Q1 2024 Moelis & Company Earnings Call
Operator: Good afternoon, and welcome to the Moelis & Co. Earnings Conference Call for the first quarter of 2024. To begin, I'll turn the call over to Mr. Matt Tsukroff.
Good afternoon, and welcome to the Moelis and company earnings Conference call for the first quarter of 'twenty 'twenty four to begin I'll turn the call over to Mr. Matthew Cross.
Matthew 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. The actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements.
Matthew Charles Moon: Good afternoon, and thank you for joining us for Moelis <unk> 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.
Matthew Charles Moon: 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 most of the 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.
Matthew Tsukroff: Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable gap 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 gap 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.
Matthew Charles Moon: Due 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 robbing 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 that most dot com I will 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.
Joseph Walter Simon: 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 and restructuring. The M&A pipeline continues to build, but conversion to revenue remains challenging. However, there is early evidence that this trend is pivoting more constructively. Moving to expenses.
We achieved revenues of $217 million in the first quarter, representing an increase of 17% over the prior year period. The revenue increase was primarily attributable to growth in restructuring the M&A pipeline continues to build but conversion to revenue remains challenging.
Joseph Walter Simon: There was 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. Two until we have better visibility on the full year, which is likely to be in the third quarter.
Joseph Walter Simon: Our first quarter comp ratio was 75%. We expect the ratio to be similar in quarter two 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.
Joseph Walter Simon: 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.
Joseph Walter Simon: Moving to taxes, our underlying corporate tax rate is expected to be 34% for the full year, we expect to target a 28% to resume once we achieve a more normalized level of productivity.
Joseph Walter Simon: We expect a 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. I'll now turn the call over to Ken.
Joseph Walter Simon: Regarding capital allocation the board declared a regular quarterly dividend of <unk> 60 per share.
Joseph Walter Simon: Lastly, we continue to maintain a strong balance sheet with no funded debt and I will now.
Joseph Walter Simon: Turn the call over to Ken.
Kenneth David Moelis: Thanks, Joe and good afternoon, everyone.
Kenneth David Moelis: 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 sponsored 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.
Kenneth David Moelis: 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.
Kenneth David Moelis: Ensing markets are open in both corporate and sponsored dialogues are active our.
Kenneth David Moelis: Our restructuring team has seen 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.
Kenneth David Moelis: <unk> capabilities.
Kenneth David Moelis: Finally, in the first quarter, we hired four managing directors, three in the energy sector and one 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 to questions.
Kenneth David Moelis: Finally in the first quarter, we hired four managing directors three in the energy sector and one to cover credit funds are.
Kenneth David Moelis: Our outlook for the deal environment is positive and we are focused on our clients and execution going forward.
Kenneth David Moelis: With that have been opened up for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press star 1 again. Your first question comes from Devin Ryan with Citizens JMP. Please go ahead.
Speaker Change: Dialed in I would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you would like to withdraw your question. Please press star one again.
Speaker Change: Your first question comes from Devin Ryan with citizens JMP. Please go ahead.
Alexander Scott Jenkins: Hi guys, Hi Ken and Joe. This is Alex Jenkins filling in for Devin Ryan.
Speaker Change: Hi, guys, Hi, Ken and Joe This is Alex Jenkins filling in for Devin Ryan Hope you guys are doing well.
Alexander Scott Jenkins: Hope you guys are doing well. 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 dialogue 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; any time frame, information, or place you're expecting would be helpful as well.
Alex Jenkins: I guess just to start can you speak to what Youre hearing in terms of the sponsor backdrop. Most of the commentary we've been hearing recently has been fairly positive dialogue picking up.
Alex Jenkins: Something around the need for these firms to act I'd love to just get your perspective on what Youre hearing and any timeframe information or place youre expecting it would be helpful. As well. Thank you.
Kenneth David Moelis: So that's a good question. Let me just give you an example. 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, you know, strategics kind of do... Strategic deals with the time frame being almost unlimited. So there's no, you know when they come up Available, and there's something they have to accomplish.
Speaker Change: Yes, so that's a good question let.
Speaker Change: Let me just give you I think there's a bifurcated market right now or the shape of our M&A business is actually more weighted in the first quarter, two publix and strategics and I think the reason for that is strategic kind of do.
Speaker Change: Strategic deals with the timeframe being almost unlimited so theres no when they come available and Theres something they have to accomplish they usually execute.
Kenneth David Moelis: 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 hold of five to seven 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 END, betting odds, the line was six Fed rate cuts.
Speaker Change: Interestingly I think PE firms are one of the things. They are paid to do is be good at timing.
