Houlihan Lokey - Earnings Call - Q3 2020
February 3, 2020
Transcript
Operator (participant)
Good day, ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey's third quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, February 3rd, 2020. I will now turn the call over to Christopher Crain, Houlihan Lokey's General Counsel.
Christopher Crain (General Counsel)
Thank you, Operator, and hello everyone. By now, everyone should have access to our third quarter fiscal 2020 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the investor relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should, or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended December 31, 2019, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website. Hosting the call today, we have Scott Beiser, Houlihan Lokey's Chief Executive Officer, and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Scott.
Scott Beiser (CEO)
Thank you, Christopher. Hello everyone, and welcome to our third quarter fiscal 2020 earnings call. We had a strong fiscal third quarter. We generated a record $334 million in revenues, an increase of almost 12% versus the same quarter last year, and this was the first time we've achieved quarterly revenues in excess of $300 million. Adjusted earnings per share were $0.88, a quarterly record for the firm, and an increase of 14% versus the same quarter last year. We also announced our quarterly dividend of $0.31 per share for the fourth quarter. Year-to-date revenues of $857 million are up 8% compared to the same period last year, and we continue to see good momentum across all three of our business lines as we enter the fourth quarter of our fiscal year. So far this fiscal year, the firm has capitalized on a number of favorable macroeconomic trends.
The U.S. economy continues to exhibit stable growth, notwithstanding an economic expansion that is now in its 11th year. The stock market had an exceptional 2019, helping to support a good mid-cap M&A market, and finally, access to capital remains strong, and interest rates remain low, facilitating a healthy leveraged lending environment which supports private equity M&A activity. These macroeconomic factors provided a strong tailwind to fuel growth in both our Corporate Finance and Financial and Valuation Advisory businesses, and we expect that tailwind to continue into our fiscal fourth quarter. Our Financial Restructuring business continues to perform well despite the current low default environment in the credit markets. Ongoing technology disruptors, changes in consumer buying habits, company mismanagement, and over-leverage have all contributed to current growth in our restructuring business without the typical characteristics of a business downturn or higher interest rates.
With respect to company-specific trends, in Corporate Finance, the number of sell-side, buy-side, and capital markets opportunities continues to grow, as does our average transaction size. Throughout calendar 2019, we saw softness in our European business, but over the last couple of months, we have started to see improving M&A and capital markets activity heading into the recent U.K. election. To date, in the U.S., we have not experienced any changes in the pace of companies and investors exploring M&A opportunities in anticipation of the outcome of the U.S. elections later this year. In Financial Restructuring, we continue to experience balance in our business between debtor and creditor work, and in fact, in fiscal 2019 and fiscal 2020 year-to-date, our debtor revenues and our creditor revenues were pretty evenly split.
Finally, our Financial and Valuation Advisory business continues to show improvements in productivity and increased diversification as all of its primary subproduct lines are performing well year-to-date. Turning to some of our specific accomplishments during the quarter. On the acquisition front, as previously announced, we closed two transactions. We acquired Fidentiis Capital, an investment banking business in Spain, and Freeman & Company, a New York-based investment bank that provides advisory services to companies in the financial services industry. We continue to monitor and pursue other acquisition opportunities as we maintain that the right acquisitions are an important part of our business model. On the hiring front, we brought on two MDs in our third quarter, a healthcare banker and an oil and gas banker, and we continue to see a robust market for talented managing directors interested in joining the Houlihan Lokey platform.
Finally, with calendar 2019 behind us, Houlihan Lokey continues to be a leader across all three of our business lines. In corporate finance, we are the number one M&A advisor for all U.S. transactions for the last five consecutive years. In financial restructuring, we are the number one global financial restructuring advisor for the sixth consecutive year. And in financial and valuation advisory, we are the number one global M&A fairness opinion provider over the past 20 years, all based on the number of transactions according to Refinitiv, formerly known as Thomson Reuters. While recently there have been more factors positively impacting our business, we are ever mindful of how quickly events can change. The outcome of U.S. elections, geopolitical events, the coronavirus, trade disputes, or a general downturn in the economy are all factors that could create headwinds and impact our business.
