Okay. Let's get started here, so we'd like to welcome back Peter Orszag, CEO and Chairman of Lazard, who joins us for the third consecutive time at the conference. Peter assumed the CEO role on October 1st of 2023, and the Chairman of the Board role on January 1st of this year, after having previously served as CEO of Financial Advisory. Prior to joining Lazard in 2016, Peter held senior roles at Citi and in the Obama White House, and thank you so much again for joining us.
Great to be with you.
All right. Let's jump right into it. So we're nearing the end of 2025, and you're more than two years into your role as CEO and with the new Chairman role. What are the big lessons so far? What are you most proud of, and where do you see the most opportunity for Lazard going forward?
Thank you so much, Jim. We actually just held our Financial Advisory Managing Director Conference globally yesterday. It is fantastic to see the progress that we've made. And let me highlight a couple things. I think I will now talk about what we have done in a way that I was not comfortable doing while we were doing it, which is a massive amount of transformation. So out of 212 managing directors on the advisory side at the end of 2022, we separated from 87 of them over the past two years and then hired or promoted 91. That has been a key part of the cultural transformation that we're sort of very far down the road in terms of having accomplished. And you can feel the vibrating energy internally in terms of the commercial and collegial culture that I've been talking about.
In addition to that, the cultural transformation, the fact that a lot of the hiring and promotions that we were doing over the past two years, which are very high quality, were offsetting that kind of, for lack of better phrasing, stable cleaning with regard to the separations, means that going forward, our growth rate should be significantly higher because as we add new talent now, we're not filling in the hole from the separations. It's just pure growth. And so we're very excited about that. Another reflection of that, and I've talked about this a little bit before, but today, as we sit here, 40% of our managing directors on the advisory side are in the first three years of being on the platform because of that significant hiring and talent promotion, but also because of the separations.
If you roll forward our plan, you should anticipate that will go down to about 30%, which is more of like the steady state. And the benefit of going from 40% to 30% is worth about $1 million per managing director on productivity. So we've made huge progress on productivity. We're already ahead of where we had said we would be. And there's a lot of room to continue down that path. So that's one bucket: culture, future growth, productivity. The second is in terms of how we see the marketplace. We have been building out, and actually, before I do that, normally when you do these separations, you go or you do this transformation, you go through a J- curve where you have the kind of negative side.
We've been able to do this all under the surface while still growing over the past couple of years, and I find that very, very encouraging, including for the pathway forward now that we have that all behind us. Second, with regard to Lazard's positioning, what we have found is that the emphasis that clients put on Contextual Alpha is higher today than it was a decade ago. Now, what do I mean by Contextual Alpha? Contextual Alpha on the advisory side means doing the analysis, whether it's on the accretion dilution on the M&A front or on you know the financing costs on a capital structure, et cetera.
But then, in addition to that, taking into account all the other factors that a C-suite or a boardroom needs to take into account in order to make good decisions, you know, the regulatory approval, the geopolitical piece, et cetera. That Contextual Alpha concept, I think, is something that Lazard excels at. And the premium that clients put on it today is much higher than it was a decade ago. So we're encouraged by that. Third thing is with regard to business model. We have invested a lot in expanding our connectivity to private capital on the advisory side. And you see that in the numbers. We've gone from in 2019 roughly 25% of advisory revenue being tied to private capital to today, 40%. We are confident we'll be able to bring that to 50%.
And that's a series of different things from our fundraising business, where we see a lot of growth ahead, both primary and secondary, to our restructuring and liability management team that has now diversified into creditor work in addition to debtor work and a much more balanced structure there, to our Lazard Capital Solutions team, to sponsor coverage, and so on and so on and so on. So, significant work has been done on what I would call the underlying business model. And then the final thing I'd say is on the advisory side, and then we'll get to asset, which is, I think, 2026 is a year shaping up right now that will feature both strong M&A and a lot of strength in those other baskets of activity. Now, why do I say that?