Speaker Change: They're in deals usually for a hold of five to seven years and it matters. When you purchase a when you exit and I think that's one of their expertise.
Speaker Change: I think if you approach the first part of the year January and.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Your line was six fed rate cuts I mean, that's kind of what the market was telling you was supposed to happen this year.
Kenneth David Moelis: I mean, that kind of what the market was telling you was supposed to happen this year. You might get ready for the market, but you're not going to go until one, two, three of those cuts happen. I think you're trying to time that market. Or, by the way, our NBRC, which is our pipe where we vet companies for what we want to, you know, deals we want to do, transactions we want to take on, has been extremely busy and at high levels, and our pipeline is as large as it's ever been for this time of year.
Speaker Change: You might get ready for market, but youre not going to go till.
Speaker Change: 123 of those cuts happen I think youre trying to time that market.
Speaker Change: By the way, our NBRC, which is our pipe where we.
Speaker Change: That companies for what we want to deals we want to do transactions, we want to take on.
Speaker Change: Has.
Speaker Change: <unk> been extremely busy and at highs and our pipeline is <unk>.
Speaker Change: Large as it's ever been for this time of year, but let me say what so what happened is I think if you saw that everybody was handicapping six rate cuts in your paid to time the market, you, probably say well, let's get ready, but we're not going.
Kenneth David Moelis: But let me say, so what happened is, I think if you saw that everybody was handicapping six rate cuts and you were paid to time the market, you'd 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 a one to two percent rate. And I don't believe we need rate cuts. I think we need stability and the ability to project.
Speaker Change: Thank you fast forward to today.
Speaker Change: And I think the handicapping is down one to two rate cuts.
And I don't believe we need rate case, I think we need stability and ability to project and I think if p/e firms. If you told them Hey, we can 100% guarantee that they will not be a rate cut for two years. They will begin to transact fairly aggressively on the basis that capital is available.
Kenneth David Moelis: And I think if PE firms were told, hey, we can 100% guarantee that there will not be a rate cut for two years, they would 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, you know, over a long period of time. And I think that you don't have to, you know, if you knew there was no rate cut, you wouldn't be timing it that closely.
Speaker Change: Rates are high relative to 'twenty, one, but not relative to the world of interest rates over a long period of time.
Speaker Change: And I think that you don't have to.
Speaker Change: New 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.
Kenneth David Moelis: 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 honed 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 in Quebec.
Speaker Change: 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 youre going to have to transact in the environment. We're in I think it will unleash a lot of activity in pent up activity.
Alexander Scott Jenkins: Awesome. Great. Thank you for that color. That makes a lot of sense. Thanks for the great 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 tech space relative to market expectations? Thank you.
And I think it is.
Speaker Change: Awesome.
Speaker Change: Great. Thank you for that color that makes a lot of sense. Thanks.
Speaker Change: Thanks for the right color too I guess, just as a follow up on the.
Speaker Change: <unk> you guys hired last year can you just speak to the momentum.
Speaker Change: In the tech space relative to market expectations. Thank you.
Kenneth David Moelis: Look, they've met our expectations. I don't know what the market thinks of the team, but we think that it's been almost one year. I think it is almost one year to the day.
Speaker Change: They've met our expectations I don't know what the market thought of the team, but we we think that it's almost one year I think it is one year to the day I think we did it on this earnings call last year announced it.
Kenneth David Moelis: I think we did it on this earnings call last year and 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, you know, in the context of the market. We're very happy with it. It's worked almost, you know, exactly as we were hoping.
Speaker Change: We have gotten deeper stronger better.
Speaker Change: All areas.
Speaker Change: It's not as I've said, they have a lot of pay focused 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.
Speaker Change: In the context of the market, we're very happy with it.
Speaker Change: Worked almost exactly as we were hoping.
Speaker Change: Awesome. Thank you guys.
Alexander Scott Jenkins: Awesome. Thank you, guys.
Speaker Change: Your next question comes from Ken Worthington with JP Morgan. Please go ahead hi.
Kenneth Brooks Worthington: Your next question comes from Ken Worthington on behalf of J.P. Morgan. Please go ahead.
Kenneth Brooks Worthington: Hi, good afternoon. Thanks for taking the time to ask the question. So along those same lines, in terms of the new bankers beyond just SPV, 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 rates? Any sort of call you can give there? I know it's still early, but... Figured you might have a view.
Kenneth Brooks Worthington: Good afternoon. Thanks for taking the question so along those same lines.
Kenneth Brooks Worthington: In terms of the new bankers beyond just SPV.