We strive to successfully manage around or through any macro business risks in order to maintain solid financial results in any economic environment. With that, I'll turn the call over to Lindsey.
Lindsey Alley (CFO)
Thank you, Scott. Revenues in Corporate Finance were $201 million for the quarter, up 9% when compared to the same quarter last year. We closed 95 transactions in the quarter compared to 89 in the same period last year, and our average transaction fee on closed deals was slightly higher this quarter when compared to the same quarter last year. Financial Restructuring revenues were very strong this quarter at $93 million, a 24% increase from the same quarter last year, driven by higher transaction volume. We closed 28 transactions this quarter compared to 21 transactions in the same period last year. Our average transaction fee on closed deals was relatively flat when compared to the same quarter last year. We would like to remind everyone that our Financial Restructuring business can be lumpy across quarters as it is often driven by the timing of large fee events.
This quarter, we benefited in a positive way from that lumpiness. Before we get into the specifics of our next business segment, we have announced a name change for our Financial Advisory Services business, or FAS. We are now referring to this business segment as Financial and Valuation Advisory, or FVA. We believe this name change more accurately reflects the type of business we are doing within this segment. In Financial and Valuation Advisory, revenues were $40 million for the quarter, a 1% increase from the same quarter last year. We had 530 fee events during the quarter compared to 502 in the same period last year. New business activity remained solid across all of our major product lines in FVA, and we have continued to see improvements in managing director productivity throughout the year.
Turning to expenses, our adjusted compensation expenses were $203 million for the third quarter versus $181 million for the same period last year. Continuing this quarter, we adjusted for pre-IPO grants and for deferred payments primarily related to acquisitions. The adjusted compensation ratio was 61% for the quarter, within our targeted range of between 60.5% and 61.5%. Our adjusted non-compensation expenses in the third quarter were $50 million versus $47 million for the same period last year. Our adjusted non-compensation expense ratio in the fiscal third quarter declined to 15% from 15.8% in the same quarter last year. Our year-to-date adjusted non-compensation ratio is 15.3% versus 15.8% for the same period last year. As a reminder, our long-term fiscal target for the adjusted non-compensation expense ratio is between 14% and 15%. This quarter, we adjusted two items out of the non-compensation expenses.
First, approximately $580,000 in primarily legal and accounting costs associated with our acquisitions of Fidentiis Capital and Freeman & Company, which closed in November and December 2019, respectively. Second, we adjusted out our non-compensation expenses, approximately $1.9 million of acquisition-related amortization. We will continue to adjust for similar types of expenses in the quarters in which they occur. Our adjusted other income and expense line item resulted in a gain for the quarter of approximately $1 million versus a gain during the same period last year of $700,000. Our income in this line item for the quarter was primarily the result of interest income on our cash and investment balances. Our GAAP effective tax rate was 29.2% for the quarter, and there were no adjustments.
We were a little higher than usual this quarter as a result of several non-deductible items related to the two acquisitions and certain costs associated with the London move. As a reminder, our targeted range for the fiscal year is between 27% and 29%. Turning to the balance sheet and uses of cash, as of the quarter end, we had $368 million of unrestricted cash and equivalents and investment securities. In the third quarter, we purchased approximately 100,000 shares at an average price of $44.18 per share as part of our share repurchase program. The vast majority of the cash remaining on our balance sheet is accumulating in anticipation of our fiscal 2020 year-end bonus payments in May. With that, Operator, we can open the line for questions.
Operator (participant)
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first set of questions come from the line of Devin Ryan of JMP Securities. Please proceed with your questions.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Great. Good evening, guys.
Christopher Crain (General Counsel)
Hey, Devin.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
I guess first question here on the restructuring business and the momentum that you're seeing there. I appreciate, as you mentioned, that it can be lumpy from quarter to quarter, but it does feel like maybe the overall trend is moving higher and potentially even breaking out of this range that we've kind of been in recently and kind of that $300 million annual level. And so I'm just curious if that's the right tone that it's accelerating and some of the drivers that you kind of referenced have been in place for a while. So I'm just kind of curious what else seems to be occurring that may be driving the uptick as we end the year and head into fiscal 2021.
