Moelis & Company (MC) Earnings Call Transcript & Summary

Okay. So good afternoon, everybody. We're delighted to welcome our next presenter, who is Ken Moelis, Founder, Chairman and CEO of Moelis & Co. Since founding the firm in 2007, Ken has created, I think, one of the broadest independent advisers in the industry with truly a global footprint. Moelis went public in 2014. They've seen very rapid growth. And I think a great stat is since the IPO, Moelis has returned more than its IPO price in dividends and the share price has more than doubled. So that's very good in terms of shareholder value creation. So Ken, thank you very much for joining us. Great to have you back in person.

I thought let me just start off with a broad question around the macro environment and how you're thinking about that. And there's obviously a lot of focus around this transition towards a higher interest rate environment, what that means, how concerned corporates are around inflation, supply chain disruptions lasting for longer, as well as obviously some changes in the regulatory environment. So obviously, a lot in that, but you spent a lot of time with corporate boards, with CEOs. How's their thought process? And how are they thinking about this transition to a more normal environment?

Let me take each of those kind of on its own. First of all, I'm not a believer that we're going into a higher interest rate environment. I think most corporates are concerned with the supply chain. That's a real issue. And again, I believe there's been a call for higher interest rates since 2008. And someday, somebody will be right, and they'll claim that they're right. But meanwhile, you could have bought a 10-year bond in 2008 that would have come due. So the -- I just think -- there are some things we're seeing right now. My gut is, and again, take this for what it's worth, is that these are supply chain issues coming through as price increase. That is inflationary, but I'm not sure that means you're in an inflationary period. You're in a post-COVID supply problem. That's my own view, by the way. The most thing that I think corporates -- and I haven't heard many of them taking much action around inflation. I think most people had a chance to refinance long term, and they've had it for 10 years. So a lot of people have refinanced long term. I think they're happy with their cap structures. Yes, the thing they are -- the one thing you said about regulatory, I do think there's a feeling that the regulatory structures that are being put in place are not going to be very corporate friendly, not very M&A-friendly at big corporate strategic level.

Okay. So maybe we can talk a little bit about what you're seeing below the surface geographically. So the U.S. led this M&A cycle. Activity in the U.S. is back to all-time highs. If you look at the recent data, Europe has seen an acceleration in activity, but it's still lagged. How optimistic are you on the rest of the world relative to the U.S. when you think about '22 and '23 in terms of pickup in activity?

Really optimistic. Last year, we had our best year in every region other than Asia, I believe. And Asia was only because we had a pretty big year before that, and they are hard to exceed. So we're seeing activity really throughout the world. It doesn't surprise me that the U.S. was first to rebound from a crisis. It's just the method. I think the U.S. system has an ability to organize capital rapidly. There's nothing like the U.S. But I'm pretty optimistic. I feel like Europe is coming around -- is coming back pretty strongly and so are most areas of the world. So yes, I feel pretty good about the geography by geography, but it feels pretty good.

Okay. And I guess with Asia, you mentioned briefly you had a record year, I guess, 2 years ago.

Yes.

A lot of focus on the relationship between the U.S. and China. From a corporate perspective, what do you think that means in terms of activity? Does that have an impact on cross-border activity? Does that lead to greater in-market activity in Asia? Does it lead to U.S. firms starting to divest some of their Chinese operations? How do you think about that dynamic?

Well, I think the -- you have to be very careful. There's obviously places where deals are just not going to get done, things that touch CFIUS and you have to be very careful. We find there's still deal activity, but it's going to be challenged. The good news, we don't have to do 100% of the deals, just have to find the niches where it works. I don't think most people are going to divest this. Look, it's a very large market. People invested a lot of money to get a presence there. And in my mind, you've got to play it out a little bit and see what happens as a result of all the rumblings that are going on. But I think most people just stick it out for a while.

