Perella Weinberg Partners - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Perella Weinberg Partners second quarter 2023 earnings conference call. During today's discussion, all callers will be placed in a listen-only mode, and following management's prepared remarks, the conference call will be opened for questions from the research community. This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhardt, Head of Investor Relations. Please go ahead.

Taylor Reinhardt (Head of Investor Relations)

Thank you, operator, welcome to our second quarter 2023 earnings call. Joining me today are Andrew Bednar, Chief Executive Officer, and Gary Barancik, Chief Financial Officer. A replay of this call will be available through the Investors page on the company's website approximately two hours following the conclusion of this live broadcast through August 10, 2023. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 3, 2023, and have not been updated subsequent to our initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP's expectations of future financial and business performance and conditions and industry outlook.

Forward-looking statements are inherently subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance. Please refer to PWP's most recent SEC filings for a discussion of certain of these risks and uncertainties. The forward-looking statements are based on our current beliefs and expectations. The firm undertakes no obligation to update any forward-looking statements. During the call, there will also be a discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website.

I will now turn the call over to Andrew Bednar to discuss our results.

Andrew Bednar (CEO)

Thank you, Taylor. Good morning. Today, we reported second quarter revenues of $166 million, up 10% from a year ago and up 26% from the prior quarter. Our first half revenues of $297 million were essentially flat year-over-year. This quarter is the first in 5 where we delivered a year-over-year increase, even as global M&A market volumes continued to decline year-over-year. Our above-market performance speaks to the strength of our brand and our client relationships, the quality and tenacity of our team, and the continued effective positioning of our firm's resources. In the second quarter, our results were driven by strong relative performance in our traditional M&A business, with activity spread across our key industries. Our revenue increase reflected more absolute transaction completions, as well as more transactions with larger fees.

The market environment remains challenging, but conditions have improved. We see encouraging signs of activity across our business, and we are increasingly optimistic that the trough in activity is behind us. Our key indicator of forward volume, our announced and pending backlog, has steadily increased year-over-year and year-to-date. We expect revenue related to this activity will lag, as nearly all aspects of transaction timelines continue to be elongated relative to historical norms. Nevertheless, after nearly 18 months of sobering data points, we do see signs of a turning M&A cycle. Our Financing and Capital Solutions business is increasingly active as we see opportunities to place and structure private debt and equity solutions for our clients in what has been a prolonged period of uncertainty of access to capital and increasing cost of capital.

Restructuring has continued to gain momentum in the year, both in the U.S. and Europe, with mandates driven by strong liability management activity, including new financings, maturity extensions, and debt exchanges designed to address 2024 and 2025 maturity walls. In what is expected to be a higher for longer rate environment, given the surge in private credit, we anticipate a higher baseline of Financing and Capital Solutions activity through the next M&A cycle. We continue to invest in scaling our franchise and make selective senior hires to enhance our client footprint and product offering. Year to date, we have added 4 advisory partners and 8 managing directors, with an additional 2 partners committed to join in the third quarter. Our new hires bring expertise in strategically active sectors, including technology, business and consumer services, aerospace and defense, and stakeholder activism.

We have been in a mode of above-market talent growth since the lead-up to our public listing, with consistently 25%-30% of our partners in their seat for less than three years. These partners are not yet at full productivity and represent a built-in source of revenue growth in the years ahead. We are confident that our steady investment in talent, without lowering our high admission standards, will prove to be highly accretive to our stakeholders over time. Our financial results in the first half have positioned us very well to execute on our strategic and financial goals for this year and beyond. Thank you to our clients and to our teams globally for their commitment and dedication to our firm and to our mission.

Before I turn the call over to Gary, I just want to acknowledge our announcement in today's earnings release that Gary will be stepping down from his position as CFO at the end of the year. We have been so fortunate to have Gary with us since our founding over 17 years ago, with his many contributions so integral to the firm's growth and development, including our transition from a project partnership to a public company. Given that Gary will remain in his position until the end of the year to ensure a smooth transition, I'm sure we will both have more to say on this topic on November's call. For now, I just want to say thank you, Gary, for your partnership and for your dedication to the firm since day 1.

