Okay. Let's get started here. Up next, delighted to welcome Paul Taubman, Chairman, CEO, and founder of PJT Partners. Paul founded PJT and just celebrated the first decade of the company, which has seen tremendous growth and become one of the preeminent investment banking firms out there. Before PJT, he spent nearly 30 years at Morgan Stanley, serving in a series of leadership roles. Thank you so much, Paul, for joining us.
A pleasure. Thank you for having us.
Excellent. Okay. Paul on that first decade point, what are the key lessons you've learned? M aybe you could touch on your key strategic goals over the next three to five years.
The biggest lesson is if you're gonna build it right, it's gonna take time, and you need the right foundation. W e started out with a great deal of patience. N o matter how patient you are when you conceive of the build-out, in reality, you need to be even more patient because everything takes more time if you're gonna do it right. W e focused initially on culture, on attracting the right individuals, on having the right filter. W e could have moved more quickly. We could have added more individuals. I don't think we would be in the strong position we're in today if we had cut those corners. T o me, the first 10 years has really been a ratification of the strategy that you need to go slow to go fast.
Now that we're 10 years in and we have a lot of the foundation built and we're better appreciated and we're much better developed as a global institution, it's time to be able to capitalize on that and to go faster not to change the standards, but to leverage all of the hard work and foundational investment that was made in the first 10 years.
When you think about investing today, are there specific businesses, areas, geographies that you're really focused on, or is it more broad and opportunistic?
You always have to discriminate between where there's the biggest wallet and where you can get the right individuals. In an ideal world, those two are perfectly aligned. T he world isn't perfect a nd sometimes the spaces you wanna occupy. I f you try and get to them too early, you'll end up with the wrong individuals. W hen we look at our build-out over the 10 years, we're in almost all of the industry verticals. O ur build-out is in varying degrees of progression. When I look at the biggest wallets, the biggest wallets would be in healthcare writ large, the world of technology, and industrials.
W e have made major investments. T here's still a tremendous opportunity in those three spaces, which are very large, high-wallet, high-impact opportunities. T he fact that we've come so far and not really made commensurate investment in those verticals with some of the other areas to me, is just more opportunity for upside. 'Cause now, as we get at those opportunities, we have the ability to take our franchise to yet another level.
Talked a little bit about being able to grow a little faster now in the second decade. H elp us think about your hiring outlook. You did have, thus far, at least a stronger hiring year already. I s that just something that we should expect going forward a little more?
When I talk about going faster, it's really just a compounding effect, right? You're spending a lot of the first 10 years building a foundation where you're meaningfully strengthening the firm. You're building it out. Y ou haven't fully capitalized on what you've built. The next 10 years, we really have the opportunity to capitalize on a lot of what we've built. If you think about how the first decade has gone, everything we've done has been a de novo Greenfields build on the strategic advisory side. You need to compare that build-out to the best-in-class businesses that we inherited from Blackstone as it relates to restructuring and liability management and the fund placement business and capital raising. On the strategic advisory side, everything we've done has been a Greenfields build.
As a result, in the first 10 years, you have a lot of partially built networks. Every geography that you enter starts out with that first partner, that first client, that first connection. U ntil you light up each one of those geographic areas or one of those industry verticals, you have a lot of investment but not a lot of return on that investment. A s we get into the second decade, a lot of those partially built networks have transitioned to completed networks. A ll of a sudden, you're seeing the real power of that investment once it's all together. You get to critical size, critical scale. T he next leg up is when the brand and the perception of what we've built better matches what we've actually built.
We spent the first 10 years focused on delivering the best client experience, the best advice to clients. T hat takes time to be broadly appreciated in the marketplace. W ith every passing day, every passing year, there's better appreciation. W e're increasingly seeing clients seek us out as opposed to us having to seek out the next client. I t's that compounding effect that suggests that a lot of the hard work and discipline and investment of the first 10 years should show compounding returns in the second 10 years. I f you can marry that to then attacking some of the really high-return verticals, healthcare, industrials, technology on a global platform with best-in-class talent, then that's where you really see the acceleration and the results.
