Evercore Inc. (EVR) Earnings Call Transcript & Summary

Okay. Great. Okay. So up next, I am delighted to introduce Ralph Schlosstein, who's Co-Chairman and Co-CEO of Evercore. Ralph has been either CEO or Chairman for 13 years. And under his leadership, Evercore has been, I think, one of the true success stories within financials. Over his time at Evercore, revenues are up, I think, 15x. I think earnings are up something like 25x and $1 invested in Evercore at the time that Ralph joined the Board would be worth $12 today, and I think that's before dividends and special dividends, which is pretty good. So Ralph is transitioning to be Chairman Emeritus in February. So this may be his last conference presentation, but Ralph, you're welcome to come back and talk to us any time.

Maybe I'll sit in here and see next time.

So thank you very, very much for joining us. So look, why don't we start off with your new role and talk a little bit about what that role means, what the new responsibilities are and what you're looking to achieve in that new role?

Sure. Well, I'll be 71 in February. I will have done this, as you said, for 13 years. And you didn't mention this, but my wife is moving to London for her next job. And so it's a perfect time for me to have some flexibility in my life. And I'm certainly not retiring. And what I'm planning to do is to spend more of my time with clients, sometimes still on recruiting talent to the firm, which is how we've built the firm. And anybody wants my advice, I'm available, but I'm not sticking my nose in anything where I'm not invited.

Okay. So let's talk a little bit about the next 5 to 10 years through Evercore. And as I said in my introduction, I mean, it really has been phenomenal. I think what Evercore has achieved just in terms of the size and the scope of the business. As you think about the next 5 to 10 years, what are the strategic priorities that are most important from your perspective? And what would you like to see the firm achieve?

Yes. Well, if you look back over the last 12.5 years, in addition to just growing, we've done a number of really important things. We've globalized the firm, 1/3 of our revenues now come from clients outside of North America. We've dramatically expanded what we do with our clients. So we have the #1 activist defense practice. We have the #1 corporate restructuring practice. We have debt advisory, we raised debt capital, we do hedging advisory. We do all sorts of things. And what that has meant is that a Senior Managing Director in our advisory business, I can unqualify at least sit in front of any banker and say, if you're going to go to an independent firm, you can do much more business with your clients at Evercore than you can anywhere else. And that's very attractive. So what's -- over that 12.5-year period so far, we've grown high teens basically on an annualized basis. To do that from where we are today, if we did that for 5 years, we'd be the size of Goldman Sachs in advisory. Not going to happen in the next 5 years. So the growth rate, I think, will be a little lower, maybe mid- to high single digits. And that will be done by just continuing to add and promote internally because half of our new SMBs come from internal promotions, filling in either white space or space that we don't have enough bankers in, which are high-growth areas. And actually, I think over time, because of the breadth of our capabilities, our productivity can be sustained or grow. And advisory revenues is really simple, number of Senior Managing Directors times productivity.

Yes. So let's talk a little -- before we talk about some of the strategic initiatives in more detail on the growth profile from here, let's spend a few minutes talking about the macroeconomic environment. And obviously, a lot has changed in the last 12 months. There's still a lot of uncertainty, but it's remarkable how quickly the market has gone from thinking interest rates won't go up ever to thinking they're going to go up very rapidly. So maybe you can talk a little bit about your expectations in terms of economic growth in the key geographies that you operate in, but also touch a little bit on some of the risk factors like supply chain disruption, inflation, higher rates, in the context of what you think it means for both the advisory business but also the other businesses.

So what sustains good M&A environments? Good equity markets, liquid debt markets, rates matter a lot less than availability, some visibility with respect to the direction of the economy, lack of uncertainty. And those 3 come together to support CEO confidence. We have all of those things right now. And certainly, as we look ahead at the foreseeable future, 6 months, 12 months, maybe a bit further, I don't see any real diminution of those. Supply chain disruptions have affected a couple of industries more consequentially, and they've affected maybe 1 or 2 processes. We were involved in selling an auto parts business, highly dependent upon semiconductors. Their earnings fell by 1/3. They pulled the transaction. But that's so isolated that I know about it because it hasn't happened a lot. Inflation, I think it's going to be longer transitory than people thought at the outset, but I do believe it's not -- it's a pig going through a snake not -- and explode -- a permanent widening of the snake. And so the one thing you didn't mention sort of greater regulatory scrutiny, antitrust. That's definitely a little bit more in the dialogue on larger transactions. But I think there's more rhetoric to that than reality because without -- if you -- without law change, you can't really have a dramatically tighter antitrust policy because companies always have the option of going to court as ATT did. And the regulatory authorities are incredibly careful and circumspect about losing cases because that undermines their ability to job own.

