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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, and welcome to the Moelis & Company earnings conference call for the first quarter of 2024. To begin, I'll turn the call over to Mr. Matt Tsukroff.
Good afternoon, and thank you for joining us for Moelis & Company's First Quarter 2024 Financial Results Conference Call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our investor relations website at investors.moelis.com. I'll now turn the call over to Joe to discuss our results.
Thanks, Matt, and good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will comment further on the business. We achieved revenues of $217 million in the first quarter, representing an increase of 17% over the prior year period. The revenue increase is primarily attributable to growth in restructuring. The M&A pipeline continues to build, but conversion to revenue remains challenging. There is early evidence that this trend is pivoting more constructively. Moving to expenses. Our first quarter comp ratio was 75%. We expect the ratio to be similar in quarter 2 until we have better visibility on the full year, which is likely to be in the third quarter. Our first quarter non-comp ratio was 21.7%. The underlying quarterly run rate continues to be approximately $46 million per quarter, excluding transaction-related expenses. Moving to taxes. Our underlying corporate tax rate is expected to be 34% for the full year. We expect the target of 28% to resume once we achieve a more normalized level of productivity. Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share. And lastly, we continue to maintain a strong balance sheet with no funded debt. And I'll now turn the call over to Ken.
Thanks, Joe, and good afternoon, everyone. We are getting closer to an M&A recovery. Our M&A pipeline continues to build as market participants have adjusted to the current cost of capital. Financing markets are open, and both corporate and sponsor dialogues are active. Our restructuring team is seeing a consistent flow of mandates, and we expect this to continue as we believe the current market environment, which combines coming maturities and an open financing market to be optimal for our business as we specialize in out-of-court restructurings, which benefit both from our strong capital markets and capital structure advisory capabilities. Finally, in the first quarter, we hired 4 managing directors, 3 in the energy sector and 1 to cover credit funds. Our outlook for the deal environment is positive, and we are focused on our clients and execution going forward. With that, I'm going to open it up for questions.
[Operator Instructions] Your first question comes from Devin Ryan with Citizens JMP.
This is Alex Jenkins filling in for Devin Ryan. I guess just to start, can you speak to what you're hearing in terms of the sponsor backdrop? Most of the commentary we've been hearing recently has been fairly positive with dialogues picking up and something around the need for these firms to act. I'd love to just get your perspective on what you're hearing, and any time frame information or place you're expecting would be helpful as well.
Yes. So that's a good question. Let me just give you -- I think there's a bifurcated market right now. The shape of our M&A business is actually more weighted in the first quarter to publics and strategics. And I think the reason for that is strategics kind of do strategic deals with the time frame being almost unlimited. So there's no -- when they come available and there's something they have to accomplish, they usually execute. Interestingly, I think PE firms are -- one of the things they're paid to do is be good at timing. They're in deals usually for a [ whole ] of 5 to 7 years, and it matters when you purchase and when you exit, and I think that's one of their expertises. I think if you approach the first part of the year, January, and the betting odds, the line was 6 Fed rate cuts. I mean that's kind of what the market was telling you was supposed to happen this year. You might get ready for market, but you're not going to go until 1, 2, 3 of those cuts happen. I think you're trying to time that market. By the way, our NBRC, which is our pipe where we vet companies for what we want to -- deals we want to do, transactions we want to take on, has been extremely busy and at highs, and our pipeline is as large as it's ever been for this time of year. But let me say -- so what happened is I think if you saw that everybody was handicapping 6 rate cuts and you were paid to time the market, you'll probably say, well, let's get ready, but we're not going. I think you -- fast-forward to today, and I think the handicapping is down to 1 to 2 rate cuts. And I don't believe we need rate cuts. I think we need stability and ability to project. And I think if PE firms, if you told them, hey, we can 100% guarantee that there will not be a rate cut for 2 years, they will begin to transact fairly aggressively on the basis that capital is available, rates are high relative to '21 but not relative to the world of interest rates over a long period of time. And I think that you don't have to -- if you knew there was no rate cut, you wouldn't be timing it that closely. So I do think it was the divergence between, hey, I thought we were going to get lower rates and that would improve my value. That's a long answer, but I think as people start really honing down to, this is not going to be a rate cut environment, you're going to have to transact in the environment we're in, I think it will unleash a lot of activity and pent-up activity. And I think it is.
