All righty. Without further ado, I'm pleased to welcome back Ken Moelis, Founder, Chairman, CEO of Moelis & Company. Back to the stage. Since founding the firm in 2007, Ken has created one of the leading independent advisory firms with a growing global product footprint and robust growth in the scale of the franchise, in particular over the past two years. So thank you for joining us again, Ken.
Thanks for having me.
All righty. Let's jump right in here. So I just want to start with the big picture one here. You're 17 years into building the business. It's now a $6 billion market cap company, $1.4 billion of revenue on my forecasts for next year. What's been most surprising to you over the journey? In which areas have you executed better or worse than you expected? And what really gets you excited for the next three to five years?
We only have 30 minutes for this one. One question. I've been thinking about what's most different. You're talking about from the day we started, kind of thing?
Yeah. Sure.
It's interesting. When we started, we started right before the crisis. And then once the crisis hit, I was terrified. Like, what stupid thing have I tried to do here? And then I quickly realized the crisis was the best, the 2008 crisis was the best thing to happen. Us bankers became available. We didn't have leverage. We had raised money. And what I thought in that time frame was I always said, if you went to sleep as Rip Van Winkle in 2008 and you woke up 30 years later, I thought somebody would say, if you were financially curious, when did Glass-Steagall get put back in place? Because the whole system would spin out away from where it was. What surprised me, and it's happening right now, is that it's not taking 30 years.
I think what people are missing is the entire transaction finance world is radically changing from a bank-centric market where it was for most of my career to alternatives, life insurance, pension funds, sovereign wealth, matched funding. So again, just that difference between it taking 30 years and 20 years right now is going to be, I think, one of the unbelievable opportunities. So again, the whole thing was transaction-based, meaning the banks wanted to be in the room when M&A was being thought about. So they figured that out in the 1990s. And that's when they all consolidated the industry. Citibank buys Salomon Brothers. JP Morgan buys five companies. UBS buys five investment banks. Deutsche Bank buys five. And the reason they did that is they were trying to fill their balance sheets, right? They had trillion-dollar balance sheets.
And the place where the most profit was at the moment a transaction was happening. So they wanted the investment bankers who were in the room when M&A was being thought about so that they can then finance it. Because those financings were always done at a margin of profit significantly better than a revolver. Okay. The crisis happens. And I think the regulators start waking up to the fact that financing a system with five-day deposits, five-day liquidity on deposits, and five-year loans is a bad business. And by the way, everybody said 2008 only happens once every 1,000 years. Well, that's bullshit. As I said, they wouldn't have made the movie It's a Wonderful Life if it happened once every 1,000 years. 80 years ago, Mr. Potter had to jump in and stop what was the bank run. There's no Mr. Potter. I think it was Mr.
Potter. He might have been the bad guy, right? Mr. Potter, I think, is the bad guy. It was five days. Now SVB, Credit Suisse, and the rest of it happens. First Republic. You figure out it's five seconds. Five seconds and no relationship, no time for Mr. Potter to ask you not to take your money out. That's just completely not acceptable for the taxpayer to bridge the gap on those bases. I think the regulators saw that. That's why they're making it so difficult for the banking system now to put these assets on their balance sheet. The whole system, all these M&A that was set up to bring investment bankers in to create assets is a dead system. I think that system is being squeezed out by the regulators. By the way, I think it's the right answer.
As a taxpayer, the taxpayer should not be funding the largest bank's ability to go into fintech and do all sorts of things. I mean, if you're going to be regulated, utilities are regulated. They don't even have their liabilities guaranteed. But they can't do super growth things. They can only do things that are in the interests of what the regulation is for. And for some reason, we had the banks out of that for many years. It's going away. That whole system is going to, so right now, there's $2 trillion in private credit. I think very rapidly, the $20 trillion that's left in the banking system of below-investment-grade credit is going to move over here. And that will reshape everything. The reason that a lot of people might have used, I went to UBS in the early 2000s because I wanted the balance sheet. It was below market.