Paul, you're still heavily involved in with clients in the boardroom. What do you think has changed under this administration in discussions in this administration versus the last, when you're with boards? W hat deals, or how much focus is there on deals that you couldn't do under the last administration are you having?
It's a very different approach from the prior administration. The prior administration took the view that they were going to go after certain consolidating transactions vigorously with a view that the more difficult they made approvals and the longer it took to get those approvals and the more uncertain securing those approvals would be, that there would be knock-on effects and you would have a chilling effect on consolidating transactions, so there was really a policy decision, which was sometimes they weren't shooting at that particular target, but the view was that by firing the shots, it was sending a message to others in the industry, and as a result, there was a lot of litigation, there was a lot of threatened litigation, and it had a chilling effect on a lot of large consolidating transactions.
If you're in the boardroom and you're thinking there's a reasonable chance that your deal is gonna be vigorously contested and it's going to result, even if you prevail, even if you have legal doctrine on your side, but the time to close is gonna be elongated, the risk that when you get to the other side and you close the transaction, the business that's presented to you is not in nearly the appropriate shape with the right operating momentum than when you had first stitched the deal together, that makes you more risk-averse. Y ou start to price that into the deals. I t makes it harder for buyer and seller to come together. Y ou have this cascading level of degree of difficulty.
If you keep moving hurdles higher and higher, you do get what you're seeking, which is to reduce consolidating transactions. This administration has taken a much more realpolitik approach to transactions, which is for the right degree of concessions and the right offerings, there may well be a path forward, and if you can go into that with your eyes wide open, that there could well be a negotiated outcome that doesn't require litigation, and that if you have certain things that you're prepared to commit to, whether it's bringing jobs back to the United States, whether it's trying to address affordability issues, national security issues, pro-growth initiatives, it gives you a greater degree of confidence. There's no guarantee that any deal is gonna be approved.
There's a view that the current environment for large consolidating transactions to be given a fair shake is meaningfully greater than what we've seen in predecessor administrations. I t's likely to be as good, if not better, than in future administrations. I n some respects, this is an as-good-as-it-gets moment. T hat has caused more companies, more boards of directors to look at those dream deals and ask themselves, "If not now, when?" A s a result, you're going to see and will continue to see more of those deals brought to market.
You just touched on the strategic boardroom. W hat about when you're with private equity's decision-makers? What's top of mind for them and their appetite to transact?
Private equity raised an extraordinary amount of capital in the last few years. They invested an extraordinary amount of capital in the late 2020, 2021 period. In many respects, there was too much capital chasing too few deals, paying too high a price. That's not true across the board. That was a consistent theme. As a result, there are many of those deals that today have not lived up to their full promise. For many private equity owners, they're waiting for the right time for the operating performance to get to a certain level and for the realization prices and multiples to deliver to their investors attractive returns.
As they continue to push out some of the monetizations, it has reduced the DPI. Less capital is being returned. What has occurred over the last few years is just a mismatch between capital that was drawn and invested and capital that was harvested and monetized and returned to LPs. What that has done is it's caused, notwithstanding all of the dry powder that the private equity industry has, for them to be more cautious about deployments and more selective about realizations, waiting for the right moment to monetize their investments.
As we're getting to the other side, that mismatch between invested and drawn-down capital and returned capital is getting into a closer equilibrium. As that occurs, you're gonna start to see more of the dry powder expended on new investments, on new initiatives. We're already seeing it. Sponsors' willingness to commit new capital has increased meaningfully in 2025. I suspect that that will continue to increase as the rate of monetizations continues to pick up.
Sounds like what you're describing on the private equity side is more of a steady build. There's not some acceleration that we should be thinking of. Is there a catalyst that you see that could cause this to really step up materially?
