So next up we have Peter Orszag, who's CEO and a member of Lazard's board of directors, who joins us for the second time at this conference for Fireside Chat. Peter took over as CEO of Lazard on October 1st of last year after having previously served as CEO of Financial Advisory and will add the Chairman responsibilities, beginning in 2025. He's been at Lazard since 2016, prior to which he held senior roles at Citi and in the Obama White House. Thank you so much for joining us, Peter.
Good to be with you.
Okay, so let's just start with your AUM release that came out this morning. Since it's topical, maybe you could just talk about some of the trends there and maybe takeaways from that please.
Yeah. Look, I think the way we think about this is just like 2024 was a transition and an inflection point on the advisory side. We are organizing ourselves for 2025 to be an inflection point on the asset side of the business. And in particular, we are organizing ourselves around the principle that in 2025 will be a net zero year. And by net zero, I don't mean emissions. I mean that inflows will balance outflows. So I'm happy to maybe could I spend a minute delineating the way we're gonna get there?
Mm-hmm.
But as an organizing principle, the idea is 2025 will be net zero on flows. And then, obviously, market appreciation will, which we still expect to be positive in this environment, will mean that AUM should increase. And then thereafter, 2025 is a kinda transition year. And thereafter, the things that I'm about to describe that will get us there in 2025 are what will lead to, you know, a tilting towards net positive flows over time. All right. So that may sound ambitious, but I would note that when I was here last year and talking about the advisory business, everyone told me that there was similar ambition on the advisory side. And I think we're ahead of schedule on that side. So I'm also confident that we are, with enough effort, gonna be able to see significant improvements on the asset side.
So let me talk about four components of how we get there. The first is the market. So, as there are two pieces to the market. One is as interest rates continue to come down, we expect that inflows, gross inflows, will increase. Happy to talk about the rate environment later. But, as gross inflows into active management increase, that's obviously beneficial. And then secondly, even though it may seem unpopular to say right now, we anticipate that there may well be a shift in investor sentiment that if you look at the valuation gaps, so price-earnings ratios in EM now are about 10 turns lower than in the U.S., international, so outside of EM, but also outside of the U.S., you're seeing a really historically large differential.
And in addition, earnings growth differentials, which had narrowed a little bit, especially EM versus U.S., are now widening out again. So if you put together the fact that there's a substantial valuation discount and earnings growth is actually differentially high there, we think over time there will be a, you know, a shift in sentiment to make EM a bit more attractive. And I would note that for us, our emerging equities, for example, have outperformed on a one, three, and five-year basis. And we see the potential to gain substantially as that happens. So that's part one is the market. Part two is better optimizing our existing products and strategies, on sales and on research and on synergies between advisory and asset management. So let me talk about that.
On research, we've made a variety of investments and also changes in the way in which we conduct the fundamental research, which we think is starting to pay off in terms of better outcomes. And on sales, we're gonna have a more concentrated, focused effort on where active management makes the most sense and where we think we have edge. So on a global basis, the highest priorities will be our quantitative, product, products, Japanese equity, emerging market equity, and global listed infrastructure as real focal points on the distribution side. There are regional priorities beyond that. But having a focused effort on where active management makes the most sense and where our performance is the most impressive, I think will lead to better outcomes on the distribution side.
And then in terms of synergies, there is a lot of content that we can share across the two sides of the business. The best example is our geopolitical team, which is now doing a wide array of meetings with CIOs. Many of the things that corporate executives and boards are interested in are also obviously of much interest to investors. So that's an example. Another example is that we have developed, I think, first-in-class generative AI tools on the advisory side that sit inside of our firewall, and we're gonna port them over the coming months into asset and, disproportionately, I think, beneficial on the research side. So that's kind of doing better with the existing products. Third category is continuing to migrate the modalities and the products we offer.