I would use the balance sheet to provide an extra turn of leverage in order to win business. Off the table, it can't be done. In fact, the capital is probably less flexible than private credit capital. So $20 trillion is going to move. And I think that's going to reshape our industry in a way. Look, I still think when trillions of dollars move in any direction, people want to have competition around it. Again, this old system was a little closed garden, if you remember, like the old AOL in tech where everything was in your garden. So if I was at UBS, my answer to every question about where's the best capital tended to be UBS as the solution because I was there to create assets for their balance sheet. And over here, I think it's going to be open architecture.
And so what that open architecture, I think, leads to is 50-100 institutions that can provide this $25 trillion of capital and five or six of the independents that are not conflicted. We don't have a balance sheet to feed. We don't want a balance sheet. We want people to look at us and say, "They don't have a conflict. We want to place $2 billion of a pref or some instrument. Why don't we use them and let them auction it off amongst those new credit providers?" And I think this whole change in the financial system is what is surprising me right now, is what it means for us. Again, when we went public, I never saw our ability to get to a $5 trillion-$6 trillion market of billion. Sorry, I wish it was trillion. $5 billion-$6 billion market cap.
But what I'm seeing is the reason why it might be happening is we are sitting in the middle of the greatest change in the history of transactional finance.
Fascinating. Okay. Maybe let's just turn to the macro. Looking at 2025, how supportive is the macro at this point for the business?
It's surprising. That's also been better. I thought the election would be positive if it went to a new regulatory environment. The day after the election, I was surprised by how exuberant the market was. As usual, the market, one of the reasons I like being public, I think sometimes the market is way smarter than even us running the company. So it's been the animal spirit part of it. Yes, regulation will drop. I think the 10-year has responded better. That's another reason why everybody's so excited to what might be a tax cut environment and higher deficits and more growth. But people were afraid the 10-year would react negatively. It's reacted positively, and the last part is I've been around the world. I was in Europe and then in India.
And outside of Western Europe, which is very depressed about a Trump victory, by the way, you're barely allowed to talk about it in France and Germany. You're not even allowed to mention anything good about it. It has to be all horrible. So they're in a funk. But I went to India, and their total animal spirits are so is the Middle East on the new regime. And from what I could tell in the U.S., it's funny. I know a lot of corporates have said they were going the other way on who they were rooting for. But the amount of animal spirits, let's do something. It's time to do something. Not just regulatory, but because it's time to do something. All systems are go. So I feel very good about that part of it, which is hard to define animal spirits, but it's out there.
Great. Maybe just digging a little bit on the post-election impacts. On antitrust, obviously, it became so much more aggressive in the U.S. under Biden. What does the sweep mean for U.S. antitrust policy? And then maybe you could just talk about the DOJ, which will turn over more quickly, versus the FTC. Do you need both? And then where do we get to on that antitrust spectrum versus, in other words, before 2020 versus the past four years?
Look, I think it's definitely going to be more predictable. I think there were new theories of antitrust that were coming into place that you just didn't know where you'd become a new theory where big is bad. I mean, our antitrust policy for the last four years is a lot of it's been big is bad, and big is not bad. Big is part of the ecosystem. There's a lot of drug creation. By the way, it's not bad for America. There's a lot of money that goes into biotech and drug creation, but not everybody wants to put together a sales force to go distribute it, so they kind of tend to sell it up into big pharma. That was good for everybody, and you can see what happened is that the dollars dried up. If you couldn't exit, the dollars would dry up going in.
Is it good that we're falling behind in the amount of money going into new therapies and things like that? So there's a lot of new theories, which will be good because I will tell you, there were transactions that you wouldn't say were antitrust violative, but people were worried about some new theory of antitrust that would hit them. So now at least I think you'll know that the old rulebook is in place, that it has to result in a consumer restriction or something that restricts the consumer and raises prices. And I think all of it will be deregulatory. By the way, it's not just FTC and DOJ. How about every other regulation? I think there'll be a huge deregulatory environment that will just EPA getting out of your way. I think there'll be a lot of deregulation that frees people up.
