Good morning, welcome to the Lazard's Q1 of 2023 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 zero on your telephone keypad. At this time, I'll turn the call over to Alexandra Deignan Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.
Thank you, Brittany. Good morning, and welcome to Lazard's Earnings Call for the Q1 of 2023. I'm Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release and an investor presentation 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 these forward-looking statements and assumes no duty to update these forward-looking statements.
Today's discussion 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 Mary Ann Betsch, Lazard's Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results, Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief Executive Officer of Financial Advisory, and Evan Russo, Chief Executive Officer of Asset Management, as they open the call for questions. I'll now turn the call over to Mary Ann.
Thanks, Ally. Good morning, everyone. Today, we reported Q1 2023 operating revenue of $527 million, a 25% decrease from the Q1 of 2022, and a net loss of $23 million on an adjusted basis. In financial advisory, we reported Q1 operating revenue of $274 million, down 29% from last year's Q1. The ongoing slowdown in M&A activity globally continues to present a significant headwind for financial advisory. However, we remain actively engaged with clients in both Europe and the U.S. In restructuring, activity picked up throughout the quarter, and we are working on a number of complex assignments.
In asset management, Q1 operating revenue was $265 million, an increase of 2% compared to the Q4 of 2022, 15% lower than in the Q1 of 2022. Management fees and other revenue was $259 million for the Q1, a 6% increase from the Q4 of 2022, 10% lower than the prior year period. For the Q1, incentive fees were $5 million as compared to $25 million in the prior year quarter, reflecting weaker fixed income markets. As of March 31, 2023, we reported AUM of $232 billion, up 7% from December 31, 2022. This increase was driven by market appreciation of $11.6 billion, foreign currency appreciation of $1.4 billion, and net inflows of $3 billion.
Average AUM for the Q1 was $227 billion, 7% higher than in the Q4 of 2022, and a decrease of 12% from the prior year period. As of April 21st, our AUM was approximately $236 billion, driven by market appreciation of $2.6 billion, foreign currency appreciation of $500 million, and net inflows of $400 million. In corporate, operating losses of $11 million included corporate revenues of $10 million, which were more than offset by a charge of $18 million associated with the liquidation of the firm's special purpose acquisition company in February. Turning to expenses. For the Q1, adjusted compensation expense was $399 million, 2% lower than the prior year quarter.
This equates to a 75.7% adjusted ratio during the Q1, compared to 58.5% in the Q1 of 2022. The higher compensation ratio is due to a combination of lower operating revenue, the liquidation of our SPAC, and higher fixed costs from amortization of prior year grants, as well as an increase in our workforce and inflationary impacts. Our non-compensation expense was $142 million in the Q1, 21% higher than the prior year quarter, primarily reflecting higher travel and professional services expenses, as well as continued investments in technology and the ongoing impact of inflation. In light of the current environment, Lazard is conducting cost-saving initiatives.
These initiatives are expected to result in the reduction of approximately 10% of our workforce globally over the course of 2023, which, combined with non-compensation initiatives, we believe will result in a reduction of approximately 10% in our run rate cost base compared to 2022. This should better position us in a normalized revenue environment to achieve our historical profitability ranges in 2024 and to continue to strategically invest in the business and return capital to shareholders. As a result of these cost-saving initiatives, and assuming the challenging environment continues, we expect to achieve an awarded compensation ratio for the full year in the mid 60% range. Taking these actions resulted in a charge of $21 million in the Q1, and we expect an additional charge of approximately $95 million over the course of the year, which will be excluded from our adjusted results.
Our operating loss for the Q1 of 2023 generated a tax benefit of $11 million on an adjusted basis. We expect our annual effective tax rate for the full year 2023 to be in the mid 20% range, reflecting discrete items which typically occur in the Q4. Turning to capital allocation. In the Q1 of 2023, we returned $187 million to shareholders, including $43 million in dividends, $99 million in share repurchases, and $45 million in satisfaction of employee tax obligations upon vesting of equity grants. Our diluted average share count is 87.6 million shares, which equates to the basic share count due to the anti-dilutive impact of losses. During the Q1, we bought back 2.7 million shares at an average price of $36.75 per share.
