All right. So before we begin, I have to read disclosure. For important disclosures, please see Morgan Stanley Research Disclosure website, www.morganstanley.com/researchdisclosures. Any questions, please reach out to your Morgan Stanley sales representative. All right. We are pleased to have with us Navid Mahmoodzadegan, Co-founder and Co-president of Moelis. Navid, I want to start by congratulating you on the news earlier this week. You will become CEO of Moelis on October 1st of this year. As part of this transition, you'll join the board. Ken will transition to Executive Chairman, and Jeff Reich will be appointed Executive Vice Chairman of Moelis. Maybe just to start, just give us some insight on the planning around this transition, why now, how your role, how Ken's role will change.
Sure. Thank you very much. I appreciate it. Nice to be with everyone today. You know, first off, let me say how excited I am about, you know, this appointment. You know, it's a real honor to have the opportunity to lead our great firm. We have incredible people at the firm and great momentum. I am really, really excited about stepping into that role. I mean, look, as Ken said, I think in the press release, this has really been originated by him as part of the natural evolution of the firm.
You know, I think Ken felt that, even though he's fully active and will continue to be fully active with clients going forward and has as much enthusiasm for the business as he's always had, that, you know, this was a great opportunity at a great time to give more responsibility, not just to me, but to the next generation of bankers that we've been developing at the firm, that are ready to step up and take more active roles, not just with clients, but with helping us manage the firm. I'm, I can't tell you how excited I am that, you know, not just Ken, but Jeff is also going to continue to be full-time, working and helping me, you know, manage the firm. To be able to have a transition with nobody important leaving is great.
and I think if you, if you take a step back and look, we promoted Chris Callesano to CFO. That was an internal transition that's been seamless. We promoted Kate Pilcher to COO not too long ago. That's been an internal promotion that's been seamless. You know, we talk a lot about talent development. You know, 45% of our MDs are internally promoted Managing Directors, a stat we're super proud of. And so I kind of look at it and say, this is just another example of, you know, Moelis & Company, you know, really, developing a culture that allows people to succeed.
If I was a young person thinking about which firm to go to, where do I want to work, I can't think of a better firm that sends the signal that we develop people internally and give them opportunities than I think what we've been exhibiting at Moelis & Company.
Great. Seamless transition. With that seamless transition, any change in strategy at all people should expect? Just how do you think about strategy once you take that CEO seat?
You know, the strategy that we've really been focused on the last few years is one that I've been, you know, central to and been helping to drive along with, you know, the rest of our senior management team. I think we have the right approach. We've been aggressively hiring into major verticals with major revenue opportunities, tech, oil and gas. Now with the hire of Matt Wesley and Paul and Jeff, a major expansion into, what we used to call PFA. I think we're going to rename it, but it's the business of continuation vehicles and raising money for private equity firms. We're going to do a lot there. That's a major opportunity for us. You know, all of these strategic initiatives so far have been really well executed. Our teams are fantastic.
They fit into the culture beautifully. The revenue ramps have been exactly what we predicted, if not better. That is the strategy that, you know, I want to make sure our foot is fully on the gas sign going forward. We think there are other opportunities like that.
Great. Let's turn to the environment. In M&A advisory, April earnings call, Ken noted backlog was down March to April. Since then, we've gotten some relief on tariffs. I saw the quote in the journal article yesterday that seemed a little bit more positive. How are you thinking about, you know, where the backlog currently stands and how are your clients thinking about the confidence to move forward right now?
I'm optimistic. It definitely feels better and better each day, since, you know, kind of the announcements of April, which I think set us back a little bit in terms of the M&A environment. You know, everywhere I go, people want to transact. They want to lean into transactions, whether it's companies or private equity firms or capital providers. Sure, there's parts of the market, especially, you know, companies that are directly affected by tariffs and trade and all of that where it's tougher to do deals right now and maybe tougher for a while. There is a whole segment of the market that's much less affected. In those segments of the market, we're definitely seeing, in our pipelines, a lot of new business activity, stuff coming into the pipeline. That really never stopped even through some of the volatility of April.
We're seeing transactions get done. We're seeing new transactions get launched. We're seeing our clients push us to launch transactions, even if the environment isn't crystal clear. All of that leads me to conclude that, you know, we're hopefully coming back into the kind of environment that we thought we were going to get. Is it perfect? No. Could something happen? Sure, you know, to take us off track. But, you know, I'm bringing a lot of optimism to this. And as I talk to our bankers, I'm seeing a lot of that same, that same feeling in their client dialogues.
Pipeline is up from April? What about that?
