Lazard Ltd Q1 2023 Earnings Call

Speaker 1: Please see a file your program is about to begin.

Speaker 1: Good morning and welcome to the Lazard's first quarter of the 2023 earnings conference call. This call is being recorded. Currently all participants are in a listen-only mode. Following the remarks, we will conduct a question and answer session. Instructions will be provided at that time.

Speaker 1: If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I'll turn the call over to Alexandria Denkin, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

Speaker 2: Thank you, Brittany. Good morning and welcome to Lazard's earnings call for the first quarter of 2023. I'm Alexandra Degnan, head of investor relations and corporate sustainability. In addition to today's audio comments, we have posted our earnings release and an investor presentation on our website. A replay of this call will also be available on our website later today.

Speaker 2: Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including but not limited to those factors discussed in the company's SEC filings, which you can access on our website.

Speaker 2: Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements. Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and in the following slides.

Speaker 2: After that, Ken and Maryanne will be joined by Peter Orzak, Chief Executive Officer of Financial Advisory, and Evan Russo, Chief Executive Officer of Asset Management, as they open the call for questions. I'll now turn the call over to Maryanne.

Speaker 3: Thanks, Allie, and good morning, everyone.

Speaker 3: Today we reported first quarter 2023 operating revenue of $527 million, a 25% decrease from the first quarter of 2022, and a net loss of $23 million on an adjusted basis.

Speaker 3: In financial advisory, we reported first quarter operating revenue of $274 million, down 29% from last year's first quarter.

Speaker 3: The ongoing slowdown in M&A activity globally continues to present a significant headwind for financial advisory. However, we remain actively engaged with clients in both Europe and the US.

Speaker 3: In restructuring, activity picked up throughout the quarter and we are working on a number of complex assignments.

Speaker 3: In asset management, first quarter operating revenue was $265 million, an increase of 2% compared to the fourth quarter of 2022, and 15% lower than in the first quarter of 2022.

Speaker 3: Management fees and other revenue was $259 million for the first quarter, a 6% increase from the fourth quarter of 2022 and 10% lower than the prior year period. For the first quarter, incentives fees were $5 million, as compared to $25 million in the prior year quarter, reflecting weaker fixed income markets. The first quarter of 2022 was $25 million for the first quarter of 2022 and 10% lower than the prior year period.

Speaker 3: As of March 31, 2023, we reported AUM of $232 billion, up 7% from December 31, 2022. This increase was driven by market appreciation of $11.6 billion.

Speaker 3: foreign currency appreciation of $1.4 billion, and net inflows of $3 billion.

Speaker 3: Average AUM for the first quarter was $227 billion, 7% higher than in the fourth quarter of 2022, and a decrease of 12% from the prior year period.

Speaker 3: As of April 21st, our AUM was approximately $236 billion, driven by market appreciation of $2.6 billion, foreign currency appreciation of $500 million, and net inflows of $400 million.

Speaker 3: Incorporate operating losses of 11 million included corporate revenues of 10 million, which were more than offset by a charge of 18 million associated with the liquidation of the firm's special purpose acquisition company in February .

Speaker 3: Now turning to expenses.

Speaker 3: For the first quarter, adjusted compensation expense was $399 million, 2% lower than the prior year quarter.

Speaker 3: This equates to a 75.7% adjusted ratio during the first quarter, compared to 58.5% in the first quarter of 2022.

Speaker 3: The higher compensation ratio is due to a combination of lower operating revenue, the liquidation of our SPAC, and higher fixed costs from amortization of prior year grants, as well as an increase in our workforce and inflationary impacts.

Speaker 3: quarter, 21% higher than the prior year quarter, primarily reflecting higher travel and professional services expenses, as well as continued investments in technology and the ongoing impact of inflation.

Speaker 3: In light of the current environment, Lazar does conducting cost saving initiatives.

Speaker 3: These initiatives are expected to result in the reduction of approximately 10% of our workforce globally over the course of 2023.

Speaker 3: which, combined with non-compensation initiatives, we believe will result in a reduction of approximately 10% in our run rate cost base compared to 2022.

Speaker 3: This should better position us in a normalized revenue environment to achieve our historical profitability ranges in 2024 and to continue to strategically invest in the business and return capital to shareholders.

Speaker 3: As a result of these cost-saving initiatives and assuming the challenging environment continues, we expect to achieve an awarded compensation ratio for the full year in the mid-60% range.

