Evercore Inc. (EVR) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining. We're delighted to have with us today John Weinberg, Chairman and 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.

Pleasure.

So John, you've led Evercore for 2 years now, first is as co-CEO and then a sole CEO since earlier this year. I wanted to get into the macro environment for a bit because that's clearly on everyone's minds right now. But first, I wanted to get your thoughts on what you've been prioritizing in the last 4 months since you've been sole CEO, particularly as you've -- particularly given the current environment?

Yes. Well, the current environment certainly is relatively unprecedented. It's something that we're all dealing with. And it's really -- there's more uncertainty than I can remember really in any time in the last 10 years at least. What I've been really focusing on is staying with our strategy. I think the most important thing for us to do is to continue to be committed to the path that we've been on, which is to expand and enhance our client coverage, meaning by sector and by geography, looking at white spaces and filling those in and basically building volume. Investing in sponsors. We have a very strong sponsor business, both in terms of the M&A side, but also in terms of private capital advisory, and we're continuing to invest in that, and that's a big focus for us. We're building out our capabilities with respect to products because one of the things that is really an important part of our strategy is to do more for more clients. And what that means is, as we double down on our products with respect to equity capital markets and investing there and making the -- going by sector and being more specific there, as well as building out our debt advisory business, which would also build in a coverage of some of the private debt businesses. And also adding products like convertibles. And then also, we are spending a lot of time investing in the places where there's real capital accumulation, the techs, like fintech, biotech, clean tech, and we're really making sure that we're investing in the places where there's growth. At the end of the day, what we really are doing and I'm spending a lot of time on is making sure that we continue to invest in excellent people and put them in position to really demonstrate acuity and intelligence in terms of calling on clients and being more to more clients.

I think that's fairly consistent message that you've been giving for some time now. Have any of those priorities changed over the course of the last couple of years? Or that's been your core area of focus for some time now?

It has been. I would say that one of the things that we're spending time on right now is making sure that we're well positioned for restructuring. We have a great restructuring business. We really are, I think, well positioned, but we're thinking about how are we calling on clients, how are we positioning ourselves. We're also investing in some of our very strong businesses like activist defense. Really, we feel like we've got a very good set of businesses and very high-quality people, and we just want to put them in position to succeed.

Great. So maybe let's get into the environment. Can you give us an overview on where you see the environment today? We're sort of coming off a record 2021, and clearly, there are some headwinds out there with the markets, Ukraine, inflation, Fed QT. I think you said that the uncertainty is only pushing deal activity out a little bit. The conversations are still pretty robust. Is that still the case? Can you help characterize it?