With regard to M&A, and I know this is, I think, becoming conventional wisdom, and therefore maybe we should be a little bit careful about it. But nonetheless, it does appear that what's going to happen is that private equity sponsors will become more active out of necessity, in order to return more cash to their LPs. And that will more than offset any lingering concerns around valuation for their portfolio companies. And that is the next stage of the M&A cycle. And we do see that momentum picking up. But in addition to that, I think there's a view that historically, when M&A booms, other things kind of fall by the wayside. And that's not how we see it. We see that M&A cycle coexisting with significant restructuring and liability management.
And I can talk about why I think they're going to coexist in the future in a way that didn't exist in the past, and also significant amounts of both primary and secondary fundraising and the other businesses that we have that are associated with private capital. With regard to restructuring and liability management, I think one of the key facts about business and the economy today that was not true 20 years ago is that the dispersion across companies in performance is much wider today than it was two decades ago. And that means there's a strong incentive for M&A, but also a lot of restructuring and liability management, one that happens kind of at the upper tail disproportionately trying to maybe buy lower performers, and then one that happens at the far left tail, the companies that are in trouble.
But they can coexist much more easily today than in the past. So anyway, a lot to unpack there. I guess on the advisory side, a lot of momentum. You could feel that in the room yesterday with regard to the managing directors that were gathered. And the cultural transformation has been remarkable. On the asset management side of the business, we actually have with us here in the front row, Chris Hogbin, who has taken over as the head of Asset Management at Lazard. We're very excited about that. I said that this would be a year in which the business had an inflection. I believe that that is the case. We've got new leadership.
We've got a lot of excitement around many of our products and strategies, quant systematic, emerging market equity, customized solutions, many others that we believe not only are showing strong investment performance, but where we're seeing very substantial and very significant net inflows over the year, and I might as well just, while I'm on the topic, briefly divert, and then I'll come back to your next question. Clearly, we had a release this morning. I've been saying for about a year that the sub-advised part of the sub-large sub-advised U.S. part of the business has a different dynamic than the rest of the business. This morning, we announced that one of those accounts is closed. That occurred slightly earlier than we had anticipated. We had been anticipating that in 2026 or perhaps a little later, but mostly focused on 2026.
So it occurred maybe a couple of months earlier than we had anticipated. The good news is I can now say with confidence that in 2026 we project positive net flows for the business, given that this is now behind us and that more diversified and repositioned platform going forward is exciting because we feel very confident in the products and strategies that we're offering clients. Outside of that one account, as one illustration of the strength that we're seeing, we have had net inflows year to date of $8.7 billion. So a lot on the asset side also. And I know that was a long answer, but there's a lot of enthusiasm at Lazard.
You answered a lot of my questions already, so that's great.
All right. You can go.
Okay. So maybe a couple of the big picture ones here. So you, as you talked about, you've substantially enhanced the hiring of senior bankers in advisory. Maybe you could just talk a little about the sort of talent that you've hired, what you're looking for in these bankers over the past three years, and then I guess where the best hiring opportunities are going forward.
So we've had a systematic plan in terms of where our priorities are. Obviously, on the hiring front, you have to match that list of priorities with opportunistic, who's available, and do they fit on the platform or not. But very excited, if you look again, systematically going through in the U.S., beyond the private capital investments that we've been, say, that I highlighted, which were necessary in order to create a attractive revenue base for that business because that's a kind of more steady flow of revenue than the lumpier M&A transactions. We've also been investing in many key sectors. I'll give you a few examples. Consumer retail, where you're seeing a lot of strength in a sector where we had not as strong a practice a few years ago. We've made investments. Sports media and entertainment as another example.
We've been expanding further in healthcare. We just had three new industrials bankers join us, as another example in North America, and we're basically just systematically walking down our priority list, finding people that fit well on the platform, some of whom, by the way, had been at Lazard before and are now returning, which we're particularly pleased about, and I think it underscores the cultural transformation that I was talking about earlier. Outside of the United States, we just expanded to a new office in Denmark. Very excited about that opportunity in Europe. We have been expanding in the U.K. and on the continent, and then I think it's very exciting to see what's happening in the Middle East, where we're getting a lot of traction out of the regional headquarters that we set up in Riyadh.
