Good morning, and welcome to Lazard's third quarter and first nine months 2026 earnings conference call. This call is being recorded. Currently, all participants are in listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. If you should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I will turn the call over to William Murdock, Lazard's Head of Strategy and Investor Relations. Please go ahead.
Thanks, Chelsea. Good morning, and welcome to Lazard's earning call for the third quarter and first nine months of 2026. I am William Murdock, Head of Strategy and Investor Relations. In addition to today's audio comments, we have posted our earnings release 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, achievements, or other events to differ materially from those expressed or implied by the forward-looking statements, including but not limited to those factors discussed in our 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 them.
Please also note that, unless we state otherwise, all financial measures we discuss today are non-GAAP adjusted financial measures. We believe these non-GAAP financial measures 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 Peter Orszag, Lazard's Chief Executive Officer and Chairman, and Tracy Farr, Lazard's Chief Financial Officer. After our prepared remarks, Chris Hogbin, Chief Executive Officer of Asset Management, will join as we open for questions. I will now turn the call over to Peter.
Thank you, William, and thank you to everyone for joining our call today. Our Lazard 2030 strategy continues to progress as we planned, with strong underlying momentum across the firm, very encouraging forward indicators, and high internal morale and cultural alignment. Additionally, now that we have obtained the necessary regulatory approvals, we are planning to close our acquisition of Campbell Lutyens and launch our third global business, Lazard CL, in early November, creating the leading private capital advisory platform globally. Turning to our results, firm-wide adjusted net revenue in the third quarter increased 11% year over year, with increasing client activity across both businesses. In financial advisory, we achieved record third quarter revenue as our investments in the business are starting to translate into results.
Over the past three years, we have hired or promoted 80 Managing Directors in North America across focused areas of opportunity, healthcare, industrials, consumer, media, entertainment, and sports, technology, and power, energy, and infrastructure. As we emerge from the J curve period we have previously described, our existing MDs in the U.S., along with these additions, produced record revenue in the Americas in both the third quarter and first nine months of this year. Our momentum continues to grow in financial advisory, which is reflected in an array of forward indicators. Globally, our announced league table position is the best that it has been in over a decade. Conflict clearances are up over 30% year-over-year on a dollar-weighted basis and up more than 85% for deals above $5 billion.
Significantly, these conflict clearance trends continued to show strength in the third quarter, with year-over-year growth in the third quarter alone. Our weighted pipeline for 2027 is now two times our 2026 pipeline at this time last year. While the pace of adding new MDs in 2026 will be below the exceptional pace of 2025, we see ongoing opportunities to attract talent to our financial advisory platform. Since our last earnings call, we have announced 10 additional top-quality Managing Directors in areas of strategic importance, including a new head of defense and emerging technology, a senior banker returning with his team to Lazard in Paris, and the expansion of our advisory business with a new senior hire in Switzerland.
In private capital advisory, we continue to anticipate Lazard CL will generate approximately $500 million of revenue and will be accretive to earnings in 2027, even before accounting for potential synergies. The Campbell Lutyens business is performing ahead of the assumptions that support of the acquisition, and we already see early signs of synergies with real estate, vendors, and IT. Our private capital advisory group, along with the team at Campbell Lutyens, together will comprise the leading global positions in primary fundraising and secondary advisory. Lazard CL will deliver dedicated fundraising, secondary advisory, and GP capital advisory for clients across all asset classes and all major markets, infrastructure, private credit, private equity, and real estate across the U.S., Europe, the Middle East, and Asia Pacific. The more time our teams spend together, the more excited we become about both the cultural fit and the strategic opportunity.
With that foundation, we expect the broader connectivity between our M&A, restructuring, and capital solutions businesses to compound over time with clear potential for further upside. Conditions remain quite favorable for client activity despite the rise in interest rates and ongoing global uncertainty. In financial advisory, companies continue to pursue scale amid rapid technological change to gain or defend leading sector positions, and vertical integration is increasingly key to addressing supply chain shocks. A more constructive regulatory environment is supporting activity overall, and our forward indicators would be even more encouraging if private equity M&A were to become more active.
The power of our renewed investment in our traditional large-cap strategic coverage, alongside our expanded private capital efforts over the past few years, is underscored on a year-to-date basis by our best league table standing in over a decade and our highest share of advisory revenue coming from private capital that we've ever had. We are confident that our ability to play to win for clients in both the largest strategic transactions and across private capital activity is promising for the future growth of our advisory businesses. Turning to asset management. Gross inflows reached a record $54 billion for the first nine months of this year, demonstrating progress from our focused sales and distribution efforts. Our won but not yet funded pipeline is robust, and we remain on track to deliver positive net flows for the year.
The work we've done under our new leadership team to strengthen the platform is reflected in the continued improvement in our investment performance. As of quarter end, 70% of client AUM was outperforming stated benchmarks over one year and 67% over three years, which is our best performance in five years. Strong, consistent performance is the foundation of this business, and this progress positions us well to compete for new mandates in the future. In summary, we remain firmly on track to achieve the objectives of our long-term growth strategy. Our progress is underpinned by our commercial and collegial culture and by our adoption of AI to transform how we work and deliver for clients. Based on a recent survey that we conduct annually, colleagues' pride and happiness working at Lazard and willingness to recommend our firm to others remained at all-time highs.
We are pleased that our employees identified the firm's AI tools training and pace of adoption as significant strengths that are improving productivity and reinforcing confidence in our opportunities ahead. I'd like to thank my colleagues for their commitment and hard work as we advance our Lazard 2030 strategy together. Let me now turn the call over to Tracy, who will cover our financial results and provide details on our operational efforts, and then we will take your questions.