Look, there's a lot of energy companies that I think felt they had to spend money on climate change initiatives that they probably didn't think were optimal capital allocations, but they had to do something. I think you'll see a lot in the energy patch of people just going back and saying, "Hey, we're in the business of providing the cheapest energy possible to the most amount of people at the best price." And by the way, that won't exclude solar, but it'll free people up to do things that they feel are economic but might not have met the social requirements of what was going on. So I think a lot of that's going to happen.
What about tech and cross-border deals where it's a little more cross currents there in terms of antitrust?
Tech seems to. People ask me about that on tariffs on cross-border. Tech doesn't seem to be affected, and the tech market is back. We invested a lot in a big tech team. It's been a fabulous addition to us for two reasons. One is we took out what I think at maturity could be a $200 million or better business without paying for it, without buying it, I should say. We paid for compensation, but it's what cost us our comp ratio last year, so for one year of hurting our comp ratio, we end up with this fabulous business. But there's a second part is they are ramping up. I think they're going to cover their compensation costs standalone one year after purchasing, 18 months. That's unbelievable, but second, the leader of that, a guy, Jason Auerbach, runs it. Very disciplined.
And he showed me that I think they do something like 5,000-6,000 calls a year. They have 14 managing directors on private equity. And our goal is to be very important to private equity. And private equity is very sophisticated now. They track. They know exactly how many times Moelis & Company is in their office versus other people. So when we didn't have the tech effort, we had more of a strategic effort. So we might be 5,000 calls more, maybe 4,000 calls more into private equity on the tech franchise than we ever were. Now remember, when they come and they look if they're going to give us a media deal, an energy deal, an infra deal, a healthcare deal, these decisions all go to a central point. And they go, "How much has this?" Because it's close. Sometimes it's obvious that one firm gets it.
But I tell you, most of the time, it's pretty close who they're going to give it to. And one of the elements is how often do we see them? How many good ideas do we get from that firm? Do we owe them a piece of business? Because have they shown us 27 things that we came close to? And I will tell you, 5,000-6,000 more calls doesn't only help the tech effort do revenue. It helps everything else in our organization become important to the sponsor community.
Excellent. So let's dig a little bit more into M&A. It's been surprising. Industry M&A completed volumes are actually down a little bit this year. Announcements are up. So it's been a.
What did you say? Completions are down?
Completions are down, I think 8%, and announced volumes are up 16%, which is, I guess, perhaps surprising given the optimism around M&A. But obviously, you outlined a constructive path for next year. Maybe you could just talk about what this cycle looks like in your view and over what time period, roughly, do you think we can get to a normalized M&A environment?
It doesn't stun me that completions are down. Remember, the election was like November, what, 5th or something? It's late in the year to put the animal spirits into people. And I almost got sick of saying it on my conference call because I felt like an idiot that we had kept saying our backlog is at all-time highs. And I was getting frustrated just repeating that and not having the revenue. But what was happening is we kept getting assigned deals. But people say, "Yeah, we want to have a banker. We want you to be on top of this. And we're not going to go now. We're going to go in six months. We're going to go in a year." And that was actually pretty expensive. You don't want to turn it down.
But the minute you put a deal in backlog, you have to put a deal team on it, because if you don't pay attention to that deal, you'll lose it, and you will then piss off the client as well. So you have a deal team on it, and it's continuous, and then you're trying to win more deals, but nothing's moving. It's almost like a retailer who has inventory, too much inventory. So now what happened, and it started to happen before the election, but it's accelerated, is things are completing. Not only are we completing, so kind of your book-to-bill ratio is getting in line, but now our pipeline is still at all-time high, but we're actually now completing a significant amount more is going to completion already, and I see that continuing.
I used to call the pipeline fragile because I thought in a bad market, there's a dozen reasons to not do a deal. And in a bull market, there's a dozen reasons to do a deal. So right now, I think people are going to be leaning toward the dozen reasons to do something rather than not do something. And I see it. Look, I think it's going to be a strong rebound initially, but not crazy because we still have one problem in. Again, the strategics have been active. I think they'll continue to be, and you'll see some larger deals that people have been waiting to do for better regulatory. But the private equity is definitely interested in getting their best assets out. Remember, none of their best assets came to market in the last two years.