Scott Beiser (CEO)
I think, Devin, your comments are a fair assessment. I mean, we do see kind of the baseline of business opportunities in restructuring continue to slowly grow. Notwithstanding, as we've said, there's been very little macroeconomic fact patterns to help the restructuring business. It's really been all of these ancillary items that continue to persist and continue to grow.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Okay. Appreciate that. Then just one on the compensation ratio and how to think about that, especially coming into this year. I think where we are today is probably a better expectation than most of us had. And so, I'm curious if there's any thought around the ability to true that up at all in the fourth quarter or whether it's more just mechanical based on the individual businesses, because it does seem like the overall revenue trajectory at the firm has been maybe better than what was viewed kind of coming in, and I would suspect that has at least some implication on compensation.
Lindsey Alley (CFO)
I think we maintain a compensation ratio, I think, consistent throughout the year with where we think we're going to be for the year. I'm not sure we think of it in terms of truing it up in the fourth quarter. The business has done quite well from a revenue standpoint this year, but we've also added a fair amount of folks, and we've done a couple of acquisitions. So we continue to feel very comfortable with that compensation ratio between 60.5% and 61.5%. I think year-to-date is probably pretty reflective of our best guess on where the year-end is going to end up.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Yeah. Okay. Terrific. Last quick one around just revenues in the quarter and whether there was any pull forward in the quarter from the fiscal fourth quarter.
Lindsey Alley (CFO)
When you say pull-forward, Devin, what do you mean?
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Of deals that closed after the last day of the fiscal third quarter where the revenues were recognized in the third quarter.
Lindsey Alley (CFO)
Yeah. Every quarter, we have revenues that you're defining as pull-forward. According to GAAP, when the transaction is substantially complete, we recognize that revenue through a checklist of items that we have to ensure are met. We've had that same structure and concept in place for more than a decade. So yeah, according to your definition, we did have pull forward revenues.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Right. I guess more of what I was getting at was if that was outside the bounds of what's normal.
Lindsey Alley (CFO)
Oh, no. It's a pretty straightforward quarter in terms of revenues, and we didn't have any significant outsized revenues that drove the quarter. We had some large fees, but nothing in particular that's worth calling out.
Devin Ryan (Managing Director of Financials and FinTech Equity Research)
Okay. Got it. Thank you. Thanks for taking my questions and congratulations on a nice quarter.
Lindsey Alley (CFO)
Sure. Thank you.
Operator (participant)
Our next set of questions come from the line of Richard Ramsden of Goldman Sachs. Please proceed with your questions.
James Yaro (Equity Research Analyst)
Thanks. This is James Yaro filling in for Richard. So my first question is, January 2020 completed industry M&A volumes softened significantly across geographies, deal sizes, and deal types. Could you talk about what parts of the business are seeing strength and giving you confidence around the Corporate Finance business heading into next quarter?
Scott Beiser (CEO)
First of all, I think you always need to make sure that you're making a difference between deal volume and deal numbers, and usually it's deal numbers that are more relevant to what we do. Having said that, we've been experiencing even deal numbers have been shrinking for the last couple of years, and our business and the number of deals that we complete continue to grow. We think it's a combination of continually deploying, mentoring, and improving the talent we have, hiring key individuals, making acquisitions. We're just able, both globally and in a sub-industry sector, to participate in more and more transaction activity. And that's what's been growing the base of our business in the Corporate Finance area.
I don't think there's anything in particular in the last quarter or two that we would point out is uniquely different than what we've really been experiencing the last couple of years.
Lindsey Alley (CFO)
Yeah. We believe we're taking market share, saying it a different way. I don't think there's any one industry that is particularly strong, certainly from a thematic standpoint over the last couple of years. I mean, some years healthcare may be stronger than others, some years industrials may be stronger than others, but it's not any trend that is driving our revenue or business mix in corporate finance.
