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

Okay. Let's get started. So up next, we'd like to welcome Peter Orszag, CEO and a member of Lazard's Board of Directors, who joins us for the first time at this conference for a fireside chat. Peter took over as CEO of Lazard on October 1 of this year after having previously served as CEO of Financial Advisory and he's been at Lazard since 2016. Prior to Lazard, Peter held a number of senior roles at Citi and the Obama White House. So thank you so much for joining us, Peter.

Great to be with you.

Okay. So it's great to have you for the first time here. I know you've had a big announcement just a few months ago about the 2030 strategy. So I was hoping maybe we could just get a few thoughts on where you're going with that and maybe fill in some of the details on the strategy.

Sure. So just to remind everybody, Lazard 2030 sets a goal of doubling our revenue by 2030 and achieving a 10% to 15% TSR on average between now and then and also expanding our relevance. And I think the natural question -- we wanted to put that vision out first, so that it was clear where we were going. And then the natural question becomes, okay, what -- how are you going to do that? So I want to just maybe fill in a little bit more of the stepping stones to 2030 since 2030 is many years away. At its -- and I think of this in 3 layers. So at its core, the foundation has to be built on a, I call it, commercial and collegial culture. We could talk more about that if you wanted to, what we're doing to encourage that. But that's the foundation. The next layer is 3 building blocks that I think are advantages for Lazard. The first is, in my opinion, the world's most powerful brand among the independent advisory firms across the globe. Second building block is fantastic people. Wherever -- I've been traveling a lot, the feedback I get on our people and our content is fantastic. And the third is an organization that is ready for change and ambitious about the future. So without that second layer, it would be more difficult to succeed. And then the third layer is, okay, so what specifically are you going to do? So let me talk about Advisory, Asset Management and capital allocation. On the Advisory side of the business, achieving the 2030 goals is a combination of higher productivity and more MDs. And there are lots of ways that we can raise productivity. Maybe we can talk about some of those. But just to be clear, we believe that we can accomplish or achieve, assuming market conditions are normalized, a productivity per MD in 2025 of $8.5 million and in 2028 of $10 million per managing director. And again, I'd be happy to talk about the specific steps that we're taking to boost our productivity because, as I've said before, that's a key form of operating leverage. And then secondly, on Advisory, expanding the number of MDs, both through internal promotion. We are the, I think, the leading independent Advisory firm in terms of having an established track record of growing our own talent and being able to promote really talented bankers from associate on into productive managing directors. So internal talent development and promotions and then also lateral hiring coming together to on-net expand the number of MDs by 10 per year each year going forward. So if you put those 2 together, and we can talk about where the opportunities are to do the promotions and the hires, but that -- those are building blocks between now and 2030 on the Advisory side. On the Asset Management side of the business, I think the way to think about it is optimizing. We're not talking about -- and I think there may have been some confusion on this, we're not talking about doubling the size of the traditional Asset Management business. I want to be very clear about that. What we're talking about is optimizing the traditional Asset Management business and diversifying or pivoting into less liquid markets and other lines of business in Asset Management or wealth management outside of the traditional contours of active management in liquid markets. So let's talk about that for a second. In the traditional business, what I mean by optimize, there's a tug of war between market appreciation on the upside versus fee compression and net outflows on the downside. And our goal is to have the market appreciation at least more than offset the fee compression and net outflows, so that there's some modest growth year by year. And we think that's -- that can be accomplished. What can you do to minimize net flows and boost investment -- sorry, minimize net outflows and mitigate fee compression? Two basic things. One is really focused on investment performance, and we now have a wide variety of strategies across emerging markets, global infrastructure, robotics, some regional strategies, et cetera, that are already showing 1-, 3- and 5-year outperformance on the investment management and investment performance side of things. And then also secondly, upgrading our distribution team so that as we've got that outperformance, we can go sell it hard. So that's the traditional business. And again, expect some -- the goal there is some modest growth because market appreciation more than offsets the fee compression and net outflows. But then we want to take the opportunity to diversify into markets where Lazard has not really played. So less liquid markets, and we're setting a goal of 30% of the Asset Management business being outside of the traditional liquid market category that we're currently focused on by 2030. So that's a calibration of the degree of the diversification that we hope to accomplish disproportionately through inorganic growth. And then that raises the question, well, how are you going to finance the organic growth? So the final thing I want to say is about capital allocation. We have 2 extremely cash-generative businesses under normalized conditions. As one reflection of that over the past 4 years, we -- after interest payments, after the dividend, after buybacks to offset dilution from our deferred compensation schemes, we bought back on top of that $1 billion in stock. So that gives you some indication of the degree of cash generation that the 2 businesses generate. And the objective going forward is to prioritize inorganic growth as a higher priority from our excess free cash flow. So the way to think about the financing side of what I said with regards to the diversification is that we have a lot of cash generation, we are intending to do programmatic M&A, not string-of-pearls type of approach to build out the 30%. And year-by-year, we have the cash to be a significant funding source for that program.