Okay. So let's segue and talk about your strategic priorities and a lot has changed over the course of this year, but I'm kind of curious to hear whether your strategic priorities have changed relative to what we discussed at this point last year. But when you think about the next 3 to 5 years, what's most important for you? And what are the milestones that you would like to achieve?

Look, I think tomorrow morning, we're going to have a meeting with the Managing Directors to celebrate the year. And the #1 thing I'm going to celebrate is not revenues that are up. That will be #2, by the way, 60%. But it's that we're going to promote the largest class we ever have, with real talent who are actually considered experts, and I'm not going to use the word dominant, but leading industry voices. And we set out to do that because I actually believe the key to one of these organizations, it doesn't matter what I do next week. What matters is that I set up a pipeline of talent development that can create -- if I asked you how were my deals in December of 2018, nobody remembers. But you still have that talent base with you, and you'll have them for 30 or 40 years, if you do it right or 20 or 30 years. So look, I think we started the firm only 15 years ago, 14 years ago. And so when we first started hiring classes in, we could only hire 3 people. We didn't have a big enough base. So by 2016, 2017, you didn't have a large group of people from which to create your talent pool. Today, these are the people we hired 7, 8, 9 years ago, where we were hiring 100 people at a time. And I think you're going to continue to see the seeds of great talent development. And that's our priority because the rest takes care of itself. And setting up a system where you train, develop, nurture, hire, pay, motivate and infuse culture in those people, that's going to be the winner.

So are there any products or verticals you're particularly excited about when you think about where you want to grow talent over the next 2 to 3 years?

Well, obviously, the base M&A business across. And I'm just going to say M&A is obvious there. But I do think that the capital market system is changing rather dramatically right in front of people's eyes. And the ability of someone like us to be a facilitator of financing without sales, trading, research is becoming more and more apparent to me. And I think a revenue line that, when we look back in 5 years, will probably surprise it.

Okay. That's interesting. We'll come back to that. That's interesting. So you touched on this exceptional year, in terms of revenue growth. I think at the 9-month stage, it was up 75%, I think, year-on-year. I think that's our forecast for the full year. How should we think about this as a base from which to grow? And look, I appreciate we've been asking this question now for a number of years, and you keep on surprising. But when you think about this as a base from which you can grow, I appreciate, look this type of revenue is clearly not sustainable. But is this as fee base something that you feel comfortable with? [indiscernible].

We don't commit to a 75% growth rate [indiscernible]. I think we need the world, 20 years from now, we don't know. Look, I'm pretty much a pessimist at heart. You could tell if somebody said they think I'm an optimist, but when they look at the fact that I run debt-free, they know somewhere deep in my -- I must be looking out for -- but the way I look at the world, we're going to grow our headcount -- our MD headcount, 8% to 10%. I don't think there's going to be a diminution in the assets dedicated to M&A. And by that, I mean, the dedicated assets are sponsor and alternative assets driven into M&A. I think that will grow probably more than 8% to 10%, you probably have a better understanding. But I saw in your research that the compound growth rate has been like 15% or something.

Yes.

I don't see why that would slow. It doesn't feel like it's slowing. And then I think the general foundation of our business is the market value of the general stock market. I think the best correlation has always been the S&P 500 to revenues for advisers because we do take a percentage of deals. And borrowing those usually grow something, call that 5% to 10%. So I don't -- I keep hearing this idea that you can't grow. And I'm thinking, well, why not? We're going to have 8% to 10% more managing directors. We'll probably have 5% to 10% more people. Our clients will have 15% more capital in the sponsor world, and the corporate world will generally follow the increasing values that happen over time. So I don't see why not. But as you know, we don't guide. But it appears to me, we're in a secular growth period for M&A, and we're in a wonderful position to be in.

Yes. Maybe we should talk about the strategic component of the M&A market and the financial sponsor piece separately. And maybe that isn't the right way to think about it, so I'm kind of curious how your thought process is around this. But if we just start off with the strategic piece, I mean, if we look at M&A as a percentage of market cap relative to history, it isn't that high. It's about 5.5%. Prior peaks were 8% to 10%. Is that relevant? Or is history dominated by some of these very large deals that are unlikely to repeat because of things like the President's executive order around competition?