Thank you, Peter Orszag. Financial advisory adjusted net revenue was $465 million for the third quarter and $1.3 billion for the first nine months of 2026. This quarter's revenue includes pull forwards for transactions that closed just after September 30th, that are in line with our two-year average. Our record third quarter revenue was driven primarily by M&A, with record revenue for the third quarter and first nine months of the year in both the Americas and the U.K., reflecting investments we have made in lateral hiring, our exceptional existing talent, and the strength of our franchise across our transatlantic footprint. With sustained client engagement and momentum across the business, completed transactions include Corteva Agriscience on its $50 billion spin-off of Vylor, MasTec's $1.7 billion acquisition of Superior Group, and Geneta Health on its sale to R1.
Recently announced transactions include Emera on its merger with Canadian Utilities for a combined enterprise value of approximately CAD 72 billion , OCS Group's proposed £3.1 billion acquisition, and Vanguard's acquisition. Liability management and restructuring assignments include Braskem SA, Victoria, and QVC. In private capital advisory, recent assignments include advising Blue Sea Capital, Exponent Private Equity, and M-One Capital on continuation, and Peninsula Capital Management on the closing of its seventh fund. Turning to asset management. Adjusted net revenue was $330 million for the third quarter, $970 million for the first nine months of the year. Management fees were a record $321 million for the quarter, up 18% year-over-year, and $927 million for the first nine months, up 22% compared to the same period last year. Management fees have increased in each quarter this year, and Q3 marks the sixth consecutive quarter of sequential growth.
As of September 30th, we reported AUM of $284 billion, 7% higher than September 2025 and approximately even with the prior quarter. During the quarter, we had market appreciation of $1.9 billion, foreign exchange depreciation of $0.2 billion, and net outflows of $2.3 billion. During the quarter, we had market appreciation of $1.9 billion, foreign exchange depreciation of $0.2 billion, and net outflows of $2.3 billion. Average AUM for the quarter was $287 billion, 11% higher than the third quarter of 2025. Client demand is increasingly visible in the strategies we have prioritized. Lazard Advantage, our quantitative equity platform, continues to attract significant client interest, and we also have ongoing strong flows into our emerging markets and global listed infrastructure strategies.
IDEQ, our international quant ETF, has grown to nearly $2 billion in AUM since launching last year, and we plan to expand our ETF platform with the launch of our first actively managed fixed income ETFs next month. Turning to firm-wide expenses. Our adjusted non-compensation expense was $156 million for the third quarter, resulting in non-compensation ratio of 19.3%. Our adjusted compensation expense was $562 million for the third quarter, resulting in a compensation ratio of 69.9%. Based on a constant deferral rate, we continued to take a conservative view to accruing compensation in the third quarter. Consistent with prior years, this quarter's accrual was unchanged from the first two quarters of this year. We continue to design our compensation programs to remain competitive and aligned with the long-term interests of our employees and our shareholders.
Earlier this year, as we previously discussed, we updated our vesting structure, and we are currently reviewing our deferral practices to reflect evolution in the market for our professionals and to enhance transparency for investors around awarded and recognized compensation. As part of our year-end process, we are considering a potential reduction in our deferral rate. This would accelerate the timing of compensation expense recognition on an accounting basis without altering the total compensation awarded, raising the reported compensation ratio by a few percentage points this year and reducing it thereafter. Our growth investments are paired with efforts to improve productivity and operating leverage across the firm. Let me share more detail on two initiatives underway to simplify our corporate and support functions and further embed AI across our work. First, we launched a project earlier this year to modernize and simplify how the firm operates.
Across our corporate and support groups globally, we've completed a broad survey of workflows and organizational structures. We are now reviewing vendors to advance implementation, which includes process automation and centralization of certain activities, shifting how work is delivered and staffed with a long-term objective to decouple expense from revenue growth. As we progress, we expect to provide specifics on how this effort will reduce expenses beginning in 2027. Next, we are increasingly embedding AI across the firm to augment our productivity and expand our market reach. In financial advisory, AI is helping us create more opportunities for junior bankers to take on expanded responsibilities. As we continue to increase our number of senior bankers over time, this higher productivity will be reflected in a decline in our total associate equivalent to MD ratios.
In asset management, we have accelerated the implementation of agentic workflows in client servicing and reporting, with plans to increase the use of AI and automation across the business. We see ongoing opportunity firm-wide with AI to deliver better outcomes for our clients, see more opportunities for upward mobility for our people, and improve our margin over time. Turning now to taxes. Our adjusted effective tax rate for the third quarter was 38.1%. We expect the full-year effective tax rate to be in the high 20s percentage range. Regarding capital allocation in the third quarter of 2026, we returned $88 million to shareholders, including a quarterly dividend of $49 million and share repurchases of $33 million. We expect to continue buybacks throughout the remainder of the year, balancing investment and growth with further offsetting share issuances from compensation.
In addition, yesterday, we declared a quarterly dividend of $0.50 per share. Overall, we are confident in our outlook for long-term growth, and we are encouraged by the strong levels of client activity and the progress we are seeing across the firm, as highlighted in this quarter's results. Now, we'll open the call for any questions.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. If your question has been answered, you may remove yourself from the queue by pressing star two. So that others may hear your questions clearly, we ask that you please pick up your handset for optimal sound quality. We'll take our first question from Jim Mitchell with Seaport. Please go ahead.
