Evercore Inc. (EVR) Earnings Call Transcript & Summary

Hi. Good afternoon. Thank you for joining us. Before we begin, I'd like to remind listeners that you can submit your questions through the webcast portal. And also for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. All right. We're pleased to have with us John Weinberg, Co-Chairman and Co-CEO of Evercore. John has been with Evercore since 2016, prior to which he was Vice Chairman and Co-Head of Global Investment Banking at Goldman Sachs. John, thanks so much for joining us.

Thank you, Manan. I appreciate it.

Great. To start with, maybe let's talk a little bit about the M&A environment. M&A is booming by any measure. We've had new records in announced selectivity. Over each of the last 2 quarters, 2Q '21 seems to be on track to be an all-time record in an announced activity. And even all leading indicators are suggesting that this level of activity can continue. Can you talk about what you're seeing from where you said? How long do you think we can sustain this level of activity?

Sure. We see that there continues to be real strength. And the factors that need to be in place are clearly there, whether it's a strong equity market, the strong liquid debt markets, the good visibility towards sustained recovery, CEO confidence, and very importantly, lots of capital that could participate in any merger situation, whether that's balance sheet cash, which is built up significantly, whether it is private equity, which really has a tremendous amount of dry powder or whether it's specs, which have been so prolific and really built up a lot of capital that has a time clock and needs to go to work. We -- as we look at the market, we are seeing a couple of quarters ahead, and that's about as far as we would ever look. And obviously, even then prognostication is always dangerous and difficult. But as we look ahead, we see nothing that would get in the way of continued sustained strength and activity in the merger market. We think that there's a lot of activity. We see corporations really thinking through how they can get back on strategy and how they can grow and boardrooms across the board, you are seeing activity where companies are getting more aggressive on really thinking about growth and mergers. So as we look at it, we don't see anything in that, that could really come -- that could get in the way. Now there's always a possibility, some disruption in the equity market, some liquidity crunch, maybe some disruption in terms of how people think about antitrust, but for the most part, absent some major event, we see that there could easily be a sustained good merger market for quite some time.

So let's dig into a little bit more on what you're hearing from clients. In your conversations with boards and management teams, what motivation is really driving M&A among corporates? Is it stuff like domestic scale, international scale, client acquisition? What are you hearing there?

For the most part, there was about a year or 1.5 years where management teams and companies were really in the mode of pulling in and internally focused. What really happened was we saw the beginning of 2020, where we had decent backlogs and there was active, really good activity. Then we saw about 6 months where things pretty much came to a stop, and there was real internal focus. And then companies started to think about it again, and obviously, the fourth quarter, there was a lot of activity that began. And we're seeing that carry through. The first quarter of this year was strong. Second quarter was strong. What companies are really looking at right now is they're looking at growth and they're looking at strategy. And there's a lot going on, whether it's the digitization across the board from almost virtually every business in terms of how can you take advantage of the technological movement in what's happening in technology. But it's also the fact that the market is strong and growing, and companies need to make sure they're positioned to share in that growth. In addition, we think that there's a real activity coming out of the sponsor business where they've got a lot of capital that needs to go to work. And we think that, that is going to be a really important theme going forward, which is how do sponsors play this? And how do they participate? We've seen sponsors become increasingly aggressive, whether it's the return to club deals and real size, or whether it's that the sponsors are trying to get very, very active across many different sectors. And some sponsors are playing in sectors where they haven't played before because they see there's real capital, capital accretion in those sectors. And so you're seeing a tremendous diversification on the sponsor side. And then on the SPAC side, there's a lot of capital out there that needs to go to work in 2 years or less. And that's going to provide some real underlying activity.

I guess as a follow-up to that SPAC comment, do you think -- I know there's about 400-plus SPACs out there looking for an M&A transaction, that's about $1 trillion plus in potential deal activity. Do you think that -- is it realistic that we get that kind of deal activity over the next couple of years?