I'm going to steal an answer that somebody sort of gave me on this, which I never really focused on. But it might also be that the denominator is now dominated by a couple of companies that have $1 trillion market cap. So Apple is close to $3 trillion as of today. Now will they do a deal that maintains the percentage -- for them to maintain your percentage, well they have to do a $300 billion deal. I don't think they can do one. So I'm not picking on Apple. But between the 5 companies that might make up $6 trillion or $7 trillion of the market economy of the world, especially in this DOJ environment, I'm not sure they can do much. So it might just be a problem with the statistics that you can't -- maybe if you deducted that out, the stat would come in line. I don't know, but it could be.

Okay. So let's talk about financial sponsors because that's obviously been a key theme. You've obviously been a major beneficiary of that. I think you mentioned 60% of your transactions in one way or another touch a financial sponsor. So a few questions. First of all, how do you approach financial sponsors relative to corporate? I mean, do you treat it as a separate client base? Or is it really just a continuum in terms of how you approach that?

It's interesting, Rich, it's a great question because it's a sum of each. I think if you use your sector expertise and the flow of the sponsors to create expertise, it's very easy to then take that expertise. It's not easy, by the way, but you can take that expertise into strategics. And they'll -- and by the way, I think strategics, for the first time, are starting to like think to themselves, I want to act like those, act a little more like sponsors. I don't think that happened as much, but they're looking at the tremendous returns, the speed with which sponsors are able to act. Some of the strategics are now thinking of sponsors as JV partners in certain assets. So I think you're seeing that will merge a little bit. And what I hope is the best thing that would happen is, you take your younger bankers, they become sector experts. A lot of that is driven by sponsored transactions and then they take the growth of their sector, because usually, these sectors grow and they become strategic advisers as their career develops. And that's a wonderful way to kind of cover both aspects of it.

So what do you think differentiates your financial sponsor coverage? And you clearly benefited a lot more than your peers from this dynamic. I mean everyone plays in the same duck pond. You've taken a bigger slice of the pie. Why is that?

Look, there are a couple of things that I think are structurally important to dealer sponsors. They're actually fundamentally just the tremendous conglomerates. And you have to be -- if you're stuck with a commission structure in your compensation -- look, we have a one bonus pool system, which means I can get money to people who've done something even if the sponsor -- so we've had transactions where -- and I'm going to just make this up. Our health care banker has shown sponsor X 10 deals, and they love them, but they just haven't hit. So then on Monday morning, they're going to announce tech deal, and they call up the firm and they say, look, we're going to give you 25% of that. We love what your health care -- we're going to give you $5 million part of the fee in the tech deal. Well, if you're stuck with a commission structure, your tech banker think he's got that pay and he's got it by contract. But really, the work was done by another group. I'm kind of making that as stark. Sometimes it's not that stark. Very important that you send the message, first of all, that we're all on one team. We've hired people from multiple companies. And when they come in, they always tell me, I'm stunned about how your e-mail system. Somebody goes, I need help. Anybody know the following person or how to contact, and they get inundated with e-mails helping. Now if you're, again, if you're in the wrong compensation scheme and let's say, somebody calls me and says, do you know the head of company X? Well, I might not want to introduce you, because it's my -- that's my client, and I own the space. Stay away, why would I help you? And in our firm, we're about to do bonuses. And yes, certainly doing -- being productive is important. But we have enough control to say, but if you're hiding or if you're not helping, that you're not going to optimize what you're able to get here. And that makes a big difference, by the way. And I've heard it from every hire we've ever made that they just can't believe how much team work goes on globally from people they've never met. It just happens. And I think we put together -- somebody said to me, are your bankers different? I said, no, I think a lot of times the trees are the same. The soil, you put them in makes them grow in different directions. And the soil of the company is collaboration and client first. And by the way, that goes to training, too. As I said, if you're on -- if you think the only way you get paid is by generating revenue, why would you ever train somebody? What would be the point of training somebody under you? In fact, it's a threat to you. Because god forbid, the guy under you is smarter than you. You might find yourself out of a client where training and developing talent under you is, as I said, that will be the first thing we celebrate tomorrow.