The other macro factor, which is a gotten a lot more attention is the deteriorating relationship between U.S. and China. How do you think that plays out, just from an advisory perspective, what sort of effect does it have? Does that lead to less cross-border activity? And does it lead to a pickup in terms of intra-Asia activity. How do you think about that?

Definitely leads to less cross-border with China and the rest of the world. And many companies have businesses in Asia, China, Europe and the U.S. And it's certainly harder to get regulatory approval in all 3 of those markets. If 2 approved, 1 is likely to take a look extra hard at it. So that does certainly have an effect on larger cross-border transactions. But the bread and butter of our business is $1 billion to $5 billion or $0.5 billion to $5 billion transactions. What we didn't talk about is the enormous buildup of cash, both in the private equity funds and in corporate balance sheets. And with interest rates as low as they are and what people are earning with that cash, you can literally buy a Dairy Queen and it's accretive.

So let's talk a little bit about financial [ sponsors ] because that's obviously a part of the market that has dramatically increased this year. So when you look at the type of activity and the run rate of activity, how sustainable is it? I mean, it feels to us that it should continue, just given the amount of dry powder. But do you think higher interest rates actually does have a chilling influence on just the velocity of transactions?

Well, first of all, the private equity, which, of course, their business is M&A. So that's very good for us. The market share of private equity among the largest institutional investors is inevitably growing. The reasons for that are that the returns have exceeded the public market. The volatility is lower because there's lags in marks. You don't have daily mark-to-market. And I actually think you can make a case that there is a good reason why private equity should outperform liquid stocks. So I think the market share of total institutional investing that goes to private equity tautologically continues to grow. And that means that private equities share of activity is going to continue to grow, which is something that's extremely good for our business.

I mean there has been this shift towards private equity firms holding assets for longer, and they are raising more of these core plus funds and there's growth in the secondaries market. Do you think that changes the turnover rate in terms of the speed at which private equity firms trade assets? And does that have much of an influence?

Well, the longer-term funds, which, by the way, haven't gotten particular resonance with investors. My old firm, BlackRock, I think, wanted to raise $6 billion, $7 billion fund and they wound up raising $2.5 billion, which is still a lot of money. But the whole idea of forever lockup doesn't seem to appeal broadly to the institutional investor community. And the reference you made to continuation funds, I mean today, if a private equity firm has something that is -- they want to sell -- an asset they want to sell, they have a hope or -- or they want to get liquidity. They have a bunch of options. They can take it public, they can recap it. They can sell it. And the thing that's been added most recently is basically a fund where they sell it to a secondary investor, the LPs of theirs who want to stay into the assets stay in it, the others sell. And that has been a particularly attractive transaction to private equity firms that want to hold on to some of their winners. We are very active in that market. And by the way, that's -- it's just as profitable from a fee point of view as selling the business outright.

So can you talk a little bit about the financial sponsor franchise that you have? And maybe talk about it in the context of how different is it to service a financial sponsor relative to a corporate? How would you rank your financial sponsor franchise relative to some of your peers? And is it a business that you are investing in more today? Or do you feel that you are where you want to be in that?

Definitely a business we're investing more but in particular parts. So there are certain businesses that -- their only clients are financial sponsors, the fundraising business for real estate, for private equity, for debt funds, et cetera. The continuation fund the business. The sale of stakes in the GP. In all of those businesses, we are the #1 factor by far. And we've really invested heavily in those businesses, and they're real material businesses. In terms of the buying and selling of assets or the restructuring of assets by sponsors, we've relied primarily on our industry groups to cover the appropriate industry partner at each of the private equity firms. We've concluded a couple of years ago that we wanted to do more than that for a couple of reasons. Number one, some of our industry partners are sort of corporate heavy, PE light. They cover all the companies that are public in their industry, but they don't really hang around with the private equity firms who invest in the industry. And then second of all, the larger private equity firms are super knowledgeable about every interaction that Evercore has with them. We're not. So if I go to lunch with John Greg, who's the President of Blackstone, a friend of mine. He pushes a button and he knows every interaction with Evercore over the last 6 months, 12 months. I sent an all-firm e-mail. So anybody who talked to Blackstone recently tell me what you did, I assimilated it all. And I probably got 70% of the answer. And so that makes it harder for us to get fairly -- to have a fair balance of trade with some of the larger firms. And so we're investing pretty heavily in both the technology that we need to track that and in the people that we need to lead those relationships.

Okay. So maybe we can talk a little bit about geographic SKUs. So the U.S. has led this M&A cycle in a very convincing way, but it does seem as if Europe and the rest of the world now are starting to catch up from an activity perspective. What are you seeing below the surface in terms of a pickup in activity outside of the U.S.? I think one interesting stat is I think our economists this year are forecasting that Europe is going to grow almost as fast as China from a GDP perspective. I actually think your comments are very similar as well. How much does that change the picture geographically in Europe relative to the past?