Good morning. Tracy, I can't help but ask about the comp ratio commentary. When you think about shortening some of the accruals, I think you mentioned that that could affect this year's comp ratio, but should help next year. It seems like shorter deferrals would increase amortization even next year. I just want to understand how you're thinking about the comp ratio trajectory, both in the fourth quarter and how that impacts both fourth quarter and next year. Thanks.
Yeah. I want to answer this with actually maybe three points. First, when we think about this, keep in mind that the huge incentive here is to align this from an employee retention and attraction perspective. I want to reiterate that first, that this is really what it is, it's using more cash in the year and lowering the amount of deferral that you are granting. That helps on a number of fronts. That helps. It's effectively similar to a share buyback. It helps from a share dilution perspective, and it also improves the quality of that ratio over time, as I think I've had some conversations with a host of the participants on this call. Regarding the impact year to year, in the year of, without changing your total compensation on an awarded basis, that can remain the same.
But on an accounting basis, you're accelerating some of the recognition into the current year. Now, what you're probably noting is that if you maintain that same deferral level, the impact of that isn't necessarily seen immediately, but it happens over a period of time. But that acceleration does come from somewhere, and that reverses over a period of time. Our current deferral policies, it probably reverses fully over a period of three years. But what that really does is it allows your comp ratio to decline more naturally over time. And as I mentioned before, the real benefit is an improved quality of the ratio itself, a greater ability for management to manage the comp ratio within a particular year, and a more attractive compensation policy for your employees.
That makes sense.
No, that's very helpful. Maybe just on a broader point, I think, Peter Orszag, you mentioned Campbell Lutyens deal is a little bit ahead of what you were expecting when you announced the deal. Still on track for $500 million next year. Can you just maybe dive into a little deeper on what you're seeing as the biggest synergy opportunities with Campbell Lutyens, whether revenue or expenses or both?
Yeah. I think it is both. I mentioned some of the areas, vendors, IT, et cetera, in the script on the cost side with a little extra scale. On the revenue side, there is a significant amount of opportunity for, in one direction, M&A referrals, so from Lazard CL to our M&A bankers, then in the opposite direction from our private capital coverage efforts into the fundraising business. So there is a flywheel or circularity there that's very positive. Campbell Lutyens, in its prior instance, did have a JV with a different investment bank that produced a notable level of M&A referrals. We anticipate, even though we didn't assume that in underwriting the deal, that we will be able to at least match, and in all likelihood, significantly beat that level of M&A referrals, that would be a significant uplift to the business.
Thank you. Our next question will come from Steven Chubak with Wolfe Research. Please go ahead.
Hi, good morning, thanks for taking my questions. Maybe to start, just given the constructive public backlog and forward indicators you alluded to with the weighted pipeline being more than double year-ago levels, I was hoping you could clarify whether that backlog commentary is on a revenue or volume-adjusted baseline, speak to any impacts on mix and how that informs the revenue growth outlook for next year.
Sure. Well, actually, they are both on a revenue basis. But the weighted pipeline being double what it is, slightly more than double what it is for next year, what it was for last year, for this year this time last year, sorry. Just to be precise, pipeline as of today, October 22nd, for 2027 is slightly more than double what the 2026 pipeline was, weighted pipeline as of October 22nd, 2025. Sorry about that. But hopefully that is perfectly clear. And that is a revenue basis weighted by the probability of each fee being collected. To give a hypothetical example, you have a deal that will pay, to make it up, $100, and we estimate the odds that it will close at various different points, that it will close during 2027 at 50%.
Then for that metric, it would be counted as $50 on a probability weighted basis. So that is that indicator. And then we have also provided numbers on the fee-weighted conflict clearance trends, and those fee-weighted ones are revenue based. In other words, a new mandate comes in and it is $400, that would get counted at $100 as opposed to just counting new conflict clearance. On account basis, we are also seeing very significant increases in conflict clearances, especially in the larger transactions. But I think the more relevant thing is the weighted pipeline that I gave you and then the fee-weighted conflict clearances, because obviously, a conflict clearance at a $5 million fee is a much different thing than a conflict clearance at a $50 million fee.
No, thanks for clarifying all that, Peter. Just for my follow-up, did want to ask on the impact of higher rates, both on conversations with sponsors and strategics. You noted that you are seeing good pipeline momentum, but to what extent is that impacting the willingness of some of those clients to initiate deal processes here?
Yeah, look, I think let us just start with, obviously, in theory, higher rates should discourage deal flow. In practice, we are just not seeing that being a very significant factor right now. And I think the reason is that most of the imperative for transactions on the strategic side, especially, and then I will turn to private equity in a second, is coming from the need for scale in this rapidly changing technology space. The desire to secure your supply chain vertically when you are subject to this new supply side era that we have spoken about, and the desire to kind of reconfigure your geographic footprint in the wake of the fracturing of the global economy.
Those are all such powerful forces that an increase of 20, 30, 40, whatever number of basis points on the long end of the yield curve doesn't really materially affect your desire to get those transactions done, especially when you realize that the regulatory environment, particularly in the U.S., may never be more auspicious to acting on what you've always wanted to do. We're continuing. I think that explains, along with the investments that we've been making and our emergence from the J curve period, why the forward indicators are so strong. Again, I've been reading some of the commentary about deal flow slowing. That is not what we're seeing, for whatever it's worth. On the private equity side, situation's a little bit different. We've all been waiting for M&A from private equity to pick up.