No question. I would say that we still have tremendous activity inside with respect to clients wanting us to talk to them about some of their strategic priorities. And our people are very busy. Having said that, announcements have really started to tail off. And the processes and M&A advisory assignments that we're on are becoming more elongated. And that it's taking longer. It's taking longer because Boards are thinking more, sometimes they're being put on hold. For the most part, I'd say that the environment has slowed down because people, especially with the recent volatility, clients were just saying, "I need to watch this a little bit, and I'm not going to announce something to do a market like this." And so we're seeing that playing out. The sponsors are still quite busy and that's a big emphasis for us, and we have a lot of focus on that. And the sponsors are busy on the buy side. They're looking at prices and they're hoping that seller expectations are coming down and they're doing the analysis. On the buy side, though, there is a concern, and the concern is, can we make -- can we get this financed. And that's a big thing, which is really making sure the financing is out there. The banks are still pretty healthy. There are -- there's lots of capital out there still going. There's private debt that is very willing to go to work, and we spend a lot of time with the private debt complexes. But for the most part, it's slower. On the sell side, I think the -- a lot of the sponsors are watching carefully. And I think that there is a point of view that they have to make sure that they're going to get the right price. We do a lot of continuation funds, and the continuation funds are actually very, very busy. And frankly, I think there's almost no limit to sponsors wanting to do continuation exercises. The real issue there is, is there enough capital to actually go alongside the sponsors and get those done? But for the most part, that activity is quite good. If you look at the equity markets, the equity side, I think it's actually slowed down tremendously. There's just not a lot of people out there who want to really put money into the equity market right now, certainly on the IPO side. I think the IPOs, as we've all seen, are really pretty much on hold, and we're watching. There are companies that need to finance, I'd say, the biotech side, where we're very involved. Those companies need to finance, and they're really willing to go out as soon as the market shows a crack of opening. On the tech side, I think a lot of the tech businesses are looking at people. Our existing investors and trying to get more capital from them and holding on and not trying to finance into a very, very tough market. And so I'd say on that side, it's slowing. The restructuring business seems to be gearing up. There's not a tremendous activity level at this point yet, but we see it starting to develop, and we're out with clients, spending a lot of time getting ready for this. And there is a significant amount of high-yield debt and leverage loans that are coming out and coming due. And I think there will be more and more activity on the restructuring side. So I think we're really gearing up for that. Activism is a very, very significantly busy area right now. There's a lot of capital in activism, and I'd say that the activists are quite active. And we have a big business there. We get a lot of involvement from the rest of our bankers with respect to our activism because it's a great entree into building relationships. That is quite busy. And I think that, that will continue to be so.

Great. I have a lot of follow-ups from that. So maybe I'll go in order. You mentioned that the Boards are taking their time to announce deals given the market environment. How long do you think deals are elongating right now? Is it hard to say just given what we've seen in the market right now? Or is that maybe a couple of months, a little bit more than that?

I really can't give you a specific time frame because the -- we just -- the volatility is so dramatic. I think when the market stabilizes, there will be people getting back into the market. I think when the market stabilizes, you'll see deals and there's kind of a buildup of demand to do deals. Companies are still wanting to do things. As crazy as it sounds, financing levels are still okay. And the reasons for doing mergers, whether it's technology disruption or whether it's the clean energy side, there's a lot of reasons why companies want to actually get going on mergers. Growth is still very much at a premium and a lot of companies want to be looking at growth. Frankly, in a couple of Board meetings that I've been at recently, the Board has basically said, "We don't want to necessarily want to do anything right now, but we want to be ready to go the minute the market stabilizes." I've been involved also in a few situations where there have been go-private discussions. We've represented the company that they're trying to go private with. And those have gone on hold, but they're not dead. And the question really is when the market stabilizes and the sponsor feels like they can get out there and do a firm financing, they'll probably come back and that will get going again. Clearly, the way rates are going and really the way there's instability in the debt markets right now, I think that the prices may be somewhat impacted by the fact that financing is much harder and probably more expensive.

So is that the only thing holding back take private deals? Is it financing? And as soon as that stabilizes, if valuations stay at these levels, that should...

It will be financing and will be price levels. The question is, will sellers have an expectation of the price that was 6 or 8 months ago or are sellers really feeling realistic about things and that will that change. And that's the big question. And a lot of it has to do with how confident the sellers feel if they really are getting less confident in their business, they may have a different point of view in terms of selling the company. But for the most part, I think, the biggest factor in my mind is the stabilizing of the market.

So it's interesting because I know you mentioned this back during the COVID recession, where there was a lot of uncertainty in the market, where deals weren't necessarily going through. But one of the things you mentioned is that your relationships were getting stronger at that point in time because it's a period of uncertainty where your clients need most of the advice. Is that something that's happening right now as well?

Absolutely. I think that the really strong relationship bankers recognize that the time to spend time with clients is when there is instability, uncertainty, volatility. Because that's when clients really want to know what you think, and they really want to bounce ideas off of you about what to do. And so it's a really good time. In addition, they're not really working on a big transaction right now, so they actually have time to really spend to think. So I think that getting out with clients during times like this is critical. And we, our bankers, are out with clients. One of the things that I would say is our travel expenses are up again because people are really getting out there.

