Okay, let's get started with our next session. We are delighted to welcome Paul Taubman, Chairman and CEO of PJT Partners. Paul founded PJT Partners in 2014, prior to which he spent nearly 30 years at Morgan Stanley in a variety of leadership roles. Paul, I just want to thank you so much for joining us at the conference again.
It's a pleasure. It's great to be here in person.
All right. So, maybe we can just start with the macro. You know, I think it's always interesting to hear your perspective, what the macro means, and how it's affecting the overall business. And then I think it would be also interesting if you could just maybe dig into some of the different geographic trends that you're seeing.
Sure. Well, look, I think clearly, we went through a series of shocks this past year, you know, a banking crisis, rate hike upon rate hike. And when you sort of change trajectory and every lever is being turned to the negative, you have some pretty difficult market conditions, and that's what we've been dealing with. And for the first time, it looks as if we're kind of getting past a lot of that, and the economy is stronger than people had feared or anticipated, depending upon your perspective. I think we have come pretty darn close to the end of rate hikes, and we're now talking about if and when there'll be a reduction in rates.
But I think this fear that rates are just gonna continue to, you know, get higher and higher has abated, and there's a lot of pent-up demand, and you're starting to see that. So whereas we came into 2023 quite bearish on the broader M&A marketplace, and I think we predicted a down year, the year turned out to be even more difficult than we had anticipated. This year, I look at the prospects for 2024, and I'm, you know, reasonably confident that we'll see an increase in activity. And I think the debate will be just how much of an increase and what's gonna be the shape of that curve. But I think we've kind of touched bottom, and we're sort of working our way out.
Great. So, you know, we are still heading into what appears to be, you know, at least next year, in the first half, a somewhat weaker investment banking backdrop, which I think is a record when, when I go back. Maybe you could just talk about when you're in the boardroom with clients, what's top of mind? And then I, I think it would be helpful if you could perhaps, you know, differentiate between the dialogue with sponsors versus strategics.
Look, I think with strategics, you know, I remind most everyone I talk to on the topic that the average tenure of a public company CEO is ±5 years. And when you have a strategic agenda to transform an organization, to either streamline it, if you've taken on too much debt, to rightsize the capital structure, if you've paid down a lot of debt and you have a pristine balance sheet, how you can use that as a competitive weapon? How do you build new capabilities? How do you remain on the cutting edge? It's very difficult to just grind to a halt for a year, 2 years, 3. And I think what you're seeing is that as we're getting closer to equilibrium, the desire to transact has pretty much remained strong. The actionability of transactions has been what's been the gating item.
As I've talked about repeatedly as we've gone through this downturn, what's been different about this downturn is the level of strategic engagement. The desire to move forward and to transform organizations has remained quite significant. What has been difficult and frustrating has been the actionability, and now what we're seeing is, you know, increasingly, companies looking to, to move forward, even though there are still many unknowns, many uncertainties. There are always unknowns. There are always uncertainties. No one ever has a perfect crystal ball, but I think we're now getting to a place where there's, there's greater confidence. So most of the, the forward-leaning dialogues are coming from the corporate side as opposed to the sponsor side.
On the sponsor side, I think I've also been pretty clear that just given how much fundraising accelerated in 2021, as companies continued to add strategies, and how much money was sucked into the alternative space, how much capital was deployed, how little capital has been returned, that I still believe that at the top of the house, in most alternative asset allocating firms, there's still a bit of hesitancy to go, you know, full, full on into deploying capital. And as a result, even though the opportunities, you know, start to seem, you know, increasingly attractive, I think there's still a resistance to, to move forward with the same abandon. The difference is, alternative asset managers are managing portfolios, and having deployed a lot of capital, I think there's probably less desire to deploy capital in the current environment.
In contrast, strategics who've been out of the deal-making business are returning to it. So I see a very slow but steady return to sponsor commitments. I think the best way that we'll get that jump-started is a reopening of the IPO market. And if you can get the return of capital cycling faster and faster, then I think that's gonna fuel more and more capital deployment. But it's really where the action is, I believe, is on the strategic side.
Okay, makes a lot of sense. So maybe just one more bigger picture topic, which is just thinking about financing and rates. I guess, how would you characterize financing markets today? I think it's always interesting to get your perspective on syndicated markets versus private credit, which has obviously taken a lot of market share this year. And then just on rates in general, do higher rates matter now? Is it more about the uncertainty about around the path versus where, you know, where the destination is?
