All right, so up next, we have Andrew Bednar, Partner, CEO, and a member of Perella Weinberg's board of directors. Andrew took over as CEO January of this year, but has been a partner since the founding in 2006, and was co-head of the U.S. advisory business until 2013. Thanks a lot for joining us, Andrew.
Thanks for having me.
Maybe we can just start with a macro question for you. I think, you know, a lot has changed over the past year, so I think just an overall perspective would be helpful, and then maybe, you know, your views on Europe versus the U.S. as well.
Yeah, sure. I think you don't need me to tell you that the M&A markets are down this year. I think that's been well documented, and I think with three weeks left in the year, I think that'll still be a true statement versus 2022. So we'll have a down year, but I think the data is very different from the dialogue, as I mentioned yesterday on air with CNBC, that the dialogue really started to increase meaningfully with our clients back in the Q2 . That dialogue has continued to pace. The progression's been very nice.
A little bit of pause here and there, some for, rate chatter during the summer that we would be higher for longer, and, a little bit for sure during October, November, because of, events in the Middle East that caused people to pause, but not terminate discussions, not put things on the shelves, just sort of pause and have a moment of reflection before proceeding. So we're on a, a really nice progression with, clients and engagement with us, as well as engagement with, counterparties. And I think that, you know, we look back and see that clients declared the M&A waiting game over back in the Q2 , and, that usually just-- You need dialogue to have transaction announcements, and so dialogue is usually a very good leading indicator of, future announced M&A activity.
So we do see that progression leading to announcements as we head into 2024. I don't see it as a rocket ship lift off the way that we saw the recovery of the M&A markets late 2020, which set up a fantastic 2021. I, I don't see that, but I do see a nice progression coming out of two down years off of 2021.
So-
You asked about Europe and the U.S, if you want me to comment or-
Yeah, no, that'd be great.
So U.S. is leading Europe out of this particular trough. We're seeing the announced activity in the U.S. increase versus a continued decline in Europe. The dialogues are very similar. It's just the timing of conversion to announcement is lagging. When I look back at, you know, the data from the last few decades that we've been looking at M&A volumes, it's not unusual for Europe to lag. I can't really explain that phenomenon. It's just been in our markets for a long time. But I do expect that with the dialogue, again, being similar in Europe to the U.S. in terms of activity and intensity, I do think Europe does begin to come out of trough, but right now they're still troughing.
Got it. So maybe just one on, you know, what you're hearing when you're with clients, when you're in the boardroom, what's top of mind, today as we move past that trough?
So our clients are still focused on creating value for their stakeholders, and as long as market participants look at revenue and growth and margin as key drivers of value, our clients are looking for ways to grow revenue and to grow margin. And often that means you're looking at existing portfolio, and you're looking at whether that mix of assets and businesses is going to help you grow and drive margin. And you see a lot of divestiture transactions, a lot of spin-off transactions in this particular part of the cycle. So people are focused on those types of transactions. And then there are larger scale mergers, there are company sales.
And so, as long as in the public company arena, at least for our clients that are public, as long as markets drive toward revenue growth and margin growth, there will be a pretty steady appetite for M&A type transactions, where you're buying and selling things. What we don't see as much, and what clearly is down and is partly a reflection of credit conditions, is there less sponsor-driven activity. There are fewer traditional take-privates . The sponsor activity is more structured, more bespoke. It's still out there, it's not zero, but it is lower than historical norms, and it's accounting for a smaller portion of overall M&A than you would expect, given trends over the last decade or so, again, if you look at the longer term trends.
So I think, I think you'll see private equity increase in activity as we get some settling of credit markets. I think that there's plenty of capital, so capital isn't the constraint. The constraints are credit and valuation and just finding targets that make sense. But, but I do think that you'll see private equity be a larger portion of overall M&A activity as we head into 2024.
Wait, I'm sorry, you just said private equity would be a larger portion?
Versus 2023. I think-
Twenty-three.