We've also been expanding in the Emirates, and I think there's more growth ahead for us in the Middle East.
So I always say this. You have a unique background, given what you've done, over your career. So I want to ask this question to you specifically. So you've described the U.S. as making one of the biggest economic bets in history on AI, highly leveraged wager on its transformative potential. At the same time, U.S. economic growth has been fragile, let's say, and obviously concentrated within the tech sector. You've talked about strengthening non-AI industries as a you know quote-unquote "hedge." What do you think markets and policymakers should do to foster that diversification and, I guess, you know, improve the resilience of the economic growth?
Well, there's a lot there. I'll answer that, and then I'm going to talk a little bit about AI at Lazard also, just since we're on the topic. Look, the U.S. economy is increasingly a levered bet on artificial intelligence. If you look at growth year to date for the U.S. from a U.S. macro perspective, it really is quite bifurcated. The AI sectors of the economy are growing at a rapid clip. The non-AI sectors are not, and that's what I meant by, you know, we're increasingly a levered bet on artificial intelligence, and I don't mean to simplify too much, but the bet will either pay off or it won't, and if it pays off, I think top-line growth will be, you know, fine, but there would be more concerns about the labor market.
Labor markets adjust well to big shocks that happen slowly or small shocks that happen fast. Labor markets don't deal well with big shocks that happen fast. In the scenario in which this all pays off, that will be a big shock that happens fast. I haven't offered you any solutions to it yet. The alternative scenario is this does not pay off. We wind up with a lot of the equivalent of dark fiber, maybe even an inferior version of what was dark fiber, because of the massive amount of capital that's going into data centers and related components here. In that scenario, top-line growth is going to be more challenging. We could spend the rest of our time on the policy questions around that.
I'm going to skip that, with your indulgence and instead just talk for a second about AI at Lazard. We are clearly committed to being the leading AI-enabled firm among our competitors. Part of what we've been doing is a lot of work internally to not only have best-in-class tools, but also to have the cultural transformation and the adoption that I think is crucial to winning this race. We've also brought Dmitry Shevelenko, the deputy of Perplexity, onto our board. He is a fantastic addition, both at the board level and in terms of interacting directly with our AI teams, and I am using the technology a lot. I had actually an AI version of myself at this managing director conference yesterday that I interviewed for a couple of questions, but I use it extensively in business-related purposes on a daily basis.
Okay. So just another one that you have some expertise in, but it does feel like the regulatory backdrop is a lot better, as it relates to M&A. So maybe you could just contextualize in the boardroom what that means for the types of deals that companies are willing to look at. And are there still sensitivities from a regulatory perspective on certain types of deals in your perspective?
What I would say is the regulatory environment in the U.S. is, as I said, it would be significant because there had been a whole bunch of confusion around the merger guidelines, which I think had been a distraction. The regulatory environment in the United States is much more accommodating than it had been under the Biden era, but it's also more political. It is possible to get a lot more things through the process, but it is no longer sufficient by any means to just talk about Herfindahl Indices and, you know, number of competitors in the marketplace with the staff at the FTC or the Department of Justice. That has to be supplemented or complemented with a White House or cabinet-level strategy, so more is possible, but it also means more nuance about how to get things through in Washington in particular.
And this is what I mean about Contextual Alpha. So having real insight into how that is likely to play out is, I think, front and center because it's possible to talk about a deal and then not have it get anywhere near completion if you're not sophisticated about how that works. So for example, not only I make regular trips to Washington, as one might expect, but we also have a variety of resources that we've brought on at Lazard. I'd highlight Patrick McHenry, who's been very effective in providing insight into what is likely to be a problem, what is not, to many of our clients.