Look, I think at the end of the day, as long as security prices react to the interest rate environment, and you're confident that valuations are consistent with the rate environment, then deals move forward. It's when there's the fear that rates are going to continue to grind higher, which are going to dampen valuations, no one wants to get in too early, and that's the issue. It's much easier to get in when you know that the direction of travel is down, even if you're locking in rates that are higher than where they might be six or 12 months later, you at least know that asset valuations are going to move higher, and you'll be rewarded for having been early.
The most difficult situation is when you think that valuations, you know, may have a lot of pull downward because rates, you know, may continue to grind higher. I think where we're starting to get to is this equilibrium where there's, you know, increasing confidence that the risk of rates, you know, running away is diminishing. That, to me, is probably the most important thing. The other thing, which I would not underestimate, is, you know, M&A is a procyclical business, so that when your competitors act, the impetus to respond and to react. So deals beget more deals, and we've been in this environment where relatively scarce deal environment hasn't really pressured others to react because there's not needed to be a competitive response. So that's sort of my view on rates.
If you go back in a historical context, we're still not dealing with choking rates. They're choking compared to what was literally free money a few years ago, and just how quickly rates adjusted and then all the volatility in terms of security prices. That, to me, has been the issue, and if you can get back to a, you know, a more orderly direction of travel, I think you'll start to see a pickup in activity.
If we can just move over to your strategy. I guess at a high level, maybe you can just update us on your key priorities for the business as you look ahead to the next, let's say, three to five years.
We're setting out to build the best investment bank in the world. Not the biggest, but the best. That's an ambitious goal, but the only chance you have to realize that goal is to be patient and methodical, because you can't just arrive and have a fully built-out, best-in-class investment bank. So we've been quite thoughtful and deliberate about how we attract talent, how we onboard talent, how we develop talent, how we build a differentiated culture, how we create capabilities, that we're highly confident when the clients see us, that they'll be wanting to do more business with us. So we've been trying to get it right, and we're still early in that journey.
So to me, the biggest priority for the next 3-5 years is continuing to be a destination for best-in-class talent, who shares our vision as to how to do the business. And I've been quite open that in 2020 and 2021, it was difficult to do that unless we compromised our standards, because trying to recruit in a remote environment, almost impossible to get the right people and to get the right cultural buy-in. Trying to recruit in 2021, when the switching costs were enormous and no one wanted to be on gardening leave during the great gold rush, and we refused to, you know, compromise our standards, so we were behind as far as building out the franchise. And I think this environment plays much better to our strengths.
Our principal focus is to continue that build-out, to maintain and to enhance the culture. And then I think a secondary objective is, as what we can deliver to clients gets better and better recognized, I'd like to be a bit more forward-leaning in communicating that to the broader ecosystem, 'cause I still think we're the world's best-kept secret about just how good our capabilities are, how broad and deep our abilities are to serve clients, and I want, but I want to focus fundamentally on delivering the best service to clients.
I think you've been very forward-thinking in terms of hiring in your advisory business, MDs that are not traditional, and I think that's really helped the business. And then I think you've also done a tremendous job of expanding the business outside of traditional M&A. So I guess, what are you thinking? What's next in terms of, you know, where you could go with the business? I know that, that's a, you probably don't want to answer every part of that question, but just, you know, at a high level, what you're thinking.
Yeah, it's, it's really simple. If, if your firm is built on intellectual capital and not financial capital, you want to have cutting-edge intellectual capital. And if you're just sort of, you know, "Yeah, they could do the job," but there was nothing differentiated or distinguished about them, or they were great for the first three weeks of the assignment, but as the issues that we began to debate migrated, they weren't able to keep up, that's, that's not gonna get you very far. So you just need to think about advice and intellectual capital holistically and expansively. And clients have all sorts of needs. They wanna understand, they want industry expertise, but they themselves most often are industry experts, so it can't just all be about your industry expertise.
It's your command in the boardroom, it's your ability to influence decision-making, it's your ability to connect so that you're one part, you know, psychotherapist, you're one part headhunter, you're one part strategist, you're one part, you know, macroeconomist. So it's all of those things that come to bear. But what people forget is, even if you stockpile all of that talent, if it isn't incented to work together, and if it isn't delivered to the client, they're just a bunch of, you know, names and faces in a directory, but the client doesn't see them. So you have to create a culture where everyone wants to organize around the solution around the client, and then figure out how to get, you know, the different parts of the firm together.