Speaker 3: Taking these actions resulted in a charge of $21 million in the first quarter, and we expect an additional charge of approximately 95 million over the course of the year, which will be excluded from our adjusted results.

Speaker 3: Our operating loss for the first quarter of 2023 generated a tax benefit of 11 million on an adjusted basis.

Speaker 3: We expect our annual effective tax rate for the full year 2023 to be in the mid-20% range. Reflecting discrete items which typically occur in the fourth quarter.

Speaker 3: Turning to capital allocation, in the first quarter of 2023, we returned $187 million to shareholders.

Speaker 3: including 43 million in dividends, 99 million in share repurchases, and 45 million in satisfaction of employee tax obligations, upon investing of equity grants.

Speaker 3: Our diluted average share count is 87.6 million shares, which equates to the basic share count due to the anti-dilutive impact of losses.

Speaker 3: During the first quarter, we bought back 2.7 million shares at an average price of $36.75 per share.

Speaker 3: These repurchases largely offset dilution from our 2022 year-end equity compensation grants.

Speaker 3: Our total outstanding share repurchase authorization as of March 31st was $203 million.

Speaker 3: So, Zard's financial position remains strong, and on Wednesday we declared a quarterly dividend of 50 cents per share.

Speaker 3: Ken will now provide his perspective on our performance and outlook.

Speaker 4: Thank you, Marianne. Obviously, it was a tough quarter. During Q1, MNA activity fell back to levels last scene.

Speaker 4: in 2012. Announcements and completions for the industry were down approximately 50% year-on-year and down approximately 30% compared to the fourth quarter of 2022.

Speaker 4: Our financial advisory results reflect these market conditions. That said, we are seeing some improvement in client dialogues and deal activity indicators such as conflict clearances, new projects, and engagements. Our European advisory business continued its strong performance in the first quarter, and restructuring activity is increasing, especially in the U.S.

Speaker 4: We recently added two new managing directors in restructuring further bolstering a business that is already ranked number one globally in industry league tables. We also appointed Ray McGuire as president during the quarter with almost 40 years of experience in investment banking and M&A. Ray will play a key role in strengthening Lazard senior relationships and an originating new business for financial advisory and across the wider firm.

Speaker 4: a market that is moving more towards fundamentals.

Speaker 4: While growth stocks outperformed in the first quarter, quality was the second best factor benefiting from resilience and uncertain periods. As an active manager, we see significant opportunities to deliver out performance as volatility uncertainty continue to create a unique set of economic and market conditions. The recent stress in the banking sector in particular reinforces our conviction and our fundamental approach.

Speaker 4: which we believe will continue to translate into long-term alpha generation. In the first quarter, asset management also expanded its capabilities in providing strategic advice and wealth management to families with the establishment of Lazarid Family Office partners.

Speaker 4: Well, as our business continued to perform solidly, we cannot ignore the environment in which we are operating.

Speaker 4: The recent new slow is unlikely to improve confidence among decision makers near term or make them any less reticent about committing capital As such, the slowdown in M&A is likely to extend beyond the first quarter

Speaker 4: Similarly, for asset management, the market outlook is likely to remain volatile, so as so long as there is a lack of conviction about the evolution of the macroeconomic environment.

Speaker 4: Given this backdrop and the significant inflation and costs across our industry over the past several years, we made the decision to enact cost saving initiatives.

Speaker 4: As Mary and Outline, we are targeting a 10% reduction in our cost base as compared to 2022. We expect to achieve that on a run rate basis by the end of 2023.

Speaker 4: We believe we can accomplish this without impacting the productive capacity of the firm. We are reducing headcounts in areas where there are fewer opportunities for revenue generation and resizing support functions.

Speaker 4: These initiatives were resolved in significant additional cash flow that will enable us to continue to invest in our business at a time when those investments are more attractively priced while continuing to return capital to our shareholders. In closing, I would like to acknowledge the dedication and commitment of our impacted employees, many of whom have contributed to the firm's success for many years.

Speaker 4: Now let's open the call to questions. Thank you.

Speaker 1: If you have a question at this time, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly. We ask that you pick up your handset for best sound quality. We'll take our first question from Brendan Hawking with UBS. Your line is down open.

Speaker 5: Hi, Brennan. Hi, how are you doing, Ken? Good morning. Thank you for taking my questions. I'd like to start on the plans for the workforce reduction. You guys provided an expectation for the awarded compression for the year. But how should we expect that to translate into an actual reported adjusted compression? Yeah, sure.