If you dig below the surface and look at the engagement with financial sponsors, if you look at just the pipeline, the overall dialogue, is there any reason to believe that this pace of activity is going to slow heading into 2022?

No. In fact, look, the private equity side, the M&A side should just increase by the amount of assets that are going in. And by the way, if you look at the valuation of the companies here, AUM is -- they understand how they're being valued. And the organization of AUM is important, so they're going to go for it. And then once you have AUM and you're in the alternative space, you have to do something, and that usually means talking to somebody like us. Now the second part that I think is getting fundamentally very interesting and I think will become something we talk about in much greater depth in the next few years is the rise of the credit funds and permanent capital. And I think you're going to see a battle between the alternative asset managers and the banking system and the traditional banks. I think they're quicker, they're more flexible. They don't have to -- they're not fed regulated. And you could see a real battle go on, and I know who's going to win between credit providers, and I like our position in that battle.

Do you think that shift towards permanent capital, so core plus-type funds reduces the velocity in terms of which private equity firms trade assets relative to the past? And is it material, relative to the $2.7 trillion of dry powder they have.

It's really -- I don't know -- I know enough, except for one thing, most of the permitting capital now is going into credit, which I don't care -- that usually has maturities and terms. So it gets traded. I'm not sure of that. I don't think there's a lot of capital yet in private equity permanent capital. That seems to be a place...

This is longer duration.

Yes, okay. And the answer to that is a may be. It's a firm may be on -- there are all sorts of ways now to extend fund, fund extension products and things of that nature, so possibly -- but if anything in the last couple of years, I think we've been in the acceleration in the turnover of assets, that's probably more of a valuation parameter. But I think assets have come back to market quicker. So we'll see. I'm going to plead not able to tell you.

That's fine. How much of a limiting factor is sourcing targets now for private equity funds, just given the amount of capital chasing, presumably a limited number of deals with valuations, especially in certain sectors at all-time highs. I mean, are you concerned about their ability to redeploy and your ability to put ideas in front of them that they're going to transact on? Or you don't see that as a problem.

Right now, their problem finding targets is our asset. If there's a liability that they have in finding targets, then it's an asset that we have. We have 650 bankers out there finding targets. And I don't think -- we've complained about high valuations since, I think, irrational exuberance in 1996. It's not stopping anybody. I think a lot of firms think quality companies, if you pay an extra turn or 2, that just means you have to hold them a year or 2 longer and that's not a problem. So look, I hope your concern becomes a reality because that's when I don't think you can invent another firm like ours. I just don't think there'll be another global boutique invented. It's too expensive. It's too difficult for a long period of time. And so the more need they have -- the clients have to find ideas, the more they need us. And hopefully, the more valuable we become to them.

Okay. So maybe we can segue and talk a little bit about some of the nontraditional M&A advisory businesses. Now you touched on this a little bit. And we have seen some very successful growth initiatives in equity capital market advisory in particular, debt capital markets advisory. What are your long-term aspirations in those product sets? And to what extent do you think you can attack that market with the existing skill set that you currently have within your banker community?

Very -- I feel like we're doing it right now, so I know we have -- we can do it with our bankers. We did go out about a year ago now and hire a team out of Barclays to beef it up. but there's a lot of leverage you get because the bankers do the work. The distribution is -- we don't have sales trading or research. We just call a couple of big capital providers, by the way. Those capital providers are becoming aggressive. There are some of the big financial alternative asset managers. They're getting -- they're doing terms that are different. They're responding quickly. By the way, it is a client that we know well and that if we're providing -- we think we can provide them with significant ideas around capital. So yes, we're -- I mean we may be 1 or 2 people because the business doubles faster than we think. But I think we're north of $100 million of revenue in that space and accelerate.