Examples of that are active ETFs that we'll be launching early next year, things like the Elaia Capital early-stage tech private investing that we have, we have gotten spun up at Lazard, and further investing in the wealth management that we already have both in Europe and in the U.S.. So the third category is kinda migrating over time what we're doing. And the fourth category is investing in talent. And we've made significant investments higher on strategy, which I think is reflected in this strategic focus, in Japanese distribution, several portfolio managers, several research folks. And that will continue.
You put that all together, and as an early indicator of momentum towards net zero in 2025, we're gonna be entering 2025 with the highest ever won but not funded, you know, set of mandates to the tune of approximately $10 billion of mandates that we have already won disproportionately in the strategies I already mentioned that have not yet funded that will help give tailwind to 2025.
Okay. Great. Maybe just one more there, a little bit, you know, I think this is point number three. Just in terms of partnerships and acquisitions, I know you, you know, historically talked about acquisitions. You, you talked about partnerships here. Maybe you could just help us think about asset management deals. And, you know, are you, are you really now focused exclusively on partnerships versus acquisitions, or could you do both?
We have been consistent throughout that we see, look, we have two very cash-generative businesses that provides firepower for acquisitions. If we did any acquisitions, they would be disproportionately in the asset side, disproportionately in moving into these in that third category. But we've also said consistently, including here last year, we're gonna be disciplined both on valuation and on the cultural match. So, in the intervening time since I was here last, we've looked at more than three dozen opportunities. We have not found the right match yet, but we're gonna keep looking, in a disciplined way to make sure that it's accretive to shareholder value and is the right match. And in the meanwhile, beyond just acquisitions, there are lots of different partnership-type structures that give us lots of exposure to that third category.
And so the bottom line is we remain interested. Many valuations are, you know, on the frothier side. And we're gonna be disciplined about what we do. But we are seeing a lot of opportunities. We're in a lot of processes. And we're gonna be careful about what we choose. And in the meanwhile, we'll be flexible about partnership approaches also.
Excellent. That makes a lot of sense. Okay. You talked a little bit about the macro here. So maybe we could just turn to the broader macro. And I think, obviously, as that, you know, impacts the business broadly, but perhaps also in terms of advisory. Maybe you could just talk about the backdrop and how it's affecting the businesses.
Look, it's let me talk about the macro environment and then maybe fill in a little bit more on advisory too. It is a very conducive environment, almost an ideal environment for Lazard at this point because several factors. The first is that the M&A cycle, and when we were here last year, I was talking about how we saw the early signs of M&A cycle picking up. This year has played out largely as we anticipated on the market, and we're seeing now the next stage, which is sponsors getting much more active, and in addition to that, perhaps disproportionately post-election, large transactions are also increasingly in the mix, so our dialogues with clients are very constructive, and the next stage is gonna be increased exposure to private capital, as it comes back onto the playing field.
And maybe at the back end, we can talk a little bit about what Lazard has been doing to create more of a flywheel on the private equity, private capital front. But the first thing is the M&A cycle. I would note this year is gonna be a significantly better year for us, reflecting the things that we've done. And I've mentioned that we're ahead of schedule on the Lazard 2030 plan. Productivity, for example, on the advisory side is about what the target was for next year, but already this year. This year will be up significantly relative to last year on the advisory side. I don't think we're gonna quite beat the fourth quarter of last year. It might come in a touch shy of that, at least as we expect right now.
But as we go into 2025, the dialogue and the feeling of constructive environment is very strong. That is reinforced by the expectation that interest rates will continue to come down, which is promising from a financing perspective and from a valuation discount perspective. It is actually reinforced somewhat by the threat of tariffs because Lazard has a competitive advantage in cross-border transactions. And one effect of the threat of tariffs is that it's creating an incentive for many firms to look at cross-border deals, especially to locate inside the United States so that you're inside of the tariff wall. And we really have, we're the only independent advisory firm that has deep local roots in Europe and the United States. And so that plays to our strength.