Speaker 5: And also can, you know, when you touched on, you gave a little color around the expected expense reduction, but, you know, could you maybe provide a bit more specificity around how you would manage these cuts without impacting revenue and where they'll be focused?

Speaker 4: Sure. Okay. Let me take a minute and just give a little bit of context for why now in terms of the cost restructuring and the cost initiatives and then get to your question on the awarded versus gap and then touch on finally the productive capacity point. Let's start. December .

Speaker 4: Goldman conference earnings.

Speaker 4: February 2nd, I think in both cases I was asked, how do you think about the environment and how are you thinking about cost initiatives? And in both contexts what I said was, look, things appear to be a little bit better today than we would have expected six months before. And so, consequently, what we're going to do is kind of take a look and see how things are starting Mumbaikennt in our case.

Speaker 4: this and it was time to move on on this. So that's the background to this. When we look at our business a couple of things stuck out. The first is, as you know, on the advisory side in particular, we have a more global footprint than many of our competitors do. And a lot of this was designed for an environment, a geo-

Speaker 4: Second, when we look at the business today and we look back on the fact that coming out of the pandemic there was a real demand for talent and we didn't do any cuts during the pandemic and as I said in December .

Speaker 4: We were kind of holding off on doing anything at the end of 22 of significance. Now, there's probably some build-up and capacity generally across the business, which could be reduced at this time without necessarily, again, affecting productive capacity. And then finally, when you think about the environment we're in, particularly on the advisory side, we've had now...

Speaker 4: five, I guess, or four or five sequential quarters of down announcements, which means that if you think about completions anywhere from six to 18 months out, shorter for financial sponsors, longer for the more complicated strategic deals, you're not likely to see a pickup and M&A Act completions this year.

Speaker 4: in all likelihood. And then you look at what the environment could be like in 2024, which maybe you get back to 22 or 20 levels. And then you think about the inflation in costs across our industry, you just had to take some action. And so when we think about that, we've seen big increases across the industry in salary.

Speaker 4: That means benefits are going up. That's very sticky. It's very hard to get that out of the system. You don't reduce salaries. And with that means benefits are stuck. On non-compensation, we've seen across-the-board increases in everything from travel and entertainment to information services to IT costs. And so consequently,

Speaker 4: getting the cost structure in place so that we can get back to our targeted profitability was going to require this kind of action. So that's the background to it. Um.

Speaker 4: As to the Comporatio Adjusted GAP versus or GAP versus awarded, we control the awarded compensation. That's actually what we pay in a given year, regardless of the deferral and such. And so we have more ability to manage that.

Speaker 4: and get to where we want to be on that in a variety of revenue environments.

Speaker 4: perfect, but it allows us more control and that's really what drives cash earnings for us, which is what we're really focused on. The adjusted GAT number or the GAT compensation, as you know, is reflective of your previous compensation costs, 21, 20, 21, record your compensation, 22, and it's all the deferrals from those years. So we have a little bit less flexibility there. Obviously less flexibility.

Speaker 4: in the high 60s if we become more conservative around deferrals that is put more cash into this system. And mid 60s if we follow the deferral policies that we've had over the last year or so. And so consequently that's kind of the range. And a lot of it's going to depend on the revenue environment.

Speaker 4: And also the way that I think that we're best able to compensate people at the end of the year. So that's going to be our thought process there.

Speaker 5: Go ahead. No, please. Then mean to interrupt you. I think you had one more question. No, it was around how you execute here at Avoid impacting the relative. I think I touched on that. I think it's a combination of two things. One is, is where we think we have.

Speaker 5: Less opportunity in people and then where you know the investments are going to go in the future I think that really is it got it. Okay. Okay. Thank you. Thank you very thorough. Thanks. Can I appreciate it? And then the follow-up it does seem you know based upon Some analysis around the fixed comp expense that you have it does seem as though there was some incentive a cruel Since you're going through and doing some workforce reduction

Speaker 5: for that as the revenue picture becomes more queer based on the outlook.

Speaker 4: So, I think I'm following the question. So, let me kind of answer what I think is a question. Look, in the first quarter, generally speaking, there's some accrual for incentive comp, but it's usually pretty small. Each of the first quarters, that's just historically the case.

