Evercore Inc. (EVR) Earnings Call Transcript & Summary

Good afternoon. Thanks, everyone, for joining us here at the UBS Financials Conference. I'm Brennan Hawken, the UBS asset manager, and trust banks, and broker analyst. I'm joined today by Ralph Schlosstein, CEO of Evercore. Ralph, thanks so much for joining us.

It's a pleasure to be with you, Brennan. I always enjoy being here.

Thank you, and thanks to everybody for joining the conference. Before I get started really quickly, I just have to point everyone to ubs.com/disclosure for some disclosures as a public analyst that I'm required to indicate. Okay. So now that we've satisfied the lawyers, we can move into some of the questions.

Ralph, I wanted to kick off with equities. You and I have had a debate on this business for a while. It's been a lot of fun, for sure. I know that this is clearly an important business to you. And so as of 2Q, you guys saw a remarkable improvement in market share in your underwriting business, nearly doubling the TTM basis from a year ago and the year prior, really impressive share gains. And what portion of that, though, do you think it might be sustainable? And how do you gauge your aspirations in the business? I seem to recall your prior revenue goals. You might have done that just in the second quarter, which I thought would kind of a stretch goals. So tip of the cap, great job. But how are you thinking about it from here?

So as you recall in the dark ages, like 6 years ago when we did the ISI acquisition, which you, of course were a massive fan of, other analysts weren't quite as positive. I said at that time that we did it for 3 reasons. One was that I thought it would be helpful to us in recruiting talent even in the Advisory business because there -- because connectivity to institutional investors and equity raising capacity -- capability are important in sectors like biotech and pharma and technology and critically important to our Activist Defense business because of connectivity to shareholders. And in fact, that has turned out to be true. There are people who -- seniors, very successful people in the firm, including our Activist Defense practice, who I don't think would have joined if we didn't have the connectivity to the institutional investors. The second thing I said was that I thought we could run a profitable Cash Equities business, that has been more challenging. I mean, we do run a profitable one, but the margins aren't as -- I always thought they'd be less than our Advisory business, but they're considerably less until this year. And obviously, MiFID II was a negative in that respect. And then finally, I said at the time that I thought we could achieve a $75 million to $100 million equity underwriting business. And I -- how did I pick those numbers? I looked at Piper Jefferies and Stifel and Blair, and I figured if they could do it, we could do it. It actually took longer than I thought it would have at that time. I never gave a timetable, but if I had been asked for one, I would have said probably 2017 and the latest 2018 and it was 2019 when we got to $93 million. And today, I would set a much higher aspiration. And it's clearly a 9-figure number. I just don't know how high in 9 figures it goes. And what's changed is a couple of things. Number one, we're gradually moving up the food chain going from co-manager to passive book runner to active book runner in a increasing proportion of the transactions that we're involved in. And that means with the same amount of underwriting, our revenues are higher. So we get 10% or 15% of the economics rather than 5% or 4% or 3%. The second thing that's happened, and this is an unquestionably going to be, in my view, a positive byproduct of the COVID-19 virus in our firm, is that we have a lot of bankers who focus primarily on M&A and starting the beginning of March, no clients wanted to talk about M&A. They wanted to talk about their liquidity and their access to capital on their balance sheet. So these capabilities, broader capabilities that we've been investing in suddenly became incredibly relevant to our clients and our bankers being commercial animals figured they had to continue to talk to their clients, so they better talk to them about the things that the clients were interested in. And so I do think there's going to -- there's -- obviously, in the second quarter, we benefited from 2 very large transactions, which you're aware of, P&C's sale of BlackRock's stake and the Danaher transaction. But I -- even without those, I think we still did roughly almost $50 million of underwriting revenue in the second quarter. That's obviously, if equity markets are not good and activity isn't there, we're not going to be there. But to me, that seems like a not unreasonable level of activity in the world that we're in right now. And certainly, I mean, this is all public information. The first 1.5 months of this quarter is cranking along at that rate as well.

That was -- that's in -- that roughly half of rev is in line with what my understanding was from the 2 big ones. But even if you're going to back that out, you're still talking about an awesome quarter, right?

Yes.

So we are -- that all seems quite solid. When we think about, though, it's interesting, your commentary about the shifting level of importance, the shifting level of priorities of the clients, is it -- is there any feedback internally in the organization? Or are you guys thinking about as this business grows for you, a reconsideration on 0 commitment of balance sheet, and what that would mean for missing out on locks or what have you because they're not always structured as pure secondaries or whatnot?

