Evercore Inc. (EVR) Earnings Call Transcript & Summary

Okay. So up next, we're delighted to have John Weinberg, who is Chairman and CEO of Evercore. Previously, he was co-Chairman of the Board and co-CEO, positions that he has held since July 2020. Prior to joining the firm, he worked at Goldman Sachs. So welcome back down to our neck of the woods. John has I think close to 4 decades of experience working in investment banking. So someone who is very, very familiar with economic cycles and what they mean to the business. So John, thank you very much for joining us.

Thank you.

But this is the first time at this conference in your role as sole CEO. So I think we could talk a little bit about some of your strategic priorities for Evercore. Maybe talk about how those have evolved over the course of the year as economic uncertainty has come really to the forefront, in terms of at least how institutional investors are thinking about the world. And then I think on a related note, you've talked quite a bit about the investments that you've made in your non-M&A capabilities. So maybe you can talk a little bit about those businesses, where you think you've got to in terms of building them out and talk about how you see them contributing to Evercore over the long term. So quite a few things there, but…

Yes. Sure. Thank you, Richard, and thank you, James. Nice to be here. It has been -- since I've begun -- it's been kind of a roller coaster this year. As you all know, we've had -- we've certainly started out with the end of last year being a whirlwind. There was a tremendous amount of volume, and we actually had a record year, as did most of Wall Street on the investment banking side. And there was just a tremendous amount of activity. And beginning of this year, we really started to see things change and shift a little bit, and then we saw all these exogenous factors, including the geopolitical unrest and then we saw inflation really kicking in, and we saw a lot of things happen. And in terms of our initiatives, we clearly have stayed with what I think are the most important core pillars to our strategy, which is, we've really tried to expand and enhance our client base. We, as a firm, have a very strong M&A and advisory business, and we've continued to build on that. And that will always remain a core to what Evercore does. We've also built out our capability. We've tried to expand that capability so that we can have a stronger and more expansive client base and have more capabilities in which we could serve those clients. And then we have continued to invest in what we think are the most fast-growing elements of the economy, which is tech, high-tech, FinTech, clean tech and biotech. And we've really been investing in that area. As the year went on, it became clear that there was going to be some weakness in that merger market. Clearly, we started out with a big backlog, and we worked through a lot of that backlog. And then I think what we saw is that the activity level started to dissipate somewhat. We've invested a lot in our non-M&A businesses. We've tried to build a much more diverse set of businesses over time. And we have been, I think, successful in doing that. Over the last 3 years, over 1/3 of our revenues have been generated by non-M&A business. And so, for example, we have a very strong business in private capital advisory, which is really advising the financial sponsor business in their GPs and LPs, as well as looking at raising money for them and doing continuity. We have a strong equity capital markets business, which continues to grow. We have a strong restructuring business, which we've invested in. And each of these businesses has been a very important part of what we're trying to accomplish. Having said that, it all goes hand-in-hand with client relationships, which is really a big part of things. And as we move forward, I think what we're going to continue to do is really try and build out our client base, continue to invest in the white spaces and make sure that we are building up that client base to apply all the capabilities that we've been able to put together. And as we go forward, I think we're excited about the prospects. We'll talk a lot more about the environment today. But frankly, the issue is that right now, the environment is slow, and we're all just waiting for something to happen. But clearly, there's a pause button being hit by a lot of the corporates.

So maybe we can talk a little bit about that because you obviously spend a lot of time in board rooms. You spend a lot of time with CEOs across a broad range of industries. And I appreciate it's difficult to generalize, but what would you say is top of mind? And one of the, I guess, related questions is I think you, along with some of your peers have talked about the intensity of the strategic dialogue with corporates over the course of the year. I think people have been surprised that it hasn't waned at all. I mean why do you think that is? And are you actually seeing any changes in terms of just the nature of the dialogue that you're having with some of these corporate clients?

