Lazard, Inc. (LAZ) Earnings Call Transcript & Summary

All right. Good morning, everyone. Before we start, I'll read the usual statement, which is please refer to the Morgan Stanley Research disclosure website and if you have any questions, please reach out to your sales representative. And with that out of the way, we're delighted to have with us today, Ken Jacobs, Chairman and CEO of Lazard. Ken is Lazard's Chairman and CEO since 2009 and has been with over Lazard for 30 years. Ken, thanks so much for joining us.

Thank you, [ Honey ].

So Ken, before we get into Advisory and Asset Management in more detail, I thought we could start with a general overview of the environment. I think you have a unique perspective given that you have a diverse set of clients across industries, across geographies. You also have allocators of capital on the Asset Management side. What are you seeing in the environment right now? And how would you characterize the macro environment?

So we reached an inflection point. You can pick your moment: was it second half of last year or first part of this year, probably accelerated by events in Ukraine, where we've gone from, call it, 40 years of declining interest rates, declining inflation to a moment in time where we now have increasing interest rates, increasing inflation. And that has changed substantially the investment outlook, the investment climate and the outlook for the economy. And that's what we're experiencing now. From an economic standpoint, it's too early to say how this all plays out. If you look at the bond markets, you would think that we're now with a flat to almost inverted yield curve, you'd think that would portend a recession sometime next year. And it does also suggest that inflation will come down to 3%, 4% at some point over the course of the next 12, 18 months. On the other hand, you have a stock market and a lot of market prognosticators who are much more bearish about inflation and think it's going to take a lot longer to get it out of the system, and varying degrees of bearishness about recession. But in any event, it's a much more complicated investment environment than we've been used to for quite some time. And the Fed's posture now is really one of dealing with inflation and taking monetary liquidity out of the system, which is going to have impacts on credit and activity for some time, I think.

And how would you contrast the U.S. versus Europe? I feel like in Europe you have not just the geopolitical uncertainty, but also there's higher prices for energy, commodities. Those tend to be a headwind for the region. What are you hearing from clients in that region?

Well, first, let's start with the fact that inflation seems to be a global phenomenon. The constituents that make up the inflation in geographies are a little bit different. But at the same time, I think the world is experiencing a period of high inflation, and there are many routes to that. Europe is differentiated a little bit by the fact that the economies are likely to slow down faster because of the high dependence on very expensive energy at the moment and also the fact that there's not as much of a stimulus cushion in Europe as there was in the U.S., where the consumer really has built up enormous savings. That was not the case in Europe. Also, the credit markets are not quite as deep in Europe in the following way -- the high-yield market is not deep a market. It's much more reliant on bank financing and private credit, which has been a bit of a ballast to activity in the U.S. over the last 6 months or so, is not as present in Europe as it is in the U.S. But still, it's a -- it's going to be -- it looks like it's going to be a little bit more challenging economic environment sooner than the U.S.

Got it. So maybe with that backdrop, let's dig into the M&A environment. We've been getting a lot of questions on that front. Has anything changed you think incrementally from the earnings call in April? And where do you see the environment in general right now?

So I sort of pinch myself, because surprisingly for us, it feels reasonably good still. But I feel a little -- I use this a lot, so it's getting overused. I feel a little -- sometimes I feel really like roadrunner, where you've gone off the cliff and you're still running and you're just waiting to fall, but it hasn't quite happened yet. The fact is, is that when you look at volumes announcements, it did a little better in the second quarter than the first quarter. It's still not quite as good as last year. Completions down a bit in the second quarter and the first quarter from last year. I'd say just anecdotally, in Europe, the sponsor activity is softening a little bit, but there's still more activity than you would expect when you have this kind of change in the credit markets. And the same in the U.S. in that regard. And again, I think the ballast in that market is because of the very large amount of capital available in the private credit markets that's offset some of the pain in the high-yield markets. And then on the strategic side, I think we have been in an environment for quite some time now, really the last year or so, where the very, very big either vertical or horizontal deals are not happening because of the antitrust environment. But you're seeing a lot of deals in the kind of $1 billion to $10 billion space, which are not as challenging clearly from an antitrust standpoint, but are strategic to companies. I think the big question around those deals over time is going to be: With the change in the equity valuations, do you have an ability to match buyers with sellers because expectations change? So far, we haven't seen too much of that. A little bit in the tech sector. But in other sectors, it hasn't been that profound yet. But that's something to keep an eye on with the drop in the valuations.