Awesome. Great. That makes a lot of sense. Thanks for the rate color, too. I guess just as a follow-up on the SVB team you guys hired last year, can you just speak to the momentum in the tax base relative to market expectations?
They've met our expectations. I don't know what the market thought of the team. But we think that it's almost 1 year -- I think it is 1 year to the day. I think we did it on this earnings call last year, announced it. We've gotten deeper, stronger, better in all areas. It's not -- as I said, they have a lot of PE focus. So it's not the optimal time period, the last 12 months, to execute on revenues, just like the rest of the M&A industry, but we're extremely happy with the penetration, coverage, expertise, client satisfaction, backlog, given -- in the context of the market. We're very happy with it. It's worked almost exactly as we were hoping.
Your next question comes from Ken Worthington with JPMorgan.
So along those same lines, in terms of the new bankers beyond just SBV (sic) [ SVB ], how are you seeing the new hire success rate over the last year or so compared to what you've seen in hirings and promotions in years past? Are these more recent hires coming in line? Are you seeing better fit and better success rate? Any sort of color you can give there? I know it's still early but figured you might have a view.
I'm very bullish. But Ken, again, let me just say the people you hired at the beginning of 2021 probably had a better 2021 than the people you would hire at the beginning of 2023. So you also have to put it in market context. In that context, I think the hiring we've done has been better. It's been -- I shouldn't say that because I'll insult somebody. It's been as good as we could have thought. I think the talent is very good. I'd spent a lot of time on the road with them. The client interactions are of the highest quality. They're in sectors that are more -- that are active. So I'm very pleased with it. It's just 2023 has been a tough year to convert that to final transaction. But I feel like the backlog and the connectivity to a large client base is exceptional, and I'm pretty happy with them.
Okay. Great. And then maybe expanding on your rate comments. I think your rate comments really spoke about 2024. If we're sort of in a higher for longer environment beyond '24, does that have implications for either M&A sentiment or even restructuring opportunity? Trying to figure out what an extended period of rates at these levels means for your various businesses.
So to be clear, I think at this point, you don't need a rate cut to trigger M&A. I actually think it's almost held back the resurgence in M&A. This idea that if you have a quality asset -- and by the way, like in all markets, I believe it's the availability of the quality asset to buy. There are buyers out there. We believe that there's capital and there are people who would buy quality companies. What happens in a market is you don't put your quality companies up for sale in January when somebody says, hey, the probability is there are 6 rate cuts coming. You kind of wait -- and by the way, you have quality assets. There's nothing going wrong with it. It's probably growing if it's quality assets. It's doing fine. So you're fine waiting to hit the market with your best quality asset. I believe at this point, as like I said, if somebody guaranteed, there will be 0 rate cuts for 2 years, I guarantee you that I believe the market would explode with transactions because people would say, well, that's -- now I know that if I wait to May, there'll be no difference. There is capital out there. There is actually acquisition capital, B, even CCC paper right now is coming dramatically to finance these types of transactions. And I think we just have to take away the opportunity that if I wait, if I kick off my sale in June, it will be a different rate environment. If that happens, by the way, great. I do think that would be a good thing. It wouldn't be a bad thing. But I don't think the market is waiting for a rate -- I don't think this market needs a rate cut to accelerate pretty dramatically from here in the private side. And the public side is already executing, and they're pretty aggressive. I believe the public market is executing, and the only thing holding that back might be FTC issues for large transactions that don't want to go into this regulatory environment.
Your next question comes from James Yaro with Goldman Sachs.
I just want to start on restructuring quickly. Maybe you could just update us on your outlook for this business. You did talk about how there was a pretty strong activity this quarter there. So maybe the outlook for both liability management and Chapter 11 as we look ahead? And then if you could perhaps give us the contributions to revenue from restructuring and capital markets, as you have done historically?