Yes, not really. I mean our -- we're kind of -- the reason I like the equity underwriting business, I was moved by a research, a very long research report written by one of your competitors about the industry as a whole, right, shortly after I joined Evercore. And I had strategic reasons that I wanted to be in the Equities business, which I can go through. But equity underwriting is the second highest margin and second highest ROE business in investment banking, generally. Block trades ain't even close. So we -- the return -- it's not that I'm terrified of deploying capital, I just don't think the returns in a business where people are deploying capital for lead table position as opposed to make money is a business where I want to -- where we want to deploy capital.

Okay. That's fair enough. That's fair enough. And what has been the feedback from the corporate so far on the back of that really rapid second quarter activity and a good start to the third quarter?

Extremely positive. There is a -- I think there's a spot in the world, which I had always hoped for a trusted adviser in the capital raising business. And one of our clients, I certainly won't identify them -- but said, in the underwriting, they had 2 bulge bracket firms in Evercore. And they said, it's the perfect line up, 2 bronze and a brain. And I think there is a -- we had a presentation recently to a Board of Directors of a public company and this was surrounding an offering that we're involved with a couple of bulge bracket firms also. And even though we're not the lead left manager, we were the firm that was asked to speak to the Board. And the CEO basically said to us, we'd like you there because you're not pushing product, you're giving us advice on how best to raise capital. And I think there's a real opportunity for a firm like ours to fill that space. And obviously, to get paid for it in the form of the underwriting.

Sure. Sure. Okay. Well, as I said, tip of the cap with it's worked out better than I expected, for sure. So...

Thank you. I appreciate it. I do really.

Yes. So shifting gears back to the M&A market, right. You guys were building out sponsor capabilities leading into the shutdown, I remember talking about that [ you put in ] effort. The idea was that dry powder is going to insulate from the impact of a downturn, which hasn't quite worked out, sponsor activity is kind of moving in line with the M&A market, generally, probably because financing markets sort of shutdown. Has that experience impacted how you're thinking about that effort and causing you to rethink the build out? Or do you still think that those investments are going to be worthwhile even though they might be quite as resilient due to the financing needs?

Yes. I think they're going to be incredibly worthwhile. And just to be clear, what we did, we do a lot of business with -- we did a lot of business with sponsors even before we had a dedicated sponsor effort. But it was all driven by our industry partners, interacting with the industry partner or with a particular portfolio company at a sponsor. And so some of our industry partners really weren't that active with sponsors, just out of personal interest. They were more interested in corporates. And some of them -- there just wasn't any real sponsor activity. And going back to the equities business, if you're showing up at the bake-off, you're almost inevitably going to wind up in a third or fourth or lesser seat. So what we've decided to do about a year ago is to have a dedicated sponsor coverage effort. So -- and we've debated this internally for years and years and years with half of our industry partners saying, what do we need a concierge for and the other half, saying we're missing a lot of business because we don't really know what's going on in these portfolios unless we sold them like a business and followed it. And so what we did actually is we took one of our most senior M&A bankers who would never be accused of being a concierge and ask him to do this. And the early returns on this are pretty good. I mean, we're starting to build real relationships with the partners of these firms. And what ultimately motivated John and me to do this was that, I mean, I would sit down for lunch with Jon Gray at Blackstone or Scott Nuttall at KKR, Chip Kaye at Warburg, and they would come to the lunch, and they would know every single interaction between Evercore and Warburg or Blackstone or KKR, and I would have to send out an all-firm e-mail before the lunch and say, tell me about all your interactions with XYZ firm, and then I had to collate it and tried to remember it. And so by understanding what we had done for them and vice versa, we're able to have a discussion with them. So when an equity offering comes up, for example, we can say we did this, this and this for you, and we really would like to be in this seat rather than an afterthought or if there's -- if you're in a bake-off for -- to sell a company that they own, you can remind them that there are 3 things that we did for them that were important. And so that dialogue instead of it being partner versus -- industry partner versus industry partner and the balance of credit between those 2, it's Evercore and KKR. And so I think we're in the early innings of the benefits that we're going to get from this.