Well, when we started the year, the sky was the limit. There was so much activity on the merger side going on and really people were looking very extensively. I think that what has happened is that the strategic angle that a lot of these companies are having right now has not changed. But there has been a question on actionability and a question on confidence. And as we all know that CEO confidence and board confidence really does impact the merger business. Unlike some shocks to the system, which one could say was this year has been a relative shock. And unlike some shocks, the dialogue and the view of boards has been that they want to continue to look extensively. And I would say that my experience in with board meetings is that the boards and management teams are looking strategically and still very aggressive about what they're looking at. It's just that right now, people are doing -- taking a pause and not pushing forward with action. I think a lot of what's happening is there's just so much uncertainty in the world right now that people want to see what's going on before it happens. And I'd say that the dialogues haven't really changed in that people are still thinking very strategically about their business. But I think what has changed is that whereas companies are preparing for an opportunity to start engaging and actioning their strategies, nobody right now is pushing forward. And even the more aggressive companies and decision-makers are taking a pause and watching.

Good. So maybe we can talk a little bit about the macro-environment, but more in the context of higher interest rates than what it means. I think most people agree that what's going to be different over the next 5 years is interest rates probably globally going to be structurally higher than I think what people got accustomed to prior to the pandemic. What does that mean for the M&A market? And maybe you can talk about both strategics as well as sponsors and talk about how they impact those 2 groups differently.

Right. Well, we've spent a tremendous amount of time on sponsors, and that's one of the big initiatives we have in terms of building our business. So we spend a lot of time with sponsors. I would say that the sponsor market right now is very dependent on access to capital as well as interest rates. And I think they are more sensitive to interest rates and access than other big corporates. Big corporates who have big balance sheet, they can be more aggressive there looking at things. I think everybody is watching the interest rates, as much because there's so much uncertainty as with respect to levels. I think that to the extent that we start to see more certainty and maybe some more stability, I think that you will see corporates really start to get more active and maybe more aggressive. Sponsors will watch more carefully because, as we all know, sponsors are very dependent with respect to their returns on absolute levels. Interest rates will definitely impact the merger market and to varying degrees. But I think the biggest impact will be that it's the uncertainty factor. And whenever there is more certainty and when people see more clarity, I think you'll see the activity level on certainly the corporate level and, to an extent, the sponsor level go up. With sponsors, it really has to do with what's the access to capital. They need to have leverage finance and private debt ready to give them loans to be able to leverage their equity. I think we'll see that happen. I think in many respects, that market will actually begin to get more fluid when we see more certainty also. So the bottom line is, I think certainty and clarity are really the key things in terms of the levels of…

Okay. You have talked about some of the catalysts that could turn the market around. But when you think about the downside risk here, is there -- maybe you just sort of assess the risk that the M&A activity could actually reset lower in 2023? And what would sort of catalyze that?

Well, you have to break up the beginning part of this year and the latter part of the year. The beginning part of the year, there was still a lot of merger activity flowing through the system. The latter part of the year, that was when the origination started with respect to this particular environment. I don't think you're going to see a reset from what I would call as the run rate for the last 2 or 3 months. I think you absolutely are seeing a reset from the run rate the first 3 or 4 months of this year. I think right now, what we see is a real wait and see in the market. I think the run rate is relatively restricted right now because I think so many of the big companies and also the sponsors are taking a wait and see. I think that for the most part, my experience is people are preparing for what can happen, but nobody is preparing to have an imminent deal announced or nobody is preparing to really do that, take it to the next level of approaching and having a real dialogue. I think companies are preparing strategically. They're thinking about things. I think companies want to be ready to go when it looks like things are going to turn. That to me says that I think that when the turn does happen, it could happen quite rapidly, because I think that both boards and management teams have really prepared for when the turn happens to have thought through what they want to do.

So you mentioned financial sponsors. Obviously, they've been a very important driver to M&A over the last few years. Can we just talk more broadly around the dialogue with sponsors and how it's evolved and where you think it's got to? And then maybe talk specifically about changes in financing conditions, what that means, what you think it takes for the financing markets to reopen? And when they reopen, look, how do they differ to what I think the market was accustomed to 2 or 3 years ago?