I think that's just the interplay of two things, one of which is exacerbated by the rise in interest rates, which is a disconnect on valuation. The owners of the portfolio companies continue to await better valuations. Obviously, a rise in rates doesn't help on that front. Against that, you've got ongoing pressure from LPs, from investors to get some cash back and to have liquidity events. It's really the interplay of those two phenomenon that will drive when we see a significant uptick in private equity M&A. I would say that has to happen at some point, and that would only further accelerate the forward indicators that we've shared with you. I'd also note that in the meanwhile, while we're all waiting for Godot a little bit on that private equity M&A moment, it is helping to drive additional activity in our secondaries business.
The Lazard CL leg of Lazard is further spurred during this moment in which the valuation disconnect component of the M&A seesaw is causing some degree of continued delay in significant private equity M&A activity.
Thank you. Our next question will come from Alex Bond with KBW. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions. Wanted to follow up around the large cap strategic outlook and activity levels there. As you mentioned, Peter Orszag, it sounds like the industry expectation there is for volume to remain strong heading into 2027. But maybe if you could just expand upon what you view as driving your recent progress in this area. You spoke again to elevated conflict clearances for deals above $5 billion. But maybe how are you thinking about the opportunity to grow share here further in this area? And also how you think the ramping of the newer cohort of MDs can impact growth in this area specifically?
Well, look, let me back up for a second. One of the things that we wanted to do over the past three years, we've already talked about the J curve, but the other component of that that we needed to address is the business model, especially in the U.S., having a duality to it that often was not the case in the past. So in the past, the U.S. business was very geared to only the large cap public company M&A. And what we saw was an opportunity to be able to walk and chew gum, and not only continue that excellence in large cap work, but also really significantly expand our private capital coverage and be able to do both.
And so what you're now seeing is that we're emerging from the J curve period, and you are seeing that duality of the excellence in large cap and our private capital coverage coexisting. So we're walking and chewing gum, which was always possible, but we had not been doing that as a strategic matter. I gave you some of the statistics, but I think it's underscored by best year-to-date league table positioning, which really speaks to the large cap side of things in over a decade. And also in the third quarter and year-to-date, but in the third quarter, our share of revenue coming from private capital is at an all-time high. So it shows that duality. What's driving the large cap side and league table positioning?
It is, I think, a combination of renewed efforts at client networking and expansion of our network, so out with clients incessantly, and the additional talent that we've been bringing on to supplement the world-class MDs we already have. We said that this would take a little bit of time to ramp, but we can see it in our internal data in terms of new meetings then showing up in conflict clearances, then showing up in announced transactions and so on. And you're starting to see the progress that we had been anticipating manifest itself. The first stage really does show up in those league table results because those are the forward indicators of future revenue from the large cap side of things.
And what we are pleased by, and why I think this is why I want to go into a little bit more detail is that that is happening at the same moment that we have got a lot of muscle on the private capital side of things. So the league table progress is not at the expense of our private capital coverage effort. It is instead in conjunction with it.
Okay, great. All makes sense there. Then maybe just as a follow-up, I believe last quarter you all had spoken to the expectation for higher than normal favorable seasonality for advisory in the second half of the year. Is that still the expectation? Then also, I am not sure if I missed this earlier, but if you could just speak to what percentage of revenue is coming from the non-M&A side and advisory in 3Q, that would also be helpful. Thank you.
Sure. So with regard to the first question, we continue to expect the second half to be stronger than the first half, and the ratio of the second half this year to the first half will be stronger than in 2025, which I think is what we said on the prior call. Then I will get the exact statistics, but I believe it is approximately 60% M&A and 40% non-M&A in this quarter. If that is a little bit off, but I believe that is right, we will get you that exact number.
Thank you. Our next question will come from
Hold on a second. I can do that precisely. I am sorry. I was a little bit off. That is a pproximately correct for year to date, but you asked about the third quarter alone, and in the third quarter alone, it was 61% and 39%, so it is still approximately correct. 60/40. That was my memory. Sorry, it is a little off.
All right. Thank you. Next, we have Devin Ryan with Citizens JMP. Please go ahead.
Great. Thanks, and morning, Peter and Tracy. I want to start with a broader expense question. I appreciate some of the moving parts on areas like the deferred comp schedules you talked about. I know some of that is still evolving. Tracy, you talked about some of the incremental work you are doing on just broader kind of expense savings, and I expect we will hear more about that soon here. As we think about all the work you are doing, is all of this necessary just to get to the Lazard 2030 goals that you have laid out here, or does this create even more capacity? I know some are kind of like 60% or better comp, so it could be something better. Is this necessary just to reach those levels?
Yeah, happy to address that. No, I think the answer directly is no. When we look at Lazard 2030, remember that the vast majority of what Lazard 2030 is about is growth. We are so focused on investing in high growth, high profitable areas of the business. You see that with the capital allocations, you see that with the inflection that you're seeing in asset management. You see this with the investment that's been made over the last three years in the financial advisory business that we talked a lot about last quarter with the J curve. The points that I'm making on the margin and these programs around comp expense and others is really a companion to that focus on growth. Here's where I want to go with this.
The real theme is that when Peter and I looked at the business, we saw that there was more ability to drive operating leverage in the business. When you are focused on revenue growth, you have to be careful that your organization is ready to achieve that revenue growth while maintaining discipline around margin. That's what I'm really focused on, is trying to augment the way that we work, where we work, how we work in the back, so that as that revenue is delivered, we're not. I mentioned in my prepared remarks, this decoupling of expense from revenue growth. That's what those initiatives are focused on. To answer your question more broadly, no, it's not required to achieve 2030.
