Moelis & Company (MC) Earnings Call Transcript & Summary

All right. Without further ado, I'm pleased to welcome back Ken Moelis, Founder, the Chairman, CEO of Moelis & Company back to the stage. Since founding the firm in 2007, Ken has created one of the leading independent advisory firms with a growing global and product footprint and robust growth in the scale of the franchise, in particular, over the past 2 years. So thank you for joining us again, Ken.

Thanks for having me.

All right. Let's jump right in here. So I just want to start with a big picture one here. You're 17 years into building the business. It's now a $6 billion mark cap company, $1.4 billion of revenue in my forecast for next year. What's been most surprising to you over the journey? And which areas have you executed better or worse than you expected? And what's -- what really gets you excited for the next 3 to 5 years?

We only have 30 minutes for this one question. I think -- I have been thinking about what's most different you're talking about from the day we started kind of thing? It's interesting. When we started -- we started right before the crisis. And then once the crisis hit, I was terrified like what stupid thing have I tried to do here. And then I quickly realized the crisis was the best -- the '08 crisis was the best thing to happen as bankers became available, we didn't have leverage, we had raised money. And what I thought in that time frame was, I always said, if you went to sleep as Rip Van Winkle in 2008, you woke up 30 years later, I thought somebody would say, if you were financially curious, when did Glass-Steagall get put back in place. Because the whole system would spin out into different -- away from where it was. What's surprised me, and it's happening right now is that it's not taking 30 years. I think what people are missing is the entire transaction finance world is radically changing from a bank-centric market where it was for most of my career to alternatives, life insurance, pension funds, sovereign wealth, match funding. So again, just -- and that difference between taking 30 years and 20 years right now is going to be, I think, one of the unbelievable opportunities. So again, the whole thing was transaction-based meaning the banks wanted to be in the room when M&A was being thought about. So they went -- they figured that out in the '90s and that's when they all consolidated the industry. Citibank buys Solomon Brothers, JPMorgan buy 5 companies, UBS buys 5 investment banks, Deutsche Bank buys 5. And the reason they did that is they were trying to fill their balance sheets, right? They had $1 trillion balance sheets and the place where the most profit was, was at the moment a transaction was happening, so they wanted the investment bankers who are in the room when M&A was being thought about so that they can then finance it. And because those financings were always done at a margin of profit significantly better than a revolver, okay. The crisis happens, and I think the regulators start waking up to the fact that financing of system with 5-day deposits, 5-day liquidity on deposits and 5-year loans is a bad business. And by the way, everybody said, '08 only happens once every 1,000 years. Well, that's bull****. There was -- as I said, they wouldn't have made the movie. It's a Wonderful Life if it happened once every 1,000 years. 80 years ago, Mr. Potter had to jump in and stop what was the bank run. There's no -- I think it was Mr. Potter. He might have been the bad guy, right? Mr. Potter, I think is the bad guy. But the -- it was 5 days now SVB, Credit Suisse and the rest of it happens, First Republic, and you figure out it's 5 seconds. 5 seconds and no relationship, no time for Mr. Potter to ask you not to take your money out, and that's just completely not acceptable for the taxpayer to bridge the gap on those basis. And I think the regulators saw that. And that's why they're making it so difficult for the banking system now to put these assets on their balance sheet. So the whole system, all these M&A that was set up to bring investment bankers in to create assets is a dead system. I think that system is being squeezed out by the regulators. By the way, I think it's the right answer as the taxpayers should not be funding the largest banks ability to go into fintech and do all sorts of things. I mean if you're going to be regulated, utilities are regulated. They don't even have their liabilities guaranteed, but they can't do super growth things. They can only do things that are in the interest of what the regulation is for. And for some reason, we had the banks out of that for many years. It's going away. That whole system is going to -- so all of -- right now, there's $2 trillion in private credit I think very rapidly, the $20 trillion that's left in the banking system of below investment-grade credit is going to move over here. And that will reshape everything. The reason that a lot of people might have used I went to UBS in the early 2000s because I wanted the balance sheet. It was below market. I would use the balance sheet to provide an extra turn of leverage in order to win business. Off the table, there's no -- it can't be done. In fact, the capital is probably less flexible than in private credit capital. So $20 trillion is going to move, and I think that's going to reshape our industry in a way. Look, I still think when trillions of dollars move in any direction, people want to have competition around it. This was again, this old system was a little closed garden, if you remember like the old AOL and tech, where everything was in your garden. So if you -- if I was at UBS, my answer to every question about where is the best capital tended to be UBS as the solution because I was creating -- I was there to create assets for their balance sheet. And over here, I think it's going to be open architecture. And so what that open architecture, I think, leads to is 50 to 100 institutions that can provide this $25 trillion of capital and 5 or 6 of the independents that are not conflicted. We don't have a balance sheet to feed. That's why we don't want a balance sheet. We want people to look at us and say, they don't have a conflict we want to place $2 billion of a pref or some instrument. Why don't we use them and let them auction it off amongst the most -- amongst those new credit providers. And I think this whole change in the financial system is what is surprising me, right now is what it means for us. Again, we went public, I never saw our ability to get to a $5 trillion or $6 trillion market -- $1 billion, sorry, I wish it was $1 trillion, $5 billion, $6 billion market cap. And so -- but what I'm seeing is the reason what might be happening is we are sitting in the middle of the greatest change in the history of transactional finance.

