Great. Thank you everybody for joining us today. My name is Michael Kelly. I work with Bill Katz, covering the US asset managers and retail broker-dealers at Credit Suisse. Today, we're excited to have Andrew Bednar, the Chief Executive Officer of Perella Weinberg Partners. Founded in 2006, PWP is a leading global independent financial services firm providing strategic and financial advice in connection with executing complex M&A and other corporate actions. Mr. Bednar has been a partner since the firm's founding in 2006, and is co-head of the firm's US advisory business and was co-head of the firm's U.S. advisory business till 2013. Prior to his time at PWP, he served as the head of U.S. M&A for Bank of America. Thank you.
Thank you. Good morning.
This is his first conference appearance as CEO, so we're excited to have him here down in Key Biscayne, so thank you for coming.
Mm-hmm.
I thought we'd start with growth and strategy from here. Can you talk to us a little bit about your strategic priorities for the firm and help us understand the growth there a bit?
Yeah, sure. We are on a mission to scale the firm. We feel like we've built a terrific business, and it's time to now scale that business. We've done a lot of testing and modeling, and we're at a point where we've got a good formula. We're gonna stay with our core business of advice and not stray from the program that we're on, which is to provide advice to clients engaged in complex strategic and financial transactions. We'll continue to do that and scale the business accordingly by adding additional talent that can cover new subsectors for us and bring us a larger client footprint.
Okay, great. In terms of that business, where are those areas that you're looking specifically right now?
We've got, you know, today, 70 partners, 51 managing directors. We're covering sort of the six major industry groups, and within all of those industry groups, there are subsectors that we just don't have enough coverage of. It's all of the above in our business, where we can find the right talent and people that have the expertise, that have the relationships, but also that will conduct the business the way that we conduct our business, which is always, you know, with our core values in mind of trust, integrity, and teamwork. As we find new talent to add to the platform, it's really gonna be across all of our industries. It'll be enhancing some of our product capabilities and also within certain of our regions.
Which regions specifically?
We are currently 10 offices in five countries, so we're, you know, largely concentrated in the U.S. We started our European business at the same time that we started the firm in June of 2006, so very much our DNA is European and U.S.-based. We have offices in Europe, in London and in Paris and in Munich. When I say regions, outside of the U.S., those would be the three primary offices where, you know, we will continue to add talent.
Okay, great. Recently, you had a couple high-profile wins on the capital markets side between Twitter and FTX. What do you think differentiated PWP in that process to, you know, secure those two mandates?
Yeah. Look, those were great wins. I always say this is sort of a game of millimeters. We have, you know, great competition out there, you know, a very impressive peer group that we're competing with every day, it's a game of millimeters. You know, in those transactions and situations, I think that we have been fortunate that we have made some investments over the last 5 or 6 years, particularly building out our liability management and financing and capital solutions business. I think those investments paid off in connection with both FTX and in Twitter. Also with respect to FTX, we had begun investing around digital assets about 3 to 4 years ago and just have a terrific team focused on, you know, fintech and aspects of digital assets.
We've also had a strong heritage in the exchange landscape, you know, traditionally had done a very significant amount of transactions around market structure. I think the combination of, you know, our capital solutions capability, digital asset capability, and just our historic work in market structure industry was very helpful in winning those mandates.
Great. Can you remind us how many partners the firm now has in the restructuring practice?
We look at restructuring as much more than what I call 9-1-1, companies going bankrupt. That's on one extreme. On the other extreme is companies are perfectly healthy. They're thinking about financing in a very choppy and uncertain market, and they seek our help for regular way financings and everything in the middle. That can include liability management across the balance sheet and maturity tower management. We do financings for public debt offerings, and we do growth capital for emerging companies in our private capital markets business. It's a broad spectrum of advice that we provide across financing and capital solutions, and that business is about 15% of our partnership.
Okay. You started it more recently, correct?
Yeah. We started making investments in the team we have, around 2015, 2016, so we're less than 10 years in that business. We are global in that business. We have a team in the United States as well as in Europe. It's a very integrated team with our industry groups, and we think that's a differentiator. Where clients, when they see us not selling products because we don't sell products, we solve problems for our clients. When we come in to help solve a problem, we come in as an integrated team from an industry, a product, and regional perspective as applicable.