Also, I'll finish by saying congratulations to Alex Gottschalk, currently our Chief Accounting Officer, who will become CFO January one. We look forward to working with her and wish her success in her new role. Gary, over to you.

Gary Barancik (CFO)

Thank you, Andrew. I just want to note that it's been an honor and a privilege to have been a PWP advisory partner since the firm's founding in 2006, and to have served as its CFO since 2018. I've worked very closely with Alex over the past 5 years and can attest to the fact that she's an exceptional talent who's well positioned to guide the firm as its next CFO. Turning to our results, as Andrew already spoke to top-line performance in his remarks, I'll begin with a review of our expenses. We accrued adjusted compensation expense at 69% of revenues in the second quarter. This resulted in a blended accrual of 67% for the first half, a level that reflected our expectations at the end of the second quarter for our full year margin.

The decision to increase our compensation margin was dictated by a few factors, including the revenue environment, investments in talent, and relative industry compensation levels. As we progress through the year, we'll continue to assess the appropriateness of this estimate. Our adjusted non-compensation expense was $36 million for the second quarter and $71 million for the first half. Adjusted non-compensation spend grew 12% in the first half compared to the same period last year, largely the result of expenses which will enhance our brand and help drive revenue, including those related to our new offices in New York and London and increased T&E spend. Our expectation remains that full year 2023 adjusted non-comp expense will come in 15%-20% higher than 2022, largely a result of infrastructure investment to support our next phase of growth.

In future periods, we expect our non-comp growth rate to moderate without the impact of one-time expenditures, such as overlapping rent, which is projected to account for approximately $4.5 million of non-comp expense in 2023. Our adjusted, if-converted, effective tax rate for the first half of 2023 was 22%, which includes a tax benefit recognized in the second quarter, which will not recur in the second half of the year. We therefore currently expect that our effective tax rate for the full year should be close to last year's 28%. Year to date, we've returned a total of $47 million to investors through repurchases, net settlement in lieu of share issuances, common stock dividends, and pro rata distributions.

Looking forward, we'll continue to return capital to shareholders through dividends and repurchases, although the cadence of repurchases will vary from quarter to quarter and will be dependent on the operating environment and our business needs at such time. On the balance sheet, we ended the quarter with $180 million in cash and short-term investments and no debt. This morning, we declared a quarterly dividend of $0.07 per share. With that, we'll now turn the call back to the operator to open the line for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing star two. We'll take our first question from Devin Ryan with JMP Securities. Your line is open.

Devin Ryan (Equity Research Analyst)

Hey, great. Good morning, Andrew, Gary. Gary, it's been a pleasure, best wishes, and I guess we'll have another quarter with you, but just, you know, really appreciate the time together here. First question, want to touch on. Thanks, Gary. I want to just touch on the Financing and Capital Solutions. The revenues were roughly flat in the quarter year-over-year. I think they're actually down a little bit year-over-year. Yet you guys talked about kind of the growing activity there. We're tracking kind of a growing backlog in those businesses as well from the outside. Love to maybe just talk about how you see that acceleration in backlog showing up in results. Is that a back half of this year? Is that 2024?

Just kind of orders of magnitude of, of how much better the activity is there. Thanks.

Andrew Bednar (CEO)

Yeah, sure, Devin. Hi, good morning. You know, when you look back at the quarter and really the first half, it's a very well-balanced business across our platform, whether you look at it by industry or product or geography. We're just really pleased with the, with the results. There's nothing that's one-off or anything anomalous, and so it sets us well. I think it sets us up for growth very well going forward. Looking at the mix, when you look at just the comparison back to 2022, we did have one revenue event in 2022, which was outsized, and that makes for the comparison, which puts our revenue in the Financing and Capital Solutions arena about flat. Again, most of our growth here in the quarter is coming from traditional M&A.

As I said, we like the balance of the business right now and the mix. I think it's a strong foundation from which we can grow. We don't really predict quarter by quarter or even year by year when that revenue's going to hit, but we like the early indications of the activity level. You know, historically, that type of activity can be more recent in hitting revenue versus the M&A cycle. Again, we don't, we don't really predict it by quarter or by year.