I guess I would agree with you that as we decouple expense from revenue growth and that revenue growth is delivered, I actually think there's greater margin potential than what we've necessarily embedded into the 2030 expectations. 2030 remains a revenue growth story, but we're trying to prepare structurally the business to deliver enhanced margin as that growth materializes.
Appreciate that, Tracy. Very helpful. Maybe bigger picture for Peter, just on the M&A backdrop and try to kind of connect the regulatory environment to what you're seeing with clients and obviously heading into midterms here. I think bigger kind of questions around what potentially could change in 2028. How much is that playing into conversations and an urgency to get deals into the market over the next year just because something may change?
Clearly there's a window now, and that window may not be there on the other side of 2028, which I would think in theory may be kind of get people over the hurdle of some of the macro uncertainties just because they know if they don't move now, they may not be able to move. Is that playing in at all? If it is, where are you seeing that? Is that intensifying in any areas? Would love to just get some thoughts on that piece as well.
I think that is a factor. I think even without that, the technology piece and the need for scale that I mentioned and the vertical integration and the geography would be driving a lot of transactions. But I think that is a factor, and I think it is one reason why you are seeing disproportionate activity in the largest deals, the big deals because this is a moment where you can plausibly get those through that may be more challenging in the future. Now with regard to hypothetical future environments that could come into place in early 2029, just two or three comments on that. The first is that obviously there is an election. You have to see what happens. So that is the obvious point.
The second is that historically we have seen larger shifts from administration to administration in the Department of Justice wing of the antitrust regulatory environment than in the FTC. That is almost by design because the FTC commissioners are bipartisan, and there is sort of more stability that tends to come from that side of things. So it will partly, in that environment, depend on whether you are a DOJ filer or an FTC filer. Then finally, and perhaps most importantly, the world is changing. In Europe, you see a shift in the antitrust environment towards promoting European champions in this new world order.
I think even in an administration shift in 2029, if that hypothetically happened, this new perspective that you need to weigh the traditional antitrust concerns using Herfindahl index or whatever against the desire to have frontier firms in each sector that are of a sufficient scale t o be globally relevant might change things going forward. But in the meanwhile, people do see this window that is certain as opposed to the interplay of those various factors that I was just mentioning that are hypothetical till 2029. The seizing the moment factor, I guess, reinforces the underlying motivations that I think are primarily the ones that I mentioned.
Thank you. Our next question will come from James Yaro with Goldman Sachs. Please go ahead.
Good morning. Actually, I guess it's good afternoon for you. Could you just help us think through the restructuring outlook from here and whether there could be upside optionality to growth given the more challenging economic backdrop as well as higher interest rates globally, and perhaps also over what timeframe, if you do think this will happen, that could occur?
Sure. I guess I could take that. Look, I do think we've seen on a year-to-date basis, growth in our restructuring practice. We think that will continue. When you look at the environment, I have said before, I think the risk of financial distress among the independent frontier labs and/or some of the neocloud providers in the AI ecosystem is elevated. That would have ripple effects in the need for restructuring throughout at least a significant part of that ecosystem. Even apart from that, higher rates does tend to induce additional financial distress at the lower-performing parts of the marketplace. What I'd say, so, yes, I'm not going to give you precise timing because that's a fool's errand in terms of trying to predict exactly when, and this is not a high-frequency business. We're kind of playing underlying trends.
I would also say, I think one of the things that's different today than was maybe the case 20 years ago is everything I just said is true, but it will disproportionately affect, maybe outside of the AI world, disproportionately affect the sort of bottom 20% of firms in each sector. One of the things that's fascinating is you've just seen this massive explosion in the dispersion across firms in performance. So what's happening at the top of a sector, the frontier firms, is dramatically different than what's happening amongst the laggards in the sector.
So I think what's new is that you may well see significant restructuring activity coincidental with significant M&A activity because those leading firms want to continue being at the frontier, and inorganic growth is one vector to do that. Yet down at the bottom of the distribution, there's a lot of distress and need for restructuring. So I would just highlight that I think that's a little bit different than prior cycles.
That's very clear, Peter Orszag. I think you have a bit of a unique lens on Europe, so I hoped perhaps you could comment on the European backdrop for your business and how this is, or has evolved more recently, especially in light of the, again, increase in rate structures in countries in France as well as the geopolitical questions in near proximity to that continent.
Sure. First, we are sitting in the U.K., so I would just note, since U.K. is part of Europe, even though it's not part of the EU, that we had a record third quarter and a record first nine months of the year in U.K. advisory, so that speaks to the strength of our franchise here where we sit right now doing this call. More broadly across Europe, obviously the macro backdrop is challenging. The political backdrop is super challenging with highly polarized electorates and frustration in the political system that you see not only in France, but across most of Europe. Yet, there is still significant M&A and other activity, and the reason for that is that you have to distinguish the macro and the micro. Macro backdrop, not so great. We could talk more about that if you wanted to, but it's not overwhelmingly auspicious.
But most European companies that we are dealing with have the majority of their activity and the majority of their sales outside of Europe. So they happen to be headquartered in Europe, but they are global firms. I think that explains the disconnect between a lot of activity that we are seeing out of Europe and the macro backdrop in Europe that is less promising because the firms that we are dealing with are operating on a global basis.
Thank you. Our next question will come from Mike Brown with UBS. Please go ahead.
