All right. So we're pleased to have with us Peter Orszag, CEO and Chairman of Lazard. Peter, thanks so much for joining us this morning.
Good to be with you.
First, I have a quick disclosure. For important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. Any questions, please reach out to your Morgan Stanley sales rep. Peter, first, let's start with you were appointed Chairman earlier this year. Congratulations. When you think about your role as Chairman, are there any changes in how you're running the board for the current volatility or just any broad changes in board strategy?
No. Look, I think part of what part of Lazard 2030 was a board refresh where we're looking for very active engagement and debate at the board level. Our Lead Director, Dan Schulman, is certainly very much in favor of that kind of approach. I would just highlight Dan Schulman, Steve Howe, Peter Harrison. We will have other new board members joining. This is just part of a kind of active coverage and active engagement. I would say we have a very constructively engaged board at this point.
It is now been almost two years since you announced Lazard 2030. That is the vision for expanding the relevance of Lazard, doubling revenues, improving returns. Where are you? Ahead of schedule? Where are you behind? How do you evaluate progress there?
I think things have been going really well. We had a systematic plan. The way I would go through it is start with the corporate level. We had reinvigorating the board, as I already mentioned, the C Corp conversion, which I think has lived up to its expectations in terms of bringing new investors into Lazard and widening the aperture on the type of investors that are interested in taking a look, all of which is good. Also the senior team. I really feel good about the coalescing of the senior team across Lazard. The next stage was in financial advisory, where I think the cultural fit of being commercial and collegial has really taken hold and probably gone faster than I would have hoped for, which is great. The hiring continues to be at a pace that I think is very constructive.
We have, again, gone systematically down the list of where we needed to add. We have a lot of future plans along that dimension also. Consumer retail, sports, media, entertainment, Germany, private capital. You can kind of go down the list of where we have been making hires in 2024. As we go into 2025, more to come, especially in private capital, in health care, and in lots of other priority areas. The Middle East is another example. I would say the hiring is going well. On productivity, we were ahead of schedule in hitting the $8.5 million per MD target.
I think that reflects a whole variety of things, including the mix of managing directors as we move to this commercial and collegial culture, including our active management of new mandates, including a minimum fee that can get waived only with senior management approval that we have actually now raised, a whole variety of other things that are going into raising productivity. I think on the financial advisory side, things are, if anything, ahead of schedule. We are heads down on execution. On asset, 2025 was just in this ordered structure of the Lazard 2030 plan, the year in which we really expected and wanted to see improvement in asset. I think that is what is going to happen.
We continue to see a lot of interest in many of our exemplary products and strategies, from Japanese equities to the systematic strategies we have across the globe, to global listed infrastructure, to emerging market equity, and continued progress there. Maybe we will come back to that topic. Writ large, basically just to step back for a second, what I would say is we are on track for Lazard 2030. We are heads down on execution. I understand the need to continue to execute. In addition to that, I think there are two benefits or two additional attributes of the Lazard story that are worth highlighting in addition to just executing the Lazard 2030 plan. One is, as the world looks maybe a little bit more at other opportunities, ex-U.S. and U.S. exceptionalism becomes a little less exceptional.
On both sides of our business, we believe that benefits Lazard. We are the only independent advisory firm that has strong practices both in North America and Europe. With regard to our asset business, a lot of the strength is ex-U.S. A lot of the historical strength is ex-U.S. We have a lot of, I think, interest from clients in that story. The third thing I'd say is the AI revolution is going to transform financial services. I am absolutely obsessively focused with having Lazard win the AI race on both sides of the business. I think we are seeing significant progress on that also. Basically on schedule, focused on execution, more diversified geographically than many of our competitors, and really focused on what is going to happen next in terms of AI.
It sounds like on schedule, and advisory is a little bit better than on schedule. When you think about your business mix, you have currently around 60% advisory, around 40% asset management, with a lot of opportunities in both, but you just went through some in advisory. Do you see that mix changing over time? Are you happy with this roughly 60/40?