This M&A resurgence was led in large part by strategics in 2025. I expect that all the trends that were in evidence in 2025 to be present in 2026 and then some. I f you take a step back, we spent a number of months dealing with the uncertainties and dislocations resulting to the new tariff regime, and that did freeze strategic activity for the first half of 2025. Our perspective is that 2026 is gonna look a lot more like how 2025 is finishing up from a corporate strategic perspective, so that says a full year of that type of activity in 2026 should generate more activity than what we saw from strategics in 2025.
Second, private equity contribution to deal activity, while it improved in 2025, lagged strategic activity. We see in 2026 there'll probably be more acceleration in private equity commitments and monetizations as the environment continues to be more favorable and builds and as a result, if you have increased activity from both sides of the equation it shouldn't be a surprise that 2026 is set not to be a really good year.
Maybe just your thoughts on financing conditions today, and I'd just love to, specifically within that comment, get your view around the quantum of AI data center debt and whether that's having an impact on financing markets and whether there's any concern that we should be thinking about there going forward.
The amount of capital that's being deployed is breathtaking when you look at it in one perspective. On the other hand, when you look at the credit quality that underpins most of those long-dated commitments, these are investment-grade companies with enormous market capitalizations, enormous cash flow-generating ability. I don't think that there's much concern at the moment from a credit perspective. Th ere is a question as to what happens if the equity markets at some point start to look at these Hyperscalers and revalue the equities based on how much hard assets are in the ground, how much free cash flow is being redeployed to capital expenditures.
T hat model is shifting. What's unclear is whether this is transitory or whether this is the new normal. T here's always the risk at some point for the equity valuation paradigm to shift. I see this more as an equity risk than as a credit risk. M ost of the capital that's being lent is really backstopped by commitments that are very high quality, on the obligor's perspective. T hat's less of an issue from our perspective. What's a bigger issue is what are the dislocations that are gonna come out of this AI revolution?
What business models are gonna be disrupted, compromised, and what are the knock-on effects? T o the extent that there are credit issues in the marketplace, it may well be that certain industries are severely disrupted as a result of AI deployment and innovation. I f that happens, then you can see a real uptick in default rates and the like in industries that are particularly vulnerable to AI disruption.
Just a couple more here on M&A. T he rebound has been led by strategics. It's also been led by the largest deals. Is the impediment to the mid-cap improving or catching up to a commensurate level, sponsors? Or are there other things that are weighing on mid-cap activity specifically?
These numbers can be a bit deceiving. If you look at number of deals, number of deals are down. N umber of deals are down at $1 billion and less. N umber of deal count's actually up from $1 billion deals and higher. T here's a lot that you can play with in all of these numbers. The fact remains that what we're seeing are larger deals because corporates have very strong balance sheets, are searching for growth. A lot of growth in certain industries is not top-line growth, but it's cost rationalization and being able to create more efficiencies. T he way you do that is in horizontal consolidating transactions. You have more favorable regulatory regime. Y ou're seeing more there.
You're seeing private equity for all the reasons we talked about, which tends to be smaller transactions 'cause those are principally cash deals. Those are not large stock-for-stock transactions. They tend to be smaller in size. Those have lagged. It's not gonna persist for very long. Y ou're gonna see an uptick across the board. V olumes are up meaningfully. Deal counts are down only in the very low end of the range where there's probably less access to capital and there's less attractive consolidating opportunities. W e see the world speeding up. There's more disruption. There's more dislocation. The cost of standing still is greater today than it's ever been.
The real issue has been, in light of all of that, why have overall M&A volumes been so sluggish? T he answer is no one knows exactly why. E ven today, with this meaningful uptick in M&A volumes, the total M&A volume measured as a percentage of global market capitalization or global output is barely back to average levels. W e're not in some dangerous level here thinking that we're at an unsustainable level of activity.
The fact is M&A activity was beaten down for a number of years. A lot of it were the COVID hangover effects. A lot of it was very vigorous antitrust and anti-competition policies. A lot of that's been relaxed. Y ou're just seeing more of a return to a more normal M&A market. T hat should continue for at least the next year. B eyond that, my crystal ball gets super fuzzy.