I think it's going to be very difficult for all of the SPACs that have really positioned themselves to do quality deals? I think it's going to -- there is going to be some SPACs that really do quite well. They'll de-SPAC with quality companies. They'll do it with quality management teams, and those businesses will perform. There are other SPACs where they'll be trying to buy businesses, and they may overreach. And those will be businesses that probably go into distress. I think that there are more SPACs out there right now than there are businesses that want to "de-SPAC or SPAC" into that structure. It will be very interesting to see how that plays out. There's going to be real pressure because I think there is an increasing number of businesses that are looking at SPACs and saying, not sure that I want to be a SPAC. I'm not sure I want to do it that way. I might want to do it another way, maybe collect private capital and take more time in the private form or possibly even test the waters on the IPO side. I think that we clearly have some regulatory overlay, which is we don't exactly know how the SEC is going to play this and really how much restrictive they're going to be. And how much that's going to pull back on the possibility of SPACking, but that will clearly be something that is a fundamental theme.

Great. And then maybe another question on the M&A environment. One of the main drivers of higher M&A activity has been how strong the markets have been, higher share prices means that acquirers have a stronger currency to make deals. And you alluded to this a little bit before, but how critical is this to the current M&A environment? Do you think that activity levels can still hold if we get some sort of market correction here?

Well, if we have a market correction, you could easily see that there would be a pullback because what happens is that sellers and buyers expectations may mismatch when the market pulls back because often, sellers want to continue to hold on to the levels that they were able to think about selling it. And buyers are basically in a very different place. The one thing I would say, though, is there's a lot of capital in the system, whether it's the capital that was put into the system by the government to basically help the economies continue to sustain itself or grow. Or the capital that's available to do deals. And so there's -- in my opinion, there is no question that there would be a pullback but the question really is how quickly would there be recovery. And right now, my view would be there would be a relatively rapid recovery because there's so much buoyancy in the system. Now if you said to me, the economy was going to actually pull back dramatically, then I would say that's a different story. So it really depends. If it's a real interruption that will really impair the economy, then I would say it will take some time. If it's just -- if it's a momentary disruption that actually makes stock prices correct, but then begin to come back, I don't think it will actually sustain itself that long.

And anything else that you're worried about here? How are clients thinking about inflation risk and rate risk if rates move higher from here? Is that something you're concerned about?

I think people all think about it. I don't think that's going to determine things unless inflation gets extreme. Unless rates really spike, which none of us really expect at this point. I think one thing that could really impact the merger market would be antitrust. We really don't know exactly how that's going to play out. Now we believe that there's going to be a very systematic, thoughtful approach to antitrust. We believe that it's going to be based on law, and it's going to become quite predictive that advisers, meaning the law firms and us the bankers will be able to give a pretty accurate assessment as to what deals can be done and which won't. But if there is some more extreme approach to antitrust, that could actually impact the market. Because obviously, there are certain deals that just won't be able to get done if there is that approach. And the other thing is CFIUS which is what will the administration -- what position will they take on CFIUS? And how will that play out? For the most part, I think people have a general sense as to where that might be. But in effect, that's really one of the wild cards, which is what are those overall regulatory overlays? What will they be? And what kind of an impact could they have on the deals that could be considered?

Great. Maybe with that, let's move on to growth. What are you doing to drive medium-term and long-term growth in the advisory business? What are some of the white spaces that you're looking to fill?