Great. There's a lot there.

A lot to unpack, a lot to talk about.

Yes, absolutely. So maybe we could just start with the Advisory side of the strategy, the MD hiring. Maybe you could just aggregate a little bit what you've done so far this year in terms of shifting to more productive MDs. Where you have been investing and where you see the best opportunities to invest in those 10 MD hires per year that you just talked about?

Sure. So first, let me repeat one thing that I said on the earnings call just because I think it's relevant, which is as we're shifting to a growth -- a high-productivity growth focus, there's a temporary phenomenon that goes on with regard to productivity because when you go out and start promoting more people and hiring more people, you have this temporary phenomenon where they are on the kind of ramping stage of their productivity. It's natural. It takes a couple of years, 2 to 4 depending on the background, et cetera, for people to become fully productive on a platform. And so when you dial up the MD growth phenomenon, you temporarily get this effect where the percentage of MDs that are on the ramp is disproportionately higher than normal. So that is what's been happening at Lazard. We have 40% of our MDs that are currently in their first 3 years of either a promotion or lateral hiring. Historically, that's been 30%. As we enter a period where this is the new normal, and we're just doing more expansions of MDs in the steady state, the people coming on the ramp are going to roughly offset the people going off the ramp. And so there's not as much of an impact on what I would call average productivity across the board. But while you're going through that transition, that kind of onetime step up, there is an effect. So that's just one comment. Second, with regard to where we've been investing. So you either do it in terms of the promotions or the hires, maybe I'll just focus on the hires. We will hire gross, not net. That's important, but about 10 people over the past 12 months, some of whom have started, some of whom are about to start. And they're disproportionately in areas where we saw lots of opportunities, so Germany and the Middle East as an example. In private capital, so maybe we'll talk about our private capital coverage effort and the feedback loop that we see there, and in restructuring. We have 3 restructuring managing directors that are on garden leave right now and will be joining us over the next couple of months.

Okay. That's very helpful. So maybe just on the Asset Management side here. You did talk about the inorganic growth opportunity. Maybe you could just talk a little bit more about the framework you are using to think about that inorganic growth? And then I know this is harder, a little bit out of your control, but just thinking about timeline for that aspect of it.