Well, I think sponsors are really looking expansively. There's $3 billion of capital that needs to go to work from their perspective and their business is doing deals. And so what the sponsors are doing right now as they sit and as they talk to people like us is they're looking at opportunities and they're evaluating opportunities. And I think they're ready. When the market turns, they have all kinds of different opportunities and deals that they're looking at. We spend a lot of time with sponsors and there are several things that we're looking at that are quite large and interesting that could happen. It all depends. In terms of the financing markets, right now, as we all know, there are some hung bridges, there are the leverage finance market and the private debt market have actually constrained a little bit. Even though their private debt is out there active, it's not as big. And so what needs to happen is that the bank lending and the high-yield markets need to kind of become a little bit more fluid. And private debt will be out there, and you'll see a lot more activity when that happens. In terms of how it's changed, private debt has become a bigger factor. And I think private debt is going to really fuel real activity levels because private debt is going to be more aggressive. It'll probably be very creative and thoughtful about driving activity. The high-yield markets will, I think, will be out there. They'll be higher, which will drive, I'd say, much more careful -- a much more careful approach, both in terms of the sponsors because they'll be paying more and as they level up their equity, as well as buyers are going to be watching more carefully because if it's a high inflationary environment and if rates are much higher, there's a higher likelihood that things could be troubled. So you'll see a lot more conservatism in terms of what is negotiated in the high-yield markets.

But over the longer term, you would expect little higher interest rates, sponsors will be just as competitive. Do you think that that's still over the longer term, the same opportunity set as in a 0-rate environment in terms of responses or strategics?

I think you'll see sponsors continue to be very active. It's clearly a better business proposition when there are really low rates. They can leverage their equity even more effectively, and it's a much safer bet. But I think the sponsors are going to be quite aggressive when things open. Because they want to put their money to work, they'll be very discerning. They'll be thinking about where are the opportunities at hand. What you may see is, in the beginning, smaller deals just to get going. But I do think that you have some of these very large investor complexes that will be looking for ways to put capital to work and putting capital to work quickly. And they'll try and be very creative about the financing structures they come up with and really how they can put it together to create returns. So I just think that as the market turns, you'll see the sponsors and the sponsor business pick up pretty dramatically, even though it's not quite as favorable than when it was a 0 interest rate environment.

That makes sense. So if we just think about sort of the fact that you serve clients globally. And Europe performed quite well in terms of M&A, at least until maybe the last 2 or 3 months. Maybe you could just talk about whether you think Europe can remain strong or rebound in 2023 relative to the U.S. given there are obviously greater geopolitical and economic issues in that part of the world?

I think over the first several months of this year, Europe performed quite well. But you're absolutely right, there's more pressures on Europe right now and that market is feeling more pressure. In some ways, I think Europe has been behind the U.S. and the U.S. kind of went -- really started to feel the impact of what was happening geopolitically before Europe did. I think that Europe is going to come out of this, but I think it may lag the U.S. a little bit. I think there is definitely pressure on that market. It's not nearly as easy to get things done. And I think there's more conservatism over there right now. Clearly, there is opportunity there. And whenever there is a slow economic activity, there is more opportunity with respect to some deals. But I think you'll see Europe slow somewhat in the first part of this year. I think that it will come back just like all markets come back, but it may take a little bit of time.

Just as a follow-up to that. I mean, one of the -- I guess, one of the most striking features of what's happened to markets this year is the extraordinary appreciation of the dollar relative to other currencies around the world. Are companies starting to view that strategically, especially U.S.-based companies that have an opportunity to buy non-U.S.-based assets, presumably at much, much lower relative valuations than in the past?

I think there's no question about it that that is something that the big corporates in the United States are looking at as an advantage and something that they're going to look at. I don't think anybody has tested that yet or gone forward with that yet because there is that -- there is still the view that there's so much uncertainty in the market that nobody really wants to take risk by doing a bigger deal or announcing a big deal right now. So we don't see it. But clearly, in a lot of the discussions, there is an opportunity with a very strong dollar, buying foreign assets to get a better deal and I think people are very aware of that and thinking about it.

When you think about sort of the size spectrum of deals out there, and I know you touched a little bit about smaller deals perhaps being the ones that break the log jam for sponsors first. The industry data suggests that mid-cap M&A is outperforming large cap M&A, at least recently. Maybe you could just talk about how -- what you're seeing in your business and perhaps what's driving the differences there?