Well, we are looking at it in several different ways. One is we're trying to expand our client coverage and really make sure that we're thinking about broadening and deepening how we are -- which clients we're covering in with what intensity. And the second is we're trying to deepen and expand our capabilities. In terms of what we're doing in terms of clients, we are expanding the white space. There are still many, many white spaces that we can invest in. Take, for example, homebuilders, our business services, media, those are places where we could easily continue to build-out, and we're going to continue doing it. We've always taken the approach on filling white space that we won't actually try and even fill the white space until we find an a player because we think that one of the most important parts of our brand is that we can offer excellence when we do call in a client. And so that's a really important part. We will not move just the --. We'll only feel with the right person. We think that we're covering a smaller percentage of the Fortune 500, then we even possibly could, less than half. And we're clearly thinking about how do we expand and intensify our coverage, especially in those selected places in the Fortune 500, where we're not and where we actually think we could assist them. There's also some very important areas where we need to invest where we do invest, and we could invest a lot more. Those are places like tech -- traditional tech worth software or internet or whether it's Fintech, CleanTech, Biotech those are all areas where there are the opportunities well out number, the bankers we have covering them. And as long as we can find cover quality coverage bankers and quality people to really attack those areas. We think there's real growth there. And we are doing it and building that out really as fast as we can, but in -- as I said, it is a responsible way as we possibly can. Another area of really important focus for us is sponsors. We have a very full complement of coverage of sponsors. We always have covered sponsors with respect to the portfolio companies in the industry sectors that we cover, and we've done that relatively well. But we can do a lot better. We have some really strong relationships with some sponsor sectors that we haven't even invested in other sectors in that sponsor and leverage the quality of the relationships that we've had, and we're building that out. We formed a sponsor group that is specifically charged with covering sponsors and helping us to build out our extensive coverage of all the sectors of the sponsors that we cover. But there's also some very important areas that we have in sponsor coverage, which really is fundamental to us. We have a very strong GP business. And in the GP business, we sell -- we actually sell stakes of GPs, and it's been a very, very good business for us. In addition, with -- for GPs, we supply advisory services and execution capability in creating continuity funds where a sponsor may decide that they want to continue on with an asset rather than selling it to another sponsor or selling it out in the market, a little bit too soon, but they need to actually put liquidity into their fund. And so what we do is we have provided them with a business, which helps them structure these so they could sell pieces of it to third party, but maintain control and a large ownership interest. And those continuity opportunities where we have 1 or 2 assets or even more in those have been a very, very fertile place for us to give advice. In addition, we have an LTI business where we sell and buy stakes. And that has been a business that has been very, very fertile and is continuing to reap real activity for our sponsor clients. And then finally, we have a top fundraising capability for sponsors who want to raise another fund, we have a very high-quality business where we get the opportunity to help sponsors raise funds, and we have a very, very high continuity rate of the places where we've worked. And so if you take it in aggregate, the sponsor business is a really important place for us to be focused. And it's a real success story for us because we continue to invest, and I think we're doing a better and better job. And frankly, each of these creates more momentum to the sponsor and our brand and the sponsor.

And maybe building on the comment you made on the Fortune 500 companies. I think for the last 3 years, you've consistently maintained your top 4 ranking in M&A revenues among the public players, you're larger than 2 out of the 5 U.S bulge bracket banks despite or maybe you'd argue even because of the fact that you're an independent adviser and you don't use your balance sheet. How do you keep moving up the chain in your roles on large deals?

I think the biggest thing is it's focus and relationship. We have real capability, and that's really important. But there are a lot of people to claim the capability. But what you have to do to really be effective in calling on bigger companies and even smaller companies is you have to build relationships, which are based on trust and their confidence in our capabilities. And so what we've done is, we've tried to put in place a real discipline in our system of how we cover companies and the standard that we hold ourselves to when we cover companies. We started an effort 3 or 4 years ago at Evercore called the Evercore 100, where basically we put a number of clients on our focus list, where we wanted to spend time making sure that we covered those companies in a very intense way with a very high standard of coverage. And we've expanded that list periodically throughout. And so it's not really 100 companies. It's many companies. But it's a level and a standard of how we cover. It's our view that if we have very high quality people, which we hope we do, and we certainly try and uphold and we think we do. And we give time and attention to quality companies and build relationships. When they do transactions, we'll be asked to do them. And I think that, that has actually worked for us. We don't need to be the banker for everybody. We certainly couldn't possibly be. We won't be big enough. But we want to be a banker for the select group of companies who care about relationships who really value high-quality advice and who actually connect with us and really like what we are able to offer in terms of a product set. So I think it's really a question-and-answer -- really an answer to you is really how you invest in those relationships. And the more you invest and the better you invest, the more you'll be able to continue that market share.

Great. So another growing and large business that you have is the equity underwriting business. They were focused on the environment today, non-SPAC activity is still going strong in IPOs. We might be off of last quarter's record, but volumes are still well above historical levels. What are you hearing from clients there on the capital raising side? Are we past the peak here? Or is there room for more?

We think there's room for more, and clients are very interested in really how to tap the equity markets and do it effectively. Clearly, if you look at some of the places where we spend a lot of time, whether that's biotech or whether it's in tech or whether it's in industrials where we're doing increasingly amount of business. Clients are looking to us for advice. There is clearly room to run in the equity business. We were not a big player on the SPAC equity issuance business. I was a very small amount of our equity revenue or underwriting revenue. And the reason is because we were very, very careful and selective about how we participated. But in terms of the overall equity space, there are tremendous numbers of dialogues going on right now. And what we have found is that the equity market is very strong, has a very firm underpinning the levels and the confidence that are in the equity market are extreme. And what we've tried to do is we've tried to make sure that we maintain our ability to look at clients and give really objective advice. And so we can give IPO advice, but we can also give direct listing advice. We can also give SPAC advice. We've added converts as a product. So we're able to actually really help companies look at their situation and decide what makes the most sense for them and do it in a very objective way. As you said, what we've tried to do is maintain our independence and objectivity and really be that one of the reasons that people would choose us is that we're able to offer that. And for the most part, I think that, that is really working quite well and that people really do look at us as a real honest broker, a group who really look at things from their standpoint and are able to offer advice in a very objective way.