If you had a 15% growing asset and you were private equity, there was no reason to put it on the market in 2022 or 2023 and get a bad deal out of it. You've convinced yourself that if you wait two years, revenues will be 30% higher, and EBITDA will be 30% higher or maybe more, and you'll get a better multiple. So let's just hold a quality asset until a better market. I think that market is today. We're starting to see A-quality assets line up to come to market, the best stuff, which generates more demand. But there is one thing that I think will delay some of this rebound to 2026, and that is that the commitments of limited partners to the private equity, especially the middle market, in 2021 was abnormally large. It was like 2x.
So especially your middle market private equity firms, I think, are a little worried about running their capital to zero before the period of commitment on the 2021 funds ends, which is 2026, because they're all so lopsided committed to that. Once that passes, remember, these are five-year commitments by the private equity. So if you eliminate all the 2021 LP commitments, we're back to a normal environment. And I think you'll see to the back half of 2025 and 2026, you'll see the middle market, I think, really come back because they'll see their fundraising cycle will be late 2026, maybe even early 2027. So they won't mind spending their money. They've been very afraid, I think, of running out of capital. How do you pay your people? What do they do all day?
If you have to go to market and everybody says, "No, we're overallocated." So I do think that the middle market will be a little slower in putting out their money. But that's only till 2026, 2027. Then they'll want to be back in business full-time or late 2025, be back in the fundraising pool in 2026, 2027.
That's really interesting. Maybe just one more on that point, which is, and I think people have a hard time with this because a zero-interest rate environment caused the private equity ecosystem to perhaps comprise a bigger percentage of M&A than it would normally. So I think in 2021, 2022, it was almost 40% of the M&A market. Right now, it's 30%. Last year, it was under 30%. So when you think back over the time and factoring in what you said at the beginning here, what is the normalized sponsor M&A contribution look like?
That's a hard question to answer. But I'll say this. You're thinking of private equity and sponsors. Now, remember, yes, we go to market every day and we want to, and I'm going to use two names, just KKR, Blackstone, Apollo. You're talking about addressing their $25 billion funds in private equity. And maybe they're putting out 10 a year. I don't know if that's right. I'm making up numbers. And that's pretty good because there's 20 of them. But those companies are now putting out $100 billion a year in alternatives. I think that's why I think the fee pool from sponsors will be much larger than people think because they're not all going to their programs here. I'll bet none of them are talking about their private equity. It's become almost a pimple on their company.
Not that they don't do it and we want to make those M&A fees and we're going to, but I want us to be involved in the $100 billion to what might become $200 billion a year if you listen to them. Per year, they're going to put out in alternatives. And they're going to, but we're in the middle of a transaction right now. I don't think it's been announced or done, but it's like a $1.5 billion pref in a deal, not an M&A deal. And we showed it to one of the direct lenders. That's one of the best things we've ever done for them. They're extremely happy with where they are. I think it's a $25 million or $30 million type fee. So it's an M&A type fee for coming up with capital for the other parts of the firm.
So, again, I think people are underestimating how these large chunks of capital, and they're going to be large. A couple of private equity firms have done $5 billion-$10 billion direct loans they originated. I think over time, the companies are going to say, "Well, I mean, it's all novel last year that this was happening." But they're going to say, "Well, aren't there like 10 of these firms that can do $5 billion direct?" And their boards or their advisors, everybody's going to say, "Well, why don't you give it to an independent and let them auction that and find out if there's 50 basis points more you can get? Run a clearing price on a $5 billion deal. Why wouldn't you? Why wouldn't you talk to five different capital sources and run a mini process and get the best terms and the best?