These repurchases largely offset dilution from our 2022 year-end equity compensation grants. Our total outstanding share repurchase authorization as of March 31st was $203 million. Lazard's financial position remains strong, and on Wednesday, we declared a quarterly dividend of $0.50 per share. Ken will now provide his perspective on our performance and outlook.
Thank you, Mary Ann. Obviously, it was a tough quarter. During Q1, M&A activity fell back to levels last seen in 2012. announcements and completions for the industry were down approximately 50% year-on-year, and down approximately 30% compared to the Q4 of 2022. Our financial advisory results reflect these market conditions. That said, we are seeing some improvement in client dialogues and deal activity indicators such as conflict clearances, new projects, and engagements. Our European advisory business continued its strong performance in the Q1, and restructuring activity is increasing, especially in the U.S. We recently added two new managing directors in restructuring, further bolstering a business that is already ranked number one globally in industry league tables. We also appointed Ray McGuire as president during the quarter.
With almost 40 years of experience in investment banking and M&A, Ray will play a key role in strengthening Lazard's senior relationships and in originating new business for financial advisory and across the wider firm. We are also seeing momentum in Lazard's asset management business with rising AUM, driven by higher asset levels and continued strong performance by many of our strategies. In fact, more than 80% of our strategies based on AUM are outperforming relative benchmarks on a one-year basis, reflecting a market that is moving more towards fundamentals. While growth stocks outperformed in the Q1, quality was the second-best factor, benefiting from resilience in uncertain periods. As an active manager, we see significant opportunity to deliver outperformance as volatility and uncertainty continue to create a unique set of economic and market conditions.
The recent stress in the banking sector, in particular, reinforces our conviction in our fundamental approach, which we believe will continue to translate into long-term alpha generation. In the Q1, asset management also expanded its capabilities in providing strategic advice and wealth management to families with the establishment of Lazard Family Office Partners. While Lazard's business continued to perform solidly, we cannot ignore the environment in which we are operating. The recent news flow is unlikely to improve confidence among decision-makers near term or make them any less reticent about committing capital. The slowdown in M&A is likely to extend beyond the Q1. For asset management, the market outlook is likely to remain volatile, so long as there is a lack of conviction about the evolution of the macroeconomic environment.
Given this backdrop and the significant inflation in costs across our industry over the past several years, we made the decision to enact cost-saving initiatives. As Mary Ann outlined, we are targeting a 10% reduction in our cost base as compared to 2022. We expect to achieve that on a run rate basis by the end of 2023. We believe we can accomplish this without impacting the productive capacity of the firm. We are reducing headcount in areas where there are fewer opportunities for revenue generation and resizing support functions.
These initiatives will result in significant additional cash flow that'll enable us to continue to invest in our business at a time when those investments are more attractively priced, while continuing to return capital to our shareholders. In closing, I would like to acknowledge the dedication and commitment of our impacted employees, many of whom have contributed to the firm's success for many years. Now let's open the call to questions. Thank you.
If you have a question at this time, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Brennan Hawken with UBS. Your line is now open.
Hi, Brennan.
Good morning. Hey, how you doing, Ken? Good morning. Thank you for taking my questions. I'd like to start on the plans for the workforce reduction. You guys provided an expectation for the awarded comp ratio for the year, you know, but how should we expect that to translate into, you know, an actual reported adjusted comp ratio? Also, you know, when you touched on, you gave a little color around the expected expense reduction, but, you know, could you maybe provide a bit more specificity around how you would manage these cuts without impacting revenue and where they'll be focused?