And then the final thing I'd say is that decline in interest rates that I mentioned is also one of the drivers of the asset side of the business in terms of both flows and potentially also the shift back into ex-U.S. investing that may be part of the equation as we move into 2025. So I look at this combined with a more promising regulatory environment. And 2025, at least as we sit here today, looks very, very promising not only for the market but particularly for Lazard. And if you can indulge me just two quick things on that front.
Sure.
One is that the sense of an inflection point on the advisory side, the sense of momentum, is reinforcing our recruiting efforts. So we're in the middle of a wide array of very constructive discussions with extremely talented bankers. And that is very encouraging. And that's on top of the hires that we've already made that are really high talent in consumer retail, in sports, media, entertainment, in private capital, which I'm gonna come back to in a second, in healthcare and in oil and gas and elsewhere. So all of that is very promising. And the final thing I'm gonna say is on the private capital side, we have really made. I think people think of Lazard as a large-cap M&A place. We are that.
We have also made substantial investment in the flywheel of diversifying our restructuring team to cover creditors in addition to debtors, in creating this new Lazard Capital Solutions Group that is active in helping companies find sources of private credit and other financing, in investing in our PCA business, especially in the secondaries line of business, which we might come back to, and in sponsor coverage. The feedback that we're getting from the large alternative asset managers in particular is extremely positive in terms of Lazard really stepping up its game. So I think you need to think of Lazard not only as that traditional large-cap, including cross-border, M&A banker, but also now having increased exposure to private capital. Five or six, seven years ago, about 20% of our advisory revenue came from private capital. This year, it's gonna be about a third.
I think we can take that to 50% over the next several years.
Okay. That's very, very helpful. Maybe just turning to another important topic, which is ramifications of the election. And you touched on tariffs a little bit. But I wanted to turn to antitrust and broad deregulatory changes more generally. Maybe you could just start with, you know, your view of how quickly the antitrust backdrop can change, especially because the DOJ will turn over more quickly than the FTC. Does that get us back to a pre-2021 antitrust backdrop? Is that feasible? And then maybe if you could just talk about a couple different areas. Obviously, you have an expertise in cross-border deals. So how do you think all of those dynamics affect cross-border and then maybe tech as well?
Sure. So let's just level set on what was, what had changed under the big is bad regime, because that will inform what is likely to now happen as we look forward. I would note that while the head of the antitrust division for the Department of Justice has been named by President-elect Trump, we have not yet seen exactly who's gonna be leading the FTC. You know, that personnel is policy in many situations. And so that can matter a little bit. But I'd say writ large, just to level set, the biggest difference between, you know, the big is bad crowd under President Biden and the prior antitrust environment really had to do with vertical integration. So vertical deals where you're combining firms that do different parts of the supply chain or different parts of the production process.
Because historically, if you go back decades under the sort of Bork view of antitrust, vertical deals were almost given a pass, as being extremely unlikely to cause harm to competition or to consumer welfare. Under the biggest bad theory, vertical deals, because they created larger entities, were attacked much more frequently. Now, I would note that's also where the FTC and the DOJ were losing quite frequently in court. Microsoft Activision is perhaps the most prominent example. But what I would anticipate is the biggest shift will be in vertical deals where you'll go back to a sort of what I'd call more normal antitrust environment. Horizontal deals are always gonna be the subject of antitrust scrutiny. They were historically. They will continue to be. So overall, more constructive environment. You asked about tech.
I think the other thing that was prevalent in the Biden era was an antipathy to large tech that almost was visceral. And here, there's a little bit of that. This is why the personnel is policy matters, like exactly who is running the FTC will matter. But in general, I don't think there's as much animus, just as a sort of starting point, but with perhaps more variation. It will be a bit more personal but not universal, and so more variation across the big tech firms. And I do think that the effort that many of the leaders of these firms are taking in order to foster good relations with the incoming administration will matter in a world in which it's a bit more personal.
Okay. One more, big picture one here just around rates. So you talked a little bit lower short rates. That's clearly happening globally. But there's also this risk, especially in the U.S., of potentially a higher long end.
Yep.
As a result of numbers and factors. But maybe you could just talk about what that could mean for corporate demand for M&A.