Fascinating. Okay. Maybe let's just turn to the macro, looking at 2025, how supportive is the macro at this point for the business?

It's surprising -- that's also a bit better. I thought the election would be positive if it went to a new regulatory environment. The day after the election, I was surprised by how exuberant the market was as usually the market. One of the reasons I like being public, I think sometimes the market is way smarter than even us running the company. So it's been the animal spirit part of it. Yes, regulation will drop. I think the 10-year has responded better. That's another reason why everybody is so excited to what might be a tax cut environment and higher deficits and more growth. But the people were afraid the 10-year would react negatively. It's reacted positively. And the last part is I've been around the world. I was in Europe and then in India and outside of Western Europe, which is still in -- it's very depressed about a Trump victory, by the way, you can barely -- you're barely allowed to talk about it in France and Germany, you are not even allowed to mention anything good about it. It has to be all horrible. So they're in a pump, but like I went to India and their total animal spirit go, so is the Middle East on the new regime. And from what I can tell in the U.S., it's funny. I know a lot of corporates have said they were going the other way on who they were rooting for. But the amount of animal spirits, let's do something. It's time to do something, not just regulatory, but because it's time to do something, all systems are go. So I feel very good about that part of it, which is hard to define animal spirit, but it's out there.

Great. Maybe just a little bit on the postelection impact. On antitrust, obviously, it became so much more aggressive in the U.S. under Biden. What does the sweep mean for U.S. antitrust policy? And then maybe you could just talk about the DOJ, which we'll turn over more quickly versus the FTC, do you need both? And then where do we get to on that antitrust spectrum versus -- in other words, before 2020 versus the past 4 years?

Look, I think it's definitely going to be more predictable. I think there were new theories of antitrust that were coming into place that you just didn't know where you'd become a new theory where big is bad. I mean our antitrust policy for the last 4 years is a lot of it's been big is bad and big is not bad, big is part of the ecosystem. There's a lot of drug creation. By the way, it's not bad for America. There's a lot of money that goes into biotech and drug creation, but not everybody wants to put together a sales force to go distribute it, so they kind of tend to sell it up into big pharma. That was good for everybody. And you can see what happened is that the dollars ride up. If you couldn't exit the dollars would dry up going in, is it good that we're falling behind in the amount of money going into new therapies and things like that. So there's a lot of new theories, which will be good because I would tell you, there were transactions that you wouldn't say were antitrust violative but people were worried about some new theory of antitrust that would hit them. So now at least you kind of -- I think you'll know that the old rule book is in place that it has to result in a consumer restriction or something that restricts the consumer and raises prices. And I think all of it will be deregulatory. By the way, it's not just FTC and DOJ. How about every other regulation, I think there will be a huge deregulatory environment that will just EPA getting out of your way. I think there'll be a lot of deregulation that frees people up less of a -- look, there's a lot of energy companies that I think felt they had to spend money on climate change initiatives that they probably didn't think were optimal capital allocations, but they had to do something. I think you'll see a lot in the energy patch of people just going back and saying, "Hey, we're in the business of providing the cheapest energy possible to the most amount of people at the best price." And by the way, that won't exclude solar, but it will free people up to do things that they feel are economic, but might not have met the social requirements of what was going on. So I think a lot of that is going to happen.