And how long do you think that would be? Do you think it's still a few quarters out? Do you think it can happen pretty quickly?

It could happen pretty quickly because you continue to see these drops, and people then take a pause and they say, "Look, our exit multiple has changed. We have to think about how we value it." But at the same time, there's still -- when you look at credit markets, if they're -- at the investment-grade level, there's still credit available on a real interest rate level. It's obviously still pretty cheap. Historically, the financing levels are still pretty cheap. So to the extent that you can finance deals, it's kind of still a pretty attractive time to put money to work. That said, when you have these kind of shifts in environment, it shifts sentiment.

And what are clients telling you in Europe specifically given that when we look at the announced M&A activity, it seems to have held up pretty well? And just given where the environment is right now, it held up pretty well. So what are clients telling you now?

Well, I would say our activity level is still good in Europe. Again, I go back to the metaphor I used. I'm wondering when that changes. But it feels pretty good for now. Clients are strategically in the same framework they've been in, which is that, number one, there's enormous technological change going on. So if I can do things that give me technological edge, I should do it. And number 2 is how do I position myself for the energy transition, which even though there's a lot of interruptions because of the new focus on fossil fuels in Europe, in particular, actually, that probably accelerates a lot of the transition discussions because of the need for alternative sources of energy. And so I think you're going to continue to see a lot of activity in that space.

And presumably, given your long relationships in the region, that probably helps you in an environment like this where there's elevated uncertainty and you have those deeper relationships.

Look, I think any kind of environment that gets complicated is good for us. I mean the easy environments are never really as good for Lazard as maybe some others, but the complicated environments are very good for us, because the level of -- the need for great advice at the senior management and the board level is greater in an environment like this and that's where we excel.

So one of the themes of this geopolitical environment has been a nearshoring here in the U.S., closer ties between the U.S. and Europe. Is that already impacting some of your M&A conversations? And do you think that's going to be a big theme for M&A activity over the next 3 to 5 years?

It's interesting. I think it's going to be a theme for M&A activity, and it's also going to be an important theme around investment by infrastructure funds. I think we're going to find, first that reshoring is going to lead to some incremental M&A that is seeing ways to augment, improve supply chain. But I think the big opportunity is going to be financing the build-out of new infrastructure -- and I'm saying corporate infrastructure, not just physical and traditional infrastructure -- in the U.S. and Europe, and actually, in the Middle East as well. And we're seeing that in multiple ways in our business right now.

And where does Lazard come in, in those conversations? How much more of that business are you doing?

Well, the Middle East is an example. We're helping raise money for a very significant green hydrogen project. In Europe, we've been super active in the renewables space and the telecom infrastructure build out, fiber-to-home. In the United States, also in the fiber-to-home infrastructure build-out. And I think you're going to see -- and also in the renewable space in the U.S. And I think you're going to see quite a bit more activity in that space for us.

And what about the cross-border deals? Do you think that, that's a little bit on hiatus right now?

I think that the big bets that we saw made in the '00s, I think that's unlikely to come back for a while. I think that's complex, again, because of antitrust. But I think where companies in Europe can increase the position in U.S., I think you're going to see that. And the -- kind of, again, not your company type of deals, deals that don't have big antitrust. It's a more favorable environment for that now because of the political environment in the U.S. is more benign around that than it was 2016 to 2020. But at the same time, I don't think we're going to see an overwhelming number of big deals like that. In Europe, I think you're going to see more kind of cross-border deals for sure.

And that's within countries in Europe?

Within countries in -- yes.

Got it. And then can you talk a little bit about sponsors. Clearly, they have a lot more capital to put to work. Private market valuations might not have come down as much as public market valuations, but they have been coming down. What are you hearing from them? At what stage do valuations become compelling for them to step in, in a big way?

Well, I think you're seeing that incrementally now. There's still a lot of activity in the sponsor space. We're seeing a fair number of go privates in Europe and particularly in the U.K. And the key there is just making sure that the financing remains available. The private equity funds have a lot more tools at their disposal to get deals done. They have the ability to leverage against the subscriptions, which people are doing. They have the ability to tap into private credit, which they're doing. So they're not as dependent on the traditional high-yield markets and bank financing as they once were. So this kind of environment probably plays to their advantage for a longer period of time than it would in past environments where you see these kind of changes in the credit outlook.