Well, look, there are many things that go into M&A. One thing is the discount rate and the financing environment. So, you know, a material uptick in the long rate would put some offsetting force on the other dynamics that are pushing more M&A. But I think that's gonna be relatively small, both because that factor is never the dominant driver in any case. But more importantly, I'm not sure how much the long rate is gonna continue running up. It will depend a lot on what the incoming administration actually does. And I think the early signs are actually somewhat promising. The administration knows that inflation is a politically toxic topic. The economic policy nominees and people being named are very sensible. I've known Kevin Hassett, the incoming NEC Director, for example, for probably 30 years. Very solid choice, along with the Treasury Secretary, another solid choice.
That's very encouraging. I would also highlight that President-elect Trump's comments over the weekend that he is not going to attempt to fire Chair Powell also both is wise and suggests a mindset that the administration is cognizant of the risk of sparking a resurgence of inflation. And that really, I think, along with the fiscal deficit, where there might be a little bit more questions about the exact path, that's what's been causing some uptick in the long rate. And the early signals that I'm reading, at least, is that they'll be cognizant of the risk of doing too much on tariffs, on changes to the labor force that would also be inflationary, on threatening the Federal Reserve that would also be inflationary, and so on. And so that's encouraging.
Great. Okay, maybe just a couple quick ones on M&A here. I think the sponsor recovery is clearly top of mind among investors. Sponsors comprise nearly 40% of M&A back in, you know, 2021, 2022. They're below. It's below 30% right now and has been for almost two years. When you think about the normalized sponsor mix of M&A, where do you think that gets to? Obviously, we're not going back to a zero-rate environment in the base case, at least, and then when do you think we get to a normalized level of sponsor?
Well, I think that we don't need to get to a zero-rate. I mean, sponsors, in part because there is a lot of dry powder, in part because valuation disconnects have narrowed, in part on the sell side because they've got portfolio companies that are getting a little long in the tooth. There will be a lot of transaction. And it's not just the sort of private dialogues that we're saying that we're seeing. The heads of most of the alternative asset managers are publicly articulating the fact that they're gonna be much more active on M&A going forward. And that will be true, you know, in most rate environments over the next several years. So that's point one. Point two is we see substantial upside for Lazard, regardless of where the aggregate data settle out in more opportunity for us within that marketplace.
And so I mentioned, you know, going from 20% to a third to 50%. I would note, I mean, year to date, we're up about 50% on revenue associated with this vector of transactions. And we anticipate continued significant growth, in part because the market's warming up, but also because we've got our act together now in terms of how we're covering these firms and the array of different products and services that creates the flywheel that allows us to have traction with the most important asset managers. And what we've been doing, for example, on the sponsor coverage side, is that we started with a targeted list of the biggest ones that we wanted to make progress with, and have succeeded, I think, in those top five or six. And we're now layering out.
We had a new hire, for example, that will do the next layer of sponsor coverage, and we're gonna keep doing that until we meet what was formerly Lazard middle market coverage effort, and then we've got the full spectrum, so a lot of progress being made in terms of how we cover this part of the marketplace, and that part of the marketplace is also growing more robust.
On a related topic, maybe we could just touch on the secondaries.
Yep.
Business. Maybe at a high level, what do you think the normalized mix of private equity exits looks like across M&A, IPOs, and secondaries? And then, how do you think that impacts the growth of secondaries? I think your team has put out, you know, some estimates that the secondaries industry is growing about 40% a year.
So we see a lot of growth in secondaries. I don't wanna say independent of, but almost, without, that much, dependence on the M&A and IPO vector. Let me break this down a little bit. One of the things that has caused growth in the secondaries market over the past couple of years is the fact that, as I mentioned before, portfolio companies have been held for a unusually long period of time. And there's a demand for liquidity that then creates demand for secondaries. That's kind of like a jumpstart to the market. But even as that will ease, as M&A and IPOs come back into vogue, we see the secondaries market continuing to grow more rapidly and perhaps even accelerating because what's happened is that jumpstart has advertised to most PE funds that this modality exists.