So that's why we've focused on shareholder engagement, investor perspectives, activist defense, geopolitical advice, liability management, capital raising, and the list goes on. It doesn't really end, because there's always another way to provide a differentiated perspective to clients, and some of it is geographical, some of it is industry, some of it is capabilities, and then some of it's just creating an interesting environment where people wanna reinvent and reimagine the business. The easiest competitors to compete against are those that are doing the same thing, the way they did it 10 years ago, 20 years ago, and at some point, that gets stale.
That makes sense. Okay, so maybe we can just dig into a couple of the businesses, starting with M&A. I think this is always an interesting question. It's obviously a tough one, and you know, who really knows the answer, but you've been through so many cycles. I feel like I have to ask you. What does normalized M&A look like? We had such an extreme example of the cycle last time around, and just what's the sort of timeline to get there?
So if you go and look at the playbook, the playbook is after you hit peak M&A volume. The problem with that is you don't know you've hit peak M&A volume until after the fact, but when you look back, I think we can all agree that we hit peak volume in 2021. The typical cycle is two down years from there, down, down, and then you kind of create a new floor, and then you start to build up from there. I believe, I'm doing this a bit from memory, because it's interesting, but doesn't change how I spend my day, is that typically, once you've kind of hit that floor, it takes about four years to get back to that prior peak. That's, like, the general shape of the curve. We've had down, down year.
I'm prepared to go out on a limb and say we'll have an up year in 2024. What I'm not yet clear on is by a little, by a lot, or by a lot more than a lot. I tend to think it's gonna be a healthy increase, but nothing that's gonna be sort of eye-popping. But I think the direction of travel is gonna change. And then, you know, you've got to, when you look at sort of what, like, a normalized market would be, if you size it by all sorts of macro statistics, I think we're running at, like, a $3 trillion M&A market today. Probably, based on all benchmarks, you know, normal is $5 trillion. So how do you get from 3 to 5? Over how long?
But I don't really spend a lot of time on that, because most of our story is about the micro, which is: How do we, you know, become the principal advisor to more companies? How do we go from not being present in an industry or geography to being competitive, to being viewed as the go-to firm? And there's so much there and so much momentum that sort of trumps what happens in the macro, that if we were, if we were ten times the size, I'd obsess about the macro, but at our size, I'm obsessing about the micro.
Makes sense. So maybe just another one on M&A, and I think, you know, you do have a skew to some of the largest M&A deals, so I think it's important for you. But you have talked about antitrust historically. I guess, what are your views on the moving parts around antitrust today, whether it's the FTC's challenges, the proposed changes to Hart-Scott-Rodino filing requirements, and some of the U.S. dynamics? And then, when you think about what could happen next year with the Republican administration, how much of a, you know, how much could that change the antitrust picture?
So there's a lot in that. I think sometimes folks spend too much time thinking about win rates when deals are directly challenged. The real casualty are all the deals that hit the cutting room floor that never saw the light of day because someone said, "You know what? Too risky. I don't want to chance it." And that, to me, is where the action is. It's not in the deals that actually see the light of day, whether the FTC's batting average is 0.300, 0.500, 0.700. It's You're sitting there, you're a CEO, you've had a back and forth about a very large transformative transaction, and you're just going through your wall of worry. You know, how much are we gonna have to pay to land this? What's gonna be the investor reaction? How long is it gonna take to close?
What's gonna be the risk to the business during that extended period of time? What other things am I gonna be frozen out of because my stock is in limbo for what could be 15, 18, 21 months? What happens in the 10% chance that the deal gets killed, and how do I restart? It's just, it's just another friction cost, and my perspective has been that it's crowded out a bunch of, of deals that we just never saw. And even when the FTC goes after deals that they know they cannot win, they're not fighting that battle. They're trying to send a message to other transactions not to come if they're closer to the, to the edge. And I think that's what's in the ecosystem.
Now, at some point, you take the view that if it's the right deal and you are well advised, and you're confident that you can ultimately prevail, you're gonna move forward. But for someone who is dealing with something where they don't have that same conviction, there's a little bit of, you know, life's too short. Now, as far as the change in administration, my own view is you're gonna quickly get to a point in 2024, where the calculus is gonna be the following: Change in administration, in which case my worries are diminished, so let's go forward, and by the time we announce this deal and it's reviewed, it's being reviewed by a different administration mindset.
If we announce a deal and it's the middle of the year and it's the same administration, I either wanna move forward or I wanna sit out, you know, the marketplace for another four years. And I suspect that as we get further into the year, the view is gonna be, I don't wanna be out of the market for eight years, and therefore, I'm gonna roll the dice where I'm either gonna have to have that battle that I was hoping not to have, or I'm gonna have, a much easier review, but either way, I can get on with it. So I suspect that as we get further into 2024— as we get into 2024, and as we get further down the road in 2024, you'll probably see more of those cuspy, you know, difficult-to-imagine transactions being presented to the marketplace.