Okay. That is interesting. And certainly fair. It's clearly very important, sponsors are really important in the marketplace. So that makes a lot of sense. One -- another one of the trends that we've noticed recently, at least year-to-date has been that financing banks are showing some pretty strong gains. Clearly at least to some degree, a function probably of scarce financing availability just period, right, which is totally logical. Do you think that trend is sustainable? Are you seeing some early signs of that changing? And is it even possible to make adjustments to insulate yourself from this just happening from time to time when financing markets become more [ controlled ]?

I think that there -- it's impossible to insulate us from that. I think the reality is there -- these are cyclical businesses and balance sheet businesses as a general matter or certainly, the trading businesses benefit from volatility and every time we have periods of volatility, they're going to perform extraordinarily well.

Right.

And the only -- I think that would be more threatening to us if they didn't have offsetting credit losses, which I think is going to depress what otherwise would have been higher comp in the bulge bracket firms.

Sure. And just in the interest of full disclosure, I actually -- even though their trading revenues have been really strong, I actually was just focusing on the M&A activity, right? They have --they lost some share to -- in the years leading in, but it seems as though this year -- and we've seen this in the past when financing markets become more difficult, right? Like at year-end 2018, coming out of that, they seem to be able to regain some just because financing isn't as commoditized, right? So I think you might be muted, Ralph.

Yes, I think there's no question that in periods of time when the debt financing markets are unsettled, what in normal markets is a commoditized access to capital becomes much more important to clients, and therefore, they're willing to give more -- a higher share of the advisory business to the larger firms because they need the capital, the access to…

Yes. Like I said, it's totally logical. It makes sense. I asked about this on the second quarter call also but you know how stubborn I am. So I'm going to ask about it again. It's related, and it's related to the point that you made before, and you sort of previewed your answer to some degree. But the bulge competitors do not seem to be nearly as weak a position as they were in the financial crisis, right? And even though, to your point, we're going to probably see reserves building, right? There's going to be some credit losses coming through. Trading strength is probably not -- is certainly not durable at this level. So some of this strength will moderate, but the balance sheets are just not teetering the way they were. They're definitely in better condition. So how do you think about your position today? You're certainly in a better position because you're so much more established. And you don't need to go out and try to grow. But do you think -- how do you think -- are there any early signs of what the avenues for growth might be in this downturn? What's the next chapter going to look like?

Well, we still have plenty of holes in our -- even in the North -- in North America, we have holes, and we're always looking to recruit talented people. I think if you look at our business versus our 2 largest independent competitors, Lazard and Rothschild, their businesses in Europe are significantly stronger and larger than ours is. And we're always looking for ways to do -- to step up our business there, but doing it profitably. And Europe is a -- it's a tougher market to have the kind of margins that we like to have than the U.S. and the -- we have great generalist bankers, senior generalist bankers here in the U.S., and they're relevant to affect what is effectively close to 50% of the fee pool globally. A great generalist banker in Europe is typically really terrific in 1 country or 2 countries. And so the fee pool that they are relevant to is so much smaller. And so you wind up meeting both industry and country, which makes it a little more challenging from a margin point of view. But we keep expanding there as well.

And this has been a longer-term goal of you all to grow across the pond. Are those -- some of the lessons you've learned so far, the fact that there are different nuances to the expertise that are needed to be folded in, both country and the industry. What else -- are there other parts that or pieces of this you're learning about as you continue to grow?

Well, I think our -- most of the businesses that are strong in Europe are country strong, industry weak or dominated by the country bankers rather than by the industry bankers. Our approach has been the opposite and not to be -- and by that, I mean, industry is strong in terms of headcount. And the hardest thing for us to find are those really senior people in country. So a top person in France and a top person in Germany and a top person in Spain and a top person in Italy. And I think those people are just not that common and they're very much coveted by the firms that they’re at, at the moment.

Yes, and does it also come into play that being a very country-specific senior banker, does that also mean that they're a little bit more likely to be with a local provider, more likely to be with a European provider just because of that expertise that just resonates better politically?

There's certainly some correlation between those 2, yes.

Seems like there would. Coming from a totally [indiscernible] perspective. How are the recruiting discussions going? I would imagine this is a very unusual year. But is there -- has there been any kind of opening up more recently? Do things really tighten up when the markets got volatile? How does it play out?