I mean, that's what you do on investment-grade financing. You go out and you talk to everybody, and you don't just take anybody's bid. You take the best bids. So I think we could play an amazing role. There's just a great role in there for independents. And the fees are pretty good because these assets, if you can put a $5 billion asset on your direct lending book, that's as profitable. You listen to Marc Rowan, you listen to all the. That's more interesting to him. He's more focused on that than they are almost on their PE. So they will pay fees to be shown that stuff. And I think that the fee pool from sponsors is going to be a lot larger if you think of them in the way I'm thinking about it. And we have to be on top of that.
I've been very much pushing our capital markets to make sure they're in that market because I think it's going to explode. And it's not going to be easy to get the talent and get in the market and be—not every M&A advisor is interested in capital markets. Some of them just want to be M&A advisors. It's not the same talent base to have a banker who does M&A and a banker who does capital markets.
Right. So I mean, it's interesting you're talking about the growth of the capital markets advisory ecosystem, which obviously spans all the way from very distressed all the way to healthy. So maybe you could just talk about liability management, which is clearly one part of that. It makes a lot of sense for you to be advising on that. Is the opportunity set that you just described as attractive in the healthy capital markets space? Is it as high fee? Can you provide the same value as you can in liability management? And therefore, I guess, is there sort of replacement if liability management comes down and normal capital markets improves?
Yeah. Well, we first started. I always said, "Nobody wants to go bankrupt." So if you give them, we had one client who had a bank covenant problem. And so we went out and found, I think, a couple of hundred million of 15% PIK preferred. That's a solution. You could say, "Oh, why don't we negotiate the banks and have a whole liability management thing?" Really, what most people want is to get enough capital to continue to try to improve their business and work their way out of it. These liability management processes have been very hit and miss now, especially with the new cooperation agreements that the creditors are signing that they won't act without each other. We did one I'm proud of. I was involved with it with Carvana, which was the most unbelievable thing I've ever seen. The stock was at $4.
I think it's at 260. A year ago, we were in liability management mode. And today, the market cap is like $250 billion. But most people will just do a financing rather than go through the whole liability management idea if they can. So that was the first part of it. But then I think we're going to be in the room when, again, you're in the room when a corporate is selling a division. And you have the call.
You could say, "Look, our team knows there's a billion of pref that could leverage the demand, and we could get it from two phone calls." I think the CEO and the CFO are going to be very interested in that knowledge of, you're talking about, I think it started as unhealthy markets, and it's moved very rapidly as insurance companies and alternative asset managers bought insurance companies and are really looking for almost investment-grade, high-quality assets. And they're looking for those in size. And I think if you're at the table when they're being created, you can direct them.
The last part of the sponsor ecosystem, in my mind at least, is the secondary continuation fund business. Maybe you could talk about your aspirations there.
Yeah. Look, that's my 2:00 A.M. wake-up when I think about things we've done wrong. I know we've done some things right, but about 2:00 A.M., all I think about is all the things we've done wrong. We've not executed well on that. We made a poor decision a few years ago. We did see continuation funds being good, and we kind of didn't do it exactly right. Let's just say that on a personnel basis. So we're looking very actively to figure out what to do in this space. I think continuation funds will be here to stay. There'll be a piece of the, as control premiums come back to the market, I think the LPs will push more for control premiums than just for liquidity. And they'll want to do M&A to realize the full value of the asset.
But the GPs, the continuation fund, is a very important vehicle. And so we have to improve there.
Gotcha. Okay. Let's turn to your strategy, investments, etc. You've hired a lot in the past two years. When you look ahead, where's the best place to invest right now? You talked about secondaries a little bit. Where else?
U.S. First of all, U.S. is the market to be in. All the big fee pools: healthcare, tech, same fee pools, industrials, and I'd say energy. I think energy is going to be surprisingly good. I think that's one of the places where deregulation and DOJ, I think that all meets to say, "Okay, we're going to," because if you think about it, the incentives that were put in place by the IRA, it's distorted the entire energy business. When you take all that stuff off the field, people are going to revamp everything they've been thinking about what is the right strategy for energy. I think we're going to have an active discussion. We hired a great team about, I think it was about a year ago now. I feel like we're in a good position there.