Is it a good thing?

Yes, it's a good thing. I mean, I never thought I'd be encouraging people to spend money. But in that case, it is the case. And I think that clients really do value good advice during difficult times.

And what are you telling clients? You've clearly been on several client meetings more recently. How are you telling them to navigate this environment?

I spent what I would -- what I'm doing and it obviously is client-by-client. But for the most part, I'm encouraging people to watch carefully, identify the things that are important to them, identify the factors that would make a deal more attractive and just watch that carefully. And I am advising caution because we just don't know where things are going. I mean, I never would have thought we'd be right now where we are. I never would have thought that we would be looking at a possibility of 75 basis points raised by the Fed, maybe over 2 successive months. That's unheard of. And I think that does destabilize a lot of things. And so I think it's a good idea to watch and wait and see. Having said that, this is the time for good companies to really look carefully at what they want to do because when things start to turn, there may be real opportunity to get things done at good prices.

And so you're saying there's going to be pent-up demand at that stage, and that could come back pretty soon?

I think so. But I don't know when that will happen, but I think there will be pent-up demand.

Got it. Maybe let's dig into the sponsor side, it's about 30% to 45% of your overall activity. Clearly, last year was a lot busier. You were fairly balanced in your comments on the earnings call because they do have a lot of capital to put to work, but funding costs, as you mentioned, right now, are rising. At what stage do you think valuations become so compelling that they have to get into the market?

Yes, it's a really good question. I've been thinking about that myself a lot, which is even if financing markets are difficult. And the sponsors will say, it's really hard because I don't know where -- financing has gotten more expensive, so therefore, I'm hesitating. And one of the questions I keep asking is exactly that, which is how low does it have to go for you as a sponsor to say, "I don't care how much I have to pay to do this. It's such a low price. It's the right thing." And obviously, it's all the calculation, and everybody runs their own numbers. I think levels are getting pretty low right now, and I think a lot of sponsors are really sharpening their pencils and they're looking at the things that they really like. The sponsors that have a theme that they're investing in are the ones that I think are going to be the more aggressive ones. The ones that may have a roll-up or maybe making acquisitions into places where they already have the knowledge, I think that may actually be a place where you see sponsors moving first. I think that there's a strong point of view that there are very high-quality businesses, that will be at low enough levels that you really are going to have to stretch. And so -- and I've had sponsor conversations that way, which is they would -- we'd be talking about 2 or 3 targets. The 2 of those or 1 of those is a really high-quality target, and they say, "I won't be able to not do this if I think the valuation goes lower." Now not in all cases, it's the valuation lower until if it's a private company until the seller thinks it's low enough. But clearly, that's something is on people's minds.

Yes, that's a challenge, right. From the sell side, if it's a high-quality asset, they might be willing to wait out the near-term volatility. And from what we're hearing, private market valuations haven't gone down as much as public market valuation. So what are you seeing there? What are you hearing from the sell side? Are they starting to come down to where the new environment is? Or is that still a little bit out?

I think there's some seller resistance to different levels. I think that sellers are a little bit -- those who may be sellers are a little bit in denial right now and thinking there will be a bounce back or hoping there will be a bounce back and certainly not willing. Anybody who doesn't have to sell in a market like this probably is not going to sell unless there's a bid out there that they weren't expecting. But right now, I don't think there's that many bids out there that are unexpected. Maybe there are some very opportunistic ones. Maybe low balls. But I don't think -- I think we're really seeing a market that is a little bit waiting and seeing.

And what do you think from the sales side? I guess, if the IPO market, as you mentioned, is clearly weak right now, it's difficult to raise funds. Could you see a push where people are forced to sell because in order to raise money or in order to keep capital levels up?