What about tech and cross-border deals where it's a little more cross currents there in terms of antitrust?

Tech seems to -- people ask me about that on tariffs on cross-border. Tech doesn't seem to be affected. And the tech market is back. We invested a lot in a big tech team. It's been a fabulous addition to us for 2 reasons. One is we took out what I think at maturity could be a $200 million or better business without paying for it, without buying it, I should say, we paid for compensation. But it's what caused us our comp ratio last year. So for one year of hurting our comp ratio, we end up with this fabulous business. But there's a second part is they are ramping up. I think they're going to cover their compensation costs stand-alone 1 year after purchasing 18 months. That's unbelievable. But second, the leader of that, again, Jason Auerbach runs it. Very disciplined that he showed me that I think they do something like 5,000 to 6,000 calls a year, they're 14 managing directors on private equity. And our goal is to be very important to private equity. And they -- private equity is very sophisticated now. They track. They know exactly how many times Moelis & Company is in their office versus other people. So when we didn't have the tech effort that we had more of a strategic effort, so we might be 5,000 calls more, maybe 4,000 calls more into private equity on the tech franchise than we ever were. Now remember, when they come and they look if they're going to give us a media deal, an energy deal, an infra deal, a health care deal. These decisions all go to a central point, and they go, how much has this -- because it's close, sometimes it's obvious that one firm gets it. But I'll tell you, most of the time, it's pretty closer they're going to give it to us. And one of the elements is, how often do we see them? How many good ideas do we get from that firm? Do we owe them a piece of business because have they shown us 27 things that we came close to. And I will tell you, 5,000 to 6,000 more calls doesn't only help the tech effort to revenue. It helps everything else in our organization become important to the sponsor community.

Excellent. So let's dig a little bit more into M&A. It's been surprising industry M&A completed volumes are actually down a little bit this year. Announcements are up. So it's been...

Did you say completions are down?

Completions are down. I think 8% and announced volumes are up 16%, which is, I guess, perhaps surprising given the optimism around M&A. But obviously, you outlined a constructive path for next year. Maybe you could just talk about what this cycle looks like in your view. And over what time period, roughly do you think we can get to a normalized M&A environment?