Speaker 4: And then I think the second is, is the room as a result of some of these restructurings to have more flexibility at your end? The short answer is yes, but all of this doesn't really kick in until we get to 24.

Speaker 6: Okay.

Speaker 1: All right, thank you. Appreciate it. We will take our next question from James Yarrow with Golden Sags. Your line is open.

Speaker 7: Good morning and thanks for taking my questions. I just wanted to first touch on your outlook for M&A in Europe versus the US, given you're clearly as a somewhat healthier banking system today and appears to have a somewhat stronger near-term economic trajectory as well.

Speaker 4: It's a good question. So kind of surprising, our first quarter performance in Europe , which of course is dependent to bid on what was announced six, 12 months before, was actually quite strong. And when we look at the business in Europe right now, look, there has clearly been a slow down in announcements over the last. has not yet come down forthe digital transformation. I. It does not know about the leadership of the schools in Microsoft in Europe and I think, after I looked at this in the right

Speaker 4: four or five quarters in Europe as well, but when we look at the individual businesses in Europe at the moment They're pretty robust and I'm not sure that plays into revenue in a quarter quarter by quarter But I feel pretty good about where our franchises in Europe right now and the activity levels well You know clearly less than they were in 21 or not at least for the businesses where the business we're doing

Speaker 7: in the country's where and it's not terrible at the moment. Okay, that's very helpful. And then if we just turn to restructuring, maybe you can just talk about the type of assignments and geographies in which you're seeing the biggest pickup in that business, when should we expect the pace of the restructuring to actually hit your revenue, and then what's your view on the length of this restructuring cycle at this point?

Speaker 4: Okay, great question. So first of all, this M&A cycle and restructuring cycle seems to be very different from 0102.

Speaker 4: O609 or 1413, whatever it was, even the short restructuring cycle before the pandemic. Generally speaking, our experience has been, not even general, but our experience and historically has been that when M&A turns down, usually some period of time prior to the M&A turn down, restructuring assignment, start to pick up.

Speaker 4: and the restructuring cycle offsets some of the decline in M&A. That's been our experience in the past. What's unusual about this restructuring cycle is it's been delayed, muted and delayed. That said, we're finally seeing a real pickup in activity. And that probably starts to translate into revenue towards the end of this year, into the beginning of next year. More thoughts on increased opportunity for material security, limited competence. Same response. The wrinkles of road and

And to that end, actually, we've just added two new restructuring partners. One focused on creditor assignments, which is an area that we've been trying to build. So I think that should help us a bit in just in terms of the market share gains there. But generally speaking, this has been muted so far. Do I think it's going to last longer? I think part of that is going to be dependent on what happens in the banking sector.

If we get a real credit crunch there, then this could be quite a long cycle. If we get a more muted credit crunch, it probably is going to be a good cycle, good in the sense that there will be activity because there's a lot of maturities coming due in a higher interest rate environment and that's going to, I think, make for some stress overall. But the actual...

Breath of the market will impart be dependent on what happens with the credit crunch.

That's right, Claire. Thanks for taking my time. And as far as sectors, I think you're going to see a lot of activity in real estate, which is a strong area for us. Retail, as you can see, continues to be an area which has been difficult. And then I think it is more or less going to be focused on companies that have

overlavered capital structures with near-term maturities that's where the pressure is, and that are affected by downturn in the economy.

Okay, thank you so much. Appreciate that. Well, I will take our next question from David Ryan with JMP Security. Is your line of snow open?

Hi, Kevin. Hey, good morning. I just want to come back to the conversation on the expense reduction. So the 10% is that equal across segments or is that more weighted towards advisory is kind of the first point. And then it sounds like some aspect of this is just a little bit of kind of...

You've been dragging your feet on areas where maybe the fee pools aren't as compelling today as they were in the past. So now it's kind of the time to do that plus some incremental trimming where the environment today is just this challenge. So I just want to kind of clarify within that. And then the other part of the question is, so then what does this mean for investing into parts of the business where maybe the fee pool is becoming more compelling and advisory?

where you guys have been pretty active recruiting externally over the past couple of years.

Okay, so let's start with the last question, what I think was the last question first. Part of the objective here in terms of taking this action now is to get ahead of the environment for two reasons. One is that the M&A business is a cyclical business.

You know, when there's summer fall followed by winter and then there's spring summer again. This is cycles. That's the business we're in. And we're in a down cycle right now. Experience tells us that in a cycle like this, you probably want to do this early for two reasons. One is...