Sure. Okay. Look, let me take a minute and just give a little bit of context for why now in terms of the headcount, in terms of the cost restructuring and the cost initiatives, then get to your question on the awarded versus GAAP, and then touch on finally the productive capacity point. Let's start. December, Goldman Conference earnings, February 2nd, I think in both cases I was asked, "How do you think about the environment, and how are you thinking about cost initiatives?" In, in both, contexts, what I said was, "Look, things appear to be a little bit better today than we would've expected 6 months before.
Consequently, what we're going to do is take a look and see how things unfold into mid-year. Candidly, things have really deteriorated, I think, overall in the external environment relative to where we were in December and again in February. Consequently, we just felt it was time to take some action. We didn't want to keep our head in the sand about this, and it was time to move on on this. That's the background to this. When we look at our business, a couple of things stuck out. The first is, as you know, on the advisory side in particular, we have a more global footprint than many of our competitors do.
A lot of this was designed for a geopolitical environment in the mid-teens, which is in fact very different from today. To your point on productive capacity, some of this is just reorienting headcount from places where we think there's less opportunity than there was at that time. Second, when we look at the business today and we look back on the fact that coming out of the pandemic, there was a real demand for talent, and we didn't do any cuts during the pandemic. As I said in December, you know, we were holding off on doing anything at the end of 2022 of significance. There's probably some buildup in capacity generally across the business, which could be reduced at this time without necessarily, again, affecting productive capacity.
Finally, when you think about the environment we're in, particularly on the advisory side, we've had now 5, I guess, or 4 or 5 sequential quarters of down announcements, which means that if you think about completions anywhere from 6-18 months out, shorter for financial sponsors, longer for the more complicated strategic deals, you're not likely to see a pickup in M&A completions this year, which means the revenue environment's going to be difficult through this year and could even extend into the Q1 of next year. When you think about that and you say to yourself, "Okay, we're not bouncing back to 2021 revenues in 2022." I don't think our industry is bouncing back to 2021 revenues in 2024 that quick in all likelihood.
Then you look at what the environment could be like in 2024, which maybe you get back to 2022 or 2020 levels, then you think about the inflation in costs across our industry, you just had to take some action. When we think about that, we've seen big increases across the industry in salary. That means benefits are going up. That's very sticky. It's very hard to get that out of the system. You don't reduce salaries. With that means benefits are stuck. On non-compensation, we've seen across-the-board increases in everything from travel and entertainment to information services, to IT costs. Consequently, you know, getting the cost structure in place so that we can get back to our targeted profitability was going to require this action. That's the background to it.
As to the comp ratio, adjusted GAAP versus or GAAP versus awarded, we control the awarded compensation. That's actually what we pay in a given year, regardless of the deferral and such. We have more ability to manage that and get to where we want to be on that in a variety of revenue environments. It's not perfect, but it allows us more control, and that's really what drives cash earnings for us, which is what we're really focused on. The adjusted GAAP number or the GAAP compensation, as you know, is reflective of your previous compensation costs, 2021 record year compensation, 2022, and it's all the deferrals from those years. We have a little bit less flexibility there.
Obviously, less flexibility there in a down revenue environment, which is why we started speaking about awarded back in 2009 and 2010 to manage through the cycle and give people a real visibility on how the business is managed through the cycle. When you think about where GAAP comes out this year, my hunch is it probably is in the high 60s if we become more conservative around deferrals, that is, put more cash into the system, and mid-60s if we follow the deferral policies that we've had over the last year or so. Consequently, that's the range. A lot of it's going to depend on the revenue environment and also the way that I think that we're best able to compensate people at the end of the year. That's going to be our thought process there.
Sure.
Uh-
Great.
Okay.
Sorry. Go ahead. No, no, please. Didn't mean to interrupt you.
I think you had one more question.
Nope?
Okay.
It was around how you execute here and avoid impacting the revenue.
Oh. Yeah, I think I touched on that. I think it's a combination of two things. One is where we think we have less opportunity in people, and then where, you know, the investments are going to go in the future. I think that really is it.
Got it. Okay. Thank you for that.
Okay.