Well, it doesn't stun me that completions are down. Remember, the election was like November, what 5th or something, it's late in the year to put the animal spirits into people. And we had -- and I almost got sick of saying in my conference call because I felt like an idiot that we had kept saying where our backlog is at all-time highs. And I was getting frustrated just repeating that and not having the revenue. But what was happening is we kept getting assigned deals, but people say, yes, we want to have a banker, we want you to be on top of this, and we're not going to go now. We're going to go in 6 months. We're going to go in a year when -- and that is actually pretty expensive. You don't want to turn it down, but the minute you put a deal in backlog, you have to put a deal team on it because if you don't pay attention to that deal, you'll lose it and you will then p*** off the client as well. So you have a deal team on it, and it's continuous. And then you're trying to win more deals, but nothing is moving. It's almost like a retailer who has inventory, too much inventory. So now what happened, and it started to happen before the election, but it's accelerated as things are completing. Not only are we completing so kind of your book-to-bill ratio is getting in line. But now our pipeline is still at all-time high, but we're actually now completing a significant amount more is going to completion already. And I see that continuing. I used to call the pipeline fragile because I thought in a bad market, there's a dozen reasons to not do a deal. And in a bull market, there's a dozen reasons to do a deal. So right now, I think people are going to be leaning towards a dozen reasons to do something rather than not do something. And I see it -- look, I think it's going to be a strong rebound initially, but not crazy because we still have one problem in, again, the strategics have been active. I think they'll continue to be, and you'll see some larger deals that people have been waiting to do for better regulatory. But the private equity will -- is definitely interested in getting their best assets out. Remember, none of their best assets came to market in the last 2 years. If you had a 15% growing asset and you were private equity, there is no reason to put it on the market in '22 or '23 and get a bad deal out of it. You've convinced yourself that if you wait 2 years, revenues will be 30% higher and EBITDA will be 30% higher or maybe more. And so -- and you'll get a better multiple. So let's just hold a quality asset until a better market. I think that market is today. We're starting to see A quality assets lineup to come to market the best stuff, which generates more demand. But there is one thing that I think will delay some of this rebound to '26, and that is that the commitments of limited partners to the private equity, especially the middle market in 2021 was abnormally large. It was like 2x. So especially your middle market private equity firms, I think, are a little worried about running their capital to 0 before the period of commitment on the 2021 funds ends, which is 2026 because they're all so lopsided committed to that. Once that passes, remember, these are 5-year commitments by the private. So if you eliminate all the 2021 LP commitments, we're back to a normal environment. And I think you'll see to the back half of 2025 and '26, you'll see the middle market, I think, really come back because they'll see their fundraising cycle will be late '26, maybe even early '27. So they won't mind spending their money. They've been very afraid, I think, of running out of capital. How do you pay your people? What do they do all day if you have to go to market and everybody says, no, we're over allocated. So I do think that the middle market will be a little slower in putting out their money, but that's only until 2026, '27, then they'll want to be back in business full time or late '25, be back in the fundraising pool in '26, '27.

That's really interesting. Maybe just one more on that point, which is -- and I think people have a hard time of this because a zero-interest environment caused the private equity ecosystem to perhaps comprise a bigger percentage of M&A than it would normally. So I think 2021, 2022 is almost 40% of the M&A market. Right now, it's 30%. Last year, it was under 30%. So when you think back over the time and factoring in what you said at the beginning here, what is the normalized sponsor M&A contribution look like?

That's a hard question to answer, but I'll say this. You're thinking of private equity and sponsors. Now remember, yes, we go to market every day, and we want to -- and I'm going to use 2 names, just KKR, Blackstone. You're talking about addressing their $25 billion funds in private equity and maybe they're putting out 10 a year. I don't know if that's right, I'm making up numbers. And that's pretty good because there's 20 of them. So we've -- but those companies are now putting out $100 billion a year in alternatives. I think -- that's why I think the fee pool from sponsors will be much larger than people think because they're not all -- if you go to their programs here, I bet none of them are talking about their private equity. It's become almost a pimple on their -- not that they don't do it, and we want to make those M&A fees and we're going to. But I want us to be involved in the $100 billion to what might become $200 billion a year, if you listen to the per year, they're going to put out in alternatives. And they're going to -- like we're in the middle of a transaction right now. I don't think it's been announced or done. But it's like $1.5 billion pref in a deal, not M&A deal, and we showed it to one of the direct lenders. That's one of the best things we've ever done for them. They're extremely happy with where they are. I think it's a $30 -- it's $25 million to $30 million type fee. So it's M&A type fee for coming up with a capital for the other parts of the firm. So again, I think people are underestimating how these large chunks of capital, and they're going to be large these 5 -- a couple of private equity firms have done $5 billion to $10 billion direct loans they originated. I think over time, the companies are going to say, I mean it's all novel last year that this was happening, but they're going to say, well, aren't there like 10 of these firms that can do $5 billion direct and their boards or their advisers everybody is going to say, "Well, why don't you give it to an independent and let them auction that and find out if there's 50 basis points more you can get, run a clearing price on a $5 billion deal, why wouldn't you? Why wouldn't you talk to 5 different capital sources and run a mini process and get the best terms and the best -- I mean that's what you do on investment-grade financing, you go out and you talk to everybody and you don't just take anybody's bid, you take the best bids. So I think we could play an amazing -- it's just a great role in there for independents. And the fees are pretty good because these assets, if you can put a $5 billion asset on your direct lending book, that's as profitable if it's -- you listen to Marc Rowan, you listen to all -- that's more interesting to him. He's more focused on that than they are almost on their PE, so they will pay fees to be shown that stuff. And I think that the fee pool from sponsors is going to be a lot larger if you think of them in the way I'm thinking about it. And we have to be on top of that. I've been very much pushing our capital markets to make sure they're in that market because I think it's going to explode and it's not going to be easy to get the talent and get in the market and be -- not every M&A adviser is interested in capital markets. Some of them just want to be M&A advisers. It's not the same talent base to have a banker who does M&A and a banker who does capital markets.