You could see that. I think a lot of companies, a lot of sponsors with very high-quality assets, they want to do continuation funds because that's a way for them. It's a good asset for them to continue the investment and to not, in effect, do a sale of the company at a low price. I think that those high-quality companies or those sponsors that have high-quality companies will want to wait as long as they can before going public. Because right now, public valuations, first of all, I don't think you could do one right now. But second of all, even if you -- the market did begin to stabilize, I think they'll wait to see whether the markets go up and they can get values because, for the most part, the private companies, they don't have to do it.

And are there any differences between sectors? Clearly, tech valuations are down a lot more now than some of the other sectors. Are you noticing any differences between sectors or even deal sizes, maybe some of the smaller deals, the midsized deals are still getting done. Are you seeing any of that?

No. Really, right now, there are dialogues. But I think the market is -- there's a lot of dialogue right now. There's a lot of analysis, as I said. In our shop, people are very, very busy looking at things for clients. And so I'd say the activity level is very high. And I think that the deals that are being discussed are very good. So I could easily see a strong market. I just think that there -- it's going to be a question in the near term as to when the deals start to roll. And I think we clearly have some deals coming out now. It's not like you're not having any deals. There are deals being announced. We're announcing deals day by day. But I think that before you get a very strong volume of deals and rapidity in terms of the announcement, it's going to take a little bit more time.

Got it. And then you mentioned the activism business is still fairly busy. What do you think happens with that business in this market environment? Does it become a little bit more difficult if this volatility continues? Or does that still keep up at the current pace?

I think that keeps up. I think that companies are very focused on making sure that they are prepared. I think the activists are quite active right now. They're looking at things and analyzing and making calls and interacting with clients. A lot of them are not public, but there's a lot of activity. And I think that there are many different types of activists out there right now. There are some that are extreme and some that are less extreme and some that are trying to be what they call constructivism. I mean, there's lots of different types. I would say that our activity level in that area is very, very high.

Great. And then maybe just moving on to the equity underwriting side. Clearly, the markets are weak. You mentioned clients are staying on the sidelines. But at the same time, you've spoken a lot about how the equity capital markets or where the M&A markets were for independent advice maybe 4, 5, 7 years ago. So it is a more exciting time for independent advice in the equity markets, at least until the recent volatility that we've seen. So how do you think, how is Evercore positioned there? You've mentioned that you want to be consistently within the top 10. How are you thinking about that business?

We have real momentum in that business. I think we have a very, very good group of people in equity capital markets. We've continued to evolve to be both strong in terms of giving advice on IPOs and also equity. We've also become more sector specific. We've been traditionally very strong in biotech. We're building out other areas, industrial, consumer and other, and we're really starting to get momentum there. I think that our team is selling that product effectively. I think that when we get in front of clients, I think that the advice that we give and the way we give it is actually valued. And so I feel very optimistic about the progress we're making. We are not yet top 10. We're trying really hard to get there. I think we have a really good chance of getting there. But year-by-year, day-by-day, month-by-month, I think we're making real progress. And we're picking up market share really quarter-by-quarter.

And I guess you're saying despite what's going on in the market, the conversations still continue in the backdrop, the hiring still continues in the backdrop.

Yes. No, there's no question. The dialogues are very good in terms of our interaction with clients. We are really having strong interactions. And clients are now starting to reach out to us about equity capital markets advice, which is great. It really shows that we're starting to -- we're starting to be known that we have a good product. And in terms of how we're thinking about the business, we're still very much willing to invest in that business. We like that business. it's a growth business for us. We feel like we're doing it well and the momentum is good. So we're going to continue to invest in that business.

And what about on the debt capital market side? You mentioned that's another area of growth. What are you seeing there, especially given where rates are right now?