Kenneth Brooks Worthington: How are you seeing the new higher success rate over the last year or so compared to what <unk> seen in hiring some promotions in years past.
Kenneth Brooks Worthington: Are these more recent hires coming in line or are you seeing better fit in better success rate any sort of color you can give there I know it's still early but.
Kenneth Brooks Worthington: Figured you might have a view.
Speaker Change: So I'm very bullish but cannot again.
Kenneth David Moelis: I'm very bullish, but Ken, I again... um, let me just say the people you hired at the beginning of 2021 probably had a better year 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, [inaudible] It's been as, I shouldn't say that because I'll insult somebody, it I think their talent is very good. I'd spend a lot of time on the road with them.
Speaker Change: Let me just say the people you hired at the beginning of 2021, probably had a better 2021 of the people you would hire at the beginning of 2023. So you also have to put it in a market context.
Speaker Change: In that context, I think the hiring we've done has been.
Speaker Change: Better.
Speaker Change: It's been as I.
Speaker Change: Shouldn't say that because all the insults somebody it's been as good as we could have thought.
Speaker Change: I think the talent is very good.
Speaker Change: I'd spent a lot of time on the road with them.
Kenneth David Moelis: The client interactions are of the highest quality. They're in sectors that are active, so I'm very pleased with it. It's just 2023 has been a tough year to convert that to final transactions, but I feel like the backlog and the connectivity to a large number of people client base are exceptional. And I'm pretty happy with it. Okay, great.
Speaker Change: Client interactions are of the highest quality. They are in sectors that are more that are active.
Speaker Change: So I'm very I'm very pleased with it. It's just 2023 has been a tough year to convert that to <unk>.
Speaker Change: Final transaction, but I feel like.
Speaker Change: The backlog and the connectivity to a large large fee pool client base is exceptional and I am pretty happy with them.
Speaker Change: Okay, Great and then.
Kenneth Brooks Worthington: 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 opportunities, trying to figure out what an extended period of rates at these levels means for your various businesses?
Speaker Change: Maybe expanding on your rate comments I think you are right comments really spoke about 2024, if we're sort of in a higher for longer environment beyond 24.
Speaker Change: Does that have implications for either M&A sentiment or even restructuring opportunity I'm trying to figure out what what an extended peer.
Speaker Change: Period of rates at these levels means for your various businesses.
Kenneth David Moelis: Here, 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 of 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 that quality asset to buy. There are buyers out there, We believe that there is 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's six rate cuts coming. You kind of wait, and by the way, you have quality assets. There's nothing going wrong with them. They're probably growing if it's quality assets doing fine, so you're fine waiting to hit the market with your best quality asset. I believe at this point, it Well, now I know that if I wait until May, there'll be no different.
Speaker Change: So to be clear.
Speaker Change: I think at this point.
Speaker Change: You don't need a rate cut.
Speaker Change: Trigger M&A.
Speaker Change: We 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.
Speaker Change: Markets I believe it's the availability of the quality asset to buy there are buyers out there we believe that.
Speaker Change: There is capital and there are people who had by quality companies.
Speaker Change: 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 theres six rate cuts coming.
Speaker Change: You kind of wait and by the way you have quality assets, there's nothing going wrong with it its probably growing if it's quality assets doing fine so youre fine waiting to hit the market with your best quality asset.
Speaker Change: I believe at this point, it's like I said, if somebody guaranteed.
Speaker Change: There will be zero rate cuts for two 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 single B, even triple C paper right now is come in dramatically to finance. These types of transactions and I think we just have to take away the opportunity that if I were.
Kenneth David Moelis: There is capital out there. There is actually acquisition capital; single B, and even triple C paper right now has come in 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'll 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.
Speaker Change: If I kick off my sale in June it'll be a different rate environment, if that happens by the way great.
Speaker Change: Great I do think that will.
Speaker Change: 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 and the private side and the public side is already executing and Theyre pretty aggressive I believe the public market is.
Kenneth David Moelis: 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 on 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, you know, FTC issues for large transactions that don't want to go into this regulatory system.
Speaker Change: <unk> and the only thing holding that back might be FTC issues for large transactions that are that don't want to go into this regulatory environment.
Speaker Change: Okay. Okay, great. Thank you very much.
Kenneth Brooks Worthington: Okay, great. Thank you very much.
Speaker Change: Your next question comes from James <unk> with Goldman Sachs. Please go ahead.
James Edwin Yaro: Your next question comes from James Yaro of Goldman Sachs. Please go ahead.