Pipeline is up. I think it's as tight pretty much as it's ever been, at the firm or close to it. We feel good about the pipeline. As I said, our bankers are busy and working really hard to try to, you know, get deals out there and hopefully get them to the finish line.
Let's talk specifically about the sponsor clients. So we're going on three or four years now of limited exit activity. What are your conversations like with sponsors right now and what will get them moving?
Yeah, look, the sponsor business is all about deployment and it's about returning capital to their LPs. I think, given that over the last few years, you know, sales and IPOs are down because of the turmoil in the M&A markets and in the IPO markets, there is pressure on private equity participants to return money to their investors. You know, you're definitely seeing that in, you know, back to this point of desire to transact. We feel, from our clients, that they do want to, you know, sell some of their portfolio companies and return capital to their investors. They need to do that.
You know, sometimes that reflects itself more in continuation vehicles, which is why we're super bullish on, you know, that business and the business Matt's going to develop for us because that's another alternative to get investors back some money. And so, you know, that focus on DPI is really there, which I think is a good indicia of what's to come on the M&A side as the market continues to recover. On the deployment side, you know, a lot of capital has been raised by a lot of different firms and that capital needs to be put to work. And so that's what we're in the business of doing, helping find and helping sponsors find places to put that capital to work.
On the IPO front, we have seen some IPOs over the last few weeks. They have priced well. There seems to be some build there. Do you need the IPO market fully open for sponsors to get moving? Are they waiting for the IPO market to open more? Is it fully open? What are your thoughts?
I don't think it's fully open. I think it's starting to open for certain types of companies, certain type of growth companies. I think, if you see some success with those kinds of companies, I think the aperture then opens to other types of companies to access the IPO market. Yes, we'd like to see a healthy, vibrant IPO market that's good for, that's good for the capital markets. It's good for our sponsor clients, and it's good for overall transaction activity.
Before we get to private funds advisory, you know, we have seen activity in stake sales from university endowments, local municipalities that are, you know, exiting, reevaluating their private equity stack. Does that impact sponsor ecosystem at all in a negative way?
No, I don't think so. I think, look, I think the idea that there's liquidity amongst LPs to sell stakes, if LPs need to do that for whatever reason, I think is just part of a healthy ecosystem that's developed around alternatives. And if you have an LP to LP trade, it doesn't directly impact a sponsor. The fact that there's liquidity in the marketplace to do that, I think makes it more likely that, you know, LPs will invest, invest in the next set of funds and the next set of alternative opportunities. You know, this is, again, this is why, you know, the team that Matt's going to be building for us once he joins the firm, which will be shortly, you know, that's part of the opportunity that he's going to go after as well.
The LP secondary opportunity is part of that whole panoply of businesses that we hope to build.
What about interest rates? Fed funds, there's two cuts priced into the forward curve this year, several more next year. Are sponsors waiting for cuts to get moving?
I think everybody wants rates to come down. Are people necessarily waiting? I don't know. You know, that's a tough game to play because you just never know what's going to happen there. I don't have a lot of conversations with people where they say everything else is right, I'm just waiting for rate cuts in order to move forward. I think that's a very tough line to follow, just given the uncertainty in the world.
If the business is performing well, if you think there's an active market of participants who will show up to take a look at your business and you think you can achieve a good outcome to try to optimize that outcome on the margin because you think rates will be cut, I don't find a lot of people doing that.
What about long end of the curve? Is rising 10 year yields coming up in client conversations at all?
Something to watch. You know, not directly, but yeah, something to watch. I think longer term, if you sort of said what are, what are the, one of the risks to the market long term, if the whole concerns about deficits and debt and fiscal, you know, the fiscal set of issues keep the 10 year at elevated rates, you know, that's not good long term for business. Let's hope that doesn't happen. Let's hope, you know, our politicians can have some sensible fiscal policy to help get those issues under control.
All right. Let's turn to private funds advisory. We've talked about it briefly, but it's, you know, an area Moelis is very focused on building out. It's been a big growth area for the industry. You've announced several key hires in recent months. Can you just give us an overview of where you're at in building out the private funds advisory business and what your vision is for this piece of Moelis?
Yeah, look, this should be and needs to be a big part of our offering here. The firm is, you know, beautifully set up given our relationships with sponsors, our deep sector expertise, to have a really big business in that set of businesses, in what we used to call PFA, which I think we're going to rename. The hiring of Matt Wesley was a game changer for us, in terms of having a real leader, a proven leader to help us build out those businesses and recruit the right people to do that. It's really important in those businesses to be a market leader. When you kind of look at, you know, who's doing well in those businesses, it tends to be pretty concentrated in terms of the top franchises in those space.