And any differences there between U.S. and Europe?

As I said earlier, I think that the private credit markets are deeper in the U.S. than they are in Europe. But at the same time, we continue to see reasonable activity.

Great. Before I move into some of the other Advisory businesses, any major areas or white spaces that you're focused on for the next 3 to 5 years?

Well, look, I generally don't like to talk about the things we're going to do so that we don't get copied immediately. But as I've said previously, the biggest white space for us continues to be North America. We've made some investments recently in Europe that have really strengthened our business there, which I think we're all very excited about. As I said, I think the private credit markets offer an enormous opportunity for us to arrange financing, and I think that's a very interesting area for us to play in. And I think the complexity of the world lends itself to more, what I'd say, specific advice around geopolitical, which is something that we've really excelled at.

So in addition to private capital advisory, I think you've also spoken about the strength in shareholder activism and defense. How do you think those businesses develop in this environment? Does that business get tougher or easier in this kind of an environment?

It's a little bit of both. What's kind of interesting around the last 6 months has been a real elevated level of activism both in Europe and the U.S. It's just been a pretty tough market environment. So that suggests the positive on it. And the negative on it: when you're in an environment like this, if you're long in a stock, it doesn't matter what you say, it's going to go down. And so, consequently, I think that makes it a little bit more challenging for some of the activist positions. But still, there's an enormous amount of capital in the hands of activists. They've been successful at creating change in companies and getting rewarded for it. And I think to the extent that, that dynamic continues, we'll continue to see activism.

Right. And then I guess the last business on the Advisory side, which is restructuring. I know you've said that dialogues have picked up, but default rates haven't really gone up. So I guess activity and revenues haven't picked up there. But what do you need to see for that business to really ramp up? And where do you see that business maybe in 2 or 3 years?

Well, I think it's starting to pick up now. I don't think we're seeing the acceleration we saw in '08, '09 yet or what we saw in -- around the pandemic. But I think the activity level is starting to pick up. Dialogues are clearly picking up.

And you think it's more likely a 2023 event at this stage...

As always -- I mean, these things take a while to unfold, and so an activity you start in the second half of this year usually doesn't start to hit fees until '23. Sometimes on financings, it can happen a little bit quicker. But when you have this kind of change in an environment, where valuations change substantially, where credit conditions change, you're going to see restructuring activity start to pick up.

And anything you need to do to prepare for that? Of course, you've been in this business for a long time. You've been maintaining teams. You have a strong level of advisers, both on the M&A side and the restructuring side. Is there anything that you're doing to prep for the environment?

Yes. Every cycle has its own elements that are unique to that particular cycle. As an example, the '08-'09 cycle was heavily focused on the financial service companies. In the '00s, it was really a lot of frauds, a lot of them took place as a result of the dot.com bubble. I think this time around, it's going to be a little bit more broad-based. I think that because the sponsors have been so active, there's likely to be a little bit more concentration with sponsors than was historically the case. And I think that -- again, I think that these pools of private credit are going to play a much more significant role in the restructuring environment in this cycle than they did in previous cycles. So those are probably some of the elements that are different, but I think we're pretty well positioned for all those.

Great. I want to move to the Asset Management business. I think we've seen the markets pull back across the Board, but more so in growth stocks across the globe. Your traditional strategies are more focused on value. So how are your institutional clients changing their portfolios and adapting to this new environment? What are you seeing there?

Well, usually, because we're very institutional in nature, things happen slowly both in and out. And so I think what's taking place right now is a revaluation -- reevaluation by the big money managers about what their approach and position will be going forward. And I think this market environment is pretty favorable to our style of investing. I mean, we tend to be geared towards quality and value. And historically, that's been a great strength of ours. Obviously, that's not been terribly fashionable for the last 9 or 10 years. I think we're going to be in a very different environment for several years now, and it probably is a stock pickers environment, which is one which should benefit us.

So do you think we have seen some reallocations accelerate more recently towards the end of last year, earlier this year? On the call, Evan said that you're seeing some new interest come back into the emerging market -- into the emerging market funds just given where valuations are. Has that trend continued? Or is this...