So one of the comments that you've made and Ralph has made in the past is that the environment for independent advice of the capital raising side today is similar to where independent M&A advice was 5 or 7 years ago. Can you expand a little bit on that? And as you talk about that, maybe also talk about how you can move higher in the league tables on the capital raising front?

Sure. What really we have seen is that really with every deal we do, where we're able to play an active book runner role that we've been able to move our franchise just a little bit forward. And I think what's happening is what companies are seeing is that when we're involved, we give very strong objective advice. We have been able to be very, very thoughtful in terms of our contribution in those deals. And that in all respects, we've been able to really add value. 80% of the deals that we participate in now are active book runner now. And what we've really been able to do is to differentiate ourselves as a firm that really does work really hard to add value, whether we're left lead or not. And what's happening is, increasingly that is becoming part of our reputation. And so we're seeing that we're getting more and more looks at real situations. Our biotech franchise, which is very, very strong, continues, but we're building out others. We've invested in the technology side. We've added some very strong people there, and we're getting a lot of activity and discussion on the TMT side. We've had a lot of success on the industrial side. And in transportation. And the more deals that we're able to do, the more people are looking at us and saying, they are actually worthy of talking to. And when we talk to people, I think we've been able to communicate the sincerity of our object of really adding value and really having it be a basis where we're trying to out for the deal more than anything else. And when we're involved, we really go all in and you get senior level attention, and that's something that really resonates with people. So we're trying very hard to build. Now you saw that we were in the top 20 in underwriting. We've fallen back a little bit. Our aspiration is to somehow get toward the top 10. We're not sure we can get into the top 10, but we think we can get close to it. And that's really our aspiration. Our aspiration is to continue to build our equity franchise and move it forward. As you know, we have a very high-quality research area. So when you get -- when you really hire Evercore in, you've got a research area that is really one of the very best, certainly the #1 independent research area in an independent firm and the #2 on a weighted basis overall. And I think that really does bring a real element of strength to whatever underwriting we do.

Great. And let's move on to hiring. You typically hire 5 to 8 SMDs a year. You've said that 2021 should come in at the high end of that range. Is that still your expectation? It seems like there's a lot of demand for talent in today's world. And I would think that fewer people would be looking to move while activity remains at these levels. So what do you think about hiring at this stage?

I think all of us at Evercore involved with recruiting, especially, Ralph and I are looking at this environment as being one of the most difficult recruiting environments that we've seen. It is just really competitive, both on the mid-level as well as the senior level. We have traditionally had 4 to 8 additions of partners per year. We still expect we're going to be in the mid- to the high level of that. But every single hire is competitive now. And I think what we're seeing is that it's competitive because other firms as well as the firms where people continue are situated are really fighting hard for the high talent. We think we've got a really good chance. And the reason is because what we offer people is not necessarily the highest price. What we offer people is the opportunity to cover their clients most effectively. We have the broadest, we think, set of products of any of the independents. And we also think that our culture allows people really in an unbureaucratic way to really do what they want to do to give their clients the best service. And so we've really offered that. In addition, I think what we've tried really hard to do is create a culture where people not -- don't just know that they can do a good job for their clients, but feel good about the jersey they wear, the values of the firm and are confident that the decisions that are made by the firm are going to be honorable in every respect and therefore, reflect well on them with their clients. And so in effect, what we're trying to is create a place where very strong bankers can do their business the way they want to do it. And I think that, that really is working. I mean, I think we have really strong people. We've hired several people who've had a higher bid, but wanted to come to us. At the end of the day, coming to us allows people to both serve their clients in the best way, but also to do well financially because we are a merit-based firm, and we will always be a merit-based firm. It was really what Roger Altman built the firm on in the first place, and we will continue to honor those values. And so we think that as competitive as the talent is, we have really been able to continue to draw good -- very, very good people, and we're working on several very important situations right now.