James Edwin Yaro: Good afternoon, and thanks for taking my questions. 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 pretty strong activity this quarter there. So perhaps the outlook for both liability management and Chapter 11 as we look ahead, and then perhaps you could perhaps give us the contributions to revenue from restructuring and capital markets as you have done historically.
James: Good afternoon, and thanks for taking my questions 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.
James: Pretty strong activity this quarter there so maybe the outlook for both library 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 we have done historically.
Kenneth David Moelis: Well, I'm not sure I've done that historically, but I'll try to give you some sense of where it is. Um, yes, we had a good, strong, uh, look, what's going to happen here. He's, 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 force some part of the part of that market into restructuring mode.
Speaker Change: Im not sure Ive done that historically, but I'll try to give you some sense of where it is.
Speaker Change: Yes, we had a good strong.
Speaker Change: What's going to happen here.
Speaker Change: As like I said I'm not sure you need a rate cut for the quality part of the market hit enter M&A transactions, but if.
Speaker Change: If you do have a company that isn't performing higher rates are going to are going to continue to plague that market and enforce some part of the.
Speaker Change: Part of that market into some restructuring mode.
Speaker Change: The interesting part is.
Speaker Change: Risk capital has become very available this kind of rescue capital that's willing to insert itself and take out some of the maturities.
Speaker Change: For high interest rate is available and so youre not seeing a lot of the credit market, which you know in the last downturn, which might've been 15 years ago in the crisis, but a lot of those credits traded down to $23.40. You don't have a huge market of 2030 40 paper it might be that.
Kenneth David Moelis: 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. [inaudible] There was a lot more equity put in under the deals, you know; the transactions went at higher EBITDA multiples. And so there was possibly more equity put in under the same level of six or seven times leverage, which leaves a bigger slice of value for somebody to come in and finance.
Speaker Change: In this cycle.
Speaker Change: There's a lot more equity put in under the deals.
Speaker Change: Transactions when and higher EBITDA.
Speaker Change: Multiples.
Speaker Change: And so there was <unk>.
Speaker Change: Possibly more equity put in under the same level of six or seven times leverage would.
Speaker Change: 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.
Kenneth David Moelis: 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.
Speaker Change: Then go bankrupt.
Speaker Change: What the rate they will try to extend the runway to do that so we're seeing a lot of that.
Speaker Change: The rescue financing extension of.
Kenneth David Moelis: Rescue financing, extension by structure, and 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, and I think it will continue, by the way, because I do think higher rates will put more pressure on that bottom 10% of economic performance. By the way, our non-M&A, and we called it out, our M&A was one of the weakest parts of our business, so our non-M&A, which includes capital markets, PFA, and restructuring, was about 50%.
Speaker Change: Bye bye structure moving.
Speaker Change: Maturities out to some of these exchange offer techniques of course, there will continue to be some chapter elevens.
Speaker Change: It's 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.
Speaker Change: Good sponsors who are getting in there early and getting to solutions quicker. So that part of the market is.
Speaker Change: Is is I think we will continue by the way because I do think.
Speaker Change: 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 or non M&A and that includes capital markets PFA and restructuring was about 50%.
Speaker Change: Okay.
James Edwin Yaro: Okay, that's incredibly helpful. Thank you, Ken.
Speaker Change: That would be helpful. Thank you, Ken just taking a step back.
James Edwin Yaro: Just taking a step back, on the fundraising businesses, I think primary fundraising activities have remained slow over the past few years, the 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?
Speaker Change: On the fundraising businesses I think primary fundraising activities remained slow over the past few years.
Speaker Change: The past year and change, whereas injury 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.
Speaker Change: Separately <unk> 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 be 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.
Kenneth David Moelis: That's good. Look, you're right.
Speaker Change: That's a good look youre right. The primary fund raise had gotten commoditized over time and it's a business.
Kenneth David Moelis: The primary fundraise has gotten commoditized over time, and it's a business, but I don't think it's it's not the same business it was 10 years ago, and I think there's also going to be a consolidation of a lot of the money in those. And the primary was made by first-time funds who really needed to be introduced and were willing to pay, you know, three points on the fundraising platform I think there'll be a consolidation.
Speaker Change: But I don't think its not the same business. It was 10 years ago.
Speaker Change: I think theres also going to be a consolidation a lot of the money in those.
Speaker Change: And the primary was made by first time funds, who really needed to be introduced and we're willing to pay three points on fund raise to get introduced.
Speaker Change: I think there'll be a consolidation there wont be as many lack of capital. There's just not as many new funds being started in the large funds are going back to their existing Lps and so theres going to be a smaller and smaller primary market to go into.
Kenneth David Moelis: There won't be as many 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.