That was very thorough. Thanks, Ken. I appreciate it. The follow-up, it does seem, you know, based upon some analysis around the fixed comp expense that you have, it does seem as though there was some incentive accrual. Since you're going through and doing some workforce reduction, you know, obviously that'll play through. Where that gets executed will play through on that, you know, adjusted reported comp as you discussed. How should we be thinking about the potential for some of these incentives that maybe you've booked to be adjusted as you get through the year? Would you think that there would be the capacity for that as the revenue picture becomes more clear based on the outlook?
I think I'm following the question, so let me answer what I think is the question. In the Q1, generally speaking, there's some accrual for incentive comp, but it's usually pretty small each of the Q1s. That's just historically the case. I think the second is there room as a result of some of these restructurings to have more flexibility at year-end? The short answer is yes, all of this doesn't really kick in until we get to 2024.
Okay. All right.
Great.
Thanks. Appreciate it.
We'll take our next question from James Yaro with Goldman Sachs. Your line is open.
Good morning, and thanks for taking my questions. I just wanted to first touch on your outlook for M&A in Europe versus the US, given Europe clearly has a somewhat healthier banking system today and appears to have a somewhat stronger near-term economic trajectory as well.
Mm-hmm. It's a good question. Kind of surprising, our Q1 performance in Europe, which of course is dependent a bit on what was announced 6- 12 months before, was actually quite strong. When we look at the business in Europe right now, look, there has clearly been a slowdown in announcements over the last 4- 5 quarters in Europe as well. When we look at the individual businesses in Europe at the moment, they're pretty robust. I'm not sure plays into revenue in a quarter by quarter, but I feel pretty good about where our franchise is in Europe right now. The activity levels, while, you know, clearly less than they were in 2021, are not... at least for the business we're doing and the countries we're in, it's not terrible at the moment.
Okay, that's very helpful. If we just turn to restructuring, maybe you could just talk about the type of assignments and geographies, in which you're seeing the biggest pickup, in that business. When should we expect the pace of the restructuring to actually hit your revenue? What's your view on the length of this restructuring cycle at this point?
Okay, great question. First of all, this M&A cycle and restructuring cycle seems to be very different from 2001, 2002, 2006, 2009, or 2014, 2013, whenever it was, even the short restructuring cycle before the pandemic. Generally speaking, our experience has been, not even general, but our experience historically has been that when M&A turns down, usually some period of time prior to the M&A turndown, restructuring assignments start to pick up and the restructuring cycle offsets some of the decline in M&A. That's been our experience in the past. What's unusual about this restructuring cycle is it's been delayed, muted and delayed. That said, we're finally seeing a real pickup in activity. That probably starts to translate into revenue towards the end of this year into the beginning of next year.
To that end, actually, we've just added two new restructuring partners, one focused on creditor assignments, which is an area that we've been trying to build. I think that should help us a bit in, just in terms of the market share gains there. Generally speaking, you know, this has been muted so far. Do I think it's going to last longer? I think part of that is going to be dependent on what happens in the banking sector.
If we get a real credit crunch there, then this could be quite a long cycle. If we get a more muted credit crunch, it probably is going to be a good cycle. Good in the sense that there'll be activity, because there's a lot of maturities coming due in a higher interest rate environment, and that's going to, I think, make for some stress overall. The actual breadth of the market will in part be dependent on what happens with the credit crunch.
That's very clear. Thanks for taking my question.
As far as sectors, I think you're going to see a lot of activity in real estate, which is a strong area for us. Retail, as you can see, continues to be an area which has been difficult. Then I think it is more or less going to be focused on companies that have over-leveraged capital structures with near-term maturities. That's where the pressure is, and that are affected by downturn in the economy.
Okay, thank you so much. Appreciate that.
I will take our next question from Devin Ryan with JMP Securities. Your line is now open.
Hi, Devin.