Okay, great. Good morning. Thanks for taking my questions. So Peter Orszag, just looking at the industry data, we can see that the software M&A has been challenged this year, unsurprising given a lot of the AI uncertainty and disruption potential there. But we have seen a few deals coming through. So maybe can you just provide a pulse check on this sector specifically and maybe just if you could kind of dissect the large versus small end of the space, the strategic versus sponsor-backed deals, and maybe just talk a little bit about how you see that progressing now that we have been living in this kind of AI world for a while. Is it kind of a better outlook from here, say maybe where you would have thought last quarter? Thank you.
In software specifically?
Yes, exactly. Thank you.
Okay, good. I would say I kind of agree with your characterization, which is I think things are better than when the shock hit the software system. As you know, we have a leading franchise out of Boston with the Head of our Tech Group, Mark Dolins, in exactly this space. I think he would say there is more pockets of activity relative to the absolute bottom, but I would not characterize this as being an extremely active area. The Tech Group as a whole continues to cover that space, but is partially pivoting to other areas in the meanwhile. One of the benefits is we can skate to where the puck is or is going within our sectors.
I would say with regard to private equity in the space, the same forces that I mentioned before are at play with the push and pull of challenging valuation causing a delay in liquidity events, coupled with the desire for LPs to see some cash on the back end. That is probably more severe in the software space than elsewhere because the valuation disconnects relative to what maybe had been expected a year ago are more severe. Admittedly, the rise in interest rates further exacerbates that. But it is not all dark. There is some activity in that space, and we continue to cover it actively.
Okay, great. Well said. If we just pivot over to the Asset Management side of the business. Fundamentals there continue to really progress in the right direction. It does seem like there has been increased strategic interest in scaled asset management platforms really across the industry. Can you just talk a little bit about how you think about the business continuing to create value for Lazard shareholders today? If these advantages are not really getting full market appreciation, maybe can you talk about how you think about the alternatives here to kind of unlock some of that value for shareholders?
Sure. I'll take that, and then Chris can weigh in on some of the underlying trends and performance. On the structural question, I'm going to repeat what I've said before, but I think it is worth repeating, which is, we have a great new leadership team, including Chris, and also our Chief Operating Officer and our Chief Investment Officer. Very strong, by the way. That also came across in our internal survey appreciation for the quality of that leadership team. We believe we can add a lot of value as we continue to focus our products and strategy on where we think we have a right to win and where we can scale the strategy and get operating leverage out of that scaled strategy rather than having it a long tail of subscale products and strategies.
Continuing to expand the number of active ETFs we have, where we've had very successful launches of roughly a half dozen, and there are more to come. Bottom line, the investment performance that I already mentioned on a one and three-year basis being the best in five years, which I think reflects this renewed rigor under our Chief Investment Officer and our excellent portfolio managers. But I've also said we're a public company, and there's no absolute blind insistence on the current structure. We will do what is in our shareholders' best interest. As a public company, that means being open to whatever the best or the most value-added approach would be on behalf of our shareholders.
It's a question of value and math, and we believe that we can continue to improve the performance of this business, and that's what we're focused on doing for right now. Chris, anything you wanted to add?
Thanks, Peter. I might just add in, look, we're really focused on trying to strengthen this business. That is, you'll have seen a number of the changes we've made in the leadership team with a Chief Investment Officer, a new Chief Operating Officer, a Head of AI, a Head of Product, a Head of Corporate Development, new risk leadership. So really trying to strengthen the team. The bedrock and foundation has to be around our investment platform and delivering consistently strong performance. So it's good to see that coming through with the numbers Peter cited. And then if we can deliver that, and as we deliver that, you start to see that in client flows. For the first nine months of the year, we had record flows of $54 billion.
To give you a bit of flavor around that, it is really in the areas where we are delivering strong, consistent performance. So that is our Advantage platform, the quantitative equities. It is our emerging markets platform. It is our Japanese equity capabilities, a number of our fixed income strategies, some of our alternative strategies like our convertible arbitrage strategy. So there is a real sort of breadth around that. Then, look, we also see a lot of white space around our business, right? We are largely a public markets active manager, but there is a lot of white space.
That is exactly why we hired in a head of product and head of corporate development for the business to really help us chart that course ahead. We see a lot of upside potential from here. Meanwhile, continuing to operate the business as effectively and efficiently as we can so that we can deliver better margin for our shareholders as well.
Yeah, just to reinforce this, I am going to again repeat other things I have said. I think perhaps sometimes in the past, people had the perception that there was a dogmatic insistence about these two businesses being together. We believe that we can continue to create significant value, as Chris was suggesting, with these two legs and then with the third leg of Lazard. But it is not a dogmatic insistence. It is an empirical question of, as they put it, math, on where the value is the highest for our shareholders. But we are very excited about the pathway forward and all the things that Chris and team are doing. Then we are also very excited about the new third leg of Lazard that will come into existence in early November.
Thank you. Our next question will come from Gabriel Angelini with Bank of America. Please go ahead.
Hi, good afternoon. Peter, I think we're about three years into Lazard 2030 now, and when I look at the valuation, I don't think the stock is reflecting the progress and the optimism that we heard in your prepared remarks. When I speak to investors, we're hearing some skepticism around whether the turnaround is taking longer than maybe you'd expected or whether Lazard might have missed part of the current M&A cycle. How would you respond to that, and what would you say that view is missing?
Well, I would agree with you that I don't think we're getting credit for the progress, but most CEOs would probably say that. I would say the following: I think the changes that we had to make, both in terms of our Managing Director bench, which was essential to improving the commercial and collegial duality that we talk about in the business strategy, especially in North America, to cover both large cap and private capital, was going to take time. Relative to our internal plans, relative to the Lazard 2030 plan that we laid out internally, we are, if anything, a little ahead of schedule, but definitely on track. This has not taken longer than at least we expected.
