Perella Weinberg Partners
NASDAQ:PWP
Earnings Call Analysis
Q4-2023 Analysis
Perella Weinberg Partners
The company is strategically expanding its partner base with a clear focus on nonlinear growth. By seeking partners who can enhance the entire firm's capabilities rather than simply adding incremental revenue, the company is mindful of avoiding dyssynergy from overexpansion.
Navigating through a complex compensation landscape, the company opted for a 70% adjusted compensation ratio in 2023, a slight increase to accommodate investments and market conditions. This approach was taken to ensure a balanced benefit for both employees (partners) and shareholders, acknowledging the significant ownership stake (around 50%) held by partners and employees within the firm.
The company's backlog has increased, predominantly owing to an upsurge in M&A activities. Even though European operations lagged in revenue recognition, the company remains encouraged by the heightened number of engagements and the overall constructive dialogue in the European market, in line with the activity reported by peers.
The firm's productivity per partner is a focal point for investment decisions, with an emphasis on the output of partners who have been with the company for at least three years. With a partner count at 64, the firm stresses disciplined growth, aiming for organic revenue growth without compromising its strict hiring criteria despite the increased applicant pool. The company's goal is to sustain its culture while employing senior bankers who are a strategic, financial, and cultural fit.
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Good morning, and welcome to the Perella Weinberg Full Year and Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhardt, Head of Communications and Marketing. Please go ahead.
Thank you, operator, and welcome all. Joining me today are Andrew Bednar, Chief Executive Officer; and Alex Gottschalk, Chief Financial Officer. 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, and 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.
Thank you, Taylor, and good morning. Today, we reported 2023 full year revenues of $649 million, up 3% from a year ago, with fourth quarter revenues of $213 million, up 16% from a year ago and a large contributor to our strong full year performance. We're pleased with how we navigated 2023's challenging market environment, growing our revenue, while the M&A market globally saw closings down 30%. Three factors drove our outperformance compared to the broader market; our relative scale, our weighting towards corporate clients and our broader service offering. Our business model demonstrated not only resilience, but an ability to outperform as clients continue to seek and value our advice through cycles. Our financial performance was supported across our industries with nearly all of our sectors experiencing growth year-over-year and by a number of large deals with higher fees, especially within our M&A business. Early signs of improvement in market conditions and sentiment, which we saw begin in the second quarter of 2023, have given way to a broader market inflection, which has driven activity and dialogue levels. And today, our announced and pending backlog stands at a record high. We expect the speed at which we recognize this backlog into revenue, especially for some of the larger deals to still be slower than our historical norms. Nevertheless, a resumption of growth in the traditional M&A markets has begun. Our financing and capital solutions business, which includes restructuring, made terrific progress during 2023 and client activity remains at elevated levels. The need for restructuring and liability management advice is high and growing. The response in part to the higher interest rate environment and increasing complexity in financing markets and also a result of structural challenges in certain industries, such as in telecom and technology. In addition to several large mandates, including our lead role in the largest crypto exchange bankruptcy, there has been a considerable uptick in recent activity, which is fueling our 2024 pipeline. Our integrated and collaborative model has proven valuable with many recent restructuring mandates requiring deep industry subject matter expertise, generating better client outcomes and often leading to future M&A activity. In our Capital Markets business, the level of dialogue around financing and private credit, in particular, has increased substantially as our financing and debt advisory team has now integrated fully and seamlessly into our platform. Talent development and acquisition remain essential ingredients to our success and growth. We are adding industry subject matter services and capabilities that matter to our clients. In 2023, we added 7 new advisory partners and 7 new managing directors, increasing our industry knowledge and coverage and technology, business services and in shareholder analytics and activism. In 2024, we intend to remain active in recruiting senior bankers in strategically attractive segments while remaining disciplined in our admissions criteria. Already in 2024, we have welcomed the Managing Director to our team in Europe and have a U.S.-based partner expected to join the firm during the second quarter. Our journey to $1 billion in revenue and achieving scale continues with our progress measured by top line results and much more. Our current team is stronger and more diversified than a year ago, with the in-place capacity to increase the firm's revenue and per partner productivity. Our client relationships have deepened and expanded as evidenced by recent high-profile transactions in which we were exclusive or lead adviser, including in 2 of the 5 largest announced transactions in January, 1 in financials and 1 in industrials. These factors, combined with the inflection in the market are beginning to create a tailwind for our business in 2024. Alex, I'll now turn the call over to you to review our expenses and capital management.