We want to have a top franchise. I think Matt is exactly the right person to help us get there. He starts next week, so he has not even hit the ground running yet. We have been able to recruit, beyond Matt, Paul and Jeff, who, you know, were on the sell side of the business at Houlihan Lokey, went to the buy side and are now coming back to the sell side to help Matt build the business. We also had a really good team of talented people within the company that, you know, we had been building over the years that I think are going to plug into that really beautifully. We are going to be off to the races with more to come.
Can you walk us through the different products here, GP advisory, LP advisory, anything else, and how investors should think about opportunities and challenges of each?
Yeah. Look, I think, you know, the business that Matt's going to first start to build for us, with Paul and Jeff, is, you know, continuation vehicles. That's a very core strategic business. That's the business of helping financial sponsors get partial liquidity for their LPs, in a specific portfolio company. That's, on a continuum of exit options. You know, one end of the spectrum is go sell my business for me. We're in that business in a big way. The sell side business, there's the recapitalization business. Sometimes sponsors won't sell a business, but they'll recapitalize the balance sheet and pay themselves a distribution or a dividend, or bring in other investors. That's a business we're in with our capital markets function.
and this business, you know, allowing LPs to cycle out who want to get out and bringing new LPs in, the continuation vehicle business is one where we have not participated in a meaningful way. That's, again, very strategic to our sponsor coverage business and, you know, the first business we're going to focus on. There are other, ancillary businesses to that business that we think there's major opportunity. LP to LP secondaries, which we've talked about, is an opportunity. Primary fundraising for private equity firms is an opportunity. GP stake sales, which we already do some of out of our asset management group, is a further opportunity to grow that business. When you look at all of that, that's a major, major, major opportunity for the firm.
Is LP more of a volume game where you need scale and infrastructure set up? Do you need to be bigger to have it be accretive to margin?
Yeah, I think we do. I think the LP to LP secondary business is more of a flow business and a scale business. You know, the spoils really do accrue to the market leaders in the space. That is why we're really focused on not necessarily being everywhere tomorrow, but being really great and then building out from there.
The disclosure around, you know, how big this business is, is kind of limited across the industry right now. Any sense just on how big you are? Could it ever get bigger than M&A over time?
I don't know that it'll get bigger than M&A over time. I do think M&A for the foreseeable future is going to be the key driver of our business right now. I don't know. M&A is, you know, 70% of our business, something like that, depending upon where we are in the cycle. I don't see this business necessarily overtaking that, but I think this will be, if we do it right, and I'm really confident we're going to do it right, given the team we're building, will be a very meaningful contributor to the company.
On the secondary side, how do you think about the structural demand for secondaries through the cycle? Right now we're hearing it's elevated, but in different parts of the cycle, how do you see it evolving?
I think there's going to be long-term demand for continuation vehicles and those types of structures because I think, you know, many sponsors look at some of their portfolio companies and say, I think this company is going to be great for a long time. I love this management team. I love this industry. I love this company. I do need to get my investors some liquidity, but that doesn't mean I need to sell the company. I want to continue to ride the upside of this asset. I'm going to give some of my investors the ability to exit because they want an exit and they deserve an exit. Others of my investors want to stay in and we want to stay in and continue to oversee this company. The continuation vehicle is the perfect product to achieve all of those goals.
What about the restructuring piece of the business? Are client conversations still elevated? Are they picking up, slowing down?
There's a good steady stream of activity in, what we call CSA, which is, you know, not just restructuring, but liability management, you know, balance sheet management, et cetera. We have a top-ranked franchise in that space doing great. You know, in any given one year, you could have spikes if there's economic volatility or high default rates. We're not in that kind of environment today. In any given year, you could have extraordinary client events. We had some of those last year. Our business is doing really well and they have a nice base, steady stream of clients and activity that we're excited about.
If we do get resolution on tariffs and we get a soft landing and, you know, the economy starts growing again, you know, accelerating, can restructuring decline from current levels or do you think it will still stay elevated?
I think there's going to be a steady stream of activity there because look, even if the economy is doing great, there's some industries that are going to be affected. There are still companies that, even if they've engaged in liability management exercise and pushed out maturities, they aren't going to necessarily solve the problem. They may need to come back again and re-engage with the marketplace about further extensions and further, you know, optimization of balance sheet. You know, some of those companies still have balance sheet issues and it's not like those problems have been solved. I am optimistic. We've seen now, we've been in the restructuring business, CSA, now since 2009, and, you know, it's been a really good business for us.