Well, I'm not sure I've done that historically, but I'll try to give you some sense of where it is. Yes, we had a good, strong -- look, what's going to happen here is like I said, I'm not sure you need a rate cut for the quality part of the market to hit and enter M&A transactions. But if you do have a company that isn't performing, higher rates are going to continue to plague that market and enforce some part of that market into restructuring mode. The interesting part is risk capital has become very available. This kind of rescue capital that's willing to insert itself and take out some of the maturities for high interest rate is available. And so you're not seeing a lot of the credit market, which in the last downturn, which might have been 15 years ago in the crisis. But a lot of those credits traded down to $0.20, $0.30, $0.40. You don't have a huge market of $0.20, $0.30, $0.40 paper. It might be that in this cycle, there was a lot more equity put in under the deals. Transactions went at higher EBITDA to multiples. And so there was possibly more equity put in under the same level of 6 or 7x leverage, which leaves a bigger slice of value for somebody to come in and finance. And believe me, every single person, every single owner of a company would rather finance than go bankrupt. No matter what the rate, they will try to extend the runway to that. So we're seeing a lot of that. Rescue financing, extension of -- by structure, moving maturities out through some of these exchange offer techniques. Of course, there will continue to be some Chapter 11s, but it's not as big a Chapter 11 market as it was in the last downturn by a long way, and I think it's because of the quality of the ownership through good sponsors who are getting in there early and getting to solutions quicker. So that part of the market is going -- as I think, will continue, by the way, because I do think higher rates will put more pressure on that bottom 10% of the economic performance. By the way, our non-M&A this quarter, and we called it out, our M&A was the weakest -- was one of the weakest parts of our business. So our non-M&A, and that includes capital markets, PFA and restructuring, was about 50%.
That's incredibly helpful. Just taking a step back, on the fundraising businesses, I think primary fundraising activities remained slow over the past few years, past year and change, whereas industry secondaries and continuation funds have grown at a fairly robust pace. Maybe you could just speak to the outlook for each of these businesses. And then sort of separately, PE is using more continuation funds and some of these other structures versus regular way M&A to generate LP liquidity. Are these structural changes to PE, in your view? And how much of the growth in these vehicles has been driven by the lack of ability to transact using M&A?
That's a good -- look, you're right, the primary fundraise had gotten commoditized over time, and it's a business. But I don't think -- it's not the same business it was 10 years ago. And I think there's also going to be a consolidation. A lot of the money in those -- in the primary was made by first-time funds who really needed to be introduced and were willing to pay 3 points on fundraise to get introduced. I think there'll be a consolidation. There won't be as many -- due to lack of capital, there's just not as many new funds being started, and the large funds are going back to their existing LPs. And so there's going to be a smaller and smaller primary market to go into. You're right about continuation funds becoming a bigger part of the concept. It's just you have to have that as a tool in your pitch as to what to do with an asset. I don't think it is generated by lack of M&A. I think it was generated by it's a good solution for an asset manager to retain an asset they like and crystallize the carry and restart it. It's almost like -- if you lay out what a continuous fund accomplishes, it's a dream for an asset manager in private equity. They crystallize carry, they maintain the asset and you get to go forward again. So it has some real positives and that, I think, will continue to be a product that is important and grow.
Your next question comes from Steven Chubak with Wolfe Research.
This is Brendan O'Brien filling in for Steven. To start, I guess, I just want to touch on recruiting. You added 4 new MDs in 1Q, which is a pretty active start to this year. And while you're unlikely to match last year's recruiting level due to the SVB hires, I just wanted to get a sense as to how the recruiting environment has evolved and if we should still expect another relatively active year on this front relative to history.