Yes, I think that -- look, to the extent that people are going to put money in emerging markets: the performance of our fund has been quite good over the last period, and as a result of that, it should attract more interest than historically has been the case over the last decade or so as people are disinvested. But look, this is an environment where I think people are a little frozen and they haven't yet made up their minds what they're going to do next. And until they do, I don't think you're going to see big changes in the way money flows. But at the same time, I think we're well positioned, not only there, but we have a whole bunch of new products in the thematic area that are really catching momentum. And we obviously have done pretty well in the quantitative space through all the ups and downs over the last several years. So that should help us as well.

So while we're on that subject, can you talk a little bit more about all of those emerging strategies whether it's quants, thematics, all that you've been investing in those for several years now? You've gotten a lot of gross inflows in those funds. Can you talk a little bit more about your investments there and what the trajectory is?

Look, one of the things -- first of all, the core -- getting the -- making sure that the core funds have the focus, the performance is really important for us. So that's obviously a key priority. But we've also, as we've done forever at Lazard, is we innovate new products. And you know from our investor deck that a very significant portion of our assets are from things that we created in-house or team lift-outs that were team additions that we've done from the outside. Our focus over the last several years have been on things that are really differentiated that play to our strengths, where intellectual capital makes a big difference. And so products around thematics and so an inflation product, something around sustainable agriculture, digital health, I mean, these are all themes that we've identified and we've launched products that we think are going to have some traction over the next few years or so. And there's quite a -- we have developed quite a capability to really create these products in a very efficient manner and get them up and running.

And is it -- does it get easier now, because I guess -- it's always harder to raise, say, the first $500 million or the first $1 billion. And then as you have more and more scale in these funds, does that help with lift-outs? Does that help with just getting in more clients?

Yes. Look, when we start things from scratch and you're incubating a strategy, it's 3 to 5 years till you get a track record. And then on top of that, you've got to get -- the first $50 million is the hardest. The next $50 million is even -- is a little bit easier. And then it starts to get easier after that. But that's a challenge. So one of the things that we focused on when we're bringing on new strategies is -- in this environment, there's a lot of teams out there between, call it, $100 million and $1 billion that's kind of stuck. It's difficult to get institutional money or professional retail money or even family -- increasingly, family office money if you're at that size range because you don't have the compliance, you don't have the cyber. And so consequently finding a platform that can offer you that is attractive. And we found that picking up teams like that with assets under management already is something that is an attractive feature for them and especially attractive feature for us. But the key for us is to avoid product proliferation. You have to do it in areas where you think you can make a big difference. And the sales teams are excited about bringing those teams on and feeling they can really add value.

So does it get easier in this market environment to do...

For sure. I mean, this is -- what was interesting is we identified this as an opportunity a few years ago. Getting your sea legs in terms of getting these teams on, perfecting it, particularly the ones that have some technological edge, creates -- you have to develop a skill base around that, and I think we've done that. The key now -- and I think this environment is probably even better than the last -- than the environment was over the last couple of years. So we'll continue doing this. But again, you have to be very selective. You have to avoid product proliferation, and you have to make sure that they're really additive.

Got it. And where are you investing in terms of technology in the Asset Management space to be able to scale up even more?

Well, look, the key thing is making sure -- I mean, there are some basic investments that had to be done around trading platforms, which are pretty much done; modernizing some of the outreach to clients, CRM, things like that, which is kind of, again, blocking and tackling. But the area that's exciting is the data strategy, and that's something we're very focused on.

Got it. I do want to move on -- I do want to move to the audience for questions, but maybe a final one on the Asset Management side. Last year, you've had significant success in your fixed income strategies. This year, we've seen rates move up fairly sharply. How has that impacted that business? And what are you doing there?

Well, look -- I mean, that business for us is relatively small to the oversize of the portfolio, but it's been important. And we have some really core areas of strength. Emerging market debt, emerging market currencies is an area where we have scale relative to the market. And we've got some really terrific strategies in converts that have done well. And these are areas we're just going to build into.

Great. Any question from the audience? All right. Maybe we can move on to talent. You've hired, I think, over a dozen bankers last year, and there's many more hires in the pipeline this year as well. Can you talk about where you're hiring and also what the hiring environment is like right now?