Hey, good morning. Just want to come back to the conversation on the expense reduction. The 10%, is that equal across segments, or is that more weighted towards advisory, is the first point. Then, it sounds like some aspect of this is just a little bit of you've been dragging your feet on-
You know, areas where maybe the fee pools aren't as compelling today as they were in the past. Now is the time to do that, plus some incremental trimming where in the environment today just is this challenge, right? I just want to clarify within that. The other part of the question is, what does this mean for investing into parts of the business where maybe the fee pool is becoming more compelling in advisory, where you're pretty active recruiting externally over the past two years.
Let's start with the last question, what I think was the last question first. Part of the objective here in terms of taking this action now is to get ahead of the environment for two reasons. One is that, you know, the M&A business is a cyclical business. It's, you know, when there's summer, fall, followed by winter, and then there's spring, summer again. It's in cycles. That's the business we're in. We're in a down cycle right now. Experience tells us that in a cycle like this, you probably want to do this early for 2 reasons. One is you get it out of the way so people are focused and ready for the recovery. You know, what you're doing with clients now determines how well you do as the recovery takes place.
That's part one. Part two is this is the environment where if you can create enough room in the cost structure to allow for future investment, which is what we're trying to do here, it's an environment where you can pick up really incrementally good talent. That's what we're focused on, is senior talent, productive talent in the places that matter to us, which I think here is going to be in the U.S. and in Europe. That's the goal here, is, one, to get ahead of it so that, you know, when the recovery does, we're not distracted by a restructuring that took place at the end of it. Number two is to make sure we have the fuel to continue to invest in our business at a time when those investments are priced much more attractively.
That's part one. As far as the places where productivity is. Look, I'm not so sure we're behind the curve on this. I just think this is a changing environment, a changing cycle. Unfortunately, these are the times where you have to do these things, and these are tough decisions. You're always making bets in this business as to where the cycle's going to, where the activity's going to be in the next cycle. You know, we're making those bets now in terms of what we're doing here.
As far as where the headcounts are coming from, look, the advisory business has more people than the asset management business has, so obviously it's going to be more impacted than the asset management business is. The office closings are all on the advisory side. With regard to corporate, I think there's a fair amount of re-engineering that's taking place there. There it's going to be impacted as well.
Okay. thanks for the thorough answer, Ken. I believe Evan's on the call.
Yes.
I want to ask what just... Okay, great. Evan, obviously, you've now been in the seat for nearly 1 year on the asset management side. Just love to maybe dig in around your thoughts in that seat, strategic priorities and maybe areas that may get more investment or less investment or, you know, how you're thinking about just the overall growth profile and strategy of that business now that you've been in the seat for 1 year.
Sure. Hey, Devin Ryan. I mean, it's been several, obviously several quarters now, couple of quarters, of direct involvement here in the asset management business, but obviously I've been in the asset management, focus on asset management for the last five years as CFO as well. You know, continuation of our strategy is what we set up at the beginning. We've been focused on three specific areas for us, which is really first and foremost is performance and focusing on the performance of all of our funds. As Kenneth Jacobs mentioned earlier, 80% of our funds are outperforming their benchmarks on a one-year basis. I think we've had some good success there.
Obviously, the market movement more towards fundamental investing that we've seen over the past six to nine months has been playing towards the areas of our strength, which are relative value, quality, and factor quant, which is the areas of focus for our business, both across fixed income and equities. I think performance is an area we're going to continue to focus on. We're spending a lot of time thinking about what tools and resources, research and insights, how do you generate the best insights across the platform we have.
We have tremendous amounts of intellectual capital on a global basis. We're lucky to have such great teams in all emerging markets and global, international, and in local areas around the world. I think bringing together those insights allow us to truly have an advantage on a performance basis in so many of our funds, especially in fundamental areas of the markets and certainly when markets become more fundamentally driven.
The other area that we've spent a little bit of time focusing on, I think it'll be a continued focus for us, is going to be on the distribution side of our business. Over the last several years, we focused on the global basis of our distribution capabilities. We've added a lot in Europe. We've talked about that in past quarters. Now we're focusing a little bit more on the North American market. We've made a couple of strategic hires over the last over the last quarter or so.