James Yaro (Equity Research Analyst)
Got it. And then obviously low financing costs have supported private equity activity, but sponsor activity has been weaker than on the strategic side over the past couple of quarters. Could you characterize the dialogue with national sponsors? What do you think would prompt them to start deploying some of the record levels of dry powder at a more accelerated rate?
Lindsey Alley (CFO)
The comment you made has just not been our experience. Private equity activity for us has been pretty robust for as many quarters as Scott and I could think about. So I don't know that I would necessarily agree with the comment that private equity is a bit slower than usual. You might look, I think it really private equity could be maybe defined in three different groups. There could be mid-cap private equity and what I'd call larger mid-cap private equity and then large-cap private equity. I think the dynamics around all three could be different. Where we are playing that market of kind of under $1 billion and probably closer to under $500 million in private equity, it's very robust.
James Yaro (Equity Research Analyst)
Got it. So it sounds like the larger deals are maybe skewing that. All right. I appreciate the time.
Scott Beiser (CEO)
Thank you.
Operator (participant)
Our next set of questions come from the line of Michael Brown of KBW. Please proceed with your questions.
Michael Brown (Equity Research Analyst)
Hi. Good evening, guys.
Lindsey Alley (CFO)
Hi, Mike.
Michael Brown (Equity Research Analyst)
So first, just to follow up on restructuring, in energy specifically, we've obviously seen some good activity in the space, but oil today is settling below $50 a barrel. I was kind of wondering if you could speak to the potential opportunity set for you from the oil and gas industry and if you could maybe compare it to the last energy restructuring cycle that may be helpful for us.
Scott Beiser (CEO)
Yeah. I think we do see a little bit of a second hiccup wave here in the oil and gas arena from a restructuring standpoint. It doesn't feel like it's going to necessarily be as big or as lengthy as what we saw before. As we've always looked at it, it's a combination of what kind of business plans people put together, what kind of financing package they have, and what was the duration of that financing package and ultimately where oil prices are. All of those are causing some round of some additional conversations and mandates in restructuring. But at this juncture, I don't necessarily think it's going to be of the same size we saw a couple of years ago.
Michael Brown (Equity Research Analyst)
Okay. Then just before the earnings call, we saw some headlines from the FHFA. In the past, you guys have advised the DOE and the Treasury Department. Can you just speak to kind of Houlihan's unique capabilities that have allowed you to kind of win on these government mandates? As we think about some of these transactions, these government transactions, how are the fees structured for something like that? Are they typically success-fee driven?
Scott Beiser (CEO)
First of all, I think we've been the leading financial restructuring firm on the street for many years, and it's just another example of kind of a marquee assignment for the firm. We don't really ever get into the specifics about any of the exact tasks or fees in a particular project. You can read what's publicly disclosed out there but I think we've continued to build a stellar organization. In the restructuring area, we continue to get some of those high-profile mandates, whether these are at corporate level, government levels, municipality levels. We've been doing this for years, in fact, decades.
Michael Brown (Equity Research Analyst)
Okay. Appreciate the color.
Scott Beiser (CEO)
All right.
Lindsey Alley (CFO)
Thanks, Mike.
Operator (participant)
Our next set of questions come from the line of Brennan Hawken of UBS. Please proceed with your questions.
Adam Beatty (Managing Director and Equity Research Analyst)
Thank you and good afternoon. This is Adam Beatty sitting in for Brennan today. You mentioned the upcoming U.S. elections among the potential risk factors. And we just wanted to get a little more of your thinking around it seems like in this cycle, it's maybe a little bit too early to see any real effects from that. Just around past cycles, particularly where there's been kind of a binary set of alternatives around tax policy, what effect that has on mid-market M&A, whether folks try and push deals through quicker or just hold off until the results of the election in terms of policy are more clear, or any nuances that you found noteworthy in the past. Thank you.