Well, look, we went through a period of time in March, April, May, where like everybody else, we had no idea what revenues were going to be. And we had no idea what -- whether our clients would even pay us money they owed us. So we were heavily focused on building up our cash and liquidity to make sure that we wouldn't have any issues there. And obviously, given the first half revenues were essentially flat and the fact that one of the other nice things about the Equities business is that, in the trading side, we -- our commissions and checks, we get paid daily, cash. And in the underwriting business, we get paid within 30 or 60 days of the event. And so our cash position is quite a bit stronger than we would have anticipated in March or April in the worst case. And so what we've started to do is to -- we have some dialogue. We've hired 2 SMDs externally this year. We have 2 or 3 other discussions underway that could happen this year or could happen early next year. And starting after Labor Day, we're going to do a fair amount of work on trying to build a pipeline for next year in anticipation of the fact that this might be a reasonably good recruiting environment.

Okay. Or just because there could be such disparate outcomes for firm, and therefore, there could be some very [indiscernible].

Yes. Well, and also it's not clear the degree to which the enormous revenues in trading will be shared and underwriting will be shared with the bankers that we particularly care about, which are those who are focused on, I call them the high ROE bankers, people who can generate revenue without the balance sheet.

Right. Right. Right. Okay. And you all have begun to rely more on promotions also for talent development. How has the experience been so far? What are your expectations for promotions longer term? I know you guys, at a high level, said, you think it will be moved towards a more balanced approach. But how long do you think that might take? And do you still think it will be balanced between those 2?

Yes. I think that 10 years ago, the first off-site that I had with our partners after I became CEO, I said 2 things. Both of which I think they kind of look at quizzically. At that time, our revenues in advisory were $180 million. Lazard and Rothschild were $1.2 billion. And I said our goal is to become the third and most elite global independent investment banking advisory firm, and they looked at $180 million and $1.2 billion and said, "Wow, what’s he imbibing". And obviously, we have achieved that. And the second thing I said is that we were going to go on a 10- to 15-year journey from a firm that grew and sustained itself by filching other people's talent to a firm that grew and sustained itself by hiring, training, mentoring, developing and promoting its own talent. And at that time, we had 35 senior managing directors, and 3 of them had been promoted internally. We now have 112 senior managing directors and 40 have been promoted internally. So roughly 35% or so as opposed to 11% or 10% or less than 10%. If you look -- so that's the stock. If I had to go back and revise what I said then, I would say that we're going to go on a probably 12- to 15-year journey because I think -- or 13- to 16-year journey because I think for the next 3 to 5 or 3 to 6 years, external hiring will still be an important element. But even over the last 2 years, if you look at the flow, it's been half external, half internal. And I would expect that, that will -- that the flow will continue to get increasingly internally more balanced, yes.

Yes. Okay. I got a question from the audience, actually, going back to our conversation about international expansion. Europe is clearly something that you're looking at. Are you looking at other markets like Latin America? Or is it mostly focused on Europe at the time being -- for the time being?

Well, we just announced a deal with a group of people who John had worked with at Goldman. And for the last 7 years were Greenhill's business in Brazil and they bought their business from Greenhill at a very attractive price. And we did a strategic alliance with them, a cooperation agreement and got an option to buy 20% of that business at the price that they bought their business from Greenhill. So Brazil is a market that we were in before, unsuccessfully. And partly because John has worked so closely with this team in the past, and we've gotten to know them over the last few months. So we feel really good about that. Asia is a really important market. But here to -- up to now has not been nearly as friendly to the independent model as North America and Europe. So our best guess is that the market share that independent firms have of the advisory fee pool in Europe and the U.S. is 35%, 40%, maybe even higher than that. In Asia, it's probably closer to 10% to 12%. And they also tend to pay lower fees there as well. So yet, we have to be there. We have offices in Tokyo, Hong Kong, Singapore, Beijing, and affiliations in India and Korea. But those -- other than Singapore, which is a terrific market for us, they really haven't -- there just isn't that much opportunity at the moment. That will change over time. And so -- but we're not believers in the -- if you build it, they will come approach to -- we like making money.

That's fair enough, that's fair enough. I think that commerciality rings with investors, too. So there's no doubt about it. So shifting back to domestic discussions. Here we are, we're in August now. Election is just a few months away. And that's in your most important market without question. So -- and that might bring a lot of change to policy, tax policy, regulatory approach, all sorts of things. And so you all typically have a decent window. We know about 3 months -- sorry, 6 months forward, maybe 9. If announcements remain constrained until the election, should we start to be tempering our 2021 expectations for revenue? Or is there still -- are you still seeing discussions that could result in a real inflection ahead of the election?