We expect to continue to focus on that as well. Enhancing distribution, making sure teams are working well together, coordination in an environment that certainly remains volatile from a markets perspective, where clients need us to be thinking forward, thinking ahead, and helping them to think about allocations is becoming really, really critical. In a market like this is where Lazard tends to shine. I mean, we're long-term advisors with many of our clients. Many of our client relationships go back more than a decade and sometimes 2 decades. In many ways, they turn to us in periods where there is a change, a changeover in markets and market sentiment changeover in big themes that go on, and they look to us for help on that.
I think our distribution, our sales and marketing is really helping clients and helping to work with our clients, partner with our clients to think about how we can drive, help them drive to further success in their business. The third area of focus for us really is around the infrastructure. Making sure that you're building infrastructure not for what you need today, but also about all the opportunities for growth. Building the infrastructure you need to support the long-term growth that you expect in your business. That's everything from operations, technology, and other areas.
I think those are the three areas we've been focusing on with the existing business. The other areas as you know, I mean, we are big in the areas that we focus. We are, you know, strong in the areas of relative value, quality, and factor quant. I think there's plenty of other strategic opportunities that will arise for us across the alternatives business, across the wealth management space and others that we're spending time thinking about in this environment and looking for opportunities.
Terrific. Thanks for the thorough answer. Appreciate it, guys. I'll hop back in the queue.
Great.
We'll take our next question from Steven Chubak with Wolfe Research. Your line is open.
Hi, Steven.
Good morning, Ken. I did want to ask about some of the comp ratio comments. You noted you're still committed to getting back to the 55%-59% target comp ratio. It sounds like you're hoping to get back to that range possibly as early as 2024, assuming a more normalized revenue environment. I just wanted to confirm first whether that's the right interpretation. Second, what level of normalized revenue will be required to deliver such an outcome on this pro forma lower expense base?
Great question. That, that is the thought process that actually went into to what we're doing. First, again, to repeat, one of the things that really compelled us to take action now is when we thought about the inflation in expenses in our business, partly deduced to some of the headcount increases and the likely revenue trajectory of our business, particularly the advisory business over the next couple of years or so. This was a necessary thing to do because if we had gone back to 2020 or 2022 revenues, and we had the 2022 cost base going into 2023 with that inflation, we would not be within our targets.
The goal here is if you think about revenue somewhere in the 2020 or 2022 range for the advisory side, then you start to see how we can get back to our targeted ranges on comp and non-comp, and what ultimately ends up is margin. Of course, it's the mix between the businesses, between advisory and asset. What's interesting about this is this could turn out to be a little like the period 2009-2013, where asset leads the recovery, because of markets, and that flows through to P&L quicker than the announcements going up and then the completions do on advisory. I would keep that in mind as we go through this, and that's how we're thinking about it. What is normalized revenue environment? I guess I would say it's not 2021.
I don't think we're going to be repeating 2021 as an industry for a while. I think individually as firms we could, but I think that's not something that the industry should count on as a whole. My guess is it looks probably more like 2018, 2019, 2020, maybe 2022 as being more normalized years. You know, this is the, this is the conundrum of the advisory business. It's a very difficult business to predict in any given year. You know what happens over the long run with regard to the advisory market. It's a 4% GDP plus growth business, but you don't know any given year. It can move, as we see, 30%, 40%. So the cycles are pretty big.
Thanks for all that color, Ken. Just for my follow-up. Now, the tone on the environment, admittedly, it's that you just conveyed, it's much less sanguine than what we heard from some of your bulge bracket peers, which are arguably better comps for Lazard, have a similarly global footprint. Want to understand whether there are any idiosyncratic factors that would result in weaker performance at Lazard relative to some of the bulges. What are some of the macro factors or indicators that could potentially support an inflection sooner than what you conveyed?