You know, sometimes it's a great business when, you know, you get these spikes like we saw during the financial crisis, we saw during COVID. It's been, if you have a leading business, like we have a leading business, a market share, a company that is very, a business that is very high market position and great reputation, there's going to be a steady stream of companies that need our services.
All right. Let's turn to expenses and hiring. So maybe just more broadly, we talked about the growth opportunities in the various businesses. Is it getting more competitive where, on the hiring front, you know, maybe you're seeing more competition out there or is that pretty stable?
Look, it's always competitive. We are trying to find the very, very best people in the world in these sectors and with these products. You know, that kind of talent is scarce. We are competing with other good firms to try to get that talent. You know, for us especially, it's really important that that talent fits culturally in our company. Culture is really critical to our company. We are looking for incredible people who want to be on our platform who fit. There is not a limitless universe of people who can do that in the spaces we want to be in where there is the biggest market opportunity, right? We also want people who can go after big revenue opportunities. Whenever we find those people, it's competitive.
It would be unusual for us to be the only person wanting to hire that person. You have to be there. You have to convince people that we are the best place in the world to work. We have been able to do that, and because I think we are the best place in the world to work. It is always competitive, and you have to attract the talent and then once they are there, retain the talent, which is really important as well.
On the pace of hiring, what are you seeing in terms of pace this year? Is it accelerating, decelerating? As you take over the CEO role, what's really your philosophy on the pace of hiring? Do you think Moelis needs to hire more and more or?
Look, I think hiring at the partner level is a 365 endeavor. You're always monitoring, developing relationships, figuring out who the great people are. Look, our tech hire, Jason Auerbach, you know, I had built up a relationship with Jason going back, I don't know, four years before we actually hired them. You know, the reason, one of the reasons we were able to quickly move to hire that team, in the middle of the regional banking crisis is because we had put in the work together to get to know each other. Jason had spent time with other partners at the firm. We had got to meet some of his people. We knew him and we knew how great he was and we knew how great his team was. There was a comfort level there.
If we had not put that work in, I do not know that we get them once, you know, once the regional banking crisis hit. We are always out there trying to figure out who the great people are, who the people are who would fit on the platform. Right now, one of the big focus areas is obviously building out the CSA team, the, I am sorry, the PFA team, Matt Wesley's group. That is, you know, a very, very high priority, but we have other priorities within the firm too. There are other big market areas, big TAMs where we do not have coverage, that we need coverage, and finding those people who can help us, you know, join our partnership to go after those opportunities is critical.
We're not going to hire anyone who we don't think is a top talent who is going to fit on the platform.
The regional bank crisis hiring spree was, you know, a great example because Moelis historically has been very nimble whenever there's uncertainty or things are slower and leaning in and then taking share the next cycle. Is that still the framework you'll deploy?
That's still the framework. I mean, look, you know, Ken always talks about pristine balance sheet and it's critical that we keep that, the fortress balance sheet, having the resources to move, even if it's a scary time because, you know, you can't pick your time when the talent's available. If you've limited yourself, without the resources to move, you've missed an opportunity. We're always going to, I think, adhere to that. We want to make sure we have the flexibility to create value when the opportunities arise. That's a fundamental tenet of the firm that we're going to keep.
And then, you know, you obviously have to have the conviction to do it, when the regional banking crisis is hit and the world looks like it's uncertain and you don't know when another tech deal is going to print, you actually have to have the nerve to follow through and hire those people. I'm really happy we did.
You talked a little bit earlier about white space and you're hiring in PFA. That's where you're focused. Any sectors in particular on the M&A side that you're more focused on or?
Look, I don't want to, I don't want to necessarily talk specifics, but yeah, look, there are, you know, there's, there's within industrials, there's some white space. Within healthcare, there's some white space. There's areas in Europe where there's white space. Look, pretty much in all of our sectors, even in some of our top-ranked sectors, there's some sectors where, you know, we're not covering all the companies there and if we can find the right talent to do that. You know, I personally want to stake a focus on the biggest TAMs. Like where, where can we really move the needle? Hiring is hard. Hiring, there's a lot of energy and effort that goes into that, not just from, you know, me, but our bankers who meet the people because again, culture is important.
Our administrative staff, our ops team, our HR team, a lot goes into hiring any banker. I really want to kind of stay focused on the areas that can move the needle the most.
All right. Comp ratio question. I have to ask. So it was 69% in the first quarter. Do you still feel comfortable at that level for the rest of the year? Any, any changes or things we should be thinking about?
Yeah, we're not making any changes to that guidance that Chris gave on our first quarter earnings call. I mean, again, at the end of the day, a lot of that will be dependent upon, you know, how the year shapes up. And baked into that too was an assumption on some of the hiring we're doing, including the hiring we're doing behind Matt's buildout. As of now, that's how we're thinking about it.