I think private equity will tick up a little bit. 2023 is unusually low. You know, when you have a rate cycle like this, and you have the pace of the rate cycles, and then you'd had some portions of the year where credit markets were shut. It's really put a lot of private equity transactions on hold, or they've been disrupted. And so I am hopeful and somewhat optimistic that you won't have that type of volatility as well as barrier to getting traditional private equity transactions completed. So I'm anticipating that we will see a bit more activity in 2024 versus 2023.
Got it. Okay, that's very clear. So maybe just turn to financing conditions. I think the syndicated markets are still somewhat challenged, although maybe they haven't been tested. You know, we've obviously also seen this, this huge shift to private credit as an alternative, and that's taking some market share. So maybe just your views on financing conditions, and then just on interest rates at this point. Was it really more about the uncertainty versus, you know, the fact they were actually rising, and that's what put a cap on some of those financing-related issues?
Yeah, I think there were two things. One was the pace of the increase, and so it was a very rapid ascent when the Fed began that rate cycle back in March of 2022. So I think the pace of it was something that caused participants to just hold back. I think also just the uncertainty of where the terminal rate would be, so not knowing where the end game was. So the range of uncertainty was very broad, and I think when the range of uncertainty is broad, it creates a barrier to transactions. I think when you know the range of uncertainty, and it's narrowing, and you can plan accordingly and do your scenario analysis, I think you can absorb that narrower range of uncertainty and transact in the face of it.
There's always uncertainty, so I think it's. As I mentioned yesterday, it was sort of an overused term in the marketplace. There's a lot of uncertainty out there. I think in 2022, and for part of 2023, I think the range was just way too broad, and it did quiet a lot of traditional M&A activity that I think now, going into 2024, I think we have a good sense for terminal rate. You know, you had a 60 or so basis point drop in the 10-year in a month. You know, that's helpful and sort of gives people some comfort that we've probably peaked. And you know, we do see a very significant increase in private credit. We're very active in that market. We like that market. Our clients like that market. That market is not just for private equity take-outs.
We're seeing increasing use and exploration of private credit by our corporate clients and by family offices and others. And so I think that is a very exciting part of our marketplace and provides an alternative to traditional syndicated loans and, underwritten bond deals, and giving clients choice of financing is a very good thing for our marketplace.
So one other big picture, one for me, which is, you know, 2024 is an election year, not only in the U.S., but, in other places too, which someone reminded me of yesterday. So, maybe you could just talk about what that could mean for capital markets, I guess, here and elsewhere. And, you know, is it a topic of focus when you're in the boardroom?
I mean, the quick answer to that is it's not a focus. I think it's more of a discussion topic about, "Boy, we really have this choice coming up," which, you know, probably occupies most of the discussions at dinner tables and restaurants. So I don't think it's any different in boardrooms and in our discussions with executives. I haven't heard a single story where someone said, "Boy, it's an election year. Why don't we kind of regroup, you know, after November of 2024?" I haven't heard that at all, so to answer that question. I think, you know, you look at some of the data, it's rare to see, like, a huge uptick in M&A in an election year, so they usually are flat to down.
But this is an unusual period where, you know, we're coming off a $5+ trillion peak in 2021, and we've had two years now where we're gonna be down. That, in and of itself, is unusual. Usually, it's one year, one and a half years. Two to three years would be a very unusual down market, and so even though it's an election year, again, I said it earlier, I'm, I'm expecting and, and anticipating that we will have a bit of an uptick in M&A for next year, but again, not, not a rocket ship up, but just a nice progression up.
Okay. Another topic that's somewhat related to this is just antitrust. Obviously, that's been a concern for the better part of, you know, a couple of years now. I think there's obviously the FTC challenging deals, there's the proposed changes to Hart-Scott-Rodino, and then obviously, what's happening in Europe. So maybe you could talk about how much of an impact you're seeing for your business from that, and then if we do see a Republican administration, does that change any of those dynamics?