Thank you, Andrew. Our adjusted compensation expense represented 70% of revenues in 2023. Exactly as we indicated in December, approximately 3% above 2022, and we believe appropriate given the industry response to market conditions and our continued targeted investment and talent through cycles. Our adjusted noncompensation expense was $144 million for the full year 2023, up 17% from a year ago and within the expected range we provided at the start of 2023. For 2024, we expect the percentage increase in noncomp spend to abate and be in the single-digit range, with the increase driven by elevated depreciation expense and some investment spend related to T&E and IT. We continue to carefully manage our expenses. And as we scale up revenue, our operating leverage will be evident, as we expect noncomp as a percentage of revenue to fall in time as revenue grows. We maintain a strong capital position with $338 million in cash and short-term investments and no debt. We are committed to returning excess capital to shareholders and managing our share count to mitigate dilution from stock-based compensation. In 2023, we returned a total of $65 million to investors through repurchases, net settlement in lieu of share issuances, dividends and distributions. Additionally, this morning, we declared a quarterly dividend of $0.07 per share. With that, operator, please open the line for questions.
[Operator Instructions] We'll take our first question from Devin Ryan with JMP Securities.
Great. I guess I want to just start with the big picture question, Andrew. You've spoken about scale of the firm and being kind of less tethered to the overall M&A market. And obviously, I think we saw that in 2023, where you grew revenues when those were down pretty meaningfully. You mentioned the backlog is at a record as well. So as we look out over the next couple of years, how would you contextualize Perella Weinberg's ability to kind of grow faster than the broader M&A market? Just trying to think about whether it's kind of thinking about the growth of the senior banker footprint plus the growth of the broader industry? Or are there network effects because of all the white space? Just wanted to get some of your thoughts on kind of that algorithm of growth from here?
Yes. Thanks, Devin. So we do think that the growth algorithm for the firm is quite different than some of the peers who have larger scale. So as I mentioned in the opening remarks, part of the reason for our outperformance is our scale, but also the way that we're structured around our client-centric model and a more diversified service offering. So those 3 factors, I think, continue to drive our outperformance relative to the broader market. It's still the case that we are not as tethered to the overall announced and closing market when you look at global MA. And I think that will be the case for some time. It's also the case that when we are adding partners, and we haven't reached a point of conflict or saturation with other parts of the business. And we look for nonlinear growth when we hire partners so that they don't simply come in and add to our mix simply the revenue and clients they bring, but rather enhance the whole of the firm, where they can leverage our restructuring, liability management, shareholder activism and analytics, our financing advisory, the debt advisory practice as well as our M&A business. So we're just not at a point where we're adding partners and you -- to potentially get some dyssynergy from that as you get much larger. We're sort of nowhere near that in our planning horizon as we look forward with respect to our growth algorithm.
Okay. Terrific Andrew. And just a follow-up on compensation. Obviously, the adjusted comp ratio of 70% in 2023. It was a bit higher than kind of the targeted mid-60s for the firm. So just want to get some updated thoughts on how you're thinking about the level of revenues or the environment that you need to be in to get back there, also appreciating there's -- some nuance as well?
Yes. Look, comp is something we look at very, very carefully. And we have to get that right because it's a multivariable equation where not only are our teams affected, but also our shareholders. And as you know, we, as partners and employees own about 50% of the firm. And so we're very incentivized and aligned with our shareholders and making sure that we get the comp ratio just right. We thought this year, given our investing and given just state of the market and what some of the competitive responses were in the marketplace regarding compensation that it was prudent to take up the margin a bit, 300 basis points, what we -- exactly what we signaled we would do back in December so that we took out a surprise from our announcement today. But we thought that was a prudent sharing of some of the investments that we've made and some of the other inflationary pressures that we do see when we go down our comp stack. And again, I've said in the past that some of comp is really CapEx when you think about it, I know I say it every time, I'll never win the argument with the accounting community. But these are our assets. These are our productive capabilities at the firm and you have to invest in those capabilities so that you're not then now trying to buy spot market resources as markets rebound. So we think we've made prudent investments in new people, prudent investments in helping our future productive talent ramp up in our system as well as pay those who've had highly productive years and again, sharing that burden a bit with our shareholders, but recognizing we to our shareholders.
We'll take our next question from Steven Chubak with Wolfe Research.