Sure. So first of all, the hiring environment is becoming more attractive as we speak. We haven't seen -- last year, obviously, was probably the most difficult year for Wall Street in terms of retention and pay in a decade or more. I think we're seeing a softening as we speak. Part of that is around expectations. It's not so much pay yet, because no one gets paid till the end of the year. So it's becoming a more, I think -- and also what's happening is, is the competition for talent is diminishing. People are starting to pull back. But look, from a lot of time in this business, for better or for worse, the best time to invest is when everybody else is divesting and talent gets cheaper. And we're very focused on that. We have a franchise that's durable, lasted a long time. This will be -- if we enter a bad cycle, we've been through them before. But this is the time where you position yourself for the future. And I think we're going to try to take advantage of that, continue to.

And is there any differences in the competition for talent, for say, senior talent versus middle level talent?

I would say that the activity around middle level talent is clearly diminished from where it was last year. And at the more senior levels, it's -- I would describe it as inconsistent. For us, a focus on -- last year, we -- a few years ago, Peter, when he took over running the Advisory business, identified 2 themes. One was with the change in the administration, which was likely to happen -- this happened before he became -- after he became running the Advisory business -- he identified that the antitrust environment was going to become much more challenging and that we were under-indexed to private equity. So opening the aperture on recruiting to address that, opened a much larger playing field of people that we could hire to help us in that business. And that's been beneficial. And so our platform is relatively attractive to many people who have been successfully prosecuting that business and coming to Lazard, has been something that's been good for them and very good for us. And so that's helped. I think the more traditional senior bankers you associate with Lazard doing the big public market deals, that's an opportunistic kind of hire, which in a very active market is difficult, and in a market like the one that we're likely to be heading into, is going to get a little bit easier. And that's quite attractive for us.

So that's something you would be looking to do, especially as you invest in the next 5...

Always. And as I said, we have a lot of white space in the United States. We always are looking to fill in our strengths, go from strength to strength. And I think we'll continue to do that.

And while we're on that topic, I mean, how do you think about the antitrust environment here in the U.S.? That's always been pretty robust in Europe, but it feels like it's accelerating here in the U.S.

It's tough in the U.S. I think that companies are intimidated about doing very, very large challenging horizontal and vertical deals. Time frames are being pushed out. And there's kind of an inconsistency in terms of the behavior of the antitrust authority. So it's more complex than it was. But at the same time, there are a lot of deals that are getting done that don't challenge -- that aren't being challenged. And I think that's where the activity has been and that's where the focus has to be.

And what do you think about -- on the strategic side, there's a lot of corporates that are flush with cash. Presumably, they should be in the market a lot more now given that valuations have come down. But at the same time, there is this antitrust component, where they might not be...

Yes. But at the same time -- I think when you look at what they're going to do, if you think about it in the -- if you're a $50 billion, $100 billion market cap company and you do a $1 billion to $10 billion deal, first, it's not a bet-the-company kind of deal -- so good or bad environments, they will likely to be active if it adds value. And second is people are going to avoid the deals that are going to be really tough antitrust deals. And I think we'll see those kind of companies probably reasonably active. But that happens every time you see a change in cycle. So...

Got it. And then maybe last on capital return. You've been leaning on buybacks given where valuations are, given the attractive valuation of the stock. Has anything changed there? Has the recent market volatility, maybe the environment we're getting into given you any cause for concern, any cause for a pause? Or are you still leaning into buybacks?

We're still leaning into it. So I'd say not yet, but we're still leaning into it. We see at these levels for our stock lot of value.

Because there was a lot of capital accretion last year that you're putting to work there.

Yes. And I think Evan has been in his 2 hats he's wearing at the moment, very effective and adept at buying back stock, yes.

All right. And then maybe to end, anything -- you think the market is not fully appreciating right now...

I think that there's just all these headwinds from the market. So to start suggesting that "we're undervalued, buy us now," all this is a little bit spitting into the wind. I mean we're in a market cycle. It will change. But right now, it's a very tough time for people to get excited about any story, because the macro events are very hard to judge, very hard to translate into action at the moment. And so consequently, I'm not surprised that our stock -- everybody in our industry's stock is weak. We're sort of a barometer for what people's expectations are about a robust economic environment, and so we end up suffering when those valuations change. That's what's going on now. But that's an opportunity to buy back stock and take advantage of the environment for the business and position ourselves for the future.

And you've seen this through several cycles?

Yes. This one is different from -- I mean every cycle is a little bit different from others. I don't think anybody around has seen us go from -- anybody investing today, except for maybe Warren Buffett, has seen us go into an inflation environment. This is a big change.

All right. With that, we can wrap up. Ken, thanks so much for joining us.

Thank you.