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

All right. Good morning. So before we kick off, I have to read a disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. We are pleased to have with us Peter Orszag, CEO of Lazard. Peter, thanks so much for joining us.

Great to be with you.

So let's kick off with -- you've been the CEO for a little over 8 months now. What's your #1 takeaway in the seat? And how does the culture at Lazard today compare versus last year?

So I'd say the #1 takeaway is I think we're kind of on our way. We put out a bunch of objectives for the firm in terms of renewed ambition and a sense of growth, and I think we're starting to execute against those. So if you look at the labor market or hiring, I think we're doing really well on lateral hires. We are also doing really well -- if you look at the acceptance rate for our summer associates, so that's a very competitive labor market, it's twice what it was in 2016 -- or it was twice what it was in 2016 for the class that just started, that I greeted to Lazard yesterday. And if you want a lot of hope about the future, the summer associate class is just full of diverse talent that is remarkable. And so that's pretty exciting. I also think that the sense of kind of a culture of -- I talk about being commercial and collegial, and both parts of that are really important. A culture of performance and being collaborative, but also being held to account is important for us to be able to achieve our objectives, and I think we're well on our way there also. Now obviously, not everyone is going to love change. And so we're in the midst of continuing to evolve towards a really high-performance culture that I think will lead to the outcomes that we're seeking, and I'd say early progress is great.

So as part of your strategy, you outlined 3 key strategic 2030 goals: revenue, return and relevance. What inning are you in, in hitting your goals in each of those 3 categories?

Well, I mean, by definition, we're going to be in the first or second inning because we're 8 months into a 7- or a 8-year plan. So -- but I think, look, good progress on all fronts. So on revenue, you already saw the first 2 quarters that are decent or at least beat expectations, and that, I think, shows some momentum. We see the market continuing to improve. It's not going to be linear, but we're pleased with what we're seeing in terms of our performance, and I could talk within some constraints a bit more about that. On the relevance, I think we're continuing to expand that. I just came back from a CEO summit over the weekend where we had exceptional people at a gathering. It's the type of thing that we need to be doing very, very aggressively and that we're seeing returns from. And then on returns, I mean, everyone can see the stock price, I expect more in the future, but early days are decent.

All right. So let's dig into the environment, starting with M&A, it's a big piece of your revenue base. And when we had you here last year, industry M&A relative to U.S. nominal GDP was at 30-year lows. Since then, we've seen some improvement. How would you characterize the environment today?

So I think it is turning and improving. It is still disproportionately warming up or it's warmer for strategic than sponsors, but I think that is evolving and changing, and the sponsors are coming back onto the playing field. But we are seeing significant activity. I mean -- so I talk about the, again, the tailwinds and the headwinds. The underlying drivers are really strong. So underlying innovation, I mean, we're living in a remarkable period. Maybe we'll talk about gen AI and other topics, but remarkable period of innovation. The energy transition, life sciences revolution, de-risking, these are all big things that are driving activity and underlying tectonic plates that are driving activity. And then on the headwinds, you're just seeing them easing. So financing markets are definitely much better than they were last year. And the buyer-seller gap, the valuation gaps are, I'd say, diminished relative to a year or 2 ago. And then in the final category of regulatory, and maybe we'll talk about the elections, there's sort of a trade-off, which is I think the deterrent effect on antitrust is smaller than it was a year or 2 ago, although bigger than it was 5 years ago because the government has lost a bunch of landmark cases. But the elections are -- we have a lot of elections going on across the world. So that -- but you put that all together and that's just a better, in terms of puts and takes, that's just a better combination than it was, let's say, a year or 2 ago. Now on the sponsors, what I'd say is activity is picking up. We have dramatically expanded our flywheel effect with regard to private capital writ large. So invested in Lazard Capital Solutions, which is mostly about financing solutions. We've got a lot of strength in our PCA business, the primary and secondary fundraising business. We have diversified our restructuring and liability management team to handle both debtor and creditor work and better cover private capital. We've made some significant hires in sponsor coverage and so on. There's a much bigger effort and more muscle on private capital for Lazard. And I anticipate that what will happen as the Fed pivots, and maybe we can get to that topic also, but when the Fed does start to cut rates, that sponsor activity is going to pick up dramatically, and we are, I think, well positioned for that moment.