James Edwin Yaro: You're right about continuation funds becoming a bigger part of the concept. 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 a lack of M&A; I think it was generated by it being a good solution for an asset manager to retain an asset they like and crystallize the carry and restart it. It's almost like, you know, if you lay out what a continuous fund accomplishes, it's, you know, 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 grows.
Speaker Change: Youre right about <unk>.
Speaker Change: <unk> funds, becoming a bigger part of the concept. It is just you.
Speaker Change: You have to have that as a tool in your pitch as to what to do with an asset.
Speaker Change: I don't think it is generated by <unk>.
Speaker Change: Lack of M&A I think it was generated by its a good solution for an asset manager to retain an asset they like.
Speaker Change: Crystallized to carry and restarted its almost.
Speaker Change: Can you lay out what our continuous it fund accomplishes its.
Speaker Change: A dream for an asset manager in private equity they crystallized carry they maintain the asset and you get to go forward again. So it has some real positives in that I think we will continue to be a product that is important and grow.
James Edwin Yaro: That's very clear. Thanks a lot.
Speaker Change: That's very clear thanks, a lot.
Speaker Change: Your next question comes from Steven <unk> with Wolfe Research. Please go ahead.
Steven Joseph Chubak: Your next question comes from Steven Chubak with Wolf Research. Please go ahead.
Speaker Change: Good evening this is Brendan O'brien filling in for Steven.
Brennan Hawken: Good evening, this is Brennan O'Brien filling in for Steven. To start, I guess I just want to touch on recruiting. You know, you added four new MDs in one queue, which is a pretty active start to this year, and while you're unlikely to match last year's recruiting level due to the SBB 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.
Brennan Hawken: To start I guess I just wanted to touch on recruiting you added four new Mds and <unk>, which is a pretty active start to this year and while you are unlikely to match last year's recruiting level due to the SBB 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.
Brennan Hawken: The year on this front.
Relative to history.
Speaker Change: No I don't think.
Kenneth David Moelis: No, I don't think we have no plans to duplicate anything like last year. The energy hires that we did, which is three out of the four, were in the process for a while. I actually think we kind of signed them up last year, and we announced when they were going to leave.
Speaker Change: We have no plans to duplicate anything like last year.
Speaker Change: <unk>.
Speaker Change: The energy hires that we did which is three out of four were in process for a while I actually think we kind of signed them up last year, and we announced them when Theyre garden leave so we almost look at that as part of last year's move to fill in some gaps we have in technology and energy and I am very excited and energy transition.
Kenneth David Moelis: So, you know, we almost look at that as part of last year's move to fill in some gaps we had in technology and energy. And I'm very excited about the energy transition and where we ended up. If you look at that team, it's a spectacular team.
Speaker Change: So very excited with where we ended up if you look at that team. Its spectacular team very excited with that that we're not going to we're not going to nowhere, but we still have some spots wed like to hire people who came available we would do it.
Kenneth David Moelis: Very excited about that. Now, we're not going to – we're not going to nowhere, but, you know, we still have some spots we'd like to hire. If people became available, we would do it. But I don't expect, you know, an SVB type of situation to occur. You know, we didn't plan for that last year. It just happened.
But I don't expect an SCB type of situation to occur.
Sure.
Brennan Hawken: We moved, and it ended up leading to us having a – you know, that was 14, I think, of the MDs out of a total of, you know, something in the mid-20s. Even if we did the non-SVP part, that, 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 this year.
Speaker Change: 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 <unk> out of a total of something in the mid twenties.
Speaker Change: Even if we did the non SVP part that to me that would be aggressive I don't even anticipate that many external hires I think this is a year, where we will fill in where we can we will pick off some really quality people if they show up and we're going to focus on the clients for this year.
Speaker Change: Got it that's helpful and then I guess turning back to the capital markets business, that's been quite active for you over the past 18 months.
Brennan Hawken: All right, that's helpful. And then I guess turning back to the capital markets business, you know, 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, 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, you know, continue to see growth there.
Speaker Change: Given the lack of.
Speaker Change: Capital availability to the credit and equity markets.
Speaker Change: The reopening of equity markets or equity issuance and debt market. So I just wanted to get a sense as to how that's impacting the outlook for that business and whether you think you could.
Speaker Change: We continue to see growth there.
Kenneth David Moelis: Yes, I'm very bullish on that. We took one of our best bankers and put him 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 like M&A.
Yes, I'm very bullish on that we took one of our best bankers and put him in charge of it.
Speaker Change: We I think these are big chunky checks.
Speaker Change: Again, if it's plain vanilla distribution of an IPO that often goes to one of the big banks.