Excellent. So you touched on the sponsor recovery a little bit already, but I do want to dig in a little bit there. Maybe the question is, why is this year, the coming year, different than the other ones in terms of a sponsor recovery? And is it an acceleration, or it's just a continuum of the need to recycle capital?
I think the reason that 2026 will be different is everything has a kind of cycle or breaking point to it, and I go back to I think what's been happening is a tug-of-war between kind of bid-ask spreads or valuations relative to, you know, where things might sell relative to their marks or just relative to what the sponsors might want versus DPI and cash back to your LPs. In that tug-of-war, many sponsors have been able to delay disposing of their portfolio companies, but that's getting very long in the tooth from the perspective of many LPs. If you listen to most of the heads of the large either alternative asset managers or more pure-play sponsors, they're the ones saying that in 2026 they anticipate being more active, so it's not just that our bankers are anticipating.
It's the people running these firms also, and there's just an inherent logic to, you know, investors want cash and not just the promise of cash in the future.
Your U.K. and European franchises have of course been a strong contributor to financial advisory revenue, despite some challenges in the region and a subdued London equity market. There was a mention that in a recent article 2026 could bring a large wave of IPOs. What are the factors that give you confidence in that outlook, and how are you positioning yourself to be an advisor to those pre-IPO companies?
Lazard has great traction with many IPO candidates. You're talking specifically about Europe, I think.
Correct.
Okay. European IPOs. We have a fantastic IPO advisory business in Europe. I'd say the factors are a few. One is that many private companies are just getting too big to have change of control outside of an IPO. So as you get kind of north of $10 billion enterprise value in Europe, it just gets harder to configure either a sponsor transaction or certainly a secondary or continuation fund kind of thing. So it's kind of the most natural exit for the more valuable private companies. The second thing is, especially in the U.K., the FTA has been trying to get rid of or simplify the process a bit and kind of get rid of some of the red tape and the sand in the wheels. And so there's been some regulatory steps.
And then I think the final factor is the Mansion House Accord that basically has directed U.K. pension funds to invest in more local companies that opens up this possibility for demand on the back end of the IPOs, so you put all of that together and, you know, we see activity being higher in the IPO market in Europe. This is obviously, though we've highlighted, this is also a test case for the policymakers and regulators in the U.K. and in Europe more broadly, which is they have an opportunity to kind of stick the landing on IPOs because of those factors, and it's, you know, still remains to be seen that they will do that, but it is our expectation that they will.
You already alluded a little bit to the Middle East opportunity here. There's a variety of different ways in which, you know, new sources of capital are coming out of the region and driving deal flow. Could you just expand a little bit on how you're positioning yourself to benefit from the advisory opportunities in the regions, and maybe what are the trends or sectors or sources of capital that are most promising in the region?
Look, this has been a very exciting part of our global expansion. We have a phenomenal team on the ground. I was just there a month or two ago, I think, and so very well connected, and that's obvious as we go to visit clients. I'd also say the connectivity among our senior bankers who are from other regions is also very high, and so that is helpful. With regard to particular sectors, obviously there's an energy component to a big part of this, but it's well beyond that at this point. We have. I'll give you one example. We have done a lot of work, you know, to connect with sources of capital. We have a dedicated team that is focused on sovereign wealth funds.
There's another example where there's across-the-board connectivity on many different sectors connecting with the sources of capital in the region in the sovereign wealth funds that we can help to play an intermediary function, and that's been very productive in technology. There was even a shipping yacht one recently. I mean, it's across the board, across sectors, because the Sovereign Wealth Funds in the region want to invest in a variety of key sectors from their economy's perspective.
We were.
I have one other thing on that, which is, I do not anticipate that this will happen in the next month or two, but if you think about the next year or two, it's entirely possible that while we won't call it Abraham 2.0, that there will be a broader, regional peace deal. Our anticipation is that if that were to occur, the economic activity in the region, which is, you know, already attractive, is going to accelerate dramatically, and so we are well positioned for that kind of embedded option, because we think it's an, that's a plausible scenario, maybe not over the next couple of months, but as you look at a little bit over time.