Right. So I mean, it's interesting, you're talking about the growth of the capital markets advisory ecosystem, which obviously spans all the way from very distressed all the way to healthy. So maybe you could just talk about liability management, which is clearly one part of that. It makes a lot of sense for you to be advising on that. Is the opportunity set that you just described as attractive in the healthy capital markets space? Is it as high fee? Can you provide the same value as you can in liability management? And therefore, I guess, is there sort of replacement if liability management comes down and normal capital markets improves?

We first started. I always said nobody wants to go bankrupt. So if you give them -- we had one client who had a bank covenant problem. And so we went out and found like, I think, a couple of hundred million of 15% PIK pref. That's a solution. You could say, "Oh, why don't we negotiate the banks and have a whole liability management thing. Really what most people want is to get enough capital to continue to try to improve their business and work their way out of it. These liability management processes have been very hit and miss now, especially with the new co-op agreements that the creditors are signing that they won't act without each other. We did one proud of. I was involved with it, it was Carvana, which was an unbelievable, most unbelievable thing I've ever seen. The stock was at $4. I think it's at $260. A year ago, we were in liability management mode and today the market cap is like $250 billion. But most people will just do a financing rather than go through the whole liability management idea if they can. So that was the first part of it. But then I think we're going to be in the room when again, you're in the room when a corporate is selling a division. And you have the call, you could say, look, our team knows there's billion of pref that could leverage the demand and we could get it from 2 phone calls. I think the CEO and the CFO are going to be very interested in that knowledge of very -- you're talking about it. I think it started as unhealthy markets, and it's moved very rapidly as insurance companies and alternative asset managers bought insurance companies and are really looking for almost investment-grade, high-quality assets and they're looking for those in size. And I think if you're at the table when they're being created, you can direct them.

The last part of the sponsor ecosystem, in my mind, at least, is the secondaries continuation fund business. Maybe you could talk about your aspirations there.

Yes. Look, there's -- that's my 2 in the morning wake up when I think about things we've done wrong. I know we've done some things right. But about 2 in the morning, all I think about is all the things we've done wrong. We've not executed well on that. We made a poor decision a few years ago. We did see continuation funds being good, and we kind of didn't do it exactly right. Let's just say that on a personnel basis. So we're looking very actively to figure out what to do in this space. I think continuation funds will be here to stay. There will be a piece of the -- as controlled premiums come back to the market, I think the LPs will push more for control premiums than just for liquidity and they'll want to do M&A to realize the full value of the asset. But the GPs, the continuation fund is a very important vehicle. And so we have to improve there.

Got you. Okay. Let's turn to your strategy investments, et cetera. You've hired a lot in the past 2 years. When you look ahead, where is the best place to invest right now? You talked about secondaries a little bit, where else?

Well, U.S., anything -- first of all, U.S. is the market to be in and all the fee pools, health care, tech, same fee pools, industrials, and I'd say energy. I think energy is going to be surprisingly good. I think that's one of the places where deregulation and DOJ, I think that all meets to say, okay, we're going to -- because if you think about it, the incentives that were put in place by the IRA, it's distorted the entire energy business. And when you take all that stuff off the field, people are going to revamp everything they've been thinking about what is the right strategy for energy. So I think we're going to have an active discussion. We hired a great team about -- I think it was about a year ago now. So I feel like we're in a good position there. But those large fee pools and especially in the United States, look, United States is the place to be. It's the transaction center of the world. We do very well in the Middle East. We had a good year in Asia, but they're all -- they're kind of small compared to what's going on in the United States.