And yet the penetration rate of secondaries is still really small across the private equity universe as a whole. So most of the growth is gonna come from this idea spreading. And the jumpstart, even though it will fade, is beneficial because it was basically a form of advertising for the existence of this product. And so we're very bullish about the market as a whole and then also our positioning within that marketplace, over the next several years.
Excellent. One last one on advisory. We just think about restructuring. There's obviously been tremendous industry growth over the past two years in the business. But I think you've had some very strong idiosyncratic growth as you expand the offering there. Maybe you could just talk about the outlook for the business, you know, the industry and your business specifically. How long can it remain this good? And what is the shape of the slowdown that inevitably comes look like?
Well, look, we, along with many others active in this field, have seen a shift in the form of what these mandates take, so it's no longer restructuring. It's restructuring and liability management and mostly the latter, and we have reshaped our team to be much historically. Lazard was very focused on debtors and had a premier franchise on that side. We've now diversified through hiring and through a variety of other steps into the creditor space and are succeeding substantially in that more diversified model, so this year, for example, about 50/50, so about half of our restructuring and liability management revenue will be on the debtor side and about half on the creditor side. If you go back historically, that was like 85% or 90% on the debtor side with a small minority on the creditor side.
So we are now, I think, much more balanced in terms of our coverage. That then plays into the overall private capital flywheel that I was speaking about before. I just think the market has changed as private equity ownership of firms has increased. There's a different nature of what happens when a firm gets in trouble. Much less reliance on the formal Chapter 11 process and much more reliance on working things out and restructuring debt. We are well-positioned for that. I think that's going to continue. Even in an environment with lower rates, particular sectors are always up or down. There is always restructuring activity in the sectors that happen to be down. Restructuring and liability management activity, I should say.
Okay. Maybe let's just turn to strategic investments quickly. You've been in the role for over a little bit over a year now. Maybe you could reflect on the past year, give yourself a scorecard, and then maybe update us on your key priorities for 2025. I think you've given some of those, but anything else that you want to highlight?
Sure. Well, thank you. I think the most important thing is that there is a sense of energy and excitement at Lazard that reflects this inflection point that I mentioned. So we have this remarkable brand, great history. But what we really needed was renewed ambition and playing to win and a commercial and collegial culture. And that is increasingly the case. So we just did an internal survey. The sense of you know would you recommend Lazard to colleagues or friends, sense of direction, sense of communication. All of these indicators are materially up. And you can feel it at the firm. It's also one of the reasons why we're doing very well on lateral hiring because people want to join a firm that is on the move, has this great tradition, but also a lot of growth potential ahead of us.
I think you see that in the way that investors are responding, so we changed our corporate form to become a C Corp. Total shareholder return since I took over is, you know, over 90%, and we anticipate that that will continue because we see so much opportunity ahead. Talking about the advisory side for a moment, because we are the only firm that is got deep local roots in both North America and Europe, and we have so much more potential than our competitors do to scale up in each geography, so I think that's very exciting. The emphasis on geopolitical insight that is dominant both on the advisory side and on the asset side of the business plays to Lazard's strength. It's always been the case that we had kind of that feel about us.
We now have created a formal Lazard Geopolitical Advisory team. A lot of client interest and demand in today's environment. You cannot make a business decision today without taking geopolitics into account. That plays to Lazard's strength. The reason I wanted to start, or I'm glad we started on asset, is I understand that many people have questions about, well, what about, the asset side of the business? My message to people that are asking that quite legitimate question is we have made a lot of progress on the advisory side. There's a sense of momentum there. You're going to see over in 2025 the same sense of focus, playing to win, and transition occurring on the asset side. So you put all of that together. I'm, you can tell, pretty excited about the pathway ahead.