Well, there is -- our debt advisory business is really giving advice on any number of things. We do a lot of liability management. And so right now, we're giving a lot of companies who are not necessarily companies that are possibilities to be into bankruptcy. But we're giving a lot of liability advice to those clients. We're also giving advice to companies that are thinking about what they should do in terms of reshuffling their capital structure. And so we're spending a lot of time on that. We're actually making some fees. Really giving that solid advice. We don't issue debt specifically, but we give advice, and we also work on private debt and private equity. And those areas are quite busy right now. A lot of people want to look at those areas. And the other thing is that the private debt complexes are very much a factor. The nontraditional bank financing is really out there. And we've been investing in how we cover those. And those activities and dialogues are actually leading to some very interesting situations for us. And so our debt advisory business is actually got a lot of momentum to it and very high activity level.

And I guess related to that is the restructuring side. You mentioned that dialogues have picked up, activity levels not so much. So we're seeing that default levels are still pretty good. What do you think you need to see for that business to ramp up? And how are you preparing for it?

I think that there is a lot of activity that is really on the edge of happening. I think that there are companies that will need advice. I think that as rates go up, that will push some companies. Some of the sponsors have activity levels where they are looking very, very carefully at their portfolios. I think that the restructuring business is really very much on the edge of starting to kick in. The activity level from our side, what we're doing, we're spending a lot of time with clients. We're actually giving a lot of advice to clients. So we have a good activity level, but I think the really serious big restructurings haven't really started to roll yet, but I think is very much coming towards us.

And it sounds like you're saying even with all you need is for rates to keep moving up at the level that the forward curve has priced, you don't necessarily need that...

It's raised. It's economic disruption. Supply chains can push things into a very difficult place for a company. I think that you could -- we're not going to see the '08 situation, where you saw a tremendous dislocation. I don't think it will happen that way, but I think there will be a real pickup.

And since you mentioned supply chain, how is that figuring into your conversations on both the restructuring side and the M&A side? Is that -- especially on the M&A side -- I guess, is that driving more activity? Are companies near-shoring integrating vertically? Is that part of your conversations right now?

Yes, there's a lot of activity thinking about that. I mean, as I said, that the merger dialogues are very strong. And people are really looking at different deals. And the near shoring is definitely something that is on people's minds and on Board's minds. And so there is real activity there. And I think that in terms of mandates of being hired to look at things, structuring deals that do that nearshoring and other, it's very much out there. And I think that we -- our activity is that we have a very diverse set of opportunities, which include the nearshoring. And I like the nearshoring discussions because I think the companies are very serious about them. So I think it's all part of that merger activity level, which I think is quite -- as I said, it's quite high. There's a lot of dialogue. There's a lot of activity. There's a lot of mandates being -- but I think that -- and so I think that we're in a situation where in the medium term, I could really see a pickup. But in the near term, I think it's going to go slow.

So I think you mentioned debt disruption, ESG is more secular growth drivers for the M&A market. Can we add supply chain disruption and nearshoring to that as well?

Yes. Yes, I think those are all factors. But I think -- I mean, the one thing I feel very optimistic about the merger market because I really do believe that these dialogues are all happening. And the types of dialogues that I'm seeing that we're having are actually quite positive, constructive and actionable. And so I really see that the market is relatively healthy right now. And the question is going to be how quickly does it track? And I think that there's a really significant scenario that even if we go into a slight recession that the merger market picks up. And I think that we're going to continue to see it in a healthy state right now.

All right. Great. I'm going to move into the -- a few questions on talent development and retention. But first, I want to see if there's any questions from the audience on either the environment or any other topics. All right. So maybe let's move on to talent. I think you've typically said you want to hire at least 48 senior MDs every year. You were at the higher end of the range last year, and I think you expect to remain at the higher end of the range this year as well. What is the hiring environment like? Because several of your peers are also saying that they're hiring pretty aggressively. How competitive is it out there? And what is it under the current market environment?