And I guess, given the level of competition, are you still comfortable with your high 50s comp ratio expectation for the year?

We are. As you know, there are 2 real variables to the comp ratio. One is the level of revenue that we are able to generate. And the other is how much money we pay for talent. And we've always said that if we find some really extraordinary tallent, we will pay up for that talent. And the reason is because in the long run, that's best for shareholders because a really, really talented banker can add tremendous value over the long term. We don't know exactly where we're going to come out on either one of those. Given the revenue level of the first quarter and maybe hopefully a continuing activity level there may be some leverage in our revenue and our comp leverage going forward, but it really all depends. And we're going to look very carefully at this. And to the extent we can, we will definitely give comp leverage. To our shareholders. But we have to wait and see how really the balance of the year comes out, what the revenue ends up being and really how much we pay for the talent that we're going to be bringing in. But in all cases, we're going to try and be very responsible about it.

Great. And then maybe on the noncomp side, can you talk about near term, maybe over the next 6 months or so, with more people coming back to the office, is travel starting to ramp up for your bankers? Or are clients still happy to work with bankers virtually in this environment?

I think there are -- there is a significant amount of client coverage that will that will continue to be remote in that there are certain things that you don't need to be there for. And I think what has happened is there's a lot of lessons learned in terms of how people deal with remote. Having said that, bankers need to get out on the road and calling their clients. It's very hard to originate business or win trust if you're not face-to-face with people. New business really is best served by being there and showing that face-to-face activity and attention. And so what I think you will see is you will see bankers calling on companies for a specific and important set of meetings, but you will see certain meetings that don't need to be in person anymore. For example, some of the execution meetings that we've had where we've sent a team of people 6 or 7 people to London that close a deal or 6 or 7 people to a law firm in Chicago to basically negotiate the contract on a merger deal. Those meetings are increasingly going to, I think, happen remote. I don't think anybody is going to need -- think that they need to be back -- face-to-face on a lot of those. So I think there's going to be a significant amount of activity that took place in person that won't need to be. Having said that, we are definitely -- the non-comp number will go up because we are going to be back on the road, and it's an important for us. And frankly, we're pushing our bankers out there, not that we had to. A lot of them are out there even before we have said anything. But people want to get on the road and they want to see their clients and they want to talk to them. And so you will see the noncomp expense number go up we're just hoping that we can really be able to exhibit real discipline, so that it doesn't go up to the level that it was at preCOVID.

Great. And we're almost out of time. So maybe as a last question, I mean if we can talk about succession. You have 4 Co heads of U.S. Advisory, 3 of whom were promoted recently. All of them have long tenures at the firm. And you also recently announced that last Celeste Mellet Brown will join Evercore and take over as CFO later this year. Can you talk about how you're thinking about succession planning, not just in the medium term, but maybe over the next couple of decades?

Sure. We are trying very hard to make sure that transition at Evercore happens in a very systematic, thoughtful, intentional way. What you saw when we when we promoted those 3 additional people to run our advisory business was Ralph and I stepping back and bringing some people in who we thought were strong leaders and who had an interest in leading and could do a good job. And so that is an opportunity for people to develop. We brought in -- because Bob, who had preCOVID, decided that he wanted to move on or retire. He had generously rededicated himself and put his head down to help us through COVID. But when the COVID started to clear, it was -- he said that it was time for him to retire and to think about some other things. And he'd been at Evercore and been at Evercore incredibly effectively and been a really important part of this firm for a long period of time. And respectfully, we regretted, but we certainly understood what his sentiment was, and we've brought in. And we're very, very comfortable and excited about her arrival. In terms of Ralph and I, we -- as you know, we decided that we would be co heads, Co Chairman and Co CEOs at that time, we said there would be some transition over time right now, we are very happy with this arrangement. We've had a record year last year. We have had a record quarter. We feel like things are in a really good place. We get along extremely well. And so from our perspective, we're both very happy. And there's really -- there is no imminent situation. We're just actually very happy with where we are right now. And so what we're trying to do as a firm is, we're trying to be thoughtful and intentional. And that's really what you're seeing, which is we're making sure that we're allowing shareholders to see that we're that we're moving forward in a way that is certainly not going to ever surprise people. But clearly, right now, we feel very comfortable with where we are.

Okay. Great. That's a good place to end. And we're out of time. So John, thank you so much for joining us.

Thank you, Manan.