I'm a little bit less focused on that exact mix and more on the specific opportunities in each business. We're sort of a little bit more agnostic on we have to be able to surf the wave of where there are opportunities. We are just playing where we see opportunities in both businesses. The mix will be what the mix is. We're not targeting a particular mix.
Right. When you think about the synergies between the two businesses, you've talked before about brand. Is that the main synergy there? Are there more that you've realized since becoming CEO and since becoming Chairman? How do you evaluate the synergies now versus a few years ago?
I think there's significant potential for synergies, only some of which have been realized historically. We are seeking to really fully fulfill that potential. There's the brand, as you noted. There's a lot of content synergy. A lot of the material, geopolitical is a good example, that we present to boards and C-suites about the world is also applicable to a CIO on the asset side and also to a client in wealth management. For example, in the wealth management business we have in Paris, but also the one that we're building in the United States, a lot of that content ports over. Obviously, the connectivity and the convening. There's a whole variety of other synergies there also. The way I think about it is brand, connectivity, and content are the categories of the synergies.
Final one I note is in technology, in AI again, we're actually in real time porting over some of the tools that were developed, and, well, were developed, and I don't want to say perfected, but where there were advances on the financial advisory side of the business, we're moving those over to asset management. That may be the other category of potential synergy also.
On the asset management business, a few questions here. Can you walk us through the growth vision here? Is there an organic path to the growth that you want? Or is M&A still maybe a part of the strategy?
We see opportunities for growth in asset, both organic and inorganic. On the organic side, this is really about investing in the portfolio managers' research and then also the way in which we distribute our products. A great example is the active ETFs that we've launched. They're off to a great start, both from a performance perspective and from an interest and investment perspective. We will be launching additional active ETFs because we think that's an attractive vector or way of delivering our products and strategies to an even wider array of potential clients. More to come on that. I think we are well positioned in the asset business for the potential shift in investor sentiment that is occurring as you move away from massive overallocation to U.S. assets towards a more diversified global portfolio. That is a very promising sign for Lazard.
As an example, I have noted before, and I'll give an update, which is that our one but not funded quantum, one but not funded mandate amounts are still up relative to the beginning of the year. In that category of where that's sitting, something like 90% of it is in strategies that are outside the U.S. Japanese equity, global listed infrastructure, et cetera, that I think highlights the shift in investor perception or investor preference that may be occurring. That will be a very good thing for our asset business.
That one but not funded is current as of today's AUM print or?
Yes. Just for a second on today's AUM, I highlighted several months ago that the large U.S. sub-advised accounts have a somewhat different dynamic. They have a different decision-making focus. They just have a different dynamic than the rest of the business. What you saw in this morning's print was one sub-advised account with an outflow that more than accounted for the total net outflow from Lazard. I.e., outside of that, there was a net inflow. I would just highlight on the sub-advised accounts that they represent, or the large U.S. sub-advised accounts represent less than 5% of LAM revenue, different dynamic than the rest of the business. Outside of, again, that piece, we're seeing a different both investment performance profile and flow profile. I think today's release highlights that.
To underscore, because I know there are questions with every print, whether we've so far eaten into that one but not funded mandate quantum. The answer is no. That still remains above where it was at the beginning of the year as of this morning's print. At some point, as some of those large one but not funded mandates fund, that may come down. The performance this year, which is much better than last year, does not reflect eating into that amount yet.
OK, great. Thanks for clarifying that. Just to kind of put a pin on the organic versus inorganic conversation, if you were to do inorganic, would it still be string of pearls? Would the opportunities there be more around the private markets and wealth space where you've previously talked about getting around 30% of AUM in that bucket?
I do think the inorganic opportunities for us have to be thought of in the frame of how can we accelerate directions we want to move into anyway. We do see significant growth opportunity in wealth for Lazard. That is definitely an arena that is worth we will continue to take a look at. Also, as you noted, private assets is an obvious growth opportunity for Lazard. In both categories, we want to make sure that, as I've said repeatedly, we're disciplined with regard to capital allocation, that whatever we do has a good cultural fit, has a good strategic fit, has a good, from a valuation perspective, also makes sense. We're going to continue to be disciplined here.