And just digging in on sponsors a little bit more because I know it's a key debate for a lot of investors in the room. How is that business model coping out with the continued pushout of rates? And can we get an acceleration before rate cuts if there's the continued pushout?

I think there -- look, there is an increase in activity, but it's going to accelerate dramatically when the Fed -- even at the first rate cut because that signals a lot. And so whether that's September or November or early next year, it's within the next 6 months in all likelihood. And I am an optimist on inflation continuing to come down, which is consistent with that view. So I'd say some pickup, but it will really accelerate after a rate cut.

Now on regulatory, you touched on that, you are among the first to point out that the tough regulatory environment was showing some signs of clarity and that the track record in the court hasn't been great. Any updates to give on antitrust headwinds, particularly with FTC and DOJ's request for public comment on the PE sponsor roll-up deals?

Look, I think 2 or 3 things. First, as I said before and I think I said this last year, the law has not changed. What has changed is the way the agencies are interpreting the law, and that is what's leading to the disproportionate losses in court because judges look to the law, not to the agencies' new interpretation of the law. So that's just a fundamental fact that the agencies can put out new guidelines. They can talk about new ways of interpreting things, but the law and the case history has not changed. Point one. Point two is, personally, I believe that in a few areas, banking, health care, in particular, the stance of the antitrust authorities is directly and problematically opposed to the thrust of other policies. So in health care, basically what you need to do to accomplish what health care policymakers are trying to do is more vertical integration, either directly or in a kind of ersatz manner by moving to value-based care. That is in direct opposition to the new health care task force the Department of Justice has formed on antitrust. So you're sort of at loggerheads. Similarly, in banking, I think what needs to happen in regional and community banking is consolidation. It's either going to be open bank consolidation or there's going to be a bunch of bank failures at some point, and there's going to be closed bank consolidation. Consolidation needs to happen. I think a bunch of banking regulators do recognize that. But again, there's conflict between that and the thrust of where the antitrust authorities are. So we're sort of at this moment where there's a lot of activity coming out of the agencies. But I think, again, its deterrent impact is attenuated because more boards and C-suites are just saying, you know what, we'll add 9 months, we'll add a bunch of legal fees, and we're going to proceed anyway. See you in court, basically.

Is that attenuation happening more in certain sectors or geographies? Is it more of a U.S. phenomenon?

It is more of a U.S. phenomenon because that's disproportionately where the court losses have, and the systems in other countries are different. I think it's pretty much across the board. I would say that where the biggest concern remains is probably in the large tech players because they are facing so many different antitrust and other regulatory questions that at least some of them are wary of taking aggressive action and doing a new transaction that would further exacerbate their position.

And in the U.S., we have a big election coming up in a few months. There's also a lot of elections going on around the world right now. How are your clients thinking about elections? And is there any sense of waiting to complete deals or announce deals until after this election cycle?

Well, I think the first point that is really important is that we have been saying for a while now, it is not just the U.S. election that matters, and the last week underscores that. So the drama of the results in the European Parliamentary elections and then the call for a new election in France underscores it. I mean we've now got important elections in France, the U.K., Israel, some slightly unexpected results in India. These are all affecting the environment for firms. The outcome of the French election, for example, will matter for business in Europe, without question. I'd say on the U.S. election, it's probably the case that it's not really affecting -- it's a discussion point instead of a decision point right now. So it's in the ether and being talked about, but it's not actually materially affecting what people do yet.

And any update on activity levels broadly in Europe versus U.S.?

We're continuing to see strength in both places, I would say, a bit disproportionately just in terms of percentages in Europe relative to the U.S. But they're both showing signs of strength.

All right. Great. Let's turn to restructuring. So we've been hearing for a while now that restructuring activity is elevated. Looking beyond this year, does restructuring still have room to run and grow in 2025, 2026 if we enter a soft landing?

So what's really important here is it's a little bit less restructuring and a little bit more -- in fact, a lot more liability management now. So it's very much more taking care of problems before you hit the Chapter 11 type threshold and working things out ahead of time. That's why we call it restructuring and liability management. But 2 things I'd say. One is the longer rates remain high, the more elevated activity in this area will be even though they're -- a lot of the really near-term maturities are -- have been taken out in terms -- because, as I mentioned before, the financing markets have opened up. And so companies have rightly taken advantage of that to try to address the maturity walls. But there still is a lot of leverage out there that will need to get refinanced in a potentially higher rate environment, and that means a lot of work for our liability management folks.

