LAZ Q3 2024: Advisory revenue jumps 40% YTD
- Robust Revenue and Deal Activity: The Q&A highlighted strong deal flow and record performance in Financial Advisory, with upward momentum in M&A and restructuring activity supporting a bull view on revenue growth.
- Improved Operational Leverage and Cost Management: Executives emphasized aggressive hiring (16 new managing directors) and efforts to boost productivity, aiming for a sub 60% comp ratio in 2025, which supports margin expansion and increased efficiency.
- Positive Investor Sentiment Post C-Corp Conversion: The conversion to a C-Corp has generated significant investor interest—including oversubscription at investor events—which unlocks new liquidity and long-term growth potential.
- Comp Ratio and Cost Pressure Uncertainty: There is uncertainty surrounding reaching the target comp ratio as the company highlighted that achieving a sub-60% comp ratio is dependent on market conditions, hiring pace, and revenue performance, with potential timing risks in Q4 that could pressure margins.
- Asset Management Inflow and Fee Rate Volatility: The discussion pointed to lumpy asset management inflows and fee rate compression from large outflows, suggesting that the current market environment might continue to pressure overall revenue and profitability in the asset management segment.
- Macro Divergence and European Market Challenges: Comments indicated that while the U.S. macro environment is auspicious, persistent structural challenges in Europe—such as higher energy costs and other regional factors—could detract from sustainable growth in the advisory business there.
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Advisory Growth
Q: What drives advisory revenue recovery?
A: Management highlighted impressive momentum in advisory, noting revenue was up ~40% year-to-date driven by deep local roots and enhanced private capital solutions, suggesting strong normalization potential. -
Ownership Conversion
Q: How is C-corp conversion received?
A: The firm’s conversion to a C-corp has boosted liquidity and drawn new investors—including firms like Capital Group—broadening its ownership base significantly. -
Comp Ratio Flexibility
Q: How will comp ratio be reduced?
A: Management is focused on lowering the comp ratio through increased productivity and lateral MD hiring, aiming to keep it at or below 60% by leveraging operating efficiencies and strategic deferral measures. -
Asset Management Baseline
Q: What is the asset management revenue outlook?
A: It was noted that asset management revenue is expected to track last year’s performance, assuming market conditions remain similar over the next 12 months. -
Asset Management Organic Growth
Q: How are organic flows performing?
A: Organic growth has been somewhat uneven with lower gross inflows towards year-end due to a current focus on U.S. equities, though a rebound is expected as rate cuts take effect. -
Emerging Market Equities
Q: What drives emerging market investments?
A: Growing interest in emerging market equities is driven by ongoing rate cuts and strong historical performance, prompting early allocation shifts among institutional clients. -
Investment Strategy
Q: How will investments fuel growth?
A: The firm is advancing a balanced approach by investing across core, specialty, and wealth management segments, strategically positioning itself for long-term growth without diluting current earnings power. -
Fee Rate Impact
Q: How does a large outflow affect fee rates?
A: Management explained that a significant, client-specific outflow resulted in slightly lower fee percentages on that mandate, though this is viewed as an isolated event rather than a trend. -
Deferred Comp Outlook
Q: Will deferred comp raise fourth-quarter ratios?
A: Efforts to manage deferral rates are expected to keep comp ratios steady, making it unlikely for fourth-quarter comp ratios to tick up materially. -
Non-Comp Expense
Q: What about non-comp cost savings?
A: The team maintained discipline over non-comp expenses, effectively offsetting typical seasonal increases so that full-year impacts remain modest. -
Regional M&A Trends
Q: How do U.S. and European M&A environments compare?
A: Despite stronger macro conditions in the U.S., European advisory performed robustly thanks to deep local insights, highlighting a nuanced approach to regional M&A challenges.
Research analysts covering Lazard.