It's almost M&A I mean, there's the idea of putting a $1 billion into some position in the capital structure at.
Kenneth David Moelis: I mean, the idea of putting a billion dollars into some position in a capital structure usually involves what we consider our clients, the PE firms or the private, you know, credit firms, which is a 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, discretion and secrecy and people like, you know, a lot of people that might involve a conflict of interest with your senior lender. And, you know, that causes people to not want to have their senior lender involved in that. So this is all.
Speaker Change: It usually involves our what we consider our clients' the PE firms are the private credit firms, which is very one off.
Whoa conversation it often in <unk> things like negotiation of governance and exit rates and all kinds of things that are just not conducive to a plain vanilla distribution.
Speaker Change: And oftentimes also discretion and secrecy and people a lot of people.
They involve conflict of interest with your senior lender.
Speaker Change: And that causes people to not want to have their senior lender involved in that so.
Speaker Change: So this is all.
Kenneth David Moelis: And the fact that it's available is fantastic for our business because, yes, we were having those conversations a year ago, but capital wasn't that available. It was very hard.
Speaker Change: And the fact that it's available is fantastic for our business because yes, we were having those conversations a year ago, but.
Speaker Change: But the capital wasn't that available it was very hard you might've had a perfect position to put our 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.
Kenneth David Moelis: You might have had a perfect position to put capital in, but the capital didn't want to move yet. They were very worried about, you know, 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.
Speaker Change: In motion and looking for those opportunities means I think our hit rate on marrying up.
Speaker Change: A problem with the solution will be a lot higher.
Brennan Hawken: Great, thank you for taking my questions.
Speaker Change: Great. Thank you for taking my questions.
Speaker Change: Your next question comes from Ryan <unk> with Morgan Stanley. Please go ahead.
Ryan Michael Kenny: Your next question comes from Ryan Kenny with Morgan Stanley. Please go ahead.
Speaker Change: Hey, Good afternoon. This is Carl Smith's filling in for Ryan Kenny.
Connell J. Schmitz: Hey, good afternoon. This is Connell Schmitz filling in for Ryan Kenny.
Connell J. Schmitz: So just going back to your outlook, your commentary seemed a little bit more reserved than last quarter, given last quarter you called for a coming resurgence in M&A. So to better get a sense of where you are in the merger market, can you go back to your Formula One red light analogy? The last time you talked about that, you said we were at the fourth of five red lights, but now we have the rate outlook has changed.
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 I better get a sense of where you are within the merger market can you go back to your Formula One Red light analogy.
Speaker Change: The last time, you talked about that he said we were at the fourth of five Red lights.
Speaker Change: But now we have the right outlook has changed and you had made this comment off in the back of Power's November comments. So can you just give us an update on where we are with that and then as a follow up.
Connell J. Schmitz: And you had made this comment on 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? Thanks.
Speaker Change: On the <unk> comp ratio guide can you just speak to what kind of revenue environment and youre expecting on a sequential basis that gets you to a similar comp ratio. Thanks.
Kenneth David Moelis: Okay, let me start. I don't know the exact words I used, but I'll tell you that our pipe is stronger, 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... The Rah-Rah, it feels like...
Okay, Let me start so.
Speaker Change: I don't know the exact words I used but I will tell you that our pipe is stronger.
Speaker Change: Our NBRC activity stronger than whatever I said at that point so.
Speaker Change: I didn't mean to.
Speaker Change: Look I think we've all been waiting for a recovery in M&A and I don't want to overdo the.
Speaker Change: Rob It feels like.
Kenneth David Moelis: It's coming, and our pipe is higher than, you know, it's been at any time at an equivalent point in time, which the first quarter is usually your lowest point. To Mike, comment on, you know, it was last November when we talked about the, uh, the Fed comments right then led everybody to the six rate cut prediction. So I thought, okay, we got four lights on, I think it's four lights, right on. I was losing track of my Formula One expertise. I'm not really that good, but
Speaker Change: It's coming in.
Speaker Change: And our pipe is higher than it's been at any time at equivalent.
Speaker Change: Point in time with the first quarter is usually your lowest point.
Rob: You might comment on you know it wasn't last November when we talked about the <unk>.
Speaker Change: <unk> comments right, then let everybody to the six rate cut predictions. So I thought okay. We got four likes I think its four legs right on.
Lose track of my Formula one expertise I'm not really that good but.
Kenneth David Moelis: So, I thought the first rate cut would be, you know, everybody would tear off. The interesting part is that, you know, it led everybody to believe six were coming. The interesting part at this point is that it does not look like six 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, people were saying, well, this isn't the environment. The environment could be, you know, a three and a half percent federal funds rate.