Usually, a change of administration would change the posture of the given regulator, whether it's FTC or SEC or any number, EPA, regulators that are out there. So to answer that question, yes, I think if there's a change in administration, you'll see a different posture and approach. To date, for our clients, we just have not seen much of an impact from the more aggressive posture of the FTC and the antitrust regulators. What we do see is different planning, and that you have to be much more thoughtful about announcing transactions and having your case ready. You have to prepare for more time, for sure. Even transactions that historically may have been transactions where you would have requested early termination, they would have sailed through and would not have had any speed bump at all.
We're in an environment where nearly every transaction is gonna get reviewed, and so you have to spend time and money and, and make an effort to make sure that you're presenting a proper case to the regulator. We have not seen the regulatory posture be to kill M&A deals. So the idea that M&A is going to die at the hands of the regulator is just not true. We don't see any evidence of that. Most of the processes we've been through, the regulators are constructive. They are demanding, and we do go through a rigorous process, and many would say, as you should, and so it just takes some more time and, and money. The cases that involve these expanded theories of harm have all been either seriously challenged or outright rejected.
It really is coming down to whether there's a, you know, consumer pricing issue, and I think there'll be some cases, there always are, that you just can't get through, and they will prevail, or that, you know, the parties will decide not to transact. But this broader, this broader demise of M&A just, just has not happened, and clients are managing through it just fine.
So let's get into some of the, you know, the timing dynamics here for the M&A recovery. It seems like there's been a little bit of improvement so far this quarter, but obviously, we're still pretty darn close to trough levels. So, you know, what do you think gets us to that place where completions are really following announcements and improvement? Is that something that we start to see, you know, at the beginning of next year, or is that a longer-term thing?
Yeah, I think we and the rest of the sector have been saying that there's been an elongation of the traditional deal life cycle. So from engagement to discussion, to agreement and announcement, to closing, all of those periods of time have elongated for different reasons. And so there was a calendar adjustment that's occurred in everyone's backlog and looking at announced versus closing, and so you're still, I think, in this adjustment period. But again, unless there is a dramatic change in the success of regulators to block transactions, you know, we're going to see closings follow the recent uptick in announcements, particularly in the U.S. Again, Europe is still down. U.S. announcements are up, and you should see those closings occur as you head into 2024.
The issue is always, and what we track in our business, is looking at what new transactions we're announcing and putting into announced and pending backlog, not just what we're taking into revenue at closing. And for our business, we are continuing to see an increase in that announced and pending backlog ahead of the sort of industry rate. So we feel, you know, quite good about the progress of our business here in the last couple of months.
Okay. So let me just see if there are any questions from the audience. Let's see if we can get a microphone. Let me just see. Okay, well, one more from me, and we'll see if the audience livens up. Okay, let me just turn to, you know, the other side of the P&L. Thinking about, you know, the fact that this is still a somewhat challenging operating environment. Maybe you could just talk to the puts and takes around margins in the near term. And then I think, you know, it'd be helpful if you could break it down between the comp ratio dynamics and some of the non-comp ratio dynamics.
Sure, sure. So it's a, it's a very simple business model. There's, there's revenue, there's comp, and then there's non-comp, and then we pay some taxes and have earnings. And so what we said when we became a public company back in June of 2021, is that given our growth and scale and our mission to scale the firm, that we would be targeting—we don't, we don't give guidance of any sort, but we would be targeting a mid-60s comp ratio. And you're going to have moments in time where, because of competitive dynamics, market dynamics, because of retention or investment, that you'll move that margin around a bit. For the current year, we have accrued for the first nine months at a 67% margin. The industry seems to be quite a lot higher than that.
Right now, looking at three weeks left in the year, we're kind of looking at scenarios for where that's going to end up, and the scenarios are narrowing. You know, we've been modeling 70% as our annual comp margin, obviously on an adjusted basis, which is what everyone looks at. And that'll mean whatever margin mathematically works out for the Q4 , because that's when you have your you know, catch up. We won't know exactly what that actual number is, but we are modeling in for the full year, again, at 70%.