Okay, 2 points on that. 1 is when I look at the actual advisory revenues of our, what I'd say money center peers, Goldman, Morgan Stanley, JPM, Citi, BofA, and then I look at the independents, candidly, most people... You know, there are, there are exceptions in there, but most people have acted within a few points of the market in one direction or the other. Some a little worse, some a little better, but it's been market performance there. I'm not sure you can make those distinctions right now, number 1. Number 2 is, I think the piece of the business that could turn for us sooner than the market turns is Restructuring.
As I said earlier, what's unusual about this cycle is usually when we see this downturn in M&A, it's offset or muted by an upturn in restructuring, almost simultaneous or even preceding. Here it's been delayed. I think what could happen towards the end of this year is we start to see restructuring revenues coming through before the market recovers and such. That should help a little bit for those that have restructuring practices. What could change? Look, I think the biggest issue out there right now is just the inability to predict the future. That is, people don't really have a lot of conviction and confidence about their ability to predict the future.
What's funny about that is they were totally wrong in 21 when they were so bullish and had real conviction. That's where we are, and it's difficult for people to allocate significant capital in that environment, whether you're a company or you're a fund manager. I think until we have more clarity and consensus about the environment, we're not going to have a real recovery in volumes. That said, you could see how the environment could recover. We get through the debt limit without a crisis. We start to see a trajectory in the macro environment, which there's some consensus on inflation coming down, small recession, big recession, Fed abating interest rate rises.
I mean, all of that could come together, pretty quickly. If it does, I think you could see the financing market stabilizing, spreads narrowing a little bit, assuming it's not a huge recession, and more activity. Right now, we still have this very cloudy lack of conviction, lack of consensus environment. Even if you do get this pickup, it's going to still be, at least on the advisory side, several quarters before you see the announcements come through as completions. I think that's going to put stress on people's revenue during that period of time. The flip side of it is asset management could really outperform in an environment like this, because if you don't get a hiccup in equity markets, particularly the way we're positioned, particularly, you know, in some markets outside of the US right now, you could have some pleasant surprises there.
Helpful perspective, Ken. Thank you so much for taking my questions.
Sure.
We will take our next question from Matthew Moon, KBW. Your line is open.
Hi, good morning. Just wanted to drill down on the environment and maybe what you're seeing between the strategic and sponsor community, in more detail. You know, on the one hand, it seems that sponsors are seeing a slightly higher level of degradation versus strategics, but, you know, as you note, they should be quicker to return to market. Just curious on, on your updated thoughts here. Yeah, would just love to hear the discussion.
Sure. Let's start with strategics. One complicating factor in the strategic market is the really big deals that have a lot of overlap are in a pretty difficult antitrust environment. We just saw the Activision deal, the problems with the Activision deal in the UK. That's been the case now for several years, so this isn't a new factor. There's obviously going to be reticence on pulling the trigger on really big deals where there's a significant antitrust component. That said, within sectors, you're still seeing some strategic activity amongst bigger deals. We're involved in, as an example, in the Newmont Mining situation. There was a big water deal that we did recently and such. There's some activity there.
I think for strategics that have strong balance sheets, as we've seen in every cycle where there's a downturn, they remain active. They're not as active as when you're in a period of massive optimism, but they remain active. The area where there's continued strategic activity, I'd say, is in the $1 billion-$5 billion deal segment, where you're not betting the company and in industries where M&A is R&D and growth. You're seeing that in the pharma sector with biotech. You continue to see that in the renewable sector. We see some in tech, although that's complicated at the moment because of antitrust.
We're seeing an enormous amount of activity in the FIG sector just because of the strength of our Restructuring practice, the strength of our FIG practice. Those have been good areas for us. You know, what's interesting about the consumer sector, every now and then there's a big countercyclical deal in the consumer sector because it's defensive. They have strong balance sheets. Valuation's a little muted, so you can get things done there. I think that's the strategic landscape. Not terrible, but it's not going to be like it is in a bullish environment. On sponsors, I think you hit it on the head. It's probably the area that could recover the quickest, and you can see the pull-through into P&L the quickest.