Speaker Change: So I thought the first rate cut would be.
Speaker Change: Body would tear off the interesting part is because it led everybody to believe six were coming.
Speaker Change: The interesting part at this point it does not look like six 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 three 5% federal funds.
Speaker Change: Right.
Kenneth David Moelis: 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's going to cut rates by 200 points in the next six months. Why wouldn't we go then? And you go, you know, squirming back to your seat and never talking to the guy again.
Imagine going to your investment Committee and say lets go to market and some senior guy at the firm looks at you and says what kind of idiot argue the fed's going to cut rates by 200 points in the next six months why Wouldnt. We go then.
Speaker Change: Hugo Squirming back to your seat and never never talked to the Guy again, but.
Speaker Change: I think as of today, it's becoming.
Kenneth David Moelis: I think as of today, it's becoming more clear that if there is a Fed drop, it could be late in the year. And what I'm saying is 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.
Speaker Change: More clear that if there is a fed drop it could be late in the year end.
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.
Kenneth David Moelis: We're going to go. And we're not going to look like idiots because we're not going to miss some gigantic six rate cut move. I don't know how to tie that back to my Formula One analogy.
Speaker Change: We're going to go and we're not going to look like idiots, because we're not going to miss some gigantic six rate cut move.
Speaker Change: Don't know how to tie that back to my Formula One now I think the cars are just going to take off.
Kenneth David Moelis: I think the cars are just going to take off and get, you know, 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.
Speaker Change: I think the cars are going to start on the track on their own and I think they are just going to go because now this is the environment.
Kenneth David Moelis: And PE firms are in the business of transacting and creating liquidity and buying new assets, so I think they're going to go. I'm on the comp ratio. I think that was the last one.
Speaker Change: And PE firms are in the business of transacting and creating liquidity and buying new assets. So.
Speaker Change: They're going to go.
Speaker Change: On the comp ratio I think that was the last one I just wanted to say.
Kenneth David Moelis: 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 even 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, you know, we'll have time over the year to adjust, but that's based on our best estimate of what the current market conditions are.
Speaker Change: 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 will update it.
As things change I'm, not trying to predict the future, though although.
Speaker Change: We will have time over the year to adjust but thats 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.
Connell J. Schmitz: All right, that's helpful. Thanks, Ken.
Joseph Walter Simon: Alright Thats helpful. Thanks, Kevin.
Joseph Walter Simon: Your next question comes from Brennan Hawken with UBS. Please go ahead.
Brennan Hawken: Your next question comes from Brennan Hawken with UBS. Please go ahead.
Brennan Hawken: Good afternoon, thanks for taking my questions. So, given the magnitude of recruiting and relatively quiet environment, was the structure of comp awards at this past year-end different than what you saw in a typical year?
Brennan Hawken: Good afternoon, Thanks for taking my questions.
Brennan Hawken:
Brennan Hawken: So given the magnitude of recruiting.
Brennan Hawken: And relatively quiet environment was the structure of comp awards.
Brennan Hawken: At this past year and different than what you saw in a typical year.
Brennan Hawken: I think they are pretty consistent you can look in the outlook look every time about deferrals and I compare to the market and I feel like.
Kenneth David Moelis: I think they're pretty consistent. You know, I look I look every time about deferrals, and I compare to the market, and I feel like our comp was right. It was pretty, pretty much where it was every other year, in terms of component, in terms of component, component.
Brennan Hawken: Our comp was right.
It was pretty good pretty much where it was every other year.
Brennan Hawken: Terms of component in terms of component component of comp.
Speaker Change: Got it.
Speaker Change: So I guess the reason I ask is that the.
Brennan Hawken: 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 – was that a function of the recruiting and the magnitude of the recruiting that came on and the stock-based comp that was tied to that, or was there something else involved in that?
Speaker Change: Average stock outstanding and the diluted stock outstanding ticked 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.
Speaker Change: And the magnitude of recruiting that came on in the stock based comp that was tied to that or was there something else involved in that we might have to we might have to include that Joe Yes, no. Yes, that's exactly right.
Joseph Walter Simon: We might have to include that, Joe. No. Yeah, that's exactly right. Each one of these new hires ultimately comes with visibility on their comp for at least one, two 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.
Speaker Change: Each one of these new hires ultimately it comes with typically.
Speaker Change: Visibility on their comp for at least one two years and so in the first year where basically.
Joseph Walter Simon: There is no revenue, but there is there is comp thats basically been guaranteed and it's a combination of cash and equity.