Well, on the one hand, growth is a supporter of M&A activity. So logically, M&A might pick up a little bit more in Europe. On the other hand, with Brexit and with increased nationalism even within the EU, it's -- as a general matter, it's a little harder to get deals done in Europe, it's very hard to -- for someone who isn't French to buy a business in France. So that's a retardant on what normally is one of the elements of why companies do M&A. They want to expand their product capabilities, their geographic capabilities. And if you have a fairly vulcanized nationalism, it's harder to do.

Can you talk a little bit more about that? Because I do think 1 of the impediments to European M&A has been this fact that even though the EU is supposed to be a separate economic block, it is very vulcanized labor unions are very powerful. Politicians have got very strong views around national champions. But that does seem to have hurt Europe from a competitive standpoint. And you look at the innovation taking place in Europe, if you look at just the size of listed companies on a relative basis, they really shrunk over the last decade. And look, I appreciate [ you're busy ]. You can talk to 100 people in Europe and get 100 different answers, but do you think there's recognition that they have to allow more consolidation for Europe to be more competitive relative to the rest of the world?

So far, I haven't seen pan-European recognition of that. Certainly, I think it's recognized in France. I think it's recognized in Germany. I think Draghi recognizes in Italy. I think Britain, I think, is starting to recognize it by necessity because of Brexit. But it's certainly not a universal perspective. You could look at the limited number of technology champions that were born in Europe.

Okay. Hopefully, that will change. But okay.

Great place to visit.

I agree. So 2021, great year for you. I think revenues for the first 9 months are tracking up something like 60% relative to 2020. And 2020 was also a good year. How should the market think about the sustainability of this new base of revenues as a jumping off point? And where do you see the most attractive avenues of growth from here? By the way, I appreciate we've been asking this question for the last 5 years, replying that you can't continue to grow this space but you continue to do it.

You can imagine how frustrated I am sitting here with, I think, our trailing 12-month EPS is $16 and we're trading at about 8.5x that, and I've been leading a business that has grown top line the high teens for 13 consecutive years and bottom line more than that. And we don't need any capital we buy back, and we're shrinking the share base. So how that works out to 9 or 10x or 8x earnings, I don't know. But the go forward is I do think we grow low or mid- to high single digits top line on average. I don't think this is a peak by any stretch of the imagination. And when you combine that with a share count shrinkage of 5% to 6%, 7%, we can solidly be in double digits in EPS growth, recognizing that it is a cyclical business, but point to point. And it's not hard to see how we do that. We just had 6, 7, 8 new senior managing directors and advisory every year. We promoted other perhaps equal number over time, a larger number. I mean even this year, we're going to have, obviously, a record year by -- in every respect. And I think you didn't give me credit, Richard, on our third quarter earnings call after I think this was my 47th -- 49th. And I've always -- I've never made a forward-looking statements through. And on our third quarter earnings call, I said since 9-month revenues were $150 million below full year revenues last year, I was 100% confident that we will have a record year again this year.

And I remember you said your General Counsel was fine with that, which is unusual for...

He was fine with that. So I think the -- even in a year like this year, where we're going to have record productivity and record revenues by a lot, we still have probably 12 to 15 senior managing directors who are in their early stages of their career here, including 8 that we hired this year. And so there's a -- it takes a couple of years for a Senior Managing Director to get to normalized productivity. So even if we just stopped hiring, there's growth potential.

Yes. Let's talk about some of the nontraditional advisory businesses because I think those have also been real surprise just in terms of how quickly they've grown and how big they become as a percentage of your business. And maybe we could talk about the capital advisory business in particular. Can you talk about the capabilities that you offer today and talk about where you see the opportunity to expand that? And maybe also talk about the opportunity to really make that more of a global business relative to where it is today.

Yes. The we -- it's the collection of businesses that I referred to earlier, all of whom have heavy connectivity to the private equity world. So we have a private funds business that raises capital for the highest quality PE and private debt firms. We have a real estate business that does both primary fundraising and secondary. We have the private capital advisory business, which sells LP interest from one institutional investor to another and PE firms and has had a huge business the last couple of years in these continuation funds. And when you add all of that together, it's a multi-hundred million dollar a year business. And as I said, we're #1 in each of those businesses and by a lot. And those were businesses that we started 7, 8, 9 years ago, and the -- we've built them in a very high-quality way. And there's a lot of connectivity back and forth. I mean if you raise capital for a sponsor in a fund, in the continuation fund, they're very grateful. So there's other -- it gets you close to the management and there are other things you can do with them, which is where this whole idea of covering the private -- the larger private equity firms like clients rather than having 1,000 points of contacts makes a lot of sense for us.