Part of that is always some investment and some amount of retention and somewhat our scale, and then what the competitive dynamics are, as I said, and I've had these debates with accountants all the time about, you know, some of our comp margin is really investment, should be viewed as CapEx, but I always lose those arguments. But that's what we've been doing to scale the business. I think as you get to a higher revenue numbers and larger scale of an enterprise, non-comp, for sure, will come down as a percentage. So as we grow the firm and the revenue, we have everyone on this mission of our journey to $1 billion in revenue.
When you get to those kinds of levels, as you go through that journey, you don't need to increase non-comp consistent with the revenue increase. So there's natural operating leverage in these businesses. You'll have some increase in non-comp, but that percentage in non-comp ought to come down as you're building the revenue base of the firm. So that's our very simple business plan. Harder to execute, but it's a very simple business model in that sense that we're operating, and it's just a more challenging environment, as you say, because we don't yet have the tailwinds in the business. We still face headwinds with the rest of the industry.
... That's very clear. So maybe you could just talk about how you're thinking about balancing investing the franchise for longer-term growth versus the need to protect margins maybe into 2024 and 2025.
Yeah, I mean, it would be, you know, in terms of just looking at comp ratios, I mean, it would be foolish to stick to some specific comp ratio where you're going through some turbulence, and you have established this phenomenal team of 65 partners and 50 MDs, and we've got all these clients that love working with us, and they've just decided, you know, this wasn't gonna be a year where they engaged in a transaction or where they needed our services, but that you have a long-term annuity value inherent in the, in the franchise that you've built.
So you always have to think about the team and making sure that you're appropriately compensating your team, because if they are, enticed to go somewhere else because of financial remuneration, it would just be foolish for us not to, again, take care of our team and do the right thing, because these are assets that are very, very valuable, but they do have some volatility naturally with the market. At the same time, we, we are growing as a firm. We're, we're 700 people, 10 offices in 5 countries. We have 65 partners. We have really terrific recruiting environment that we're in, and we're talking to some fantastic people who would, join our platform and build the revenue of the firm. A third of our partners today have been on the platform for less than three years.
There's investment needed to get those people, those assets, up and running and integrated into the firm, and hopefully providing what I view as nonlinear growth opportunities, where someone comes in not just with their revenue and their clients, but actually becomes part of our firm, where there's opportunities to expand the joint revenue opportunity once we're partners working together and covering clients together. So you do need investment. We're unlikely to have, like, a breakout investment year, where we decide to hire 25 partners, and that's like creating another new firm overnight. And I think for us, we look at what type of professional fits our business strategically, financially, and culturally. We're opportunistic, but also disciplined, and there's that trade-off. You know, we own 51.
We, as a partnership and employees, own 51% of the firm, so we care a lot about how we compensate our team, but care a lot about our equity value and growing equity value and getting wealth creation for our teammates. And so we're very aligned with shareholder interests in that sense, which, you know, we think about all the time.
Maybe philosophically, I think there's a lot of discussion, you know, among peers as to what happens over the long term in terms of normalization of comp ratios and non-comp ratios. But I guess, is there any reason why you shouldn't be able to get them back to where they were, and obviously, as you scale, why they couldn't come down, you know, over time?
Yeah, I think over a longer period of time, once you get to scale, you can see some of the more scaled players in our industry and where those comp ratios have been outside of this year and sort of aberrant markets. I think they're again much, much higher than they've been historically, so they're out of the traditional band, but I don't think they stay outside of the traditional band. And so you just need more scale in the business so that when you're investing for growth in the future, you can't ask shareholders to pay for all that, but you also can't ask the current team who's producing the revenue to pay for all that. Because if you did that, you're gonna lose that team.
And so it is a really delicate balance, but as you scale, you're able to meet your growth targets and also compensate your team well, at the same time, creating wealth because your earnings model is growing, because you have this notion of a range of compensation. And as I said earlier, you're not increasing non-comp at anywhere near the rate that you can increase revenue, so you have natural operating leverage and earnings ought to grow.
Excellent. I'd like to turn now maybe to strategy.
Mm-hmm.
I think you have an interesting perspective in that you've been at the firm since the founding, but you've now been in the CEO role for about a year. Maybe you could talk about the changes in the firm since you've taken over as CEO, lessons learned, and then maybe expand on some of the investments in hiring that you've been focused on. And then, as we look ahead, maybe let's start with this part, but where do you see the best opportunity to build in M&A?