Sure. Well, first, let me just say the framework is going to be one that is -- got a programmatic M&A kind of mentality of building up a string of pearls. So that's point one. Point two is we're going to be very disciplined in our M&A acquisitions because we're cognizant of the pros and cons of going out and trying to integrate an asset management team or a firm into Lazard and want to make sure that we do that effectively and well, and also that the pricing is shareholder value accretive or at least shareholder value increasing. And so those are sort of guidelines or principles. With regard to kind of where we're fishing, as I said on the third quarter earnings call, there is a stage of development in the Asset Management kind of progression that we think is particularly well suited for what we're looking for. So it's entities that have sufficient track record so that, that investment performance can attract new capital. That's in some sense, the whole point of going inorganic rather than seeding a new team to accelerate that process. You don't have to wait for the investment performance to accumulate. So that's fact one, which is a sufficiently long track record that we can raise funds off of that. Second thing, though, is that they're not so far down the AUM progression that the idea of being programmatic or a string of pearls kind of gets off. So it's -- maybe they're on their second fund, they're probably not on the -- fundraise, they're probably not on their fourth fund. And looking specifically for that inflection point so that we're, again, maximizing the shareholder value from the strategy. And then the question becomes, okay, but this is kind of a crowded space. Lots of people are interested in private credit, infrastructure, real estate, blah, blah, blah. So why Lazard? And I think there are 3 big reasons for why we are an attractive place for these firms. The first is the brand, which is very powerful. The second is we have a global distribution force. A lot of these firms as they look to scale would need to build that out themselves. There are others that have global distribution teams, but they tend to be much, much larger. So we are differentiated along that dimension. And then the third thing is precisely because we have not done this diversification in the past, there is much more running room on the Lazard platform so that these firms would not be bumping into or get crowded in terms of the distribution team selling their product. That makes it a very attractive moment for us to be doing this right now.

Okay. That makes a lot of sense. And then just one other broader one on the strategic plan. I guess just you talked a little bit on the productivity side of this, but how are you thinking about the ramifications on profitability as you work through the plan? How should we think about the ability to hit that mid- to high-50s comp ratio in particular, and I guess the non-comp ratio guidance as well during the process of working through the plan?

Yes. We're very comfortable that we will be able to achieve our historical operating margin targets under normalized conditions. And just to unpack that a little bit, let's talk about productivity. I mentioned, I think, again on the third quarter earnings call. I don't mean to keep going back to that. When we raise productivity and maybe I -- we'll get a little bit more granular on how we'll do that. But as we raise productivity for managing director, there is significant operating leverage that comes from the non-managing director compensation ratio coming down. And so the way to think about how we fit the growth that we're planning to do on -- for example, on the Advisory side by adding to the number of MDs within our historical comp ratios, is that we see significant opportunity to raise productivity, which drives down the non-MD comp share and frees up room to invest in new MD hires. And that has been accentuated by the potential for technology to reduce the ratio of non-MDs to MDs over time because -- maybe we'll talk about generative AI, but I think we're on the verge of a very exciting period of time in investment banking, where a lot of the more mundane tasks that analysts and to some degree, associates do will be replaced by automated tools and that frees up potentially more room in the non-MD comp pool also to do the investments in managing directors that we want to do.

So maybe just one more on that because I think that's a really interesting point. I think historically, we've seen productivity improvements, but it feels like the bankers just end up doing more, right? There's more services. And you tell me if I'm wrong, it doesn't feel like there's necessarily been a higher fee. So why do you think this time is different? I think that would be a fascinating question.

Sure. Well, maybe I'll just talk for a second about productivity as an example, like I mean -- because there are lots of different ways of parsing that. Look, I mean, the easiest answer is we're looking for more deals and higher fees. And in fact, I would note, even over the past couple of months as we've really focused on these things, some of the deals that we're involved in feature the highest fees that Lazard has ever had. So that's an encouraging sign of this. Everything from our compensation scheme, which is going to be shifted to explicitly incentivizing both collaboration and productivity. And in the productivity component, we'll have a ratchet so that as productivity increases, the percentage payout goes up, reflecting that kind of operating leverage that you get from particularly high productivity to lots of things in which we can expand the suite of services that we offer both to accelerate the client development process and also with regard to existing clients, sell them more things. So our geopolitical unit, which is in very high demand right now is one illustration of that phenomenon. I think our ability to do convening is another illustration. So there -- and we can keep going. There are a lot of things that we can do to hit the objective of raising productivity, and we are already in motion on getting that done.