And do you think you can continue to grow that without sales and trading and research in the way that Evercore kind of made an acquisition to grow that business?

We're not going in that business. First of all, that was a lot of equities as I understand it. And this private credit market has got more margin. You don't -- we don't have to re-trade it. If we sell it to a permanent capital vehicle, like you said, it's kind of put in a home. And the key is the idea. The key is the introduction to the idea. And so our banking team puts that together. And then we just funnel a call through a very small group of people, and it's a great business.

Okay. So let's talk a little bit about the restructuring business, and that's obviously slowed down quite a bit this year. How is your assessment of the long-term opportunity in restructuring changed? I mean when you look at it, have these companies refinance themselves and turned out their debt to a degree that this isn't going to be an issue for multiple years? Or are they just kicking the can down the road and when interest rates rise and supply chain disruptions persist, this is going to come back to the fore as a mentioned. And when you talk to that client base, do you find them -- do you find that they're realistic about what their real prospects are?

I don't think it's a kick the can down the road. We don't see a lot of limpers. That's what you're talking about, just kind of kicking the can down the road. Right now, the economy is fairly healthy. If you're having a supply chain problem, I don't think you think of that as a permanent balance sheet issue, you just find your way through that. Look, the one thing I know about restructuring is, you never know what's going to happen. But the world doesn't go straight up. When you say it's a long term, right now, it's hard. I think you have to sit down and really execute a perfectly executed plan to fail. You have to try hard. And then even then you might not be able to fail, like a famous show, was it Springtime for Hitler? I'm not sure you can fail. So the -- but it will change. And I don't know exactly what it will be. I don't think the '08 crisis -- the '07, '08 crisis was apparent to everybody in the world. I certainly didn't see the pandemic. So whatever happens will happen. There's a tremendous amount of paper out there. And it will go from 0 to 100 miles an hour when it does. So again, if I could hire -- we are keeping our whole team together. We think we have the best team on Wall Street. We are finding things for them to do right now that are adjacent. And one day, they'll be complaining that they can't sleep with them.

Okay. So let's talk about talent more broadly. And I think this has been a theme again throughout the course of the year. The market for talent has been really competitive. How has that evolved over the course of the year? Do you see people doing irrational things? And do you, in any way, feel capacity constrained given the amount of business that you're getting asked to bid on today?

I'm not going to call anybody irrational, because irrational is defined as the guy that somebody else hired that you were $1 behind. So I'm not going to declare anybody irrational. I think the most focus is funny. Most people are so focused on their middle talent. I think we almost didn't -- we weren't as aggressive on the top. We are replacing Vice Presidents. The middle of the batting order got really hard hit, because of being at home, Zooming, the amount of deal flow, and we spend a lot of time on that. And almost -- when you're up 75% of revenue and holding everything else together, I would say we didn't even lean into going outside as much because we're just worried about holding -- making sure we executed what we had. I think the talent is out there. I think one of the things, Richard, that I feel very good about, at the end of this year, we will show people once again that we can operate a firm at 33% margin this year, 8% of the dollar of revenue goes to SG&A and overhead, the other goes to comp and shareholders. I think there are people who have joined thinking the boutique world was all the same. I think they're going to look up and they're going to go, it's not all the same. Some people run a model that can bring $1 from the revenue line down to them as a shareholder or as a -- and I think we're going to start to see that. That this -- what I said about the soil, the people are going to see a different, it takes a while. I mean really the rise of boutiques, what has it only been 5, 6 years when you really alien accepted by the bankers as, hey, maybe that's the winning strategy. Now within those strategies, I think they're going to sub look at who's got the winning strategy and the sub winning strategy. And I like the look of our model. I think our productivity, our ability to deliver returns, comp, -- and by the way, collaboration in a new world where there aren't these magical investment bankers anymore, collaboration and delivery of the whole firm to the client is the winning hand. So I think people are going to -- I think we're going to start to get approach, and I feel that if your model isn't as good as ours, maybe you want to join us.