You get it out of the way so people are focused and ready for the recovery. What you're doing with clients now determines how well you do is the recovery takes place. So that's part of part one. Part two is this is the environment where if you can create enough room in the cost structure to allow for future investment, which is what we're trying to do here, it's an environment where...

you can pick up really incrementally good talent. And that's what we're focused on is senior talent, productive talent in the places that matter to us, which I think here is gonna be in the US and in Europe . So that's the goal here is one to get ahead of it so that...

you know when the recovery does we're not distracted by a restructuring that to place at the end of it and then number two is to make sure we have the fuel to continue to invest in our business at a time when those investments are priced much more attractively

So that's kind of part one. As far as the places where productivity is, look, I'm not so sure we were behind the curve on this. I just think this is a change in environment, a change in cycle. And unfortunately, these are the times where you have to do these things and these are tough decisions. And you're always making bets in this business as to where the cycle is going to, where the activity is going to be in the next cycle. people are saying, we couldn't have someone paying almost 10 fully to go and use a cool

You know, we're making those bets now in terms of what we're doing here. As far as where the head counts are coming from, look, the advisory business has more people than the asset management business has. So obviously, it's going to be more impacted than the asset management businesses. The office closings are all on the advisory side.

And with regard to corporate, I think there's a fair amount of re-engineering that's taking place there and it's going to be impacted as well. Okay, thanks for the answer, Ken. I believe Evan's on the call. So I want to ask one just...

Okay, great. So Evan, obviously you've now been in the seat for nearly a year on the <expletive> amendment side. So just love to maybe dig in around kind of your thoughts in that seat, kind of strategic priorities and maybe areas that may get more investment or less investment or, you know, how you're thinking about.

just the overall growth profile and strategy of that business now that you've been in the seat for a year. Sure. Hey, Kevin. Happy to share some thoughts on that. I mean, it's been several, obviously, several quarters now, a couple of quarters of direct involvement here in the Asc Management business, but obviously in the Asc Management focus on Asc Management for the last five years as the FO as well. So, you know, continuation of our strategy.

that we've seen over the past six to nine months has been playing towards the areas of our strength which are relative value quality and sort of factor quant which is the areas focused for our business both for fixed income and equities and so I think performance is an area we're going to continue to focus on

We're spending a lot of time thinking about what kind of tools and resources research and insights. How do you generate the best insights across the platform we have? We have tremendous amounts of intellectual capital on a global basis. We're lucky to have such great teams in all emerging markets and global and international.

and in local areas around the world and I think bringing together those insights allow us to truly have an advantage on a performance basis in so many of our funds, especially in fundamental areas of the markets and certainly markets become more fundamentally driven. The other area that we've spent a little bit of time focusing on, I think it'll be a continued focus for us.

is going to be on the distribution side of our business. Over the last several years, we've focused on the global basis of our distribution capabilities. We've added a lot in Europe . We've talked about that in past quarters. Now we're focusing a little bit more on the North American market. We've made a couple of strategic hires.

over the last quarter or so, we expect the contingent focus on that as well. So enhancing distribution, making sure teams are working well together, coordination, in an environment that certainly remains volatile from a market perspective where clients need us to be thinking forward, thinking ahead, and helping them to think about allocations is becoming really, really critical.

I mean a market like this is where Lizarre tends to shine. I mean we're long-term advisors with many of our clients, many of our client relationships go back more than a decade and sometimes two decades. And so in many ways they turn to us in periods where there is a change over in markets and market sentiment.

change over in big themes that go on and they look for help on that. And so I think our distribution, our sales and marketing is really helping clients and helping to work with our clients, partner with our clients to think about how we can help them drive to further success in their business. And the third area of focus for us really is around the infrastructure, making sure that you're building infrastructure not for what you need today.

but also about all the opportunities for growth, so building the infrastructure you need to support the long-term growth that you expect in your business. So that's everything from operations, technology, and other areas. So I think those are the three areas we've been focusing on with the existing business. The other areas, as you know, I mean, we are big in the areas that we focus. We are.

you know strong in the areas of relative value quality in factor quant I think there's plenty of other strategic opportunities that will arise for us across the alternatives business across the both management space and others that we're spending time thinking about in this environment looking for opportunities.

Terrific. Thanks for the throw answer. Appreciate it guys. I'll be back in the queue.