Scott Beiser (CEO)
Yeah. I think our major points really regarding U.S. elections have more to do with what could be potential changes in tax policy, which does drive corporate executives to make different kinds of decisions. As I said early in my remarks, so far to date, we've not really seen any new evidence of key investors or business owners making decisions to start transactions in advance of elections. So they're either not concerned about it at this point or they're still waiting. Typically, when people do expect to see significant changes in tax policy, you will get different folks who will start going forward on different kinds of transactions in different time periods. But at this point, I'd say we're focused on it to be aware of it, but we've not seen any impact in terms of kind of the volume of new business coming in.
Adam Beatty (Managing Director and Equity Research Analyst)
Okay. That's all we had. Much appreciated.
Scott Beiser (CEO)
All right. Thank you, Adam.
Operator (participant)
Our next set of questions come from the line of Manan Gosalia of Morgan Stanley. Please proceed with your questions.
Manan Gosalia (Equity Research Analyst)
Hi. Good afternoon. You mentioned earlier on the call that coronavirus could impact the M&A environment. Is that mainly a potential indirect impact on markets and sentiment, or is there a more direct impact there? Basically, I was trying to get to if the markets hold up in the U.S., would you expect the M&A environment to remain elevated?
Scott Beiser (CEO)
So first of all, I think we all need to be somewhat careful on where any of this could go. It's only been a week or two that really this has become more of a world news, and what happens in the ensuing days, weeks, months will tell us. Short term, it can have some impact on business directly with China, albeit we don't do a lot of transactional work with counterparties in China. Otherwise, if the virus continues to go forward, it could obviously have some ongoing negative impact, as you mentioned, in investor sentiment. It can also impact everybody who is getting supplies or materials, not necessarily from a transaction standpoint, but just impact on businesses themselves. Early, early days here, and we've obviously seen the stock market whipsawed over the last week or two because of these events.
Lindsey Alley (CFO)
Yeah. In theory, any effects that the virus has on M&A transactions as a result of supply chain disruption, in theory, should be temporary. It could have a temporary effect. As Scott said, too early to tell, but it's worth calling out. I mean, I think it's moved faster than anyone's expectations, and we're keeping an eye on it in terms of how it might have an impact on the next six months.
Manan Gosalia (Equity Research Analyst)
Got it. Then separately, just on the non-comp side, your non-comp expense ratio came in at the higher end of your range, and I know you reiterated your outlook for the 14%-15% range. I was wondering, is there anything special you're doing on the IT cost side right now? Because you called that out for a couple of quarters now. Should we think about that non-comp expense ratio coming in at the higher end of your range for a few quarters as you continue that investment spend?
Lindsey Alley (CFO)
Yes. I think there are a handful, and I've called this out in previous quarters, of IT-related expenditures that are affecting our P&L. One of the larger ones is we are rolling out a new ERP system, and that is having its impact on the IT-related costs. Having said that, I think if you look at our year-to-date non-compensation expense ratio, we are performing quite a bit better than we were at this time last year. Last year, we ended up at roughly 15.1% from a non-comp standpoint. Our expectation is and hope is that we end up slightly better than that. So to answer your question, yes, I'd probably assume towards the higher end of that range but we have seen improvement year-over-year and expect to continue to see that certainly over the long run.
Manan Gosalia (Equity Research Analyst)
Got it. Thank you.
Operator (participant)
Our next set of questions come from the line of Ken Worthington of JPMorgan. Please proceed with your questions.
Will Cuddy (VP in Equity Research)
Hi. This is Will Cuddy, filling in for Ken.
Scott Beiser (CEO)
Hello.
Will Cuddy (VP in Equity Research)
Hi. So Scott, you highlighted the U.K. in your prepared remarks. Could you elaborate on how the evolution of Brexit has been impacting your European business?
Scott Beiser (CEO)
I think my comments really are probably a little broader even to Brexit. I think we've all seen that the European economies have not grown at the pace that the U.S. has over the last couple of years. As the Brexit uncertainty continued to roll out during calendar 2019, we think that did have some probably negative issues, especially in the U.K., maybe to a lesser extent in the continent. We found that calendar 2019 was slower in Europe than we probably would have thought a year ago but we have seen it in the last couple of months pick up. Whether it's because people are adjusting to a new expectation of growth rates out in Europe or because they felt that there was finally going to be a resolution in Brexit.