And then on the asset management side, one of your goals in the Asset Management business is to double the business by 2030. What's the rationale for that?

Well, just to be clear, we didn't say double the Asset Management business, we said double revenue overall for Lazard. And there are lots of different pathways to get there. So I just want to be clear, we didn't -- it's not necessarily the case that the Asset Management business itself doubles. But the way I think about it is there are sort of 3 categories of growth for the Asset Management business. One is what can be done within liquid public markets to improve performance in traditional products. So we've upgraded our distribution teams. We've changed the way that research is conducted. We just hired a new Head of strategy -- internal strategy for the business who's terrific to help on new product placement and sort of where we're placing our bets within liquid public markets in -- often in the traditional area. That's one category. That category is clearly facing headwinds because there will be fee compression, there will be net outflows. Those are exacerbated the longer rates remain high. And the question is how best to manage it. But that's category 1. Category 2 is what are the things within, again, within public markets that have a much different growth trajectory. Systematic is a great example where there's a lot more capital allocation that is possible over time and where we're investing in expanding. And then category 3 is what can you do outside of public markets, in less liquid, more in private assets and in wealth management. And there, as I said before, it is likely that our activity will be disproportionately inorganic because of the lag times involved in establishing a track record and what have you, given that we have not been as active in that area.

On the inorganic growth in the Asset Management business, how do you avoid overpaying? And can you just walk us through how you and the Board evaluate potential opportunities?

Yes. This is really important. The -- we're not -- we're obviously far from the only ones to recognize that the theory of the case for active management on a sustainable long-term basis may be stronger outside of public markets. And so there's a lot of asset allocation and a lot of interest in private asset managers. And so it's easy to overpay. I think the best way to avoid that is to just be really disciplined about what we're willing to do. And we do think we can still find good matches at reasonable shareholder-friendly, shareholder-enhancing valuations, but it means that we're going to have to kiss a lot of frogs. I'm very pleased that we have a new Head of Corporate Development who is very actively in the marketplace, making sure that we are taking a look at as many potential partners as we can. And we're going to be disciplined about how and when we do this to exactly to avoid the risk. I'd say the 2 biggest risks, you highlighted one. The other is, and the reason that it will take time, is we need to make sure we have the right match from a cultural perspective. So even if you have the right pricing, if you don't have the right people and the right integration, it's also not going to work out. So it's really the duality of getting the right valuation and also getting the right cultural fit that is crucial. And it's why it takes a lot of dating before you get married.

When you think through the cultural piece of that, how do you really integrate the cultures between the public market side and the newer private market side?

I think it's like any integration. When you're going into an adjacent area, it's a mix of old and new that is what creates the -- there's a little dynamic tension there, and that's healthy. I think I'm actually pretty confident that we can and have been doing that pretty well. We've already added a couple of new entities, either through JV structures or making them actually part of Lazard. So I'd highlight the Elaia Partners in Europe as an example of the partnership structure. And then, obviously, our new effort in family offices and our wealth management platform in the U.S. and make it part of Lazard category.

Let's shift to flows in the Asset Management business. Outflows have clearly been a headwind. And is there -- are there any trends to point to -- maybe give us a little bit more confidence in a potential stemming of the tide in net outflows?

Well, look, I think the first thing to note is a lot of the outflows that -- the net outflows are coming often from places that are actually performing well, and the result is then an overallocation to particular areas as opposed to just across-the-board problems in performance, et cetera. So it's often important to dig into why is something happening. But I would say, overall, the shift here is going to occur, again, coming back to the Fed pivot, when the Fed pivots, because there is a lot of capital that is on the sidelines right now that will come back into the market as rates come down. And I think that's the moment where you're going to see gross inflows come up a lot more than today, and that will obviously feed into net flows. But that's kind of the pivot moment.

Got it. On expenses, all right, so comp is your biggest expense, and you've highlighted that the goal is to get back to mid- to high-50s comp ratio over time. And comp ratio for you and the industry group has been elevated in a lower revenue environment. So how long does that take to get back to your target?