Devin Ryan (Equity Research Analyst)

Okay, perfect. Just on the M&A outlook, if, if you can, just elaborate a little bit more on some of the green shoots that, that you tracked or alluding to, where you're seeing some of that increased activity. You know, is it broad-based, or is it in specific sectors? Just, just also, you know, there's also a PWP story in here. You guys have a higher number of bankers that are kind of ramping on the platform, that have been on the platform for less than, you know, 2 or 3 years. Just love to kind of talk about also maybe some of the idiosyncratic growth that you're seeing. Maybe it's just bankers are maturing and connecting with clients, and there's more business coming through from more recently added talent. Thanks.

Andrew Bednar (CEO)

Yeah, Devin, as you well know, you know, given our scale, we tend to be less tethered to the global M&A volumes. We, we, from time to time, will have outsized growth relative to what's happening in the broader market. I think we can continue to do that over time because of our, because of our scale. We're really happy with our 2021 and 2022 class of partner hires, especially coming out of COVID, where we made some very strategic and very deliberate hires, and those sectors continue to be quite active. We see, you know, very early returns in areas like energy transition and basic materials and turnaround technology. Those have been good investments that we made. We're, we're very pleased with our, you know, very steady investment in that type of talent.

I think the generally, the activity, and even though revenue always lags, and certainly it's very hard to predict, again, quarter by quarter, year over year, with activity converting to revenue, that's always quite challenging, especially in what is an elongation cycle here for M&A. Things just are taking longer. I think we're finding that most managements and boards are just saying that there's going to be a time here where they have to stop thinking about when conditions will improve and start accepting that current conditions might be here for a while and setting a plan forward. I think we're starting to see that type of thinking change, and that's been good for the increase in activity, which, again, is happening across the platform.

Devin Ryan (Equity Research Analyst)

Okay. That's great color. I'll leave it there and let someone else... Thanks, guys.

Andrew Bednar (CEO)

Thank you.

Operator (participant)

We'll take our next question from James Farrow with Goldman Sachs. Your line is open.

James Yaro (Equity Research Analyst)

Hey, good morning, and, and thanks for taking my questions. With the benefit of hindsight, the restructuring tone from your peers has been quite different. Maybe you just speak to the trends that you're seeing in, in your business, and maybe differentiate between Chapter 11 versus, liability management.

Andrew Bednar (CEO)

Yeah, I think, some of our peers may have had some extraordinary events that, you know, they've certainly reported on, and those are, you know, well documented. I think for our business in, in this particular quarter, we didn't have those type of extraordinary events, but we have, I think, a very steady and, and growing increase in activity across our Financing and Capital Solutions business. You know, as I mentioned on the prior set of questions, my answer is there was a revenue event in 2022 that was outsized that makes for, you know, a bit more challenging comparison for the current quarter. Going forward, we're, we're seeing, you know, pretty broad activity around liability management and in our financing advisory business. I'd say that people have reported on the uptick in bankruptcies.

I don't, I don't think we see a, a significant uptick, though there are some that are very well documented and well publicized. I think it's more about companies realizing that it's a more challenging market with respect to accessing capital and certainly a more challenging market with respect to cost of capital. You have the advent and the increase in the private credit markets, which are, you know, new participants that a lot of our client base is unfamiliar with. You know, that is a, a helpful trend in our business for sure, where our traditional corporate client base will need assistance in accessing the private credit markets.

We're seeing, you know, a, a request for balance sheet management and for complex stories where people need help in thinking through maturities, a lot of which is coming in 2024 and 2025. I think some of that revenue always lags, and we look at the early indicators for what we see as positive trends, and we're seeing positive trends in that market, both across Europe, Europe as well as the United States, where, as you know, in Europe, we've made significant investments in, in our team and, and feel very good about our positioning there.

James Yaro (Equity Research Analyst)

Okay. That's very clear. Thank you for that. Just wanted to touch on the comp ratio both in the near term and the longer term. You've talked about additional hires coming on the platform. Could that result in additional near-term upward pressure on the comp ratio in 2023? Then maybe just it'd be good to get your thoughts on over what time period you think the comp ratio could normalize back to the 64%-65% range that you put up in recent quarters.