Excellent. Okay. Maybe we can just turn to some of the businesses here. Maybe start with M&A. It does feel like some of the industry data around M&A announcements have started to improve. I think when we ran the data, it looks like at least this quarter, volumes are up 24% versus last quarter, but obviously, completions continue to lag. Things seem to take a little bit longer. So I guess, at this point, what do you think is driving these dynamics? And what do you think really breaks the logjam and causes this -- those deals, to start to close it?

Well, look, a couple of months ago, I said that I thought we had turned the corner or hit the turning point on the M&A cycle. Our conviction around that has increased since a couple of months ago. So we are confident that the fourth quarter of this year will be our best quarter of the year and that '24 will be better than '23. So the question becomes, what were the underlying fundamentals driving that? And the way I'd like to think about it is what are the things that cause M&A to proceed? And then what are the things that are tailwinds? And so in the kind of catalyst category, you have lots of fundamental forces. We talked a little bit about technology, that's clearly a force for transactions. The life sciences revolution is another. The energy transition, actually traditional energy, as we've seen, but then also the energy transition is another big category. The so-called derisking or decoupling or whatever you want to call it, with regard to China is another big driver. So there are a bunch of catalysts that drive M&A activity forward. And then on the kind of the negative or the headwind category, there really are 3 and I might add a fourth now. But the 3 are, we had a very rapid increase in interest rates that caused the present value of cash flows from the seller's perspective to decline, and there were a lot of Boards or C-suites that wanted to see whether things would pop back up. And I think what's been happening -- and so it caused a buyer-seller disconnect on value. What's been happening is the longer this high-rate environment has been in place, the more people think, "Well, you know what, we're just going to have to live with it. Let's proceed anyway." So that's been attenuating. The second is that rapid increase in interest rates also caused a bit of a freezing up in the financing markets. And as the Fed tightening cycle -- maybe we'll talk about inflation later, but as the Fed tightening cycle kind of tops out, maybe has reached its limit or is very close to reaching its limit, we're definitely seeing signs of thawing in the financing markets, plus you have this brand-new force, which we should also talk about, which is the rise of private credit, where you're seeing deal size appetite in the private credit market clearly increasing. So that one is attenuating also. Third is regulatory, where the big is bad team had put a chill on strategic transactions for a bit. But I think one of the reasons why you're seeing big deals come back is several prominent court losses have caused Boards to say, "You know what, worst case we'll litigate it, and we think we'll win because the law has not changed." The authorities are just putting a new interpretation on the law. And in court, what matters is the law, not the way the FTC or the DOJ is newly interpreting that law. So that's also attenuating. And then the final one, is new, which is we have 2 hot wars going on in the world. And that creates a little bit of nervousness, but I don't think sufficient at this time to be a massive headwind. So there's always this type of war between headwinds and tailwinds, and it's just that type of war has shifted in the constructive direction. And we see that with regard to -- we're getting new mandates practically every day now and the tone of the dialogue, more serious new ideas are coming up in our discussions with clients.

So maybe -- and this is sort of a difficult question, but I'll ask it anyway. When you think about normalized M&A, I think last cycle was a little bit extreme, prior cycles were perhaps a little bit more of a steady growth and a peak after a number of years and activity falling after that. But I guess, how are you thinking about normalized M&A this cycle? And I guess sort of what's the time frame, which I know is inherently difficult, for us to get back there. It doesn't seem like it's 2024, could this be a number of years?

When I think about normalized, something like an average of the past few years with the exception of '21, which was an outlier, is probably a decent guidepost. Look, at this point, conviction level around '24 being better than '23 is fairly high. The world's uncertainty, you never know. But -- and there is some ambiguity about the pace, but I think it's possible based on the constructive dialogues that we're seeing that we'll get closer to that ZIP code in '24. Again, as you pointed out, you just -- it's premature to be having a definitive view, but it's possible even in '24. We'll get into that ZIP code. And again, I think the most promising or the most auspicious thing is in that tug of war between the fundamental forces, it's clearly shifted in favor of the constructive side.