I don't think it's for me to. I think you asked me to grade myself. I'm not. I grew up in an academic family. I'm not really comfortable doing that. I'll let others grade me. But I'm very encouraged by the cohesion of the senior leadership team, by the shift in the internal culture that we've been able to accomplish, and by the results so far. So I would also say this is just the beginning, the very first or second mile of a marathon. And I'm proud of what we've accomplished together so far, but much more excited about the pathway forward because I just see so much more potential ahead.
Great. Maybe just one more on the financial advisory side, strategy investments. I think you talked about getting to your productivity target of $8.5 million one year early. The longer-term target's $10 million of productivity. Do you feel good about getting there? Could you potentially exceed it? Any thoughts there? And then how has the hiring market evolved in terms of cost? And where are you investing in advisory today?
Sure. So, first on productivity, the $10 million in 2028, I am confident we're going to ultimately exceed, whether it's in 2028 or thereafter. But that is not a cap. If you look at, and I find it interesting that some people have said, "Well, let's look at Lazard's historical productivity." And that kinda caps out. That is not, I think, the right way to think about it. If you benchmark us both in terms of the quality of the people that we're hiring and also against some of our competitors, there is a lot of upside potential for us to exceed those productivity levels. And I'm confident that we will. I don't wanna give a timetable because I wanna at least let the first step is let's accomplish Lazard 2030 before we go and beat it.
But I think there is a lot of potential to go well beyond those productivity levels. I'll give you an example. One of the things that has been feeding into higher productivity is that there are a lot of different elements. We talked about many of them last year. But one of them is that we've put in a minimum fee, both in terms of disciplining mandate selection and in terms of, you know, making sure that we're fairly paid for the outstanding work that I believe we do. We just a month or two ago ratcheted that minimum fee up yet again. So I think there's a lot of further progress that we're gonna be able to make on the productivity side. On the hiring front, in terms of where the priorities are, we see lots of potential to continue to build.
The first thing is I think in terms of where we had major holes, we've really filled in many of them, so consumer retail, we now have an exceptional set of bankers in consumer and retail, and you already saw early progress on the lateral hires there. Sports, media, and entertainment, another area where we were not punching at the right level, we've made a series of exceptional hires. I'd note in sports in particular, I think, last week there was some news around this. We are expanding our practice in sports. It's a very exciting area as sports become increasingly internationalized and as private equity enters that sphere, so 2024 was a bit of filling in holes where they existed, including on private capital coverage. Now we're gonna build on strength.
That will mean focusing on plays, things like tech, healthcare, industrials, and then building on. We just made a hire in oil and gas, so in the energy sector, building on areas where we're already strong. So, I mean, I would just say lots of opportunity across the board, both in the U.S. and in Europe. We're going to. We are. I think we've made 17 hires this year so far. We're on track to hit the 10-15 net MD adds that I articulated. We're gonna do that again in 2025, at a minimum. Some of these discussions with highly talented bankers are so constructive, that we may exceed that if the opportunities arise with regard to really talented bankers. We'll see.
Great. Last quick one here. You've talked about lower than 60% comp ratio for next year. I guess you could maybe talk about your views on the sustainability of that or the ability to continue to improve on that over time. And then specifically, could you just talk about the incremental margins and the differences there across asset management versus advisory?
Look, I think, so I said that we could hit 60% next year as long as the M&A market continues to develop in the way that we expect. So that's condition one. And condition two is back to what I just said. If the opportunity to hire exceptional bankers arises in such an abundant way, that will help us produce more productivity and more revenue in the future, even if it means a temporary bump in the comp ratio in 2025, we will take that opportunity because it's in Lazard's interest. So those are the two conditions. And I think the thing that people need to remember and continue to understand is how much operating leverage you get on the non-MD comp pool in advisory by raising productivity per MD. That is really the crucial driver of how comp ratios in advisory work.
And so coming back to the point about continuing to raise productivity, that is also an essential pathway to hitting the comp ratio goals.
Excellent. That, I think, we're out of time. But thank you so much, Peter. Hope you enjoy the next year.
Thank you, Richard. All right. Thank you.