No, I don't think -- we have no plans to duplicate anything like last year. The energy hires that we did, which is 3 out of the 4, were in process for a while. I actually think we kind of signed them up last year, and we announced them when they're garden leave. So we almost look at that as part of last year's move to fill in some gaps we had in technology and energy. And very excited -- and energy transition. So very excited with where we ended up. If you look at that team, it's spectacular team, very excited with that. We're not going to nowhere. But we still have some spots we'd like to hire. If people became available, we would do it. But I don't expect an SVB type of situation to occur. We didn't plan for that last year. It happened. We moved and it ended up leading to us to have -- that was 14, I think, of the MDs out of a total of something in the mid-20s. Even if we did the non-SVB part, to me, that would be aggressive. I don't even anticipate that many external hires. I think this is a year where we'll fill in where we can, we'll pick off some really quality people if they show up, and we're going to focus on the clients for this year.
All right. That's helpful. And then I guess turning back to the capital markets business. It's been quite active for you over the past 18 months, given the lack of capital availability through the credit and equity markets. But with the reopening of equity markets or equity issuance and debt markets, I just want to get a sense as to how that's impacting the outlook for that business and whether you think you could continue to see growth there.
Yes. I'm very bullish on that. We took one of our best bankers and put them in charge of it. I think these are big, chunky checks. Again, if it's plain-vanilla distribution of an IPO, that often goes to one of the big banks. But it's almost M&A. I mean the idea of putting $1 billion into some position in a capital structure, it usually involves what we consider our clients, the PE firms or the private credit firms, which is very one-off, bespoke conversation. It often entails things like negotiation of governance and exit rights and all kinds of things that are just not conducive to a plain-vanilla distribution. And oftentimes also, discretion and secrecy and people -- a lot of people that might involve conflict of interest with your senior lender, and that causes people to not want to have their senior lender involved in that. So this is all right -- and the fact that it's available is fantastic for our business because, yes, we were having those conversations a year ago. But the capital wasn't that available. It was very hard. You might have had a perfect position to put capital, but the capital didn't want to move yet. They were very worried about 7% federal funds rates and there were all kinds of issues around how bad this was going to get. The fact that capital is now in motion and looking for those opportunities means I think our hit rate on marrying up a problem with a solution will be a lot higher.
Your next question comes from Ryan Kenny with Morgan Stanley.
This is Connell Schmitz filling in for Ryan Kenny. So just going back to your outlook. So your commentary seemed a little bit more reserved than last quarter given last quarter you called for coming resurgence in M&A. So to like better get a sense of where you are within the merger market, can you go back to your Formula 1 red light analogy? The last time you talked about that, you said we were at the fourth of 5 red lights. But now we have -- the rate outlook has changed. And you had made this comment off of the back of Powell's November comments. So can you just give us an update on where we are with that? And then as a follow-up, on the 2Q comp ratio guide, can you just speak to what kind of revenue environment you're expecting on a sequential basis that gets you to a similar comp ratio?
Okay. Let me start. So I don't know the exact words I used, but I will tell you that our pipe is strong, our NBRC activity is stronger than whatever I said at that point. So I didn't mean to -- look, I think we've all been waiting for a recovery in M&A, and I don't want to overdo the rah-rah. It feels like it's coming, and our pipe is higher than it's been at any time at equivalent point in time, which the first quarter was usually your lowest point. To my comment on last November when we talked about -- the Fed comments right then led everybody to the 6 rate cut prediction. So I thought, okay, we got 4 lights -- I think it's 4 lights, right? I lose track of my Formula 1 expertise. I'm not really that good. But -- so I thought the first rate cut would be everybody would tear off. The interesting part is -- because it led everybody to believe 6 were coming. The interesting point at this point, it does not look like 6 are coming, but I think the same outcome is going to derive from that, which is, okay, this is the environment. I think at the moment in time when I was waiting for it to move was people were saying, well, this isn't the environment. The environment could be a 3.5% federal funds rate -- imagine going to your investment committee and saying, let's go to market, and some senior guy at the firm looks at you and says, what kind of idiot are you? The Fed is going to cut rates by 200 points in the next 6 months. Why wouldn't we go then? And you go squirming back to your seat and never talk to the guy again. But I think as of today, it's becoming more clear that if there is a Fed drop, it could be late in the year. What I'm saying is I think that decision-makers are going to come to the conclusion and are coming to the conclusion that this is the environment. We have to liquefy some assets. We're going to go. And we're not going to look like idiots because we're not going to miss some gigantic 6 rate cut move. I don't know how to tie that back to my Formula 1 analogy. I think the cars are just going to take off, and I think the cars are going to start on the track on their own. I think they're just going to go because now this is the environment and PE firms are in the business of transacting and creating liquidity and buying new assets. So I think they're going to go. On the comp ratio, I think that was the last one. I just want to say what we put out there today is based on what we know, not what I think might happen, not what I hope might happen and not what I even expect to happen. But based on today's market environment, that's our best guess, and we'll update it as things change. I'm not trying to predict the future, though, although -- we'll have time over the year to adjust, but that's based on our best estimate of what the current market conditions is, which is what Joe and I think we're supposed to do with comp ratio.