Okay. I think you have a unique perspective on Europe given Lazard's presence there and strength there. Maybe you can just talk about some of the differences between what's holding up deals or not holding up deals in Europe versus the U.S.?

Well, look, I think there's a little bit of a macro difference, obviously. In general, I'd say the U.S. economy has held up better than the European economies have, in part because many economies, let's take Germany as an example, have a very difficult fundamental transition to undertake involving moving away from Russian energy and moving away from exports to China. And that combination happening at the same time makes the macro environment very challenging. Now one of the benefits for Lazard is there are a lot of European companies now that are interested in U.S. targets because the macro growth environment in Europe looks a little bit more muted relative to the U.S. one. That is fantastic for a place like Lazard because we are the only independent advisory firm that's strong in both continents. And so as firms look Europe, U.S., that's a natural place for us to play. By the way, that may be accentuated. There is the possibility of what I've called a EU-U.S. super bloc forming where there's much tighter integration. A good example is the green aluminum steel club that is currently being negotiated. To the extent that, that club kind of gets reinforced, that would just underscore further, I think, European strategic interest in U.S. firms.

Okay. That's really interesting. So just one more on the M&A side. I think you have a pretty unique perspective given your time in D.C. But I guess you talked a little bit about antitrust, I think there's obviously these reports from the FTC on changing Hart-Scott-Rodino. Obviously, there's a lot of focus on antitrust in Europe. So 2 questions. If we see in 2024 a Republican administration, does that change any of the antitrust dynamics? And then I guess, just generally, we're moving into a U.S. election year, is that something that comes up more? And do you think it could either weigh on or benefit M&A activity as we move closer to that time?

Sure. I'll answer the second one first. So I'd say -- and by the way, it's not just the U.S. election. There are a lot of elections happening across the globe next year. And those -- and that underscores 2 things. One is you cannot make a business decision today without taking geopolitical forces into account. It's one reason why Lazard, which has long been known for combining sort of pure business with a broader perspective is a natural counterparty for many of our clients to help them navigate this, further accentuated by the new geopolitical team that we formed. But what I'd say about the elections is right now, it's coming up more in Europe than in the U.S. and coming up only in like the first 5-minute warm-up to the meeting, not the actual meeting, the typical like to the, "How's the weather?" They're like, "So what do you think is going to happen in the U.S. election?" And then you get into the meat of the meeting and it's kind of downplayed. And that may be consistent with, at least on average, I believe, Goldman Sachs research has shown that elections don't have a massive effect on M&A activity. So that's the first part -- or the second question. On the first one, yes, historically, you've seen when there are transitions from Democratic to Republican administrations or vice versa, there is an associated shift in the stringency of antitrust enforcement, a little bit more extreme at the Department of Justice than at the FTC just given the bipartisan nature of the commissioners at the FTC. But I would say that shift would be significantly larger today if there were a change from the current administration to a Republican one, because of the big is bad team that's in charge of these agencies right now. They would not be in charge under a Republican administration.

Okay. Okay. Maybe let's turn to restructuring. You obviously have a very strong business there. Maybe -- and I think you've actually had a slightly more positive tone than a lot of your peers, which I think is interesting. So maybe you could just talk a little bit about what sort of activities you're seeing. Is it more liability management versus Chapter 11, Chapter 7? And then I guess when you just take a step back, what would need to happen to turn this from a good structuring environment to a great one?