Yeah. So maybe just a quick history lesson on the firm, 20 seconds, which is that we started the firm as very clearly an M&A advisory firm, and we were a group of senior bankers from various firms, including one that's very, you know, prominently featured here today. And we had great clients. They were very supportive. We realized a little bit after the financial crisis, which was, perversely enough, a very big benefit to the firm. Unfortunately, a very difficult time for the world, but for us, we were able to really build our firm and franchise and establish real trust and credibility in the marketplace. We realized sometime after that period that we needed to change strategy a bit and not be so product-oriented.
In around 2010, we very deliberately decided to build out our industry coverage model, and that's what we have today. We have five key industry groups. We are organized as industries. We get support from product experts as well as regional experts to help cover clients, so we're a very client-centric model, and that allows us to get very, very deep and also have opportunities to add on to existing core.... In healthcare, you add all sorts of subsectors, in around healthcare, and tech is the same thing, energy, same thing, where you cover upstream, midstream, downstream, energy transition, renewables, et cetera. I think that model gives us a very large growth opportunity.
Within that, we also evolved from purely an M&A advisory business to include restructuring and liability management, and we've expanded that service line to now include debt advisory, particularly around private credit, which has been very active for us. Capital markets advisory, as well as shareholder engagement and shareholder activism, which is a business that we've been getting demand from clients to have deeper capabilities there. We've recently hired two partners. You know, terrific, very, very experienced partners in that arena, and that's an example of where we do get that geometric growth that I mentioned, because they bring expertise and clients and experience, but also in our system, where they immediately plug into 65 partners and 50 managing directors who cover clients.
They're able to offer those capabilities in our client-centric model immediately, which again is a very exciting part of adding product capabilities. And so we're. The strategy of the firm is to provide advice. Number one, first and foremost, we help clients address complex strategic and financial challenges. I have no interest in straying from that business model, so we're not interested in getting into investing and starting funds and businesses that are far afield. We're not a teaching hospital or an exploratory firm in that sense. We have a very large market opportunity in what we do really well. We've established a reputation for trust and for expertise in our markets, both here in the United States and in Europe. And we're gonna keep pursuing that very, very clear strategy and business model.
To really get to our, you know, journey to $1 billion and, and stay there and grow from there, though, you do, you do need some tailwinds in the market. So that is one thing that, you know, we're not in control of. We have to accept the conditions as they are and do our best within all those conditions. But again, from where we started in M&A to now a broader product set, also allows us to navigate through choppier waters 'cause we have a lot of ballast in the system with different advice, markets that we can be involved in beyond traditional M&A.
So you talked about some of the product capabilities you built out, right? And I recognize that you might not want to give us all the answers here, but when you look ahead, what's next? What are the adjacencies that you think are most exciting as you look ahead over the next three to five years?
So we're constantly, you know, thinking about our growth opportunities, and I think they're, they're in our five sectors, so there's no magic to that. And because we're 65 partners and 50 managing directors, we just have a scale today that when you think about our algorithm to get to a billion and how we get there, I think it's a very clear path. I think it's very achievable and verifiable, and it all works. And you can see partners and MDs that we will hire in all of those sectors because there are so many subsectors today. You can't walk around and just say, "I'm a technology banker." You know, those were the days when I first started in the business back in, you know, 1994. Today, you have to be much more specialized.
You can draw analogies from the medical profession, where you just don't go in and see a doctor anymore. You get to the point of what the issue is, and it's the same thing in financial services and what we do. People want experts that know their industry, know the issue, and, you know, bring financing expertise or bring healthcare expertise in devices or in services or in energy and energy transition, in wind or in battery or whatever. And you have to have those experts. And so we're thinking about all those add-ons and all those sectors, but you're right, I'm not going to give you the roadmap.