But I don't think it's gonna be a tsunami, but I think it'll probably be a modest tailwind. And as I look at 2024, my crystal ball, I just see lots of very modest tailwinds, none of them that are blowing particularly hard, but if you aggregate all of them together, it gives me some confidence that we should have an up year.
Great. Let's turn to restructuring. You have talked about how you expect restructuring to have continued momentum, and that's driven by a couple of factors, but maybe we could just dig in a little bit there. You know, tailwinds, a variety of tailwinds, you know, small tailwinds, those are all positives, perhaps not so much for restructuring. So maybe you could just talk about what the Chapter 11, Chapter 7 activity levels are looking like, or is this really still being driven on the restructuring side largely by liability management?
It's a little bit of both. So you got to look at this in a historic context. The default rates today are still relatively modest relative to historic standards or historic periods, and also relatively modest versus times of crisis. So I think I have this right. So we started the firm in 2015. In 2016, you had this collapse of energy prices. You had all of this stress in the energy sector. I think the default rates were, like, 5%. You had COVID, you had that extraordinary choke point for companies where their business model seemingly evaporated overnight. You had default rates around 7%. You had the great financial crisis, you had default rates around 9%. Right now, we're operating at, like, 3%, 3 and change.
So it's elevated, but it's elevated against, I would argue, a credit bubble environment, but it's not really elevated relative to long-term default rates. But what's more interesting is if you look at sort of the leading indicators that we look at, which are, you know, we have our own proprietary way of looking at, what's likely to come down the path, that's meaningfully up. So we think this is a longer cycle of restructuring, and I think the two things that... People tend to focus too much on rates. It's an important factor. I focus on two different factors. One is, this elevation is coming off one of the most benign credit environments we've ever seen. So you got to ground it against that baseline versus this baseline. People tend to forget that pivot.
The second thing is, as this world speeds up and as entire industries get dislocated... Just think about everything we do, how we consume media, the types of cars we drive, the trend to decarbonization, electrification, digitization, all of the new businesses that get created over here, they leave roadkill over here. And that creative destruction does speed up the number of horse and buggy companies in a world where their business model doesn't really work in most any environment. It only works in a zero interest rate environment, where people are chasing yield and prepared to put capital into businesses just because there's no other place to get yield. But in more rational environments, that doesn't work. And I think those two drivers are why I'm reasonably constructive on a longer runway for restructuring opportunity.
I got it wrong in late 2020 because I didn't fully appreciate the enormous fiscal and monetary stimulus that was just put in to prop up the world. But at some point, that punch bowl has been taken away, and then I think I'm gonna be more right than wrong. But I didn't really appreciate the punch bowl and what was, you know, presented there to prop up all of these damaged companies. But I think that's gonna be the two. And then the third point is just the sheer quantum of debt and how much capital has been raised. So, you know, 3%, 4% default rates are applied against ever larger quantums of outstanding debt, James.
I want to turn to Park Hill, in which you've talked about a challenging fundraising backdrop for the entirety of this year. Maybe you could just talk about whether that started to improve, what your expectations are for activity heading into next year. And then I think there are obviously some structural pressures potentially for private equity as we move from lower rates to higher rates, and what that means for returns and fundraising. So what does that mean for the broader private equity landscape and thus for Park Hill?
So I think the direction of travel was we had a record year in 2022, but we could see, you know, the back half of 2022, we could see the deceleration, and then we came into 2023, and then it just went from, you know, challenging to, you know, very challenging. And it feels as if it's not a dissimilar narrative to the M&A environment, where, like, all the bad news is priced in, and from here, you kind of only go higher. So I'm constructive on the intermediate to longer term prospects, and I kind of feel that, you know, if we can navigate through 2023, we should be looking to a better place. Now, you talk about some of the challenges in private equity.
We could have an entire conversation about, you know, the changing nature and face of the alts business and private equity, but I would just point out that it's one of a number of verticals for us. So we spend a lot of time, you know, raising credit funds, which are clearly in demand. We spend a lot of time in real estate. One of the challenges has been the lack of asset turnover in private equity portfolios. There haven't been the rush to IPO, there haven't been the dividend recaps, there haven't been the trade sales, there haven't been the P2P deals, but what that's done is it's created an enormous, an enormous desire to create liquidity for LPs within their portfolio ownership, and those are through fund continuation vehicles, so-called secondaries and the like.