But we've seen, and I think some of our peers have seen, somewhat of an improvement in the European marketplace in the last couple of months that didn't necessarily exist in the first calendar half of the year.
Will Cuddy (VP in Equity Research)
Got it. Thank you. And then following up on an earlier question on private equity, and Lindsey, I appreciate your comments segmenting the space. If we're going to think about those segments, could you maybe share if you've been seeing more entrants come into private equity in a different segmentation? Has that been contributing to the continued strong growth of Houlihan in those businesses?
Scott Beiser (CEO)
I think we continue to, over the last couple of years, see new formations of private equity firms, whether they're completely grassroots, they're spinouts of personnel from existing funds, et cetera. But the number of private equity firms continue to grow. Usually, most of the newer formation ones tend to focus more on the size deals that we're doing, especially in the early years of formation.
Will Cuddy (VP in Equity Research)
Got it. I'll sneak one more in. On the lumpiness of the restructuring, could you just maybe elaborate a little bit more on what drove that lumpiness, please?
Lindsey Alley (CFO)
I'd say this quarter, I have called out in the past where we've had one or two transactions that have had a meaningful impact in the quarter. I would say this quarter, it was not. There are no single transactions. We just had a very strong restructuring quarter. I think my comments are more that it doesn't follow the same growth trajectory that our Corporate Finance or FVA business does. So annualizing that number or assuming growth quarter over quarter in that number can be dangerous in restructuring. So no specific callouts on very large transaction fees that affected the quarter. We just had a very strong. The timing was good this quarter for restructuring.
Will Cuddy (VP in Equity Research)
Got it. Thank you for taking our questions.
Lindsey Alley (CFO)
Of course.
Operator (participant)
Our next set of questions come from the line of Chris Walsh of Wolfe Research. Please proceed with your questions.
Chris Walsh (VP of Equity Research)
Hey, Scott. Hey, Lindsey.
Scott Beiser (CEO)
Hey, Chris.
Lindsey Alley (CFO)
Hey.
Chris Walsh (VP of Equity Research)
Hey. So in the past, you guys have called out the Capital Markets Advisory team as one of the fastest, if not the fastest, areas of growth across the whole franchise. Now that that team is a couple of years old, can you kind of help size the revenue contribution to Corporate Finance revenues over the last 12 months?
Scott Beiser (CEO)
Yes. We don't call out the specific percentage that it represents of Corporate Finance. So we just tell you we think it's one of the most important pieces we have. It's growing rather rapidly over the last couple of years. We believe, for a lot of secular reasons that we've talked about, we think the whole capital markets, or effectively being the agenting of especially private financing, is in the early days. We think it can continue to grow for quite some time. Kind of regardless of where the markets are going, it's just we're seeing more and more either companies or private equity firms are hiring firms like ourselves and our peers to actually assist in the raising of debt capital.
Chris Walsh (VP of Equity Research)
Okay. That's helpful. Then just on the acquisition front, with deals being a key part of your revenue and earnings growth playbook, just hoping you could share how the two most recently announced deals in the fourth quarter fit into your overall growth strategy?
Scott Beiser (CEO)
Like most of our deals, these are kind of small or average-sized tuck-ins, so none of them usually have any significant financial impact right out of the box, but this clearly, the Fidentiis transaction clearly increases our size and substance out in Spain. The Freeman acquisition just builds to an already strong FIG business that we have, and this just adds to the bench strength of all of our FIG capabilities.
Chris Walsh (VP of Equity Research)
Okay. Cool. Thank you very much.
Scott Beiser (CEO)
Thanks, Chris.
Operator (participant)
Our next set of questions come from the line of Matt Coad of Autonomous Research. Please proceed with your questions.
Matt Coad (Equity Research Analyst)
Hey. Good evening, guys. Thanks for taking the question. So just taking a step back, as we attempt to level set the next downturn against the last one and the implications for Houlihan, I'm curious if you could provide your take on how the rise of private credit vehicles, as well as the improvement of international bankruptcy law, will impact default rates, fee rates, and the addressable market?