Yep. That team, that practice within the firm, you would say, is kind of at a seasoned inflection point now?
Sorry, what-
They're seasoned.
Oh, for sure. Yeah. I mean, they're a very seasoned team as our firm. All the partners and more senior professionals at the firm all grew up somewhere else. We're a melting pot of Wall Street when we think about, you know, the founding of the firm and the partnership that we've built. The team is very seasoned in terms of their experience. They're all 20-plus veterans in the industry as a partnership. In terms of working together, You know, they have come together very nicely over the last 5, 6 years. I think that's sort of a pretty typical ramp-up for, you know, a new business and a new team to hit their stride and where the flywheel starts to spin a little faster, and we're starting to see the effects of that now.
It's just They've done a terrific job.
Yep. It's a great, you know, segue into my next question, which is, what is your biggest source of talent, and how does it differ between the different regions?
There's probably not much of a distinction in the sourcing of talent by region. I think it's pretty consistently been from the money center banks and the fully integrated financial services institutions. Those continue to be, for us, the greatest source of talent. There are pockets of talent elsewhere, some in consulting, some from law, some from industry. Largely, overwhelmingly, the talent is coming from other money center banks.
Yep. Do you find it easier to recruit because of the independent nature of the firm, and that you're very more focused than the money center banks?
No.
No way?
I mean, it's an intensely individual decision that, you know, a financial services professional makes and where they wanna spend their time and how they want to sort of evolve in their career. For those that are a little bit more entrepreneurial, for those that would like to have a more focused effort and advice, and for those that would like to work in a very team-oriented, collaborative organization where their compensation is more correlated to their contribution, I think we are, you know, a first choice for those types of folks. We continue to see a pretty healthy pipeline in the conversations that we're having of people that reach a certain point in their career where it makes sense to make that kind of change. It's not for everyone. You know, continue to be very high-quality talent across the financial services industry spectrum.
We will continue to attract that type of individual that, you know, again, will work in our type of environment where trust, integrity, and teamwork are really paramount.
Great. I apologize for not doing this in the beginning. If anyone in the audience has any questions, please feel free to raise your hand, and we'll get you a microphone. Thank you. I kind of wanted to move now into the current operating environment. You have a unique perspective given that you're often in boardrooms with your clients, the CEOs. What are clients asking you most about today? Maybe if you could talk about how that's evolved over the last year to 6 months.
Yeah, sure. I mean, our perspective is probably not as broad as other firms because we're smaller, and we cover a more narrow landscape. I do like to think of our conversations that we have with clients as more intimate. So I think you get more out of the discussions when it's a narrower breadth but, you know, deeper in terms of content and relationship. Look, I think boards are focused on the same things that all of us are focused on. The, the uncertainty in the market, while that never goes to zero, it seems to me in the discussions we're having, that the range of uncertainty has just been incredibly broad, and the duration of that broad range of uncertainty has also been very long. So I think that has people just very focused on, you know, their people.
I think they're focused on, in some cases, financing because financing markets are not wide open. There, you know, are more and more open and closed windows in this kind of market. I think that is a little frightening, particularly for, you know, relatively new CFOs, many of whom have not seen, you know, this type of rate cycle before.
Yeah.
That's challenging, and I think creates, you know, a conversation that historically financing conversations were largely with the CFO and treasurer. Now that's become a strategic conversation with many CEOs and with the board in the case of more leveraged credits. I think if you look back at 2021, for example, which was a, you know, ripping M&A market, $5+ trillion, you really had plenty of access to capital. There was, I think, a level playing field between corporates and sponsors, more levered credits, less levered credits. People were very focused externally on acquiring assets that they put the brakes on during the 2020 period through COVID. That's now transformed into a market where, you know, access to capital is less certain, where valuations have declined over the course of 2022.
In a declining market, buyers adjust faster than sellers. You've had this, gap.
Yes.