In the meanwhile, there are lots of things that we're doing that I think help us further refine when the match will be right. I mean, highlight a good example in private assets is the alliance that we have with Arini Capital Management, which has a new private credit fund that is focused on a particular part of European middle market businesses. We have an alliance with them. This is allowing us to do two things that I think will be very promising for any future activity that we have in a more traditional acquisition. One is to see what kind of deal flow our banking teams within that breadbox are able to generate in terms of potential investments. Obviously, we're doing this with the agreement of our clients and on a non-preferential basis.
The degree to which our distribution teams are able to sell a product that they have not historically sold is important. I think on both fronts, experience to date has been promising. This is a good low-cost way of running an experiment in which we're able to test out those two propositions. Those two propositions are part of the story for why a private credit fund may want to become part of Lazard as opposed to some other place. We are doing this in, I think, a very low-cost way, testing out some of the key selling points. Depending on that experience, we'll be able to better refine how we look at potential acquisitions also in the future.
All right, let's shift to advisory.
Yep.
Let's start with the environment for M&A advisory. Since the April earnings call, we've gotten a couple trade deals or at least pauses, and we've seen market valuations improve. Is there any change in client sentiment on the M&A front?
Yeah, I think so. People are still waiting a bit for resolution of the tariff uncertainty. I would say the rise of the Treasury Department in the decision-making process, which has been very clear since the beginning of April, in particular since the pause, I think most boards and CEOs take as a positive development. We are definitely seeing kind of an acceleration of discussions. Now, the timing of how that maps into future activity, as we know, it's not linear. There are long and variable lags. The pace of discussion seems to have picked up. I would just note, back to my point earlier, we have seen a lot of strength out of Europe throughout the first quarter and into the current situation. I think that reflects, again, the benefit of being diversified across geographies.
The dynamic in the United States may differ a little bit from the dynamic in Europe. We're seeing a pickup in activity, again, not linear and with long and variable lags in terms of when things are announced or future revenue. We had been growing at a, our backlog had been growing at a pretty steady rate. That has continued to date.
there any way to help us frame thinking about the percentage of deals that are moving forward versus pause versus any being pulled or any new deals coming in because of tariffs?
Yeah, we haven't really seen, I mean, the argument that there would be a lot of investment X from outside the U.S. into the United States in order to get inside the tariff wall, that is a logical argument. It's one that could play out. I'd say to date, that vector, not so much. I think in part because people are waiting to see what the operating environment looks like and what the, I don't want to say final, but what the quasi-resolution of the tariff regime looks like. Again, there's a lot of activity outside of that one vector, Europe-Europe deals. It is interesting to note, there was a large alternative asset manager this morning announcing massive investment into Europe over the next decade. We're definitely seeing a significant amount of that kind of activity.
I would also highlight that outside of M&A, we have a very well-diversified business model where we're seeing significant activity outside of M&A in restructuring and liability management, in our Lazard Capital Solutions, in our secondaries business, et cetera.
You were previously Director of the Office of Management and Budget, Director of the Congressional Budget Office. We are seeing a lot of market chatter on tenure yields and sustainability of the fiscal budget. We are going through a tax bill process. Are there any risks around that that corporates are thinking about as it pertains to M&A advisory? Is the debate there more around tariffs?
I do think that one of the things that's happening in the current market is the questions around the reserve currency status of the dollar is feeding a bit into the long end of the Treasury market. I do not foresee a collapse in the safe haven status of the dollar. It has been declining gradually over time. The rate of decline may be steeper going forward than it was in the past. That will weigh on the 10-year and the 30-year bond yields. I don't really think that that has a massive effect on M&A activity. It does influence some of the investment perspectives and the investment flows that I was talking about earlier in terms of U.S. versus ex-U.S. For M&A, higher interest rates are a detriment. Volatility and uncertainty and rapid moves in interest rates are a bigger detriment.