Scott Beiser (CEO)
I think what we would say is that we do know the absolute size of the leveraged debt, high-yield debt marketplace, et cetera, is substantially larger than it was at the last peak in 2007. We also know that default rates are still very low compared to historical time periods when we've entered into some restructuring environment. If and when we do get a downturn, we would expect the restructuring business would substantially grow from the levels we would see. Then likewise, we would expect some slowing down or slowness in the Corporate Finance business and FVA business that we have. So I don't necessarily expect a different set of fact patterns than we've seen in previous downturns. Other than each recession, what causes it and what impact and exactly the timing, no one can completely predict.
We'll have a different point of view than what we've seen in the past. What we continue to stress is we are not experts at exactly when a recession will occur, what will happen with interest rates, stock market, etc. We just continue to try to build the best business we can in all of our segments to hopefully operate financially successfully as best they can in whatever the markets might send our way.
Matt Coad (Equity Research Analyst)
Great, guys. Thanks.
Operator (participant)
Our final questions come from the line of Jim Mitchell of Buckingham Research. Please proceed with your questions.
Jim Mitchell (Managing Director)
Hey. Hey. Good afternoon, guys. Just maybe a longer-term question on China. I know you've started to see some activity there from restructuring there with the phase I deal. Looks like there might be more opening up, more U.S. companies or foreign companies investing and taking over 100% stakes in investment companies. How do you think about the long-term opportunity in restructuring there? Are you making any changes or investment strategies now to try to capture that in the future?
Scott Beiser (CEO)
No short-term changes. We've operated in dozens and dozens of countries now and doing restructurings, China being one of the many areas outside of the United States and Western Europe that we have done restructurings and we continue to be a global player there. We tend to follow where capital is going, where they'll make investments. So long as there's some form of rule of law, creditors' rights, et cetera, we believe we can continue to operate and be a successful financial restructuring player. But short-term, don't see any differences in what we think will come out of the marketplace in China from a restructuring standpoint.
Lindsey Alley (CFO)
I think, Jim, and we've talked about this in the past, is as countries' economies mature, as their rule of law matures and allows for a financial restructuring product, we are very aggressive in making sure we're present in those countries, whether it be China or India. So I think as you think through modeling China 10 years from now, if the restructuring climate and environment in China doubles, triples, quadruples over the next 10 years, you could expect us to be a significant player in those markets. It's really going to be driven probably less by our presence in those markets and more by how quickly the governments in those Second World countries are willing to accept the rule of law that allows for a restructuring product that we're used to here in the West.
Jim Mitchell (Managing Director)
Right. No, that makes sense. That's helpful. And maybe, Lindsey, on the balance sheet, you guys did a couple of acquisitions, but cash is still up 24% year-over-year. Obviously, as your business grows, cash flow grows. How do we think about capital return? Or is it still we could do bigger acquisitions, so you're going to hold on to it? Or do you start to think about special dividends or more aggressive buybacks?
Lindsey Alley (CFO)
I think that with respect to holding on to cash in anticipation of acquisitions, we don't really approach it that way. We put a revolver in place so we don't have to do that. So we will tend to use our cash in kind of the three primary buckets: one for dividends, one for share repurchases, and two for share repurchases, and three for acquisitions. I think since we went public, we have made enough acquisitions so that we haven't held a lot of excess cash. We are generating some excess cash. If we don't do an acquisition for a while, we'll have to think as a board what the best use of that cash is but we don't anticipate holding anything back in anticipation of acquisitions.
If it gets to be a big enough number, we would consider anything that makes sense relative to holding on to it.
Jim Mitchell (Managing Director)
All right. Thank you very much.
Operator (participant)
We have reached the end of the question and answer session. I will now turn the call back over to Scott Beiser for any closing remarks.
Scott Beiser (CEO)
I want to thank you all for participating in our third quarter 2020 earnings call, and we look forward to updating everyone on our progress when we discuss our fourth quarter results for fiscal 2020 this coming spring.
Lindsey Alley (CFO)
Thank you, everyone.
Operator (participant)
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.