This quarter's also had some headwinds, most notably the government shutdown. In hindsight, was there any impact, anything structural that you've seen either on your business or on the economy?
At the margin, it probably made management teams and boards more cautious because you never know what the collateral effects are as you get further and further into the shutdown. T his was more a case of what might have been the case had the shutdown persisted for another month or two or three and what those unforeseen consequences were than the actual damage that was presented during the period of the shutdown. There was certainly a period of time when merger reviews and the like, ground to a halt, but that's mostly behind us, and it's as if we're back to a more normal operating cadence, and we haven't seen much impact on our business.
Led to terms of restructuring, which for you and the industry generally has remained persistently strong. Help us think about the forward from here. How do you think about the moving parts of elevated liability management versus bankruptcy, and the, I'd say, divergent tone that we've heard from various participants around whether it could continue to grow, stay at this level or slow?
I can only speak to what we see. Whether or not that comports to what others see is really more for others than for us. Here's what we see, which is we've been constructive on restructuring liability management for more than a couple of years now. T here are secular trends which are going to continue to keep activity high relative to what we've seen before. Why is that? First of all, we're dealing in a world of greater dislocation and disruption, changing buying patterns, consumer preferences, use of technology, onshoring.
All of those factors are disruptive to existing business models. There are winners and there are losers when there's disruption. We tend to focus more on the winners and the innovators. F or every innovator there who is disrupting, there is someone who is disrupted. As a result, there are business models that worked when the capital structure was initially created that no longer work, and you need to address that. That's just a fact. The second is when we look at activity levels were anchored in what the "normal" was. If the normal is a near-zero interest rate environment, that may have been where we were. T hat's not a normal credit environment.
Where rates are today, where default rates are today, is closer to what normal looks like than what we saw four or five years ago. As a result of those two factors, you should see increased levels of liability management and restructuring. Add to that the fact that the size of the addressable market has grown by leaps and bounds and the quantum of debt outstanding is meaningfully greater.
If you have higher debt outstanding, if default rates are closer to normal by historical levels than what we've seen the last few years, if more companies are being disrupted or disintermediated, you're gonna see more concentrated stress. All of those things are secular trends that suggest that activity should increase even if the overall macroeconomic environment is reasonably benign. Y ou take from our perspective, what are our own tailwinds? One is that we continue to grow geographically. As we expand outside the United States, our ability to bring our best-in-class restructuring and liability management capabilities to markets outside the United States grows.
Our addressable market grows in that dimension. The second is we have a significant market share with certain financial sponsors in liability management. A s we continue to build out our sponsor coverage efforts, our addressable market grows on that dimension as well. T he third is just the interplay between our strategic advisory buildout and restructuring and liability management. The more industry expertise, the more personal relationships we have.
W e see all of those as subtly increasing our addressable market. E ven if the overall market is flat, we should be able to gain share. I f we can get those two things going together, we could have an environment where we have increasing M&A activity and increasing liability management activity.
You alluded to the growth in the quantum of debt. One of the things that I find interesting is the fact that restructuring MDs don't actually grow that quickly, whether at your firm or across the industry. Is that just the nature of restructuring and why if there's so much more debt, is there not the commensurate growth in senior bankers?
First of all, we are aggressively adding to the resources committed. Some of it comes from dedicated restructuring and liability management practitioners. Some of it comes from all the other areas that we talked about. If you have more sponsor coverage professionals, if you have more individuals who are running country offices outside the United States, if you have more industry bankers, their ability to work alongside our best-in-class restructuring and liability management bankers is where you're getting incremental capacity. They're not taking the leading role in actually dealing with the liability management issues.
They're identifying the targets. They're important in prospecting and presenting our credentials, providing industry expertise. As we take advantage of that interdisciplinary approach to all of our assignments, we're able to do more without necessarily meaningfully increasing the dedicated number of individuals. I f you look at just our headcount in the effort, it continues to grow. T he reality is it's a specialized area.