Andrew Bednar (CEO)

I think we're still within our parameters and the guidance we put out when we had our public listing, that we'd be around the mid-60s. You know, we were precise in the statement, but that statement provides for a little bit of flexibility downside and upside. I think we're still within the bands. You know, we've had an operating environment where I think it warrants a bit of an uptick in, in the comp margin. You know, Gary has highlighted the reasons for that, and I think we've always been quite disciplined and, and very steady in how we think about hiring. Even though it is a much more favorable recruiting environment in terms of the numbers and the people that are interested in, in changing their employers, we're still maintaining very, very high standards for joining the firm.

I think you always have a challenge culturally and financially with that type of growth that goes beyond a steady growth of talent. We'll continue to be steady. We, we don't see any gap up in hiring. We're going to continue to be steady so that we can stay within our bounds in terms of the comp ratio, and also not require our current productive bankers to overinvest in growth. We're, we're pretty de- we're pretty disciplined there and pretty deliberate. Right now, as Gary said in the opening remarks, we believe that we're at a level that is our current expectation where we'll end the year, but conditions can change, and we'll watch it very closely.

As I've said in prior calls, we're always going to invest behind our team. It'd be foolish not to. Hopefully we are in a, an environment where we don't need to move the comp ratio, but right now it reflects our best view, and that's at the 67 level, which is where we ended up in the first half.

James Yaro (Equity Research Analyst)

Okay, that's very clear. Thanks a lot, and, thanks a lot, Gary, for all of your help over the past few years, and, all the best.

Brendan O'Brien (SVP of Equity Research)

Thank you, Jeff.

Operator (participant)

We'll take our next question from Steven Chubock with Wolfe Research. Your line is open.

Brendan O'Brien (SVP of Equity Research)

Good morning. This is Brendan O'Brien filling in for Steven. I wanted to follow up on, on the comp question. In, in the release, you indicated that you're undertaking some actions on, on the expense side. I was hoping you could provide more color on, you know, what the aims are of the business realignment initiative and what type of actions we should expect you to take, coming going forward.

Andrew Bednar (CEO)

Yeah, thanks. Our, our actions were to really optimize our allocation of capital and less about reducing the overall expense base. So we took a really close look at where we had resources, both geographically as well as from an industry and product perspective. Our, our focus is around making sure that we have the right team on the ground in the right place and where we can win. So we've decided to make some changes across our platform and at all levels, and we will redeploy that capital toward investment and toward making sure that we are positioning new resources in places where we see growth and where we see opportunities.

It's not about taking cost out of the system to get to a better earnings result, and I don't think of it as cost-cutting. I think of it as capital allocation and where we're putting our resources so that we can better position the firm for growth.

Brendan O'Brien (SVP of Equity Research)

That's great color. Thank you for that. I guess for my follow-up, I wanted to discuss Europe. You know, central banks in Europe are behind the Fed in terms of where they are in the rate hike cycle, and we've seen how the uncertainty on the path of rates has impacted activity in the US. It would be great if you could get some perspective on this dynamic or on the dynamics at play in the region and how conversations and activity levels compare there versus the US.

Andrew Bednar (CEO)

Yeah, I think you're right that the Bank of England and ECB are probably a step or two behind, but I think people are pretty well modeling in the expected terminal rates there. Absent surprise, I think people have adjusted to what are likely to be conditions that persist for some time, and this concept of higher rates for longer, I believe, will be conditions in the United States as well as across Europe. I think Europe is seeing similar type of activity. I think, again, revenue always lags, but, you know, when we look at our key indicators of activity, they're very similar across Europe as what we're seeing in the United States.

I think the lag effects are usually a little bit higher in Europe than what we see in the United States in terms of converting to revenue.

We are seeing increased activity across our European platform, which is similar to the United States. In terms of the early indicators, they're, they're quite similar in spite of macro and central bank activity potentially being a little bit behind.

Brendan O'Brien (SVP of Equity Research)

Thank you for taking my questions.

Operator (participant)

This concludes the Q&A portion of today's call. I would now like to turn the call back over to Andrew Bednar for additional or closing remarks.

Andrew Bednar (CEO)

Okay. Thank you, operator. Thank you everyone for joining and for your interest in our firm and, of course, for your support. We look forward to talking to you in November. Thank you.

Operator (participant)

This concludes the Perella Weinberg Partners second quarter 2023 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.