across the last couple of quarters. Certainly the significant strength we had in Q2 was terrific. You know, Q3, again, a record 1/4. We always get a little bit of some slowdown in Q3 just in terms of closings. The pipeline we have and, you know, sort of the opportunity set that we see ahead of us across the continents, as Ken just mentioned in Europe as well as the Americas, but really on a global basis, we're just seeing a very high levels of activity.
If I can just follow up on that, in terms of cross-border M&A, with more economies opening up, are you seeing that starting to accelerate? Or, do you think that's yet to pick up, you know, and we need to see supply chain issues fade before things really, accelerate on that front?
I'd say cross-Atlantic, not as much as we've seen in the past. Within Europe, for sure. A lot of that is supply chain. It's private equity, of course. Importantly, it is, I think, the beginnings of energy transition. I think we're gonna see a lot more within Europe, eventually, probably more across the Atlantic, but I'm not sure that we're gonna see as much as we've seen in the past for a little while.
Got it. Thank you.
Thank you. Our next question comes from Brennan Hawken with UBS.
Hi, Brennan.
Good morning, Ken and Evan. Thanks for taking my questions. Ken, you know, you've spoken in the past about an effort to hire more MDs in certain sectors in advisory, a bit of a bias to the U.S. geographically. Evan referenced 20 senior hires in his prepared remarks, but you know, maybe could you give us a little bit more specifics on how that's proceeding?
I believe your advisory MD headcount ended last year at 171. So, you know, given the hires you've made, pipelines, any that you might expect could be joining here, it's a little late in the year, but maybe there's a few. Where do you think you'll end the year, and where are you adding? Is that in the places that you've identified?
Could you maybe just give a little bit, on that front?
Sure.
Thanks.
This has been a very aggressive year for us in terms of growth outside hires. I think actually we're close to 24 outside hires now, not quite there, but almost, in senior hires between partners and/or MDs and senior advisors. The focus for us has been on, I think, the areas we've outlined in the past. I mean, clearly, the growth in private equity opens the aperture for us of people that will succeed on the
Lazard platform and also opens the aperture for many of our younger partners and directors, I think, which others have talked about as well because of the ability to pursue that business for them. That's been a real positive for us. As you've seen, we've done hires.
Obviously, this accelerated group of hires plus the promotions in the last year will impact the MD headcount. In terms of other areas, clearly biopharm is important, technology is important, and anything around the energy transition is important. As you can see, we made a recent hire just in the last week in London around that. This has been a very good year for recruiting for us. I think it'll slow down a little bit in the fourth 1/4 as it always does, but we have, I think, a good pipeline for next year ahead of us.
Great. Thank you for that. There also was a comment, I believe, Evan, that you made about sponsor activity doubling, and Ken, you know, that's clearly an area where you're looking to grow. Do you have an estimate for how much of your advisory revenue, either today or has been, involved or touching a sponsor in one way or another? Do you have a sense for where that stands and where you're interested in driving that as you continue to build out that business and make hires in places that you think can move the needle there? Do you have any
Sure.
you know, parameters?
Sure. We've doubled it this year. I think we're getting close to 40% for the first 9 months. We were in the low 20s last year, just above 20%. Many of our competitors are indexing up around 60%-80%, so there's a lot of white space ahead of us. Frankly speaking, if you look at that, it's been historically more skewed to Europe for us, so there's a lot of white space for us in the United States on sponsors. That's an area where we think there's a lot of growth right now.
Is the goal to just eliminate that gap to the 60-80 and therefore, you know, basically potentially double it again from the 40?
I think there's room for a lot more growth in that business. It's, you know, look, there's ups and downs in the markets, and obviously you have to modulate between where the activities are in the strategic and private side, and a lot of it is growing out of these sleeves in private equity. Yeah, there's a lot of room for growth for us here.
Great. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Devin Ryan with JMP Securities.
Hi, thanks. This is Brian McKenna for Devin. Within Asset Management, it was another 1/4 of modest net outflows. How should we be thinking about flows moving forward? I know it takes some time for mandates to come through and outflows to abate, but do you have any sense of when we'll start to see an inflection here?
Evan?
Sure. Let me start with that. Look, on the flow side, as we called out before, you know, gross flows have been strong, and that's, you know, the key for us in our business. We continue to see strong gross inflows in so many of our products. As you mentioned, look, we had some slight net outflows in the 1/4, but you know, as we've talked about in previous quarters,
we're starting to see that be more balanced and that's sort of as we expected. We're starting to see a little bit more balance in the outflows versus the inflows. You're starting to see months where we have positive net inflows, but yet it's still a little bit lumpy, right? It's still a little bit choppy.