Fair enough. Let's turn to one adjacency where you have had a lot of success, especially this year. Financing and capital solutions has performed quite well. It seems like some of that is driven by restructuring. Maybe we could talk about the outlook for restructuring into next year. What's been driving it? It seems like it's more liability management than the Chapter 11 type activity, but is that has that started to pick up? And then when you take a step back, what could turn this from a good restructuring cycle into a great one? And I guess the likelihood of that occurring.
Right. So-
That's a lot of questions.
Yeah, no, it's great, though. It's... You know, restructuring is a part of our financing and capital solutions business. Restructuring is really where I always say you're calling 911, you got a problem, and you may have to go into bankruptcy. And unfortunately, there are companies out there, and it's a bit more idiosyncratic today than, for example, during COVID or during the financial crisis or during retail Armageddon. It's not as systemic, I don't think, but there are definitely pockets of distress, and there's probably more pockets of stress, and that's where we think the opportunity is to help clients avoid bankruptcy entirely, get ahead of maturities, and help them navigate through their capital structure challenges and their capital needs to the extent that they're in need of raising capital versus just restructuring the existing capital structure.
So what's happened in restructuring is that, you know, it's a little perverse where restructuring bankers sometimes might be rooting for... You say, what could cause this to be a real restructuring cycle? It's just bad things, which nobody in this room would really want. And I think you don't need that in order to have a thriving financing and capital solutions business. And so the idea that these businesses are entirely negatively correlated and countercyclical, that's just not the case, because the financing and capital solutions business now is much broader than traditional restructuring. So both businesses, M&A, traditional M&A, and financing and capital solutions, can thrive in a particular market. One can do better than the other. Obviously, if you have a 2021 ripping market in M&A, it's gonna outpace financing and capital solutions.
And if you have something like COVID again, where, you know, that's where we spent most of our time, helping companies, work through liquidity and their balance sheet and maturities and bankruptcy and all of that. So, you know, but you don't need those extremes to have a thriving business. There's sort of that—there is a sweet spot, which you could see both businesses doing, very, very well. And the real magical moment is where you have situations where you're doing an M&A transaction, and you're bringing in expertise around debt advisory, and you're raising $2 billion in acquisition financing, you know, for which we receive a fee. And if it's in the private credit arena, even more attractive for our particular line of work, versus going to traditional syndicated bank markets.
So there's a lot of moving pieces, and the fee pools are large in what we do. And so having that range of products—and, again, I lost this battle a long time ago. I call them services, but nobody wants to talk about services. They want to talk about products. So we talk about capital solutions and financing products, as well as in, M&A product. But really, we don't sell products, so we're really not a bank that sells products. We're an advisory firm that's solving problems for clients. That's what we do.
Great. So just one more for me, which is on capital return. I think you have slowed your, your capital return substantially, year on year. Maybe you could just talk about your capital return priorities, the balance between buybacks and dividends, and then I think there may be an unlock of some, of some equity ahead, so just how that factors into this-
Yep
... dynamic as well.
Yeah, we have always said, since the day we went public, that we would return excess cash to our shareholders. And as I said earlier, we are 51% of the company as partners and employees, so we're very interested in that. We have to always think about what excess cash means, and we do have needs for cash in the business, but generally, it is a cash-flowing business. But for example, this year, I wouldn't say we slowed our return of capital. We just changed the form of it. So we were not as active in open market operations this year because we have natural built-in share buybacks in the way we net settle RSUs.
Because of how we went public and phased in our stock-based compensation program, in the first year, we didn't have much opportunity to net settle, but as the years go on, we have more opportunity to net settle. So rather than chasing market prices at any one, you know, time through open market operations, we kinda know what the net settlement looks like, and we were able to, in fact, retire shares through that mechanism. We've continued our $0.07 quarterly dividend. That's continued apace. And then this year we had, I think, very good uses for capital around investment, as well as some action we took around staff reductions, where we wanted to redeploy capital toward investment and more productive businesses.
And so we did have some staff reduction through the course of the Q3 this year and into the Q4 .
Okay. So I think with that, we're out of time. Andrew, thank you so very much.
Thank you.
Hope to see you again next year.
Great. Thank you.