Okay. That's fascinating, so you referred to a little bit of advisory mix, trending towards 50/50 between M&A and non-M&A. Maybe the question here is, of the non-M&A engines, I guess, fundraising, secondaries, Lazard Capital Solutions, and restructuring, where are you most constructive in 2026? And after the investments you've talked about, where's the remaining white space in non-M&A advisory?
Look, the biggest components there remain restructuring and liability management, and then also our PCA business. I already mentioned restructuring and liability management we think will remain active throughout, you know, throughout 2026 and beyond because of that increased dispersion across firms. That means that the kind of correlation with other activities is probably different today than it was in the past, and that anyway, we're seeing a lot of demand for our services in that area. In PCA specifically, we have a fantastic team, and we have a substantial amount of ambition there. I think you should expect significant expansion in our PCA offerings and strength and presence from an already strong base, and that's both in primary and secondary. It's both in the U.S. and Europe, and across the globe, so we see a lot of activity there.
I am not a believer that the private equity exits that I mentioned before that play into M&A will dramatically affect the underlying trajectory of the secondaries business. I know that's been a question. The way we see it is that penetration of secondaries across sponsors as a whole remains still pretty modest or has plenty of room to grow, and so this is going to remain while the lack of other exits may be a bit of a jumpstart to the secondaries market. There is an underlying demand for secondaries as a part of just the regular way set of options for private companies.
Chris Hogbin's actually in the front row, so I guess this will be interesting for him. He stepped into his role as CEO of Asset Management just this month. What are the key priorities you've set for him? How do you see his leadership and partnership influencing Lazard's broader strategic direction in the next few years?
Well, first of all, let me just say when I was thinking about the right leadership structure for Asset Management, Chris Hogbin was at the top of everybody's list, and he has not disappointed so I'd say both during the transition period, but especially since he's been officially part of Lazard, this has gone over extremely well with clients. It's gone over extremely well internally and so it's only a second week, but off to an extremely strong start. That's point one. Point two is you'll hear more from Chris in, you know, in the coming quarters and years about the vision for asset management but I think it and this is what Chris is tasked with.
It is building on the strength that we have where we believe active management makes a lot of sense and can generate alpha, and we've been able to demonstrate that it does, especially using quantitative and systematic approaches, not only, but especially quantitative and systematic approaches, emerging market equities, customized solutions, and a variety of other offerings where we think both the theory of the case for active management is very strong and our performance has been very strong. And that's what we're seeing in the flows, the net inflows that we're seeing in those kinds of products and offerings. That's point one. Point two is, Chris is also a talent magnet.
And so I think the opportunity that we have to reinvest in research especially, but also our portfolio managers and the distribution team, all of which are strong, but we can always aim for even more strength, I think, is very exciting, and you should be expecting that sort of reinvestment in the years ahead. And then finally, in our Asset Management business, we have a lot of opportunity to make sure that we're deploying artificial intelligence as well as possible. And that's another key priority. Fourth thing I'd say is, many of you may know that we have a very attractive Wealth Management business in Paris. We see a lot of opportunities to be expanding in Wealth Management and also possibly in alternatives, but especially in Wealth Management in the coming years.
Excellent. So I think you now have, by my account, seven active ETFs, and there's further growth to come.
Yep. In the U.S.
In the U.S., what does success look like for the ETF platform over, let's say, the next, you know, one to two years? And how are you integrating the ETFs into the broader franchise?
Look, ETFs are very attractive for many kinds of investors, because of their liquidity, because of their tax structure. We see a lot of opportunity to expand the pool of investors that are interested and exposed to what Lazard has to offer, through the ETF structure. So you should anticipate continued expansion in the US, but also geographic expansion. We already have an ETF offering in Australia, but there will be more coming in Europe, specifically. And these are all performing well so far in the U.S. after being launched, and we see them growing over time because it's a structure that investors find attractive, but also married with the Lazard brand and the performance that I was talking about in many areas where active management makes more sense than passive.