-through most of 2022, which has resulted in lower M&A volumes. That's a long answer to your question, which was, I think, what are, you know, what are executives and boards thinking about? They're thinking about rates, they're thinking about geopolitics. They're thinking about, you know, a war going on in Ukraine. They're thinking about what's going to happen with, you know, our Congress here and the actions that they may or may not take. I think the band of uncertainty, as I call it, the range of uncertainty is narrowing. As long as investors require growth to put attractive multiples on companies are going to look to grow. They're not going to be able to grow internally, they're going to have to look outside. For companies that have levered during COVID or after COVID, the operating cash flow is insufficient-
Yeah.
-to repay that debt. For sure, they're gonna be coming back to the financing markets, and you see the maturity towers are very evident as you head into 2024 and 2025. There should be a lot of activity around capital markets. I think there'll be a pickup in, you know, sort of core M&A, but I don't, I don't necessarily predict that we'll get back to a $5 trillion market. I think that's really a ripping market that's probably unsustainable.
Yes. I would generally agree with you there. I do wanna hit on one point within your answer there about buyers and sellers. Obviously, buyers adjust faster. Have you started to see sellers and the valuations they're considering because of the things we just spoke about, the financing markets, et cetera, are you starting to see sellers come down a bit in their expectations?
I think there's a confluence of factors there, depending upon whether you're in the public or private markets. I think in public markets, you know, the duration of having stock prices sit now closer to 52-week lows than highs for many companies and, you know, certainly considerably off of their highs from 2021. I think the longer that settles in, you start to anniversary some very high prices, the reality sets in that the valuation is probably here to stay for some time. I think shareholders reassess. You have new shareholders come in at lower basis. Boards adjust to current markets and management teams sort of rethink their strategies in that type of environment. I think the duration of the down market is helpful to adjust expectations. That's in public markets.
In private markets, I think what's happening is that valuations have come down so precipitously, and the access to capital is more limited, particularly if you are a growth company with a lot of your expectations further out on the forecast graph and where you're still incurring losses. I think those companies are struggling to raise capital at acceptable valuations. More and more, as you see down rounds and as you see, again, valuation adjustments and mark-to-market, I think that reality sets in to a point where in some cases these private companies will look to M&A markets rather than to traditional financings because either the cost of financing and availability. The cost is higher, the availability is more limited, or they're at such a dilutive level that it makes sense to pursue an M&A transaction.
We're seeing some change in behavior from, you know, traditionally growth-oriented private companies would go directly to the financing markets. Now it's more dual track.
Okay. I think that makes sense. On that point, are you seeing more dialogue on the public side or the private side? It seems like maybe the private side, based on your last comment. Within that, where are the conversations most active? Maybe industry, obviously, you just touched on growth, more growth companies, but...
Look, on the private side, it's more pressing. If your primary objective is to raise capital to pursue a growth strategy, you kinda need the capital. They're not really faced with an option. They're faced with a requirement to raise capital to potentially merge or sell the company to continue on their business plan. With respect to public market M&A, you know, those are more options. You know, people are looking at their options. People decide whether they wanna pursue particular types of transactions, but they're not really forced to do it. It's much more an elective procedure than it is to, you know, have a financing, which, you know, if you're in need of capital to stay in business, you have no choice.
You either have to take a much lower valuation than you probably could have achieved in 2021, or you're faced to think about other alternatives for, you know, for capital to conclude a sale of a company.
Yeah.
In terms of industry, I'm not. You know, it's pretty active. The dialogues are very active across industry, so we're not in a situation where in some prior markets, you could isolate and say, you know, in 2020, for example, the energy restructuring, M&A, capital raising markets were highly elevated given the situation with the pandemic. You know, in 1998 and 1999, dating. I'm dating myself, but you had a disproportionate amount of the market in, you know, media and telecom transactions. I think we're seeing activity across the board. Now, some markets are larger than others. You know, energy is a large market, healthcare is a very large market, general industrials is a very large market. But I don't see the evidence of any, certainly domination, but even evidence of disproportionate activity.
I think it's active across all of our key sectors.
Okay. Makes sense. Maybe shifting more to the macro environment we sit in today, if rates and our economist expects, you know, a bit higher for longer five and then maybe come down a couple cuts. Given if rates remain structurally higher for longer, what will it take to see a pickup in M&A activity, do you think? Is it just certainty of where we're going and the rate curve is going? Is it some type of stability, and I think we're seeing it year-to-date in the equity markets? Is there something else other than those two scenarios that we need to see your activity levels?