This is Brendan O'Brien filling in for Steven. I guess to start, your comments on the backlog being at record levels is encouraging, but you seem to imply that restructuring and liability management comprised a greater percentage of that backlog than usual. So I just want to get a sense as to what that backlog looks like today relative to what you would typically see? And maybe how that mix has evolved over the last year.
Yes. Thanks for the question. No, that's not the case, actually. Our M&A backlog of announced and pending closing transactions, that specific backlog is up much more in M&A than it is in restructuring. The pipeline of both restructuring and M&A are up. So those 2 pipelines are up from where we stood last quarter and where we stood last year. So that -- I'm glad you asked the question and glad I had the opportunity to clarify that to the announced and pending backlog is largely driven by an increase in M&A.
That's helpful color. And I guess turning to advisory specifically, I just want to touch on Europe a bit. From what we can see in the public data, European activity was quite strong in the back half of last year. And one of your peers also called out strength in the performance of the region as well. So I just wanted to get a sense as to whether this is consistent with what you're seeing in the business and whether there's any difference in the tone of discussions or pacing activity between the U.S. and Europe?
So I think we see the tone and pace of activity to be consistent with what our peer group is reporting and I think the on-the-ground conditions there are pretty ripe for activity, both in traditional M&A as well as in restructuring and liability management. I think we've got a bit of a lag on some of our larger transactions and bringing them to market and to announcement. And so we probably had less recognition into revenue in '23 from our European business than would otherwise be suggested by the level of activity, but we're quite encouraged by the increase in engagements as well as in overall dialogue in Europe.
We'll take our next question from James Yaro with Goldman Sachs.
I just wanted to start with thinking about some of the productivity numbers for you. I think we do like some of the historical data that we have with your peers that have been public for longer. And also I think the business has changed quite dramatically over the past 5 or 6 years. So I just wanted to ask how you think about normalized productivity for your partner base? Is it more in the mid-teens millions level like what we saw in 2018 and 2021 or closer to $10 million like we saw in 2017, '19, '22 and this year?
James, thanks for the question. So we are definitely moving up and seeking to move up in our overall productivity per partner. This year, we came in around $10 million, last year was similar. As you mentioned, '21 and '18 were more like $15 million. We certainly aspire to be in the $15 million category. It is a function, of course, of overall revenue and market conditions. But also how much you invest in new talent because new talent does require some time to ramp up. And usually, it's not a vertical takeoff. It's much more of a gradual take off when you hire individuals or teams to the platform. So we will look at our in-place partners and their productivity, those who are here at least 3 years and make sure that we're making the right investment decisions. But then also you have to account in the overall productivity of those partners who are recently joining the firm what have been recently promoted, where again, the ramp-up is a bit more gradual and those tend to bring down your productivity metrics, but they're also the built-in organic opportunity to grow revenue over time.
Okay. That makes sense. And maybe just a related one on the investment. A quick one just maybe -- could you give us the partner count at the end of the year just for our models? And then when you look ahead, how are you seeing the competition for talent today? I think some of your peers have talked about potentially slowing hiring into 2024. So I guess just hiring expectations for next year in '25.
Yes. So the partner count is at 64, and we expect to be active in recruiting in '24 as we have been in '23 and before that. We haven't participated in the rapid rise of recruiting that we see in some other firms. We have continued to be very disciplined in how we grow. We want to make sure that we're hiring senior bankers who are strategically and financially as well as culturally an excellent fit for our firm. We have been seeing more and more candidates and that gives us a greater pool to select from. But the increase in candidates and applications, if you will, has not led to a change in our admission criteria. So we're still really strict on how we think about areas where we can grow. And as I said earlier, we really look for nonlinear growth, not just adding the revenue a partner would bring to the firm, but really thinking about a multiplier on that when partners come into our ecosystem and help to grow and drive our business. So we'll continue to be active. We have a very healthy pipeline of potential candidates, but we think being disciplined there is prudent and a proper way to grow our firm.
And there are no further questions on the line at this time. I'll now turn the call back to Andrew Bednar for closing remarks.
Great. Thank you, operator. I'll close the call by saying, first, thank you to our team for their hard work and dedication and many contributions to our firm and thanking to our clients for their trust and support. And thank you from our analysts and investors for your interest in Perella Weinberg. Thanks for joining today's call, and we'll speak again in May. Thank you.
This does conclude today's program. Thank you for your participation, and you may now disconnect.