Your next question comes from Brennan Hawken with UBS.
So given the magnitude of recruiting and relatively quiet environment, was the structure of comp awards at this just past year-end different than what you saw in a typical year?
I think they're pretty consistent. You can look in -- I look every time about deferrals and I compare it to the market. And I feel like our comp was right -- it was pretty much where it was every other year in terms of component [ of comp ].
Got it. I guess the reason I ask is that the average stock outstanding, the diluted stock outstanding picked up a bit more than is typical, the typical cadence. So I wasn't sure whether -- did that -- was that a function of the recruiting and the magnitude of recruiting that came on and the stock-based comp that was tied to that? Or was there something else involved in that?
We might have to include that, Joe.
Yes. No, it's -- yes, that's exactly right. Each one of these new hires ultimately comes with typically visibility on their comp for at least 1, 2 years. And so in the first year, we're basically -- there's no revenue, but there's comp that's basically been guaranteed, and it's a combination of cash and equity.
Great. Okay. Appreciate that. Ken, I have a question -- sort of a related question. The recruiting has been remarkably active. You have been really excited about the quality of the bankers that have come on to the platform. When we think about looking at your productivity per MD historically, ex the remarkably strong '21 and '22, the previous sort of high watermark was about the mid-7s. Do you think that the extent and magnitude of the recruiting you were able to do was to such a degree that you'll be able to move that high watermark up further? And what kind of order of magnitude do you think would be reasonable to expect for a new high watermark?
I don't know the answer to that. But look, first of all, I do think the market has gotten a lot larger -- expansion of valuations and GDP and quality of banker. But it's also unfair of you to take -- in what is a cyclical business. I mean 2018 was kind of a -- the Fed -- you don't -- 2018, the Fed hurt us, 2023, the Fed hurt us. And the one time when -- there's some average to a cycle too, I mean, Brennan. You can't just say, take out your best 2 scores. I mean I guess, that's the way you do it in golf. But you can't just say, take out like 2 of the best 5 years you've had and then tell me what you do in only the crappy years. There is some cycle to this business, and I do look at it through the cycle. And I think we should do better than what -- my underwriting is better than what you're saying. Do I have an exact underwriting? You tell me the market, I'll kind of tell you what I think the underwriting is. But '21 and '22 were very different than that. And I think the right way to look at it is kind of through the cycle. You're right, I don't plan for '21s every year, but I don't plan for '23s every year -- 2023s either. And -- but I think the amount of competitors are getting less, the amount of quality out there is getting less, and I think we're going to be more and more percentage of the market. And so...
[indiscernible] is getting better.
Yes. So I think the -- look, I think the -- I'm more bullish than what you said on -- but I haven't put a pin on what I think the actual productivity would be. You'd have to tell me under what market conditions, I think.
Yes. And I wasn't trying to narrow you down or anything. And the only reason why I picked that was '18 was -- we had the bump after the tax reform. So it wasn't -- the Fed was going against, but there were some benefits, too.
There are no further questions at this time. I will now turn the call back to Mr. Ken Moelis for any closing remarks.
Thank you for your time. We look forward to talking to you. And hopefully, the market will change in line with a lot of what we're thinking. So I look forward to it in the next call. Thanks.
This concludes today's conference. Thank you for your participation. You may now disconnect.