We'd still expect it to remain a little bit lumpy for the next few months ahead. That's just because, you know, mix of reallocations of a lot of our corporate clients as markets have traded up, as pension plans become, you know, more fulsome. There's different risk reductions going on in some of the institutional client bases and a little bit of also change in investment philosophy, just as the market's changed and as the environment changes, you know, out of the pandemic.
We'd normally expect to see some lumpy and choppy movements in the institutional space, and that's what we're seeing. Gross flows remain strong and, you know, we continue to build a great pipeline of new products that we keep talking about.
I think as those come on, certainly in the next year or 2, that's gonna be also helpful from a flow perspective. As, you know, gross flows is what we focus on, those continue to remain strong. You know, I think as we continue to play out the rest of this year and get into next year with the new products, we should be in a better position.
You know, we're just gonna continue to focus on great performance in our business. We're starting to see some real turnaround, as we called out, you know, 2-thirds of our composite strategies ahead on a performance basis. That also plays in over time to driving even more strong strength and gross inflows in the coming quarters ahead.
Got it. Helpful. Non-compensation costs declined about 2% sequentially in the 1/4. How should we think about the trajectory of these expenses into the fourth 1/4 and then next year? Within that, do you have any expectations around how quickly or to what magnitude T&E will recover?
Sure. Look, I think, you know, we did $117 million of Non-Comp in Q3. You say it's down $2 million from Q2, but I think we're getting to sort of that newish level. The ratio, as we said, coming in about 16.6% through the 9 months, we're at the low end of our normal Non-Comp range. I'd make a couple of comments about Non-Comp. You know, I think the first part, as you mentioned, T&E, we're starting to see a little bit of an uptick in travel in the third quarter of this year, most specifically in September, and of course, as you get into October.
As people are coming back to the offices, as our clients are coming back to their offices, as clients are demanding more, you know, not demanding, but asking for more meetings in person, as we're getting out more on the road to develop new client relationships, we're starting to see more travel pick up. Of course, we're starting from a very, very low level, but we're starting to see that come up a little bit.
I think it's gonna still take. It's gonna accelerate over the next couple of quarters, but it's gonna take a little bit of time until you get back to a more normalized environment. But I don't think you're ever gonna get back to sort of the pre-pandemic levels.
You're probably gonna get back to a 70%-75%, maybe, and that depends on business activity and the strength of the movement of people around the globe. At this point in time, look, it's starting to accelerate, but off of a very low base. The other thing we're seeing in Non-Comp over the last couple of quarters, and we expect it for next 1/4 as well, is the increase in recruiting costs.
As Ken mentioned, we've got a huge pipeline of senior hires in both businesses, both Asset Management as well as in Financial Advisory, and that's everything from mid-level to senior hires. We're in a pretty good expansion phase here in both of our businesses. We're seeing lots of opportunity to acquire great talent.
That, the recruiting costs associated with that comes under professional fees in our Non-Comp, and you're starting to see that tick higher as well. That's terrific for us, great investment for the future. Finally, you know, it's technology. I mean, we continue to invest in technology. We continue to find great opportunities to deploy more into technology, which we believe is a competitive advantage and certainly a significant comparative advantage for us versus our peers.
as we've talked about in previous quarters, we're investing in everything from infrastructure to creating a better environment for all of our employees, more efficiency, to create a better workplace, and to just get better efficiencies out of everything we do on a day-to-day basis, as well as client insights, using data analytics and data science and all the things you can use once you have strong technology tools to truly deliver, better advice to clients in both
Asset Management as well as in Financial Advisory. Those are sort of the key, sort of 3 key topics that sort of impact Non-Comp. I'd say, look, going forward, as you questioned, I think you're gonna continue to grow it from here.
As we said, if we can continue to find ways to invest into the business at this point when we have and we are at the lower part of our Non-Comp ratio, it's a great opportunity for us to deploy some of that into areas that are gonna create benefits for us for years to come.
Great. Thanks, Evan.
Thank you. As a final reminder, please press star one now if you would like to ask a question. Again, we are pausing for questions. Please press star one to join the queue. Thank you. At this time, I'm showing no further questions. This now concludes the Lazard conference call. Thank you for joining. Have a good day.