We're in a very different environment for sponsors today than we were in the period through 21. We're in an environment where interest rates are going to be elevated for a period of time. They're not going back, I don't think, to 0% or 1% interest rates. I think spreads are going to be a little bit wider, consequently, expense, you know, financing more expensive. As a result of that, valuation is probably more, a little bit more challenged. Leverage into the companies probably few returns, the returns are going to be a little bit more difficult. That said, there is still a lot of capital out there. It's an incredibly inventive industry, very, very creative.
The sources of private capital that are available probably provide some fuel for activity even in a, in a very muted environment as we've seen. The deals for sponsors, probably smaller in this environment. In some cases, that's a function of the fact that people will put up 100% equity in a deal just to say, "We'll refinance it later." We've seen a little of that. In some cases, and also just in terms of financing, it's easier to finance the smaller deals than the larger ones at the moment. Activity is muted.
Great. Just shifting gears for my follow-up to the asset management side.
Mm-hmm.
You guys obviously executed a smaller, modest-sized acquisition in March in Truvvo. While also simultaneously combining the existing private client offering you guys had to create the Lazard Family Office Partners. I know it's a smaller part of your AUM base, but just curious if you're seeing any recruiting and onboarding opportunities for the private client side of the business specifically. I'm just thinking, you know, in the wake of the banking crisis, you know, that affiliated bank model for private clients, if there's anything there or if that's more outside the area of focus for you guys?
Evan, you want to size that and?
Yeah. As you mentioned, we formed Lazard Family Office Partners with the acquisition of Truvvo earlier in the Q1, and we put that alongside our existing private client business. We've always had a very strong private client business in the high net worth space here, the direct business here. The combined business now in the US, approximately $8 billion of AUM. You know, we're very excited to bring on the new team and to really form this new entity to chase the and start building a much broader practice across the wealth management space. Look, it's really augmenting what we've always done.
I think when you think about the movement around what's going on in the financial space today, there certainly is a lot of movement. That's partly why we thought about thinking about this channel as one that we should continue to grow. Obviously, we've had a large wealth management practice across Europe, for a while now. This was just a good opportunity for us to create a base to look at, you know, all the changes that are going to go on. We do expect there to be a lot of movement in the wealth management space over the coming couple of years. This will give us another growth vector in that space over the coming years as well.
Great. Thanks, guys.
Yep.
We will take our next question from Ryan Kenny with Morgan Stanley. Your line is now open.
Hi, good morning.
Hi.
Wanted to follow up on the comment around wider spreads impacting deal financing. Can you give us some more color on how much wider spreads and tighter credit conditions are playing a role in deal completion? Is it a bigger headwind than higher rates? I'm asking to just try to get a sense of what's a better macro outcome, higher rates with no recession or a rate cut that come with a recession, but also tighter credit conditions.
Well, look, I mean, I think the problem here is you've got a lot of crosscurrents. Navigating those crosscurrents is the challenge of this environment for anybody that's looking for financing. If we end up in a more difficult macroeconomic environment, one where there's a recession, my guess is spreads start to widen a bit. On the flip side, if we go in a recession, that probably is an expectation that the Fed is going to start to pull back on rate increases, you have a rate environment that starts to improve a little bit.
Another current is if you think about what's happening in the regional and the community banking sector with regard to deposit outflows, and what that does to the ability to lend, particularly into the commercial real estate sector and the SME sector, where the regional banks and the community banks are very important players. That probably creates a bit of a credit crunch for people. On the other side of that, you have a huge amount of money in the private credit funds right now that start to become more active. You have all these crosscurrents. The key here is just that risk capital is just a lot more expensive today than it was in 2021. As a result of that, valuations are going to be depressed, or what people can afford to pay for businesses is going to go down.
Thank you.
Thank you. This now concludes the Lazard Conference Call.