Well, I think that for the most part, you're absolutely right, that mid-cap is actually performing slightly better just on a general market basis. And I think that there's no question that smaller deals are easier to do right now. I think that many times when you see markets turn, you see mid-cap deals happen first, and they lead the big-cap deals. And I think that could easily happen here. There's just -- there is -- one of the big things about the big-cap deals is you have somewhat of a pressure that people are also thinking about, which is antitrust and people are looking at that carefully to understand what is the impact of that and what -- certainly in the United States and really internationally. I think the mid-cap deals are certainly being considered. I think they are performing. I think it's easier for big companies to do small deals because it takes much less financing risk. So I think that the premise that you put forward, which is that mid-cap may lead, that mid-cap is more active right now is absolutely the case. And I think that across the board, you'll see that that is the case. And I think for this foreseeable future, I would say that's true. But when you see a real market turn, I think you'll see larger deals start to come pretty quickly because I think, as I said, I think a lot of companies and management teams and boards have really started to think and prepare. They've had a lot of time to understand what they want their strategy to be in so they've really loaded up.

Is there a difference in the financing conditions in those 2 markets? You talked a little bit about direct lending? And I guess, is there more financing availability from the mid-cap space today?

Well, they're smaller deals. So it's easier. There has been over the last several months, some capacity constraint for the large financings. And so I would say that the answer is yes. As you know, with big companies and mid-cap deals, that makes it easier. They don't really even need to think that hard about the financing market. So in a constrained financing market, smaller deals for big companies is an easy thing. I think you'll see that when the market begins to turn, you'll see the whole market turn. And I don't think you'll just see mid-cap activity and no big-cap activity. I think big-cap activity will return pretty quickly because I just think that management teams have had the opportunity to really think through the issues and what they want to do. And I think you'll see companies who are anxious to begin growing again starting to think through some real activity for larger deals.

So maybe we can segue and talk about the restructuring business. It's obviously something the market, I think, is very focused on. So could you talk to how the dialogue has evolved over the last few months around restructuring? Is it predominantly liability management mandates? Or is it actually starting to show up more as restructuring mandates? And maybe you can talk about your positioning in that business and what you think differentiates you relative to some of your peers.

Well, I think that there's no question that there's an evolution now, with rates going up and with business possibly going into a recession, you're seeing companies that really have high interest rates, lots of debt, you're seeing them start to feel the pressure of that. We are definitely seeing a change from liability management to thinking about distressed financings and distressed debt. And I think that our business continues to be quite busy and robust. We're seeing real activity levels. We've seen a progression of our opportunities. And I think that what's happening for us is that we're starting to get very full in terms of our activity levels in that space. Our restructuring business is a really strong business. We really like our people. We have quite a few people focused on this. And I think that what differentiates us, I think, is that we are quite diverse. We do both creditor and debtor. We have a lot of liability management assignments. We are very fluid in terms of things that we can do. And I think that from our perspective, I think we can provide a lot of really good advice to people who have distressed situations. And so I can easily see us continuing along that line and having that activity level continue to run pretty high.

As you think about the next 12 months, you envisage an environment where both M&A activity and restructuring activity could pick up concurrently as we head into '23?

I could see that, yes. I mean I think that M&A activity, I believe, will really start to pick up when there's more certainty, in terms of clarity, in terms of where interest rates are, where the economy is. And frankly, I think there is going to be quite a view of looking at what's going to happen geopolitically. The geopolitical overlay and exogenous factors are certainly the wild card. And I think if people think that there could be a shock in some ways, I think people -- it will be joined to the market. But I think that you could easily see a real pickup in the merger market. And I also think that restructuring, there will be because rates are going to be higher and they may continue to go higher for quite some time. There will definitely be companies that go into distress, especially if there is inflation and supply chain issues. And especially if there is a recession, I think you're going to see the real activity pick up in terms of the restructuring opportunities. And I think there could easily be at the same time, the merger of our market. So you could see both happening at the same time, which is relatively unusual because usually, when you have a great merger market because the equity market is strong and everybody is moving fast. In this case, there -- it's going to be somewhat different because of inflation, because of recession and because of high interest rates, you could see companies going to distress even when the equity markets start to get better.

Maybe in terms of your equities businesses, the primary market has obviously slowed even more than M&A. But on the other hand, your equities trading business remain quite strong. Maybe you can just talk about when you think equities -- the ECM market could recover and what would catalyze that? And then do you expect some sort of normalization on the equities trading side?