So a couple of comments. We are definitely -- we lagged some of our competitors in the early stages of this restructuring cycle. We are now seeing a significant uptick in our dialogue and mandates. And that's partly a reflection that our team, which has historically been on the debtor side, on the strategic side is now diversifying into private equity-linked firms and creditor work. So a more diversified portfolio. I think I mentioned earlier, we have 3 new restructuring hires coming on the books over the next couple of months that will further diversify the restructuring practice that we have. And a couple of other quick points. First, with regard to the future on restructuring. It really comes down, I think you've got this massive wave of maturities over $1 trillion, $1.3 trillion, I think, in maturities that -- the maturity wall in '25, '26 and '27. So there's a lot of debt that is out there. If rates remain high, it's likely that what's going to happen is you're going to see significant restructuring. And so what's interesting is there's certainly a possibility that, that M&A pickup that I talked about will coincide with relatively high levels of restructuring, which is historically anomalous. And then the final thing I would say is, for our business, we are definitely seeing a feedback loop from more extensive coverage of private capital as a big theme as the restructuring world has moved a bit towards private equity, a bit away from Chapter 7 and Chapter 11 and into what you call liability management. But that's reinforced. So we've got our restructuring team focused on that. We've got our new Lazard Capital Solutions team, which is interacting with a lot of the private credit and other sources of capital. And then we've got traditional private equity M&A coverage, and we've got our primary and secondary fundraising effort for private capital. That all plays off of itself. So let me give you a recent example. The GOJO transaction, which -- PURELL is that -- GOJO makes PURELL, boomed during the pandemic and then a crash post pandemic. They were facing some stress over some debt that was coming due. Our restructuring team actually got the call, turned it over to the Lazard Capital Solutions team. And the Lazard Capital Solutions team was able to fashion a creative structure. I think there were multiple different vectors for fundraising for that firm, turned out to be hugely successful. So that's an example of the flywheel across these different categories of covering private capital.

Capital Solutions, I think that is a little bit of a different offering, a little bit unique. So maybe you could just talk a little bit about how that's different than the restructuring private capital advisory, how it fits within the business generally, if you could.

Sure. Yes. So look, I think there's a huge opportunity because what's happened, as you all know, is the rise of alternative asset management firms and the growth of private credit, in particular, as an asset class, which may be further accentuated, we were talking beforehand about Basel III, by additional disintermediation of the banking sector in various forms of lending, opens up an opportunity for a firm like Lazard to step into the middle. So what this new Lazard Capital Solutions team does is the clients are corporates looking for funding, and you match the corporate with all the alternative sources of private credit or structured equity or the other forms of fundraising. So it's different than our primary -- our PCA business because they do fundraising for private equity funds, both primary and secondary. It's different than restructuring because the company doesn't have to be in distress. But it's basically a way of intermediating on behalf of our client, the growth of private credit as a -- and other structured equity and other things in this new world. And the other thing that it does, though, is even though we are adamant about getting the best possible transaction on each individual transaction for our clients, which are the companies in this case, the interaction with the alternative asset managers on the other side of the table, again, creates a set of relationships and a flywheel effect that can then benefit other parts of our broader private capital coverage.

Okay. All right. I think we just have time for one more here. So maybe just thinking about the fact that there's still a somewhat challenging operating environment. I guess what are the sort of puts and takes around margins into next year and into 2025? And I think it would be helpful if you could differentiate between some of the trends on both the comp side as well as on the non-comp side.

Well, a couple of things. First, we had announced earlier this year a 10% reduction in head count measured from the first quarter of '23 to the first quarter of '24, we are on track to accomplish that. The objective there was to basically clean up or clear away some of the lower productivity areas of Lazard and free up resources to invest in growth going forward, as we mentioned. So that's one thing that's obviously advantageous. What I would say on '24 comp, in general, is it will depend a little bit, as you know, It's very -- the comp ratios are very sensitive to revenue, that constructive environment that I was talking about earlier is at least promising on the comp margin. And then finally, don't forget that as we raise productivity, that's an additional benefit in terms of the comp ratio. So a lot of efforts that we're undertaking will take some time to pay off. We are acting with urgency and some of the impact of those actions will take a little bit of time to play through. But I go back to -- we have an organization that is very focused on growth. It is excited about the ambitious pathway forward, and we've got a lot of opportunity to accomplish the high-productivity growth that will allow us to hit the targets that we talked about while still maintaining our historical margin targets.

Okay. Well, thank you so much, Peter. It's great to have you here.

Thank you so much for having me.