Yeah. Whenever I'm asked a question about macroeconomics, I always like to say first that I'm not a macroeconomist. I'm just a human being, so I have no idea where all that's going, and my crystal ball is as terrible as everyone else's. It seems to me, though, that the rate of change and the unexpected nature of the rate increases during 2022 had a quite chilling impact on any big moves by both private equity and by corporates. I think in the midst of an unexpected and large move, you know, in a key metric around capital markets, I think it's just prudent that people paused and, you know, didn't make any big moves in the middle of a storm. That was just, I think, good advice.
I'm not surprised by the reaction from, again, both sponsor community as well as the corporate community during 2022. I think now we're in this environment where, as I said earlier, I think the range of uncertainty has narrowed quite a bit. I think now, you know, we're in a zone where the bid ask on rate moves is something like 50- 125. My own view is that we're gonna be a little higher. You know, I think if you asked people a couple months ago, they would have said probably the peak on rates is in the sort of low 5 zone. My own view is that it's gonna be closer to 6. Again, I'm not a macroeconomist, and I'm not sitting around the table in an FOMC meeting. That's just my view on where this inflationary environment is going.
I think services inflation is tricky, and I think energy with transition going on at the same time have a rising rate environment and geopolitical unrest. I think it's very, very tricky to arrest the rate of inflation. I think we're gonna settle into a little higher rate. I also don't think it peaks and then immediately comes down. I think they'll be reticent to drop rates quickly in response to any near-term data that comes out. I think they're gonna wait. Yes, I think we're in this environment where we get up to a peak and it plateaus for a while there. I think once that occurs, as we get really close to that, it's all about the adjustment mechanism that people go through.
Last year, you're just in constant adjustment mode, and this year the rate of change is lower, the peak expectations are narrower. I think we can operate, and the world can operate, companies can operate, sponsors can resume activity even in a higher rate environment. It's the change environment that I think impacts activity. I think as we get closer to peak rates, we had 4.5%-5% Fed funds back in 2005, 2006, 2007 timeframe. Perfectly excellent M&A market for both advisors and for sponsors and for corporates. We know we can operate in a higher rate environment. I think the challenge is managing the change in getting to peak rates.
Yep, that makes sense. That's a good comment on 2005- 2007, that time period, because my next question was, if we do stay at a higher, you know, 6% maybe, for longer, what does that mean for PWP versus what I think corporates and maybe your bankers were accustomed to over the last decade?
Yeah. I think, in the last decade it was open access to markets, low cost, a high degree of availability, competition from liquidity providers to provide corporate and sponsor funding for transactions. You know, it's a little bit more by invitation now. I think, underwriting standards have definitely tightened up. You have plenty of liquidity out there. It's just a question of how it gets deployed. I think it's a, you know, reasonably positive environment going forward and, you know, a slightly higher rate environment from where we are here. Slightly more challenging access, I think is going to drive more demand for advice.
I think that when things are regular way and where you can make a few phone calls and get financing, you know, the need to have a Sherpa get you through those kind of markets is just lower. I like the setup for what we do. I like the investments we made, but it's gonna take some time for that story to play out and for, you know, again, that rate of change to slow down a bit and see people come back to markets even though they'll be at an elevated rate.
Great. I think that's great segue and the dry powder comment to the conversation I wanted to have next, which, because of our coverage of the alternative managers, I thought we'd talk a little bit about sponsor-driven activity. I read the transcript from your earnings call, and it seemed like you have, based on this conversation, a pretty optimistic view of capital markets recovering, in the back half of the year, maybe. Do you see that more sponsor-driven or strategics?
I think on our call, I would hope that we weren't optimistic. I think what we said was that last year was just an unconstructive market backdrop, I think heading into this year it's less unconstructive.
Understood.
I wanna be careful about.
Yes.
I think for sure it's better, but it's not great. That's a really different term that I'm using. It is a better market from where we were in the middle of 2022, no question. It's still not great. You know, we really don't have an IPO market. We still have financing windows that open and close. People are gonna get their fingers caught in some of those, in some of those slamming windows that come down. Again, that's a reasonably positive factor for us because as markets are trickier to manage and navigate, we tend to get calls for help. I think, you know, in the IPO markets, that market likely is going to recover and see some opening for companies that are more established, for companies that are showing positive cash flow and earnings growth.