Brennan Hawken: Great Okay. Thanks, Joe. I appreciate that. I have a question, sort of a related question, you know; recruiting has been remarkably active. You have been really excited about the quality of the bankers that have come on board. When we think about looking at your productivity per MD historically, you know, X the remarkably strong 21 and 22, you know, 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 it would be reasonable to expect for a new high watermark?
Speaker Change: Great. Okay. Thanks, Joe appreciate that.
Speaker Change: Ken.
Speaker Change: I have a question.
Ken: Sort of a related question.
Ken: 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 M D.
Speaker Change: Historically.
Speaker Change: The remarkably strong 'twenty, one and 'twenty two.
Speaker Change: Previous sort of high watermark was about the mid sevens.
Speaker Change: Do you think that the.
Speaker Change: Extent and magnitude of the recruiting you were able to do was to such a degree that youll 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.
Kenneth David Moelis: I don't know the answer to that, but I... Look, first of all, I do think the market has gotten a lot larger, you know, expansion of valuations and GDP and quality of bankers. But it's also unfair of you to take it in what is a cyclical business. I mean, 2018 was kind of a Fed, you know, you don't talk about 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, Brendan, you can't just say, take out your best two, two scores.
Speaker Change: I don't know the answer to that but.
Speaker Change: Look first of all I do think the market has gotten a lot larger.
Speaker Change: <unk> of.
Speaker Change: Valuations in GDP and quality of banker.
Speaker Change: But it's also unfair you to taking it in what is a cyclical business I mean 2018 was kind of the fed.
Speaker Change: Total 2018, the fed hurt us, 2023% had hurt us and the one time win.
Speaker Change: There's some average to a cycle to be bright and you can't just say take out your best two two scores I mean, I guess, that's the way you do it in golf, but.
Kenneth David Moelis: I mean, I guess that's the way you do it in golf, but you know, you can't just say take out like two of the best five years you've had and then tell me what you did 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 you're saying. My underwriting is better than what you're saying. Do I have an exact underwriting?
Speaker Change: You can't just say take out like two of the best five years, you've had and then tell me what you do in only the crap years.
Speaker Change: There is some cycle to this business and I do look at it through the cycle.
Speaker Change: And I think we should do better than what you are.
Speaker Change: My underwriting is better than what you are saying do I have an exact underwriting you tell me the market I'll kind of tell you what I think the underwriting is.
Kenneth David Moelis: You tell me the market, and I'll kind of tell you what I think the underwriting is. But 21 and 22 were very different than that. 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, you know, 2023s either.
Speaker Change: But 'twenty, one and 'twenty, two we're very different than that and.
Speaker Change: I think the right way to look at it as kind of a through the cycle.
Speaker Change: Right I don't I don't plan for 'twenty ones every year, but I don't plan for 'twenty Threes every year 2020, threes either and.
Speaker Change: But I 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 it is getting better yes. So I think the look I think the.
Kenneth David Moelis: But I think the number of competitors is getting less, the amount of quality out there is getting less, and I think we're going to be more and more of a percentage of the market. And so our brand is getting better. Yeah. I mean, look, I think the, I'm more bullish than you said on, but- I haven't put a pin on what I think the actual productivity will be. You have to tell me under what market conditions. Yeah,
Speaker Change: I'm more bullish than what you said on but I haven't I haven't put a pin on what I think the actual productivity we'd have to tell me under what market conditions I think.
Brennan Hawken: Yeah, and I wasn't trying to narrow you down or anything, and the only reason why I picked that was the 18 was that we had that, you know, the bump after the tax reform. So it wasn't the Fed was going against it, but there were some...
Speaker Change: Yes.
Speaker Change: I wasn't trying to narrow down or anything happens and the only reason why I pick that was 18 was that we had that.
Speaker Change: A bump after the tax reform so it wasn't the fed was going against but there were some benefits too.
Brennan Hawken: Okay, I appreciate all the cover, and I'll get back in the queue. Thank you.
Speaker Change: Okay I appreciate all the color.
Speaker Change: I'll.
Speaker Change: I'll get back in the queue. Thank you.
Speaker Change: There are no further questions at this time I will now turn the call back to Mr. Ken Moelis for any closing remarks.
Kenneth David Moelis: There are no further questions at this time. I will now turn the call back to Mr. Ken Moelis for any closing remarks.
Kenneth David Moelis: Thank you for your time. I would look forward to talking to you, and hopefully, the market will change in line with a lot of what we're thinking, so look forward to the next call. Thanks.
Kenneth David Moelis: 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 look forward to it in the next let's call. Thanks.
Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Speaker Change: This concludes today's conference. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Sure.