So I think I'd be remiss if I didn't dig in a little bit on the flows comment.
Sure.
The guidance for 2026. Maybe you could just break down the inflows versus outflows and maybe just highlight for us: is it just the outflows that are really slowing down, and that's what gives you the confidence that you can have these net positive flows for next year, or are the inflows also accelerating, or maybe it's both?
So let's again bifurcate the world. We have the kind of historical piece around this one large sub-advised account that, again, I was, I think last time I was here trying to foreshadow and hint at, and this is not a surprise. The timing's a little bit accelerated, but not a surprise. Very small share of revenue. It was an exceptionally low-fee mandate because for various reasons. So put that to the side. At this point, the good news is that's behind us, and there's therefore a turning of the page that is the opportunity here. And as I said, almost $9 billion year to date outside of that one account. That gives you some sense of, on a net basis, the strength of the franchise going forward, which is exciting.
And the vast, vast majority of our revenue, as I've already said, was outside of that one account. Secondly, with regard to the balance between the gross inflows and gross outflows, we've seen an acceleration in gross inflows, so that is a significant explanation. There also is an effect on gross outflows in those components. A very large share, disproportionately large share, vastly disproportionate revenue of our gross outflows, you know, over the past year or two has been in that one account again or in that category, and so what we have been doing under the surface is you've seen a shift with net inflows outside of that one account, outflows in that one account.
Now it's that given that that's behind us, all of this will be a bit more above the surface, and you'll see, not only, I think, very healthy gross inflows, but a pretty healthy positive net inflow, net inflow in 2026.
Great. You target a 60% or lower comp ratio with timing to reach that dependent on the market. Just help us think through the roadmap to get to 60%. How much is in your control versus the backdrop? And maybe just, if you're willing to comment on incremental margins across the different businesses.
Sure. Look, I think, two things. The two businesses have different key drivers for operating leverage. I've said before that on the advisory side, the most important, single driver of operating leverage is revenue per MD. We are making very significant progress there. We exceeded our 2025 target last year. We're on, year to date, above that. I've laid out now that, we see just almost mechanically from the, ramping phenomenon that I mentioned, another $1 million in per MD in productivity from going from 40%-30%, and that's if we don't really do very much. But we are going to be doing a lot to continue to upgrade our talent, to continue to raise minimum fees, to continue to work on mandate selection, to continue to work on how we structure our fees on the advisory side and so on.
As that revenue per MD goes up, you get operating leverage, especially on the non-MD component of compensation, so that is the key driver. There are additional things that we can talk about, but that's the single most important thing, and then on the asset side of the business, I think the single most important thing is scale per strategy in terms of generating operating leverage. Many people talk about the overall size of the business. I am less convinced that that's a massive driver of margin than how the scale per strategy.
And Chris will be very focused on making sure that we are, you know, ridding ourselves of products and strategies that are subscale and that don't have the opportunity to grow, investing in those that we think do have the opportunity, and expanding those that are already at, you know, an attractive size, but that could grow further. So, lots of room for margin improvement over time. And that's before we get to any of the transformational effects of artificial intelligence, which is likely going to be the case over the next few years also.
Last one for you. So you've definitely had a little bit lighter capital return. You've been remixing the business, hiring, et cetera, as we've talked about. Just could you update us a little on your capital return priorities from here?
Yeah. They remain what I've said before, which is, with regard to excess cash, we will aim to at least offset the dilution from our deferred compensation schemes, and then beyond that, it's a tug-of-war between inorganic growth opportunities and delevering in terms of our priorities. We do see a lot of attractive opportunities for shareholder-friendly, shareholder-enhancing inorganic growth vectors on both sides of the business, honestly. I think in the past I've talked about the asset management side. There are opportunities on the advisory side also. We will be disciplined about this, but we do see growth opportunities as being a very attractive use of excess cash.
All right. That's a great place to leave it. Thank you so much, Peter.
Thank you.