Obviously, I can't speak to any outside expectations, but I think emerging from a J-curve where we had upgraded 40% of our Managing Directors over roughly a three-year period is actually pretty good. But I understand others may have different expectations about the timetable. We can't control that. All I can say is we are emerging from the J-curve period, seeing lots of very positive forward indicators, and relative to our internal planning, we are definitively on schedule, and we intend to remain so. With regard to missing the M&A market, I also just don't really see that. Again, our weighted pipeline for next year is twice what it was as of this time last year. That's not consistent with missing any window.
Perfect. Maybe as a follow-up to that second point, I think when we look at industry-wide data, it does look like volumes are decelerating, but you've mentioned several times now that you're not seeing that same deceleration. Is it fair to think about this as Lazard getting back to your more natural market share as those MDs that you've brought on are ramping, or would you argue that the industry backdrop remains as constructive as it was, say, three to six months ago?
I'd say it's probably the former, but I don't really know because obviously we have insight into our own deal flow and we're reading the same reports about the overall market that you are. So I don't have anything differentiated to say outside of our own experience, but I think our own experience is suggesting significant momentum, again, on schedule. And whether that shows up as a constant share of an expanding wallet or a larger share of a stagnating wallet overall, I don't know. But we're really focused on our internal operations and tracking and accountability and client coverage and all the things that go into continuing momentum, and that's what we're seeing. It may well be the hypothesis that you suggested, which is we take a larger share of a market that's not growing as rapidly as it was in the past. I don't know.
Thank you. Our next question will come from Brennan Hawken with BMO Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. Tracy, you spoke to the shift to greater cash. It's consistent with some comments that we've heard you make more recently, so not surprising. But when we think about it from a framework perspective, and we think about those few percentage points that we'd be adding to the ratio, what should be our starting point? Do we take the year-to-date comp ratio as the starting point, or do we take last year's ratio and add a few percentage points to that? What's the best frame of reference?
Yeah, it's a fair question, Brennan. Thank you. I think you understand the dynamic well, and I understand your question. Well, the way I would answer this is on a like-for-like, no change in the deferral policy to date. Our remarks throughout the year would be consistent that we would have expected a decline towards the end of the year on an adjusted GAAP comp ratio. I think that would have been modest, a few points, but that would have been modest. And then I would reiterate what we said before, which is that if we were to make a deferral change, and I'll come back to that in a minute just on magnitude, but it would accelerate. And again, I want to make sure this is really clear.
I know you understand this, but for others on the call, this is purely an accounting recognition concept. I have mentioned before to you and to others that I am very focused on comp discipline on an awarded basis, on an actual economic basis. This is an accounting concept that would accelerate some of that today and would help us by managing, again, that share dilution concept. The impact of that would be a few points. You can think of that on kind of a year-to-date accrual basis. I think that is a good basis. I would just reiterate that were we not making that change or if we did not, you would still see that kind of contraction or decline in the fourth quarter on model space. Does that answer the question?
The only other thing I would add to that is, this is one of those situations where we have talked about wanting to manage share dilution. We have talked about share buybacks and wanting to continue that into the end of the year. As far as the total magnitude, it is hard to comment now, so I will not. I will just flag that duality of focusing on both whether it is share buybacks or whether it is decreased deferrals, so increased cash. Economically, it is very similar. We are trying to solve more than one opportunity with this. We see it as a great opportunity and the right time to make that change. Does that answer the question, Brennan?
I think so. Why do I sort of re-paraphrase, and you can confirm that I am understanding. It sounds like what you said is, and totally get you, yes. When you increase cash, you are increasing the expense in the year in which it is earned as opposed to amortizing it later. So totally understand. It sounds like what you are saying is like-for-like basis, not changing the methodology, we would have seen, I think what you characterized it as modest improvement in the year-to-date ratio as we come into year-end. However, given the change that you guys are making, no change to award it, understood. On an adjusted comp ratio basis, there is going to be an offset to that improvement that you guys would see from the accounting change. Is that fair?
I would just note, Peter, that we have not finally decided to do this. I think Tracy said we are considering it, so we will have more to say about that in the coming weeks and before year-end.
Otherwise, directionally, Brennan, I think your comment is accurate with Peter's caveat.
Understood. Of course, you do not know the revenue that is going to come in the fourth quarter, so that is a to be determined also. Okay, thanks. I appreciate that. Thank you. One more, Tracy, because you had some interesting comments on efficiency efforts that we are going to learn more about, I think, in the coming months here, it sounds. Can you give us some texture on where you believe there is the most wood to chop? We discussed this since you have taken the reins. I know you are very excited about this opportunity to make the organization more sort of lean and mean. When you think about some of the areas where you think, low-hanging fruit is always a bad term, but maybe the most ripe opportunities would be for these efficiency efforts.
It is a fair question. I would characterize it in a number of ways. Part of it is thinking about where and how we can serve. Part of that is around centralization. I think centralization and standardization of the workflow is probably one of the most, using your term, the lowest hanging fruit. Lazard has this amazing global presence. Not only is it global, but it is local. So where we operate, we have amazing connectivity to our clients. That said, historically, that geared itself in kind of the corporate functionality, and that is not necessary to superb client delivery.