If rates were a bit higher but steady, I do not think that it has a bit of a negative impact on dealmaking. It is kind of secondary or tertiary relative to the forces that push dealmaking forward. On that front, I do still think that once we get past the tariff uncertainty, you are going to be in an environment in which the regulatory environment is more accommodating than it was under the previous administration. On that point, just for a second, I think there had been a lot of confusion about exactly how much more accommodating the Trump administration will be, in part because some of the guidelines were maintained. I do not put any weight on maintaining the guidelines because you can maintain the guidelines and then implement them in dramatically different ways.
I think an important speech over the past week illustrated, again, it's not anything goes. It is significantly more deal-friendly and business-friendly than under the biggest bad crowd under the prior administration, which is also.
This is the DOJ speech, right?
Correct.
Yeah, so DOJ and FTC both seem aligned on if there's not a likelihood that they'll win in court, they will get out of the way. Is that enough to get, are those statements enough to get clients comfortable with the antitrust environment? Or do they need to see more deals come through and get approved?
It varies across clients and sectors. One clear thing is the prior administration had really diverged from precedent on vertical deals in particular. I think that's where you'll see the biggest shift back to a more traditional perspective, along with just the general sense that there's not an antipathy to dealmaking, that there's a recognition that M&A is constructive for the economy or could be under the right conditions. By the way, there is new research from Nick Bloom and others showing what significant benefits to the overall economy are created by M&A. I think that is consistent with returning to a more traditional perspective from the regulatory authorities. It doesn't mean that anything goes. That was never the case. Horizontal deals that move to a very limited number of competitors are always going to get a lot of scrutiny.
I think we will move not all the way back to a more traditional perspective, but a significant way back. That is very helpful from the perspective of dealmaking over the next several years.
On the sponsor side of your client base, are you seeing any pickup in activity there? Is the recent surge in IPOs, where we've had several IPOs priced well, trade well, getting sponsors to pick up more on the exit side?
Look, I think there will be a pickup in sponsor activity. It is still kind of warming up. A lot of portfolio companies have been held longer than their private equity owners would like. I would characterize it as warming up. In the meanwhile, there is a lot of activity in the secondaries business that we have. We anticipate additional private capital activity in the quarters to come. I would just highlight all the effort, all the steps that we have taken in the advisory business to build out our capabilities here, from diversifying our restructuring and liability management team to be more balanced debtor and creditor.
That has moved from 90/10 debtor-creditor to something more like 60/40, building out our PCA business, both primary and secondaries, building out Lazard Capital Solutions, which is quite busy now with the rise of private credit and other creative financing solutions, building out a true sponsor coverage effort. That flywheel of all those different touchpoints with the large alternative asset managers is really starting to work quite well. The share of our revenue that comes from private capital is hovering around 40%, which is significantly higher than it's been historically. We see significant growth in that category for us ahead.
Does the build-out of the private capital advisory side and strength there help create client relationships on the sponsor M&A side? Are there any synergies there?
Oh, absolutely. I mean, and again, I think this is a change from Lazard historically, where our PCA business, which is our fundraising business, was really held quite separately from or managed quite separately from the rest of the advisory business. We've worked to significantly improve the connectivity there. The fundraising business is an important part of the overall private capital coverage effort.
On the restructuring side, is your sense that conversations are still picking up given the volatility we've seen in April? Is the level of elevated activity sustainable? If we get a resolution to tariffs, would that come down?
I think you're going to see elevated restructuring and liability management activity, mostly liability management and not restructuring, given the changes in the marketplace. This is an area, coming back to the point about high interest rates or higher interest rates, where you could see a more material effect. Even high and steady interest rates can generate a significant amount of restructuring and liability management for firms that are in sectors that are under duress and that need to refinance. Those higher interest rates, especially at the long end, can produce stress that requires services like ours.