Well, the things that are likely to be -- to occur ahead of the end of the year, and obviously, they need to get off the ground now to do that, are transactions where the capital gains rate might be -- come into play. So where there are individual owners or there's some amount of private equity transactions I think that are shooting for closing by the end of the year because of that. We're very early in 2021. The others -- in corporate transactions, I think less -- at least today, less influenced by the election. Now that may change when it gets -- I think the whole corporate discussion or the whole outlook of corporations is so impacted by the pandemic that the election really hasn't been a major discussion point. I do think as we get closer, that, that will change. And particularly, if we start to get vaccines and therapeutics that have real saliency.

Okay. Do you think that the vaccines could have any impact on the trajectory and the direction of the election?

Well, I don't know. I'm not a -- I'm barely an expert in finance, much less politics. But I don't know. I think that the election will become much more front of mind as we both get closer and as the pandemic becomes a little less of a factor because of medicine in some cases.

Right. I got you. The pandemic is overshadowing the election.

Yes. I think -- yes. I mean, and the other thing is that in big transactions, and what's really absent now are the larger transactions. Transactions larger than $5 billion. If somebody is going to do a transaction of that size, they're going to want to be able to have dinner with the CEO 2 or 3 times and meet the team. And there's a certain amount of -- there are lots of things that can be done over Zoom and GoToMeeting, but getting really comfortable and understanding the culture is pretty tough.

Right. Right. Right. There's no doubt, especially for the bigger deals. That's fair. We only have a handful of minutes left. And so maybe shifting gears to expenses. You all just expanded your real estate footprint right before this happened. Obviously, no one could predict this. But now we kind of have an understanding that working remotely is very much a real possibility. And so how are you thinking about -- how much office space you might need going forward? Is this something that you might have some visibility into now? Or are your core businesses so centered on collaboration, meeting with clients and the like that, you think that the impact to office space isn't going to be that [ great ] ?

I think that there's no question in my mind that from a cultural point of view, our businesses thrive on human contact. And so that's our goal to get back to where we were and recognizing that, that may take a while. And the things that we really pride ourselves on in terms of training and mentoring and developing talent, very hard to do. They're harder to do in a remote world. We happen to have the son of one of our clients is working as an analyst. And I happen to be talking to that client, and I said how so-and-so doing. And the client, the CEO of the company said, well, what he's told me is that for things that he knows how to do, working from home, he's as productive, if not more productive. For things he doesn't know how to do, they're really hard. And there's -- our analysts all sit in a bullpen and if somebody has to do some kind of an analysis, there's one person on the left and one person on the right who’s done that. And you just don't have that now. And all sorts of other things. When a call comes in from a CEO, each team, the younger people sit outside of the partners’ office. And so he or she can call them in and say, here, I'm going to put it on the box, you can listen to the conversation. You can't do that. So there are lots of learning and training, and this is an apprenticeship business. So our goal, obviously, being 100% focused on the safety and health of our employees and their families is ultimately to get back into that space with the density that we had before. It's going to be a while before that happens. And the thing that I will say is that I think there's definitely going to be some longer-term impacts from this. I think back on, we had a really talented woman in our restructuring business 5 years ago or so. And her husband had to move back to Michigan to work in the family business. So she came in and said, "I've got to resign. I really hate leaving, blah, blah, blah." Today, we would say great. Go, go, stay working here as long as they're willing to travel once in a while, and maybe you can go to our Chicago office once every couple of weeks or something like that. And I mean, we wouldn't think twice about doing that today. And our Equities business, obviously, has been in the office, these traders have been in the office every day and so -- how did we accommodate that? We basically quickly took some space in New Jersey and some space in Connecticut. And so everybody could just drive to a convenient location and so we'll definitely be thinking about things like that. But I don't really actually see that there'll be a reduced need for space in New York ultimately, unless there is a marked change on the part of young people's desire and willingness to work in New York. That would be what would affect it.

Okay. That's fair. Well, I think we're out of time at this stage, Ralph. So I just want to thank you for your time. Appreciate it. Thanks so much for being here.

Terrific. Really enjoyed it. As always, Brennan.

Absolutely.

And I promise you, no more controversial acquisitions. I just don't like disagreeing with you.

It's good stuff. Well, thanks again, Ralph. Take care.

All right. Thank you.