Yes. So let's talk a little bit about return to office, what that looks like. And I'm very curious, when you talk to clients, what is their preference between in-person versus virtual? And look, as we get further away from this pandemic world, it just feels clear we're not going to go back to 2018, 2019. So what does that mean as you think about the margins within the firm and how people are going to spend their time and how sustainable this tremendous uplift in productivity is going to prove to be?

It's going to be a mix. I think there are certain meetings where people want you in person, those are usually more decision-making. It's amazing, I think some of the interim meetings between large -- let's get together and decide are we going to do this? And some of those in corporate strategic you have to do because of the record. So there'll be some back on the corporates more than anything, because for the record, if you're going to do a big deal and you can get a Board together in person, it's going to be a better record. I think during COVID, it was an acceptable record because nobody was together. But you probably don't want to go in a lawsuit when everybody is getting together and go, like, you decided to spend this money and you did it over a phone. So I think that will happen more and more. We're definitely going to cut out a significant amount of the commodity meetings. Again, I think travel will return. We'll keep at least 1/3 of it off and maybe more. As I'm watching it develop, I don't know, maybe more.

Do you think COVID hurt you at all in terms of your ability to form new relationships. I'm sure maintaining relationships straightforward, you know them getting on the phone, getting on the Zoom straightforward. How easy was it for you to form new relationships with new clients over COVID? And look, if we go back to in person, is that actually an opportunity for you because it does open up the client box more?

Yes. Look, I thought it was a negative for especially someone like me. What was kind of amazing was to watch the firm go up 75% of revenues. And the least productive person might have been me. Because my job is traveling and seeing the decision makers, and they would be like nobody would take a meeting. So the conference used to go to where the person -- I might have been the door opener to a lot of that. So for all this concern, like what happens when Ken Moelis isn't here. I said, well, we just saw it, it wasn't so bad. And -- but -- so I think there is some benefit of putting our client-facing people back out there and meeting new people, yes. It wasn't easy. The introduction via Zoom is really suboptimal to a new person, very, very much so. And by the way, even for that client we haven't seen in a while, scheduling a Zoom to catch up is horrible. Because you've already had this relationship where you go out for dinner every once in a while. And now you're like, I used to say, if you talk to somebody every day, you can never stop talking. You ever talked to your friend about -- you can never stop talking. If you don't talk to somebody for 4 or 5 months, you have nothing to talk about. Because the trivial becomes important if you talk every day, and if you haven't talked in 6 months, you have to have real things on the agenda. So I think that I'm very much looking forward to in-person meetings.

So you've obviously been very active in returning capital to shareholders. I think it's what, 3 special dividends, more than double your common dividend -- How should we think about your philosophy around capital returns going forward from here?

Well, we would have done 4 specials last year, but we actually skipped the second quarter because we thought we'll look so dumb. If we did 4 specials in a row or something like that, we just figured we have to -- waited to this last one to.

When the special cease to be special.

Right, so at some point, somebody will say, well, can you manage your cash flow. So look, we feel like we want to get rid of the capital. If when we have excess capital, we're going to return it, we usually wait until we have enough that it's meaningful. We don't want to pay a $0.47 special. But whenever we have excess capital, look, we're not huge fans of M&A. And so we're generating 33% -- of every $1 now, $0.33 if it's coming down to the pretax line. That's a lot of money on the revenue we're doing, And we get it out the door as fast as we can back to our shareholders. And by the way, I know there's -- we've done some open market purchases. But when you look at it, it's just so much easier. I don't know how much capital we did in the special recently, but I think this year, we did $500 million in special, something like that. Something more than that. And just trying to figure out how to use $500 million to repurchase stock in the windows that you're open, it's just easier to just give it back.

So I think with that, we're out of time. But Ken, thank you very much for coming back this year. And really, I hope to see you in person.

Thank you. Appreciate it. Thank you.