Terrific. Thanks for the throw answer. Appreciate it guys. I'll hop back in the queue. Great.

We'll take our next question from Stephen Chubank with Wolf Research Your Line is open. Hi Stephen. Hi again, one second. So I did want to ask about some of the Comprehio comments. You noted you're still committed to getting back to the 55 to 59 percent target Comprehio.

such an outcome on this.

pro forma lower expense base? Great question. So, and that is the.

thought process that actually went into what we're doing. First, again, to repeat, one of the things that really compelled us to take action now is when we thought about the inflation in expenses in our business, partly to do, partly to do some of the headcount increases.

And the likely revenue trajectory of our business, particularly the advisory business over the next couple of years or so, this was a necessary thing to do because if we had gone back to 20 or 22 revenues and we had the 22 cost base going into 23 with that kind of inflation, we would not be within our targets.

is if you think about revenue somewhere in the 20 or 22 range for the advisory side, then you start to see how we can get back to our targeted ranges on comp and non-com, and what ultimately ends up as margin.

And then of course it's the mix between the businesses, between advisory and asset. What's interesting about this is this could turn out to be a little light. The period 9 to 13 where asset kind of leads the recovery because of markets and that flows through to P&L quicker than the announcements going up and then the completions do on advisory.

So I would kind of keep that in mind as we go through this and that's how we're thinking about it. What is normalized revenue environment? I guess I would say it's not 21. I don't think we're going to be repeating 21 as an industry for a while. I think individually as firms we could, but I think that's not something that the industry should count on as a whole. My guess is it looks probably more like 18, 19, 20.

maybe 22 as being more normalized kind of years. But you know, this is the, this is the conundrum of the advisory business. It's a very difficult business to predict in any given year. You know what happens over the long run with regard to the advisory market. It's kind of a 4% GDP plus growth business.

But you don't know any given year, it can move as we see, 30, 40 percent, and so the cycles are pretty big. Thanks for all that color, Ken. And just from my follow-up, now the tone on the environment admittedly that you just convey, it's much less sanguine than what we heard from some of your bold bracket peers, which are arguably...

better comps for Lazard, have a similarly global footprint, want to understand whether there are any idiosyncratic factors that would result in weaker performance at Lazard relative to some of the bulges, and what are some of the macro factors or indicators that could potentially support an inflection sooner than what you can bid.

Okay, so a couple points on that. One is when I look at the actual advisory revenues of our, what I'd say, money center peers, so Goldman, Morgan Stanley , JPM, Citi, B of A, and then I look at the independents, candidly, most people, you know, there are exceptions in there, but most people have acted within a few points of the market one direction or the other.

earlier what's unusual about this cycle is usually when we see this kind of downturn in M&A it's offset or muted by an upturn in restructuring almost simultaneous or even proceeding here it's been delayed so I think what we could what could happen towards the end of this year is we start to see restructuring revenues coming through

before the market recovers and such. So that should help a little bit for those that have restructuring practices. And then what could change? Look, I think the biggest issue out there right now is just the inability to kind of predict the future. That is, people don't really have a lot of conviction and confidence about their ability to predict the future. Now what's funny about that is they were totally wrong in 21 when they were so bullish. And we're at real conviction.

But that's where we are, and it's difficult for people to allocate significant capital in that kind of environment, whether you're a company or you're a fund manager. And so I think until we have more clarity and consensus about the environment, we're not going to have a real recovery in volumes.

That said, you could see how the environment could recover. We get through the debt limit without our crisis. We start to see a trajectory in the macro environment, which there's some kind of consensus on inflation coming down. Small recession, vigorous recession, said abating interest rate rises. All of that could come together.

pretty quickly and if it does I think you could see the financing market stabilizing spreads narrowing a little bit assuming it's not a huge recession and more activity. But right now we still have this very cloudy lack of convention, lack of consensus environment. And even if you do get this pickup it's going to still be at least on the advisory side several quarters before you see the analysis.

of the U.S. right now, you could have some pleasant surprises there.

Helpful perspective, Ken. Thanks so much for taking my questions. Sure.

We will take our next question from Matt Moons on the TVW. Your line is open.

We will take our next question from Matt Moone. I want to keep you W. Your line is open. I did morning.