Well, I think that we continue to see really good talent out there right now. And the people that we're talking to, I'm really happy with the level. I think we are talking to A+. And I'm feeling like we are doing very well in terms of recruiting that A+ talent. So I feel really good about that. I'm certain it's a competitive market. But from my perspective, the dialogues we're having have been very, very constructive. I think that what happens in a market like this is people say, "If I'm going to move, maybe this is a time to do a move." And that's why I think that some of the dialogues are as constructive as they are right now. We're going to continue to be looking for A+ talent. That is really part of our model. We feel really good about the places. We're very selective about where we bring people in. We're not just going to do it -- help discover but we're going to be very focused and targeted about where we bring people in. And the areas that I've talked about, which are the focus areas of the places that we're looking to add talent, and we're going to complement and build all the different areas that we think will really help us to kind of build real momentum in the business. I feel like the talent we hired last year has really started to kick in, and I'm really very, very pleased with them. And I feel good about the people we're talking to right now.

And also, internal promotion has been a big part of your push to grow. Is that -- does that continue to be a key focus area for you?

Yes, there's no question. And it's very important that we start to -- that we continue to promote in from internally. And we did -- I think we had 17 promotes last year. And I would like to continue the momentum of really having significant internal promotions. Developing talent is critical. Really critical to a business like ours. And obviously, you take away some of the risk when you promote from within because you know them, you've trained them, they've come up through the culture so they're very aligned culturally. Those are all reasons that it really makes sense to have that happen. I feel like if we're able to promote from within effectively, it will be excellent for us. And we build a lot of programs in to develop the talent, and I really assess our success in those programs as to whether we have people who are on the edge of being able to be promoted.

And I guess on a related topic, I think sometime back you spoke about how some of the new MDs were taking a little bit more time to ramp up in the post-COVID environment where travel was not at the same level. It was more difficult to build relationships. Is that -- has that changed? Have productivity levels increased?

Yes. No, there's no -- well, there's no question that we are getting our MDs out there now, and we're actually assigning companies to them, and we're really trying to mentor and coach them as they start to call in companies. I think that's something that we identified as something that we needed to work on, and we're working on it. And I feel like we're making real progress there. As an organization, we're not huge. We're not one of the really -- we're competing at a very high level, and we're competing with some of the -- with the very largest firms. But our size is not as big as some of the very big bulge brackets. Having said that, I think our SMDs are very talented. And our MDs are very talented and get those people on the street really calling on companies and teaching them and coaching them and letting them become more effective and growing as professionals is a critical aspect. And I feel like we've really made progress there.

And I guess another related question there, John, on the comp side. How should we be thinking about the comp ratio now? I know you typically stay in the high 50s. 59% is where you're at year-to-date. How should we think about the comp ratio in this environment where there's not that much visibility? Are there any puts and takes? Are there any parameters that we need to consider?

Well, our comp ratio is going to depend some on revenues. I mean, wherever revenues are could really have a big impact on our comp ratio. We also, as you know, there is -- our comp for the senior level does change with respect to productivity. It's very tied to productivity. So those are some of the key things to know. What I can't do is project our comp ratio at this point. But clearly, we set the comp ratio as to what we think the year is going to be. We did that in the first quarter. We'll be coming back on the second quarter and doing the same thing again. And it really depends.

All right. And then the last question I had was on capital return. The Board raised both dividends and the buyback authorization recently. I think the buyback authorization went up as high as $1.4 billion. I would think that the recent volatility gives you more opportunity to buy back the stock. But at the same time you might think that -- you might want to preserve levels of capital given the uncertainty in the environment. Can you tell us how you're thinking about that aspect?

Well, in the first quarter, we bought back significant amount of stock. We've always said that when excess capital, we're going to return to shareholders through dividends and repurchases. And that is our philosophy. So the philosophy that we will uphold is that we will use the capital we have -- if we have an investment for it in the business. That cash and really the capital that we don't use for investing, we're going to, over time, return it. And we've been very consistent on that and continue to be committed to it.

All right. Perfect. With that, we're out of time. Thanks so much for joining us.

Thank you, Manan.