If we get Fed rate cuts and long end stays elevated, steeper yield curve, then restructuring could still be elevated?
Correct.
What about just on rate cuts? Are sponsors waiting for rate cuts? There are two cuts priced into the curve this year. If we do not get that, will that impact their timing?
It may. Again, for sponsors writ large, you just have these push and pull factors. The portfolio companies are getting long in the tooth. LPs want their money back, their cash back. Financing markets get more stressed when interest rates are behaving in an uncertain way. Pricing also gets affected if there are volatile movements in interest rates. We will see. I anticipate that over the next year or so, you're going to see more private equity activity almost out of necessity because of that LP pressure.
All right, let's turn to expenses. Comp ratio, first quarter, 65.5%. Slight improvement from 66% last year. You stated before the goal is to bring it down to 60%, depending on market conditions. What conditions do you need to see to bring that down further?
Yeah, the comp ratio is obviously very sensitive to market conditions, also to productivity per MD on the advisory side, as I previously mentioned. We are committed to running efficiently while also investing in future growth. I specified before what it takes to get to something like 60%, which is a growth rate this year that matched last year's growth rate. As we move through the year without a much more auspicious external environment, that becomes increasingly unlikely. We are going to work to produce as much operating leverage as possible.
All right. On the recruiting side, are you finding that recruiting is more or less challenging in a slower M&A environment?
I think we're doing really well on recruiting. There are a lot of discussions happening. We've got some exciting additions coming, a significant addition to our private equity coverage effort out of London, a significant addition to our debt advisory team in Germany, additions coming or just happened in health care, and so on. We're having a whole variety of discussions. The external environment will ebb and flow a little bit. I think the fact that we are in the flow of people that are looking for new opportunities is the key in that we're succeeding. Importantly, the people who are joining Lazard are having a good experience in doing so. They're productive. They are finding a collegial culture. That feeds on itself.
It sounds like there's not a change in the pace of recruiting.
I've said we're aiming for 10-15 net adds to MDs per year. We accomplished that last year. We're on track for it this year. We may be above that number in some years, maybe slightly below in other years. You should expect that that's the growth plan for the advisory business. We're going to execute against that.
Is that a meaningful driver of comp ratio this year? Or is that more a function of revenue growth in the environment?
I think barring some exceptional new developments on massive new talent becoming available that we want to grab, the biggest driver of where the comp ratio lands for this year is going to be what happens to the external environment and therefore our revenue.
On shareholder return, one of your goals in Lazard 2030 is to deliver an average total shareholder return of 10%-15% per year. What's your message to investors on how Lazard can really reduce the volatility of earnings, increase the stock performance, and demonstrate sustainable returns over time?
I go back to we have a plan. We are going to execute against that plan. On TSR, we obviously had very strong TSR in 2024. We are going to continue executing against the plan. The stock price will follow if we succeed at doing that, which we will. It goes back to what I have said before, lots of upside potential in both businesses. In financial advisory in particular, we see significant growth ahead of.
Be loud.
Significant growth ahead. We are going to continue to raise productivity per MD and hire additional bankers. Asset, as I've said, really focus on where we see differentiated ability to help clients succeed in active management and in wealth. We see a lot of that.
I think the stock price will follow as a result.
All right, one moment. Fixing audio.
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OK, am I back? OK.
All right, great.
Thank you.
We have a couple of minutes left. Are there any questions from the audience? All right, Peter, any final messages to the room before we close?
No, I would just say I think there's a palpable sense of excitement inside of Lazard about our growth opportunities. We have shifted the focus to growth. I think that's come across. I think the cultural foundation of being commercial and collegial is a very strong base for our future growth. We see a lot of upside potential ahead because many of the core pillars of what makes Lazard special are particularly valuable in the world going forward, combining business insight with geopolitics, a diversified, especially North America and European approach. I think we are very focused on staying at the forefront of the AI revolution that is going to have significant effects on both of our businesses.
Great. Peter, thank you so much for joining us.
Thank you.