I think it's less likely to come out of an IPO dry spell with something that's super high growth that doesn't show unit economics yet, that is focused on a large TAM, but hasn't had positive cash flow. I think that's gonna be pretty tricky to get those kind of businesses off in an IPO market. I do think we will see some resumption of IPO activity. I think that is likely to come from both sponsors and from some corporates, where you see a close cousin of the IPO in an increasing incidence of spinoffs and separation transactions. I think that trend will continue.
With respect to more of a broader sort of M&A recovery from last year, I do think corporates are gonna lead us out of that first and foremost, because they're not gonna have the same financing issues, certainly for less levered corporates or, you know, high quality credit corporates that won't have an issue financing. I think they're likely to continue to see a pace of activity that's higher than sponsors. Sponsors have a tremendous amount of capital. Their job is to deploy it. They will deploy it, and that's just a matter of time, but I think that will take a little bit more time.
Yes. What do you think are the three biggest drivers of sponsors staying on the sidelines still?
I think right now, it's a little bit of this valuation volatility where, you know, I'm certain that sponsors are in conversations with a lot of owners and managers of assets that are desirable to have in the portfolio, but the valuation deltas are still there. I do think it's gonna take a little more time for, you know, buyers and sellers to come together and see eye to eye on valuation. I think that's number one. It doesn't mean conversations aren't ongoing, and it's still happening, but getting to the finish line on a transaction's harder until you see more eye to eye on valuation. I think that's number one. Number two, for larger transactions, I think it's just the availability and cost of financing.
Mm-hmm
... and the uncertainty of financing, which, you know, sellers get very concerned about. I think until some of the plumbing unclogs in the banking system, where you do have still, you know, quite a lot of private equity-driven leverage transactions still on the books.
Yes
in the banking system, I think additional commitments are just a little harder to get. On larger scale transactions, I think that has private equity, you know, a little less active than what we've seen. I think lastly, there's something in the liquidity supply chain where traditional LPs are not seeing enough recycling of their capital-
Mm-hmm
... where I think they are a little less excited about writing a big check in a co-invest or in connection with a specific transaction. That has transaction activity a little bit, again, muted from a PE perspective. That community is still extremely active. They still provide, you know, incredible value to, you know, their constituents, and they're gonna continue to be active, but the pace of transactions are a little more distant from where we are today.
That makes sense. On the second point, funding specifically, it seems as though the banks' traditional funding sources, the alts, obviously private credit has grown a lot, but you still believe that, you know, you're gonna need the traditional big banks coming back to leverage market for activity to really pick up there? Do you think private credit can fill that void?
Private credit has been, you know, an incredible development for our industry. It's something that, to me, is the latest stage of massive disintermediation of money center banks and their activities over really what started probably 30-plus years ago. This is just another chapter in disintermediation. The sort of non-bank private credit market is very important, it's very large, but that's not free money. You know, that's not like any transaction you pull up the dump truck and say, "You know, put the money in." They have very strict underwriting standards. They're very sophisticated. They can deploy large amounts of capital in a very concentrated way. It is an attractive source of funding, both for private equity and for corporates, because it doesn't involve the normal process that you'd go through with an underwriting bank.
They're not gonna put underwriters out of business. They're gonna be competitive with underwriters, and there'll be different reasons why certain companies, certain sponsors will access the private credit market versus going through a traditional bank commitment and.
Okay
... normal syndication process. I think those will coexist, but it's not that the underwriting standards are different. You know, when markets started going south a bit and you saw rate increases, you know that's gonna change the way all creditors think about extending credit. It's not like that's a more attractive market from an underwriting perspective. It's still very strict underwriting standards and they'll continue to underwrite appropriately for their investors. It is a great development for our client base and for our business generally, because again, I'll use my analogy before. That market to access private credit does require a Sherpa and we're a very good Sherpa for, you know, both private equity and for our corporate clients looking to access private credit.
Great. Then on that, have you found. I think a lot of our private credit managers speak to the clients, the portfolio companies and the borrowers, they like it because they get to know the lender versus going into a syndication and that getting chopped up. Have you found that as well with your clients in speaking with them, that they like private credit because they know the lender is gonna hold it on the books for longer, and they're gonna know who holds the loan, for instance?