But those large fee pools, and especially in the United States, look, the United States is the place to be. It's the transaction center of the world. We do very well in the Middle East. We had a good year in Asia. But they're all kind of small compared to what's going on in the United States.
Got it. I think you did a lot of hiring last year, less hiring this year. MD count is a little more flattish. What's the right growth rate for the MD count going forward?
Look, I think there's room for a lot of growth because I actually believe if the federal regulations continue to almost destroy this old system, just think of how many bankers and how many assignments are available if it's not commercial bank-centric. You can do the math yourself. Those are big entities. There were lots of them. And so people say, "Are the independents too large?" And I can make a case that the independents can't fill the gap if what I think is happening is happening. But you have to find good people because you're not giving away balance sheets. In the old days, if I was at UBS, you could hire somebody who was kind of a B player because you were giving away below-market loans. Just put a candidate in front of below-market loans.
Today, I think it's going to be very much upgrading. You got to have the best talent because you're not giving away any candy along with the assignments. So you have to have really good people. We spent, I think, the last few years upgrading our biggest fee pools to the best talent we could find, and I wish we were more aggressive. Out of all the things I've criticized myself for, and we haven't been unaggressive. We've only been 17 years in business, but I look back and I say we should have been more aggressive, and especially, by the way, when these firms go out of business like Credit Suisse and Silicon Valley Bank, it's amazing how profitable the liftouts are because unlike any other hire, you're not competing with an organization that exists.
So if we go hire from Bank of America today, they're going to have the CEO call the client, and they're going to swarm the client and try to keep it. The interesting part is Silicon Valley Bank had nobody left to swarm the client. Credit Suisse wasn't around. So you can make those groups extremely profitable quickly. So look, I think I would like to be more aggressive, but you really do need A talent. You cannot be a standalone advisor and put B talent because you're not supporting it with anything off-market. You're just going to market with the quality of your people.
So you've talked about a 60% comp ratio over time in a more normalized backdrop. Any color you could just give on margins across the different businesses? And then when you think about getting to that 60% or plus or minus 60%, and you can correct me if I mischaracterize that, what's the timeframe to get there?
Our goal is to get back to about there, right? We'll decide at that time whether it's plus or minus a point because we were below there before. There's been some inflation in junior talent. So who knows if that'll be the point estimate, but it'll be right around there. I think that's the right place to be. We just haven't been in a revenue environment. I think we've put out an algorithm. Our CFO did, Joe Simon, that said four to five points of comp ratio per every hundred starting from where we were. I actually think that works. I think that's. I'm stuck with it, so I got to make it work, but I think it does work. But we've got to live by it because we put it out there. And then again, I think the revenue environment looks pretty good. How good for 2025?
Again, I think it looks very good. Could we get close to it? Maybe. Maybe. And then from there, the real thing I think that everybody, again, the focus is on comp ratio, comp ratio. I think we'll get back to 60% at some point. The question in 2021 was we took the pre-tax margin. So if we get to 60% and it's kind of normal way, we're shooting for a 25 pre-tax margin. In 2021, we got to a 33%. What did we get? 33%, 34%? 34% pre-tax margin.
I mean, so everybody's saying, "What can you do on this one point of comp?" And I'm like, "You're taking your eye off the big prize," which is if we keep our cost down, in a market, even if we're at 60%, if we can get up into the higher ends of these ranges, that was 12 million per MD we did in 2021. If we can get back to there, I think we can get back to a 34%-35% pre-tax because the fixed costs don't move. They move very little when you're doing all that. So the 40% comes, even if you're at 60% and you don't get to 59%, people go, "Where's the leverage in that a couple of hundred million of revenue that comes right down the chute at 40% margins?" And I think we can get back to that.
It's just I don't want to predict the future of where these animal spirits go, but it feels like we should be able to get back there.
I wish we had another 35 minutes, Ken, but we're out of time. Thank you so much for the time. I hope you have a good day.
Thank you. Appreciate it.
Next year.