I see that as an enormous, enormous growth vehicle for us in the coming years. Right now, the challenge is that the demand, the desire on private equity firms to utilize continuation funds and sophisticated ways in which to create liquidity for their LPs, is outstripping the dedicated pools of capital that can fund that desire. As that investor base broadens, as that asset class matures, as more and more dollars are deployed, I think there's a step function opportunity for that to, to move higher. I'm quite, I'm quite comfortable with how we're positioned and our ability to, to prosper, notwithstanding the fact that there's gonna be some, some reshaping of the private equity landscape.
Great. Maybe we can just turn to the other side of the P&L. How are you thinking about the balance between investing in the franchise versus longer-term growth versus the need to protect margins? And then, you know, how do you think about the 2024 and 2025 outlooks for comp and non-comp ratios? And then, I guess, just longer term, is there any reason why either one of those two ratios shouldn't be able to return to the historic levels?
Well, I think the answer to the latter is no. There's no reason why we shouldn't get back to a normal set. When we have a normal environment, when the firm is a bit more mature, when we're past some of the recruiting hump, when activity levels are more in the middle of trend line, I think we should be, we should be in a good place. Now, our mantra is pretty simple, which is: invest, invest, invest, but don't waste money. And that's how we think about it. So within a non-comp line, there's real investment. There are things that need to be done. There's training, there's development, there's client engagement, there's travel.... there's making your offices quite attractive so that you can become the place for a return to office.
And then there's some dollars where you just have to spend, because it's important, and then there are other places where you can be more disciplined. So our view is general direction of travel is to invest. That doesn't mean that there aren't ways in which we can, you know, continue to exert, as we have, discipline over individual lines, in the P&L. And where businesses are run adrift is trying to manage for this quarter's margins or this year's margins. And, you know, my responsibility is to never deliver an inferior margin because we're not being disciplined. If we do that, that's on me. But what I'm not gonna do is stop investing because people want us to hit some number this quarter or this year, and then do that at the expense of the longer-term, attractiveness of the franchise.
There are too many case studies of businesses that look like they were best in class on a margin and then fell off a cliff. We're building something very different, durable, sustainable, and the margins are gonna, you know, ebb and flow a bit, depending upon what the macro environment is and where the hiring environment is. But I think if you ask me to just look out five years, and we're sort of in a, quote, unquote, "more normalized environment," we'll have more normalized margins, and our responsibility is to move it in that direction without compromising smart investment.
Okay. Just one more from me, which is maybe on the capital return side. You know, capital return obviously was down this year, which makes sense in a challenging operating backdrop. But just, you know, what your priorities are there going forward, and then, you know, perhaps just differentiating between buybacks and dividends. And then, you know, I guess some of your peers have talked about this being a better opportunity to potentially acquire firms, given the pressure across the industry. So any thoughts there as well?
Well, I'm not-- I would never challenge a Goldman Sachs statistic, but the dashboard I look at for the nine months, we increased the number of shares we bought back versus the year prior, and we increased the dollars committed to share buyback versus the year prior. And I think that put us completely out of sync with everyone else. Now, we are being cautious with our capital deployment because we have many really attractive uses for the capital, but we've not, for a moment, abandoned our commitment to both invest in the business by attracting best-in-class people and then doing our best at managing that dilution by being aggressive repurchasers of shares.
I think, unlike others, we've taken our return of capital, and we've disproportionately moved it to buying back the stock, which is gold to us, and not, you know, racing to just, fatten the, the dividends and the, and the payouts. So that's kind of how we think about that. And as far as, you know, investment, there's, there's individuals that you attract. We don't buy or attract teams because I think there's an unhealthy culture if you sort of lift out a team from a firm. So we just do not do that. We, we attract individuals. Now, if a number of individuals independently want to come to our firm, that's very different than lifting out teams. We don't do that. We've had great success with the CamberView acquisition.
If there were other situations like that, I would be quite open to it. But I think as you get to larger and larger transactions, it just becomes harder, not impossible, but harder to to make it all, make it all work. The more surgical you can be in your inorganic growth, just the more likely it's gonna be successful.
Well, I guess I'll have to go back and check my model there. So thank you for that, Paul. All right, well, I think we're out of time, so I want to thank you so much for joining us, Paul. Hopefully, we can do this again next year.
It was a pleasure, James. Thanks for having me.
Thank you.
Thank you.