Okay. I think you've done -- you did a lot of hiring last year, less hiring this year, MD count is a little more flattish. What's the right growth rate for the MD count going forward?

Look, I think there's room for a lot of growth because I actually believe that if we continue to -- if the federal regulations continue to almost destroy this old system, just think of how many bankers and how many assignments are available if it's not commercial bank-centric. You can do the math yourself. Those are big entities. There were lots of them. And so people say is -- are the independents too large? And I would -- I can make a case that the independents can't fill the gap if what I think is happening. But you have to find good people because you're not giving away balance sheet. In the old days, if I was at UBS, you could hire somebody who was kind of a B player because you were giving away free below-market loans, just put a candidate in front of below-market loans. Today, I think it's going to be very much upgrading. You got to have the best talent because you're not giving away any candy along with the assignment. So you have to have really good people. We spent, I think, the last 2 years upgrading our biggest fee pools to the best talent we could find. And I wish we were more aggressive. Out of all the things I've I criticized myself for, and we haven't been unaggressive. We've only been 17 years in business, but I look back and I say we should have been more aggressive. And especially, by the way, when these firms go out of business like Credit Suisse and Silicon Valley Bank, it's amazing how profitable the lift-outs are because unlike any other hire, you're not competing with an organization that exists. So if we go hire from -- pick Bank of America today, they're going to have the CEO call the client and they're going to swarm the client and try to keep it. The interesting part is Silicon Valley Bank had nobody left to swarm the client. Credit Suisse wasn't around. So you can make those groups extremely profitable quickly. So look, I think I would like to be more aggressive, but we need -- you really do need a talent. You cannot be stand-alone adviser and put the talent because you're not supporting it with anything off market. You're just going to market with the quality of your people.

So you've talked about 60% comp ratio over time in a more normalized backdrop. Any color you could just give on margins across the different businesses? And then when you think about getting to that 60% or plus or minus 60%, you can correct me, if I mischaracterize that, what's the time frame to get there?

Well, our goal is to get back to about there, right? We'll decide -- at that time, whether it's plus or minus 1 point because we were below there before, there's been some inflation in junior talent. So who knows if that will be the point estimate, but it will be right around there. I think that's the right place to be. We just haven't been in a revenue environment. I think we put out an algorithm. Our CFO did, Joe Simon, that said 4 to 5 points of comp ratio for every 100 starting from where we were. I actually think that works. I think that's -- he sort of -- I'm stuck with it. So I got to make it work, but I think it does work, but we've got to live by it because we put it out there. And then again, I think the revenue environment looks pretty good. How good for 2025? Again, I think it looks very good. Could we get close to it? Maybe, maybe. And then from there, the real thing I think that everybody, again, the focus is on comp ratio to comp ratio. I think we'll get back to 60% at some point. Your question in 2021 was we took the pretax margin. So if we get to 60%, and it's kind of normal way, we're shooting for a 25% pretax margin. In 2021, we got to a 33 -- what do we get, 33%, 34%, 34% pretax margin. I mean, so everybody is saying, what can you do on this 1 point of comp? And I'm like, you're taking your eye off the big prize, which is if we keep our cost down, we -- in a market, even if we're at 60%, if we can get up into the higher ends of these ranges, that was $12 million per MD we did in 2021. If we can get back to there, I think we get back to a 34%, 35% pretax because the fixed costs don't move. They move very little when you're doing all that. So the 40% comes -- even if you're at 16%, you don't get to 59%, people go, where is the leverage is in that a couple of hundred million of revenue that comes right down the shoot at 40% margins. And I think we can get back to that. It's just -- I don't want to predict the future of where these animal spirits going where, but it feels like we should be able to get back there.

I wish we had another 35 minutes, Ken, but we're out of time. Thank you so much for the time.

Thank you. Appreciate it.