Yeah. We have heard that there are certain issuers that like the idea of, you know, holding the loan and in effect being invested as opposed to being an agent. I do think there's an attraction. I think if the company does run into a speed bump, they also don't need to go out and, you know, do a broad-based amendments. They can go to one or two parties and be able to negotiate amendment terms very quickly. There are also downsides to that level of concentration as well. I think there's some, you know, sort of pros and cons to, you know, going to the private credit market.
That is one of the appeals. I think the other appeal is that some terms that public credit investors require, private credit investors may be a little more flexible on things like make-wholes and being able to redeem prior to maturity. I think those are aspects that we find private credit to be a bit more flexible than public credit markets.
That makes sense. Maybe on that, have you seen the use of more covenants within the private credit space because of the uncertainty? A lot of the lending was pretty covenant-lite over the past few years.
I think that, yeah, that market needs to be competitive on covenants. Not really seeing any material observable difference...
Change
... between those two markets, I think other than, like I said, some terms I think you get enhanced flexibility by going to private credit markets. I think you get this, you know, sort of partnership dynamic, which is very different than a syndication process. I haven't seen a real distinction in the covenants.
I guess maybe outside of the private credit markets, what do you see as the biggest catalyst for the debt markets at this stage?
Again, I'm not a credit investor, but it seems to me everybody's hanging on, you know, every word that Jerome Powell says. I think in the, you know, next 2, 3 months in the meetings that occur and the rate decisions are made, I think everyone's gonna look very carefully at, you know, the script, the words, the changes from the prior statement, the interview. And, as I said, I think investors want not zero uncertainty, 'cause you're never gonna get it, that's not an achievable objective, but just a narrower range of outcomes, I think will be a very significant catalyst. I think we're probably a couple of Fed meetings away from that.
Yeah.
Unfortunately.
More of a back half of the year.
You know, I guess everybody has optimism for back half.
Yeah
'cause when you're in the front half, it's harder to predict when, you know, that inflection point comes. It just seems like you will have more data, and instead of unknowns, you're gonna have more knowns.
Yeah.
Whether there are new factors that enter in the market that affect people's confidence and that either increases or decreases the range of uncertainty, who knows? I don't know what's gonna happen in the back half, but I do know we're gonna get more data points. Some of those are gonna be encouraging, because at some point you do get to peak rates in a cycle, and you either plateau or begin to come down. As I said earlier, I do expect more of a plateau here once we get there.
Great. We're coming up on time, so if anyone does have any questions, please feel free to raise your hand. Maybe one last one. As we get through this year, and we do have those knowns, it seemed earlier you had said you think corporates are gonna lead us kind of the market out of it. It seems as though your business is a bit underweight sponsors versus strategics. Over time, where do you see the larger opportunity once we have certainty in looking 2024 beyond?
Yeah. Look, so for most of my career now, almost 30 years of sponsors have always been a very, very important part of the M&A markets. I think even in a down year, last year, I think the numbers look like something around 40% of M&A activity was sponsor-related activity. You are correct, we are historically, we have been more overweight corporates. We are more known for our corporate relationships and our industry coverage. We have taken steps and have made investments over the last several years and have a very keen focus now on making sure that we get that more balanced, I think, to reflect market activity. I am optimistic about our efforts there and believe that they will pay off over time.
Again, we're in a relationship business, so that doesn't turn overnight. I think we have the features, and I think we have the assets in place that I think can drive a more representative business in terms of the mix between corporates and sponsors. I do think, in that I think it's probably not half and half going forward, but I think that 40-ish% zone, given the capital that's available in private equity and also the portfolios of private equity. When we think about private equity, it's not just new capital deployment, but it's existing assets.
When you combine the dry powder, the leverage, and the existing portfolios that both need sometimes M&A assistance and sometimes capital structure assistance, the sponsor community is a, you know, very, very significant market for what we do, and we need to enhance our focus on that client base.
Yep, that makes sense. With that, I think we're out of time here. On behalf of Bill, myself, and Credit Suisse, thank you for coming and participating, and thank you.
Yeah. Thank you very much. Thanks.