So I think some of the centralization and uniformity that we can deliver, delivers a lot of cost savings, and frankly, delivers better delivery to our front offices and frankly, to our clients. So I would say that is one. Another is vendor rationalization. We see a lot of opportunity in that area.
That is partly, I think you are already seeing a little bit of that in our non-comp expense accrual relative to some of the expectations around inflation. So I would say those are probably two of the biggest areas. Technology remains a huge opportunity, but it probably lags some of the process and workflow redesign.
Thank you. Our next question will come from Connell Schmitz with Morgan Stanley. Please go ahead.
Hey, thanks for taking my question. Peter, I know this was largely addressed, but for more clarity, I'd like to dig more into the potential for the upcoming U.S. midterms to catalyze M&A, given your expertise here. Can you speak to the credibility behind the notion that a Democratic sweep could ultimately act as a near-term propellant to large transformative deals ahead of a potential shift in the reg environment in 2028? Or is this just not much of an impact given you've already described a pretty robust deal-making environment and deals really aren't waiting for the midterms? Tracy, as a quick follow-up, can you help quantify the level of pull forward in the advisory this quarter versus last quarter?
Sure. On my question, I'd say the following. I don't think that the midterms will have any effect on the existing regulatory environment, and I know this was not what you were suggesting. Some people, however, have thought that, so I just want to clarify that. I think your question is kind of one layer beyond that, which is, if a blue wave happens, does it further accentuate the need to get deals done before a potential presidential election in 2028? Maybe at the margin is the answer, because it would reinforce the odds as of now that the White House would switch parties in 2028.
In other words, if this blue wave doesn't happen at all, which is an unlikely scenario at this point, it may take some of the timing off of when the White House may switch, and a massive blue wave would probably reinforce the odds or the perceived odds that the White House would switch. Then leading us to that next stage that I've already talked about with regard to the DOJ, FTC, et cetera. I would say, though, a couple factors make this why I said at the margin. One is the desire to get deals done now is pretty strong, and so a little bit of extra emphasis there, I think, is an accentuating factor, but doesn't materially change things all that much.
Secondly, we are still pretty far out from a presidential election. While the midterm outcome may affect the perceived odds of the White House moving one way or another in 2028, it probably does not move it that much. That is why I think it is a great question and it is a subtle question, but I think it is probably pretty marginal.
On your point around pull forwards, I would say pull forwards for the quarter, I would make a couple points. They were broad-based, not really as concentrated as I think people might expect. Frankly, I think it was not concentrated in any one transaction. I would reinforce this concept that sometimes fees associated with a particular transaction can be spread across multiple periods. I think that sometimes can be difficult to get a read through on.
To help on the quantification, I would just say that Q3 pull forward, it was really right on. It was slightly below what it was year-over-year on a quarter basis, and very much in line with $2 million or $3 million of an average over the last year or two. Again, nothing exceptional. An average amount of pull forwards and frankly, less concentrated than what I think people might assume as far as any given transaction.
Awesome color. Thanks, guys.
Thank you. We will take our last question from James Yaro with Goldman Sachs. Please go ahead.
Thanks for the follow-up. Tracy, I think we are getting a couple of additional comp deferral questions. Just two more clarifying ones here. I know you have said that you have not made a final decision on changing the deferrals, but is this part of the explanation for the persistent 69.9% comp ratio each quarter of the year so far? Or is there something else? Then number two, could you just speak to the timing and magnitude if you decide to make the deferral impact in light of your three-year comment? In other words, would that potential change only impact 2026 or would there be impacts in 2027 and 2028 as well?
Okay. I understand the follow-up question. The definitive answer is no on it factoring into the 69% accrual throughout the year. On that explanation, I would just guide you to, frankly, our last quarter's comments around J curve, revenue growth, the comp expense line, and the investment spend. That does not drive any of that. I would reinforce what Brennan's question was that on a like-for-like basis, we would have otherwise expected a modest increase in the fourth quarter. To your point around its timing, I cannot speak to magnitude for the reasons that Peter mentioned. We have not made that definitive decision. I will give you some framework to think about it, though. I cannot answer the timing question. Timing, we would naturally go through that in our normal compensation year-end process. That has yet to happen, which is why we cannot the exact.
But over the next quarter, we will be able to give that color. On timing the impact should we do it, regardless of magnitude, when does it show up? It accelerates some of that. The amount of increased cash or the amount that you otherwise would have deferred that you are now paying in cash, that is an immediate recognition on a GAAP basis in the current year. It does not impact the total award comp for this that the way to think about that is each year when you eventually roll off of the prior amortization of prior deferral periods in the past, each year, you are recognizing a third of prior year's amortization. So it is this vintaging of amortization that happens. Where this will really benefit the firm in the future is one, the ratio itself, the quality improves.
But two to three years from now, what will happen is your amortization build includes much lower deferrals from the current year, next year back. So it creates this kind of embedded improvement in your comp expense line over effectively the next two to three years. So that is when it manifests. The reversal of that effectively is as future periods require less amortization of current year deferrals, if it makes sense that way. The only framework I would give you around magnitude is, again, I go back to the purpose of this is to improve the quality of the ratio and to attract better talent and improve the overall quality of our compensation program for our employees. One of the metrics that we look at is just where are our deferrals relative to market.
You can do a little bit of research on this, and I am happy to talk about it, but one estimate of magnitude is if we were to get our gross consolidated deferrals closer to average market participants, that would be a good target over a period of time to try to achieve.
Thank you. Ladies and gentlemen, this now concludes Lazard's third quarter and first nine months 2026 earnings conference call. You may now disconnect.