I f you're looking for the best of the best, they're not being grown every day. They're really being trained through an apprenticeship model. W here we're getting a lot of that is getting our VPs to operate at a higher level of responsibility. E veryone moves up because they're seeing so much activity and they're learning from the best. Their ability to operate at a more senior level is enhanced.
One more on the restructuring side. When you think about the growth in the quantum of debt, it's mostly been in private credit. Do you see any risks in private credit today?
Private credit has a place alongside the more traditional syndicated model. T here will be moments in time where each market is better and more aggressive in terms of pursuing credit opportunities. Our job is to increasingly tap both markets and give our clients the best opportunities. O ver time, you would expect that the composition of underwrites, of lending standards, and the like to be reasonably consistent across both markets. O ftentimes, you'll see a deal that's underwritten in private credit and then it gets refinanced through the syndicated market. T here's a back and forth. W hen you're first starting up a business, there is that pressure to get market share to get into the game.
You very quickly realize that in order to have a robust business model, you need to have credit quality and underwrite standards that look like everyone else. Y ou can't be a laggard in that regard. A s the industry matures, that's precisely what you're gonna see. T he idea that anyone is infallible and won't make, lending mistakes or underwrite mistakes, that's not realistic either.
Let's turn to margins here. Maybe you could just help us think about the competitiveness of the hiring market and how that's impacting comp ratios. R elative to today's 67.5% that you put up last quarter, how should we think about normalized comp ratios over the medium term? And over what timeframe?
The first thing you have to focus on is the supply of bankers, and in a high-velocity environment, the supply diminishes. What do I mean by that? When everyone's sitting around with nothing to do because M&A is dormant, M&A activity is dormant, the only activity you have is to think about changing jobs. When everybody is working full out, they don't have time to think about a career move. I f they do, they're deeply concerned about the dislocations to their clients if they go on gardening leave. W e've talked about this for years. In a low-velocity M&A environment, the switching costs are the lowest, and therefore, we lean in the most in terms of our recruiting efforts.
In a high-velocity M&A environment, the switching costs are high and your yields are gonna be lower. That has less to do about the competitive dynamic than it does just about the supply and those bankers who are willing in a busy M&A environment to investigate changing jobs or career opportunities. I f you layer onto that the fact that everyone seems to have recommitted to investing in their banking franchise, you have more firms looking for talent. You have fewer individuals who are willing to make a move. Not surprisingly recruiting's gonna become more difficult in that environment.
S ince we believe we're offering a unique value proposition to candidates, the fact that it gets more competitive doesn't make that much of a difference on our yields because ultimately what we're presenting to senior bankers is fundamentally different than what they can experience at a large bank. The biggest challenge we have is just when everybody's active and they're busy and they don't wanna hit the beach for three months or six months. It just takes longer to get individuals to make the move 'cause the switching costs are higher.
A s far as the comp ratio goes, it's in large part a function of how much investment are you making at that moment in time and how quickly are you getting a return on that investment. N ot surprisingly, because we've made major investments in the last few years and we have not come near getting full return on that, we will in the coming years. I t takes a while. You're seeing an elevated comp ratio.
We touched on AI a little bit in terms of the market. W hat are the impacts on your business, whether it be in terms of headcount, margins, or productivity?
The easiest one to answer is productivity. How could it not go up? P roductivity's gonna go up. The question then becomes, what do you do with that productivity surplus? How much of that goes back to the client? Y ou just need to provide more services to that client on every transaction. I n many of the technological innovations of the last 20 or 25 years that should have been productivity tools, what ended up happening is they were productivity tools, but the clients ended up with better service, better advice, better data, better response times from bankers, better analytics, and the like. T he first question is it needs to go back to the client.
To the extent that there's additional productivity gains, which I suspect there will be, because we're in a growth position, I would imagine that we would take most of that productivity increase and we would be able to do more with the same resources than we did previously.
Okay. Well, that's a great place to end with that. We're out of time. T hank you so much, Paul. Hope to see you again next year.
It's a pleasure, James. Thanks for inviting me.