Just wanted to drill down on the environment and maybe what you're seeing between the strategic and sponsor community in more detail You know on the one hand seems that sponsors are seeing a slightly higher level of degradation versus strategic But you know as you know, they should be quicker to return to market. So just curious on your updated thoughts here Yeah, we're just a little So let's start with strategic one complicating factor in the strategic market is the really big deals that have a lot of overlap are In a pretty difficult antitrust environment. We just saw the Activision deal The problems with the Activision deal in the UK And so that that you know kind of and that's been the case now for several years So this isn't a new factor, but there's you know, the big deal is the

because of the strength of our freak practice, the strength of our fig practice. So those have been good areas for us. And then, you know, what's interesting about the consumer sector, every now and then, there's a big counter-cyclical deal in the consumer sector because it's defensive, they have strong balance sheets. Evaluations are a little muted so you can get things done there. So I think that's the strategic landscape. Not terrible, but it's not gonna be like it is in a bullish environment. On sponsors, I think you hit it on the head, it's probably the area that could recover the quickest and you can see the pull through into P&L the quickest. On the other hand, we're in a very different environment for sponsors today than we were in the period through 21. We're in an environment where interest rates are gonna be elevated for a period of time. They're not going back, I don't think to...

zero or one percent interest rates, I think spreads are going to be a little bit wider. And so consequently, you know, financing more expensive. And as a result of that, valuations probably a little bit more challenged. Leverage into the company's probably a few returns. And so the returns are going to be a little bit more difficult.

for sponsors, probably smaller in this environment. In some cases, that's a function of the fact that people will put up 100% equity in a deal, just to say, we'll refinance it later. We've seen a little of that. And in some cases, and also just in terms of financing, it's easier to finance the smaller deals than the larger ones at the moment. But activity is muted. Great. And then just.

AUM this, but just curious if you're seeing any recurring and onboarding opportunities for the client, private client side of the business specifically, and just kind of thinking that, you know, in the wake of the banking crisis, you know, the, that affiliated bank model for, for private clients, if there's anything there, or if that's more outside the area of focus for you guys.

Evan, you want to kind of size that and... Yeah, as you mentioned, we formed Lazard Family Office Partners with the acquisition of Truvo earlier in the first quarter, and we put that alongside our existing private client business. We've always had a very strong private client business in the high net worth space here, the direct business here.

And the combined business now in the US, approximately $8 billion of AUM, we're very excited to bring on the new team and to really form this new entity to chase the sort of building a more broader practice across the wealth management space. Look, it's really augmenting what we've always done. I think when you think about the movement around what's going on in the financial space today, the

There certainly is a lot of movement and that's partly why we thought about thinking about this channel as one that we should continue to grow. Obviously, we've had a large wealth management practice across Europe for a while now and this was just a good opportunity for us to create a base to look at all the changes that are going to go on. We do expect there to be a lot of movement in the wealth management space over the coming couple of years and this will give us another growth vector in that space over the coming years.

credit conditions are playing a role in deal completion? Is it a bigger headwind than higher rates? And I'm asking to just try to get a sense of what's a better macro outcome, higher rates with no recession or rate cuts that come with the recession but also – and also tighter credit conditions. So, I'm asking to just try to get a sense of what's a better macro outcome?

Well, look, I mean, I think the problem here is you've got a lot of cross-currents. And so you're sort of navigating those cross-currents is the challenge of this environment for anybody that's looking for financing. If we end up in a more difficult economic environment, one more, there's a recession. My guess is spreads start to widen a bit. On the flip side, if we go in a recession.

that probably is an expectation that the Fed is gonna start to fall back on rate increases, so you have a rate environment that starts to improve a little bit. Another current is if you think about what's happening in the regional and the community banking sector with regard to deposit.

outflows and what that does to the ability to lend, particularly into the commercial real estate sector and the SME sector, where the regional banks and the community banks are very important players. That probably creates a bit of a credit crunch for people. On the other side of that, you have a huge amount of money and the fact that you don't have as much money Music

in the private credit funds right now that start to become more active. So you have all these cross-carns. But the key here is just that risk capital is just a lot more expensive today than it was in 21. And as a result of that, valuations are going to be depressed or what people can afford to pay for businesses is going to go down.

Right, it funds right now that start to become more active. So you have all these cross-carns. But the key here is just that risk capital is just a lot more expensive today than it was in 21. And as a result of that, valuations are going to be depressed or what people can afford to pay for businesses is going to go down. Thank you.

Thank you. This now concludes the Lazard conference call.

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