I mean it depends a little bit on how quickly the M&A market, in particular, recovers. But I'd say there are 2 things. I mean there's the revenue environment normalizing, which we believe is underway and which will accelerate as the rate cuts occur. And the second is there may be short-term timing differences involving just talent acquisition. As I said before, we are finding really, really promising, and we're very happy with our ability to recruit top talent. So I will just say, if we find that we're getting a lot of matches on top priority areas for hiring laterally, we're going to grab those people even if that means that the comp ratio remains a bit above the target range for slightly longer because it's a long-term investment. Over time, as I said, we get a lot of productivity enhancement in our MD ranks that will feed into the comp ratio. The second piece that I think is really important is no one knows yet how generative AI is going to play out. But I think there is a significant opportunity for it to affect overall comp ratios because we are on the verge of a step function. Whatever you think of the existing tools over the next year, they are going to be not just a little better, they're going to be dramatically better.

Let's pause here. Just want to see if there are any questions in the audience. All right, we'll keep going. So you mentioned recruiting. How would you describe the recruiting environment today? Is it hypercompetitive yet? And are there any sectors you really want to lean into?

I'd say the recruiting market is we're finding it very, very positive in the sense of we're getting grip with a lot of really talented bankers. So in terms of the people that we've already hired, I mentioned sponsor coverage, which we're very pleased with. There will be more coming there. We hired a very senior sports, media and entertainment banker, very happy with that. There have been others that have been rumored in the press, I obviously can't comment on that, but filling out some of the sectors where historically, we had strength. And more recently, we were not performing quite where we wanted to be, and we believe we'll be kind of back at it with some additional hires. And then the categories that are top priorities are the ones that where we have -- we're going to build on strength, but we believe there's additional wallet that is available. So in particular, technology, industrials, health care and energy in the U.S., probably some expansion in the Middle East where we believe there's additional wallet that we can grab. And then we've been making additional hires in Europe. We just hired a senior European health care banker as an example. And we see -- there's a lot of active discussions ongoing both on the continent and in London.

And you also mentioned AI. I mean, how should we really realistically think about AI's impact on Lazard? Is it really an efficiency opportunity for the next year? Or does a bulk of the efficiency come more in 5 to 10 years?

The truth is no one really knows because these tools are developing really quickly. Someone very knowledgeable just put it to me recently that the existing tools are the equivalent of a high school education. The ones that are going to come online over the next year or 2 is the equivalent of a PhD education. So we're going to see improvements that are not marginal, but dramatic. How that translates into what we do will depend on lots of factors, including the cultural adaptations. So I talk to our analysts and associates about the QWERTY effect, which is the reason that all your keyboards still are Q-W-E-R-T-Y is a legacy of the initial typewriters where they tried to literally slow people down from typing because the keys were getting stuck. So that keyboard is designed to be inefficient, but it still exists today even though that original rationalization no longer makes sense because there's just the inertia of one generation passing on to the other how to type. The same thing applies to a lot of the work of investment banking, which is we could keep doing things the same way or we could adopt the new tools. And the question becomes, how much of that kind of persistent QWERTY effect occurs and how much is not? And that's largely a cultural question, but it obviously depends on just how much better. The reason we haven't moved away from QWERTY is there are more efficient keyboards, they're just not sufficiently more efficient to make it worth everyone switching.

And is there an upfront investment in AI or new technologies that might weigh on expenses near term before we get those efficiency unlock?

I don't think there's anything material here. I mean we are making investments, but there's -- it's part of an overall IT effort, and it's nothing that, at this scale, nothing that anyone would notice. So I think the big question is how quickly do we adopt the tools and how quickly do we improve efficiency as a result.

Great. Is there anything else that we didn't touch on that you want to get a message across to investors or parts of Lazard's story that you maybe feel are misunderstood?

No. I'd say, again, early days. Back to your innings analogy, we're clearly at the beginning of the baseball game. But really excited about the progress that's already been made and the sense of renewed ambition and growth with excellence that we're on a path that we're already well underway on and a lot of excitement about what's ahead.

Okay. Great. Well, with that, thank you, Peter.

Thank you very much.