Well, it's really hard to know when the equity market's going to turn. It's certainly been -- its quiet and it's been difficult in that market. There have been some activities, mostly in biotech. But the equity market, for the most part, has been quiet. And it's really hard to know when it's going to turn. Once again, it really does depend on clarity, certainty, confidence level, the fact that people really have some ability to really understand that there will be some stability in the market, and that's when you'll see the market start to come out. There are certainly financings that need to get done as once again, biotech is one of those places where they burn a lot and they've got to go out there as soon as they can. But I think that what the equity market really needs is stability and some clarity and less uncertainty and then you'll see it start to turn. But it's going to take some time of really seeing that before that market really jumps.

Okay. And then if you think about the recruiting market today, there have obviously been some notable dislocations with some of your -- some of the bulge bracket peers, some advisory firms as well. How do you think about the recruitment market today? Is it more attractive to go out and hire versus perhaps last year?

Well, I think it's still very competitive at the very -- at the highest level and for very productive people, it's very competitive, both in terms of other firms looking for people as well as the cost of people. So I think it's a very, very competitive market at the very top level. In the sectors that are the busiest, those continue to be very much a competitive marketplace. I think that you'll see some firms to -- that will begin to pare back a little bit. I don't think that really is going to detract from the competitiveness at the top of the market with respect to top talent.

So maybe you can talk a little bit about how you're thinking about the near-term operating margin against the need to continue to invest in the business. So how are you thinking about that, I guess, over the course of this year? And how should we as investors think about that as we think about '23 and '24? How do you balance those 2?

Well, we -- the way we think about it is that our job is to maintain a very high level of ability to call on clients. That's what we do. And we are very careful with our expenses. We're working really hard to pare back our expenses as volumes have been down. We do invest in our business, and we'll continue to. And as we see top talent, we will continue to try and bring that talent in because I think at the end of the day what we need to do is create a growth trajectory for our business. I think that it's important, though, also for our shareholders to see that we're really being responsible with our costs, and we're trying really hard to be on top of that. Our margins are sound at this point. And I think we feel like we have continued to manage to that, whether it's paring costs, whether it's watching how we replace activity. And when we have people leave, we haven't been rushing to replace them unless we need them. So we're really trying to manage our costs and expenses as well as really watching the way we invest.

And then if we just think about the non-compensation side, there's obviously been a lot of inflation over the past year or so with bankers trying to travel, conferences, et cetera. How are you thinking about the non-comp expense trajectories? Is there more natural inflation to go from here?

There is some inflation. There's just no question about it. And you see it in terms of kind of the -- whether it's the tech expenses you have to pay as well as all the other factors. We want T&E to go up because we want our people out there traveling and that is what's been happening. Our non-comp expenses are up. A lot of that is T&E because our people are back out on the road in force, really talking to clients and meeting with clients to try and really continue to develop those relationships and generate activity. I could easily see our non-comp expenses to go up. We're actually watching that very carefully to keep control of it. But there are certain parts of it that we need to continue to drive. There's no question that inflation is there, and I wouldn't represent that we're not going to feel it. We probably have -- because we're a smaller firm and we aren't as extensive in our activity to some of the larger firms, we're not going to feel it quite as much as some, but it's there.

We've got a couple of minutes left. So maybe we can just talk about capital returns, how you're thinking about capital returns versus running with a larger cash buffer, just given the economic uncertainty? And how you think about the attractiveness of buybacks just given the outlook versus obviously the valuation that Evercore's trading at today?

Well, we've done quite a bit of repurchasing this year. We slowed down a little bit in the third quarter, as you all saw. We continue to believe that it's very important for us to, in effect, buyback all the shares that we issue for RSUs on our comp, and we will continue. We've done that, and we will continue to do that. At this point, we are watching carefully, understanding that next year we don't know what's going to happen. And so we're really trying to make sure that we protect our fortress balance sheet. We have a very strong balance sheet. We want to make sure that we are able to sustain whatever could happen. So we're going slowly, but we are continuing to repurchase. It's part of what we believe we should be doing. And so we're going to, over time, continue to be watching and be opportunistic. And that's why, I think, the most important point, which is we're going to continue to be opportunistic in terms of repurchasing. And I think it's important that we continue to make sure that we don't create dilution with our comp system, if we can.

A couple of minutes left. Can we see if there's any questions from the audience. I think we're done. And thank you, John, very much for joining us. And hopefully, we'll see you again next year.

Great. Thank you so much. Thanks, everyone.