What do you think of as a normal comp ratio in a regular solid year?
Yeah. Look, we do not want to be at 69%. That's not what we think of as sort of equilibrium for our company. I think we've said, you know, through cycles, we'd like to be in the low 60s, you know, plus or minus a little bit depending upon how any particular year shapes up. That feels right to us. You know, having said that, you know, we have this pristine balance sheet with the resources to move, to go build value and capitalize on opportunities. You know, what we've asked from our shareholders who've been great about giving us this flexibility in the past is allow us to go capitalize on those opportunities in the short run. Like, don't let the comp ratio be the limiting factor in our ability to go and create value.
If you allow us to do that, we promise we're always going to be super mindful and respectful of what equilibrium needs to be over the long run. You know, our pledge to you is we're going to do everything we can to bring it back down.
It sounds like nothing structural changing that's changing comp ratio outlook over the longer term?
No, no.
All right. Great. On non-comp target for non-comp growth this year is 15% year -over -year. How do you think about balancing investing for growth versus getting efficiency?
Before we get to non-comp, the one thing I do want to talk about is I do think, and again, I do not want to put out benchmarks there, but I think there really is an opportunity hopefully for technology, AI to help us with, you know, comp ratio and managing that, you know, on the margin. I think, you know, and we are testing out some applications that really good early feedback on from our bankers, and we are rolling that out more broadly about how do we get more efficiency, especially from our, at least for now, from our junior bankers and making A, their lives better, so that there is a higher percentage of their work that is intellectually stimulating as opposed to just rote. I think AI can help us with that.
I think if we're successful in smartly adopting technology, the right technology when it's available, I think that could help in terms of the size of our pyramid. If the size of our pyramid can be managed down a little bit, I think that'll make the lives of our junior bankers better. I think that could help with comp ratio over time. Again, early days, I don't want to predict anything yet, but I think that's something that we're staying on top of carefully. On non-comp, we have a great team. They're very mindful of what we spend money on. You know, there are parts of our business where we do need to be and have good office space, good real estate. We've upgraded our real estate in New York recently in L.A.
We'll be doing that in London, soon. That's in process. I do think it's important to have, you know, good facilities that impacts culture a lot. It impacts client perception a lot. You know, we're very mindful of the spend on the non-comp side as well.
When you talk about the pyramid getting a little smaller, is that the bottom of the pyramid, the associate?
I think so. Again, I don't know what it's going to look like, you know, once we really embrace technology the right way. But my instinct is it will be a little tighter. Again, if we can have our junior people doing more in a way that's more intellectually stimulating for them, you know, we're never not going to have a pyramid. We need a pyramid because we're in the advice business and we want to develop talent. We need to keep developing the next generation of people who are going to interact with clients and all that. On the margin, can we be a little more efficient on the pyramid down the road if technology develops the way I think it will? I think there's a possibility of that.
What about the revenue side of AI? Are you seeing clients?
That's the big, yeah, that's the big AI for, well, for sure. AI is impacting lots of spaces. And so, you know, our tech bankers, you know, other bankers in the firm are becoming experts quickly in how tech, how AI is developing. And so there's a crop of companies to bank that are playing in the AI space and related spaces. And then I think even further than that, even if you look out even in the horizon, I do think, you know, AI has the potential to help senior bankers be smarter about opportunities to put companies together, be smarter in their dialogues with clients, be more efficient in our ability to create transactions. If you think about what really expands the pie, it's that, right? How do we make more transac, more smart transactions happen faster? AI could help with that.
I want to pause. Are there any questions in the room for Navid? All right. No questions. So maybe just let's wrap with overall thoughts. You're taking over as CEO, you know, what do you really want to leave investors, knowing about what your overall strategy and approach will be?
Yeah. Look, the fundamental pillars of the company, collaboration, shareholder friendly, transparency, fortress balance sheet, culture, you know, none of those are changing. You know, that's very much, you know, part of the philosophy, you know, we all created together, Ken, Jeff, myself, the whole management team. I really believe in all of that. And, you know, what I hope to do is, you know, to help, you know, execute at the very, very highest level, our strategy. We want to continue to strive to be the best independent investment bank in the world. And more than anything, clients front and center, you know, all of everything we do, every success we've had, every reputational advancement, every dollar of revenue that comes in the door is directly tied to doing a great job for clients and building these long-term relationships.
You know, relationships and clients are front and center in everything we talk about as a company. That is not going to change.
Great. Navid, thank you so much.
Thank you. Appreciate it.