So maybe we can talk a bit about the recruiting environment. And I think it was either you or John, I think, who said that this is the most competitive recruiting environment that you've seen in 30 years. And that was earlier on this year. How would you characterize it today? And would you say that the market is rational in terms of what they're willing to pay to attract talent today given the opportunity set.

Well, I guess you have right now bankers that are doing a lot of businesses like finding gold in a gold rush. This is a really great period of time. The thing that is super positive for Evercore is -- and this has really come to the fore over the last 5 years. When I sit with a senior banker either at a bulge bracket firm or at one of our competitors in the independent firm space. I can without any challenge, assert to them that they can do significantly more business with their clients at Evercore than at any other firm. Why do I say that? Because we have all of the capabilities we discussed, we have debt advisory, we are the only independent firm with equity underwriting capability, $275 million business last year. We have the #1 activist defense practice. We have the #1 corporate restructuring practice. I mean we represented DuPont and their restructuring, United Technologies in theirs, and most recently, GE, 3 largest corporate restructurings ever. We were lead adviser on all 3. So it's not hard to convince someone that if they're going to be an independent firm, they can do a lot more business with their clients at Evercore and that normally translates into being able to be personally rewarded better. The comp this year in the successful larger firms, Goldman Sachs, JPMorgan and Morgan Stanley, in my view, is almost unquestionably going to go up for the most senior and successful people just as it's going to go up at Evercore because our revenues are up a lot. So the thing that you have to be careful about is you don't pay a premium on top of your revenues.

Yes. Okay. So maybe we can talk a little bit about your approach to capital returns and how you're thinking about steady state levels of cash. And I think that you've returned over $600 million of cash to shareholders this year through buybacks and dividends. How are you thinking about the longer-term trajectory of capital returns? And maybe you can talk about the attractiveness of buybacks versus dividends given the comment you made about the fact that the other core valuation does look very attractive to us as well.

So our Board has taken a basic approach to dividends that they should grow very high single digits, low to mid-teens every year. And that's what we've done. And I think -- I don't see any reason why they would change that. And our earnings have grown a lot more rapidly than that. If you look at the trailing 12 months EPS, it'd be a little over $16. And I think our trailing 12-month dividends are [ 2.32 ]. So it's a pretty damn low payout ratio. And as long as the stock is trading where it is, we're going to take every penny of excess earnings or every penny of earnings that we don't invest in the business. And we're not -- and that basically means things we would buy. We haven't bought anything, which is why we have a huge amount of capital return this year. And we've modeled this into the future. And if you -- it's a reasonable expectation that we take out 5% to 7% of our shareholder base every year. And so if you can grow your top line at mid- to high single digits and sustain your margins, not even get any earnings leverage and shrink the shareholder base like that, you've got a pretty consistent record of double-digit earnings growth.

So we've got a couple of minutes left. So maybe I can talk -- maybe we can talk a little bit about the non-comp leverage, which has obviously been significant. And there's been this gradual return to office, gradual return to in-person meetings. Although it definitely feels that restaurants are lot busier than conferences. What is the appetite amongst your client base to go back to meeting in person versus virtual? And when you reflect on the COVID environment, how impactful was it in terms of driving this improvement in bank of productivity? Because they could touch so many more clients in the day than in the past when they actually had to physically visit.

Yes, I think that there's definitely going to be an increase in productivity, efficiency. I was on the phone with Roger Altman, our Founder and Senior Chairman, the other day early in the morning, I said, what are you doing today? And he described 5 CEO meetings in 5 cities on 3 continents. And I said to him, who would have thought that you could do that. And these were all -- these weren't like high meetings. These were all on specific matters. And that would have taken at least 3 or 4 days to do in the old world. And so I think travel will not be as depressed as it is now, but it's not going back to where it was. But it will go back somewhat -- I don't know, I'm not smart enough to know whether it's 75%, 70%, 80%. I do know that the first time a banker is told we would have hired you but you didn't come visit us. That's going to cause a spike in travel. And the other driver, of course, is that activity levels are high now, and noncomps tend to be driven by dollars per person. And so if your revenue per person goes up as it is this year, your noncomps ratio is going down. So I think they're artificially depressed right now by 2 things. Number one, the very high level of activity that we have right now. And number two, the impact of COVID. But I would also say, in the old days, I used to say that we would -- that our noncomp ratio will be in the 15% to 17% range. I don't think it ever gets there unless the world is [indiscernible]

Okay. Well, Ralph, with that, I think we're out of time. But thank you so much for supporting this conference over the years, and I really do hope we can stay in contact. Thank you.

Next time, I'm going to take [indiscernible].