Moelis & Company (MC) Earnings Call Transcript & Summary

All right. So before we begin, I have to read disclosure. So for important disclosures, please see Morgan Stanley research disclosure website, www.morganstanley.com/researchdisclosures. Any questions, please reach out to your Morgan Stanley sales representative. All right. So we are pleased to have with us Navid Mahmoodzadegan, Co-Founder and Co-President of Moelis. And Navid, I want to start by congratulating you on the news earlier this week, so you will become CEO of Moelis on October 1 of this year. And as part of this transition, you'll join the Board. Ken will transition to Executive Chairman, and Jeff Raich will be appointed Executive Vice Chairman of Moelis.

So maybe just to start, just give us some insight on the planning around this transition, why now, how your role, how Ken's role will change?

Sure. Well, thanks very much. I appreciate it. Nice to be with everyone today. And first off, let me say how excited I am about this appointment. It's a real honor to have the opportunity to lead our great firm. We have incredible people at the firm and great momentum. So I'm really, really excited about stepping into that role. I mean, look, as Ken said, I think in the press release, this has really been originated by him as part of the natural evolution of the firm. I think Ken felt that even though he's fully active and will continue to be fully active with clients going forward and has as much enthusiasm for the business as he's always had that this was a great opportunity at a great time to give more responsibility not just to me, but to the next generation of bankers that we've been developing at the firm that are ready to step up and take more active roles, not just with clients, but helping us manage the firm. I can't tell you how excited I am that not just Ken, but Jeff is also going to continue to be full-time working and helping me manage the firm to be able to have a transition with nobody important leaving is great. And I think if you take a step back and look, we promoted Chris Callesano to CFO. That was an internal transition that's been seamless. We promoted Kate Pilcher to COO, not too long ago. That's been an internal promotion that's been seamless. We talk a lot about talent development. 45% of our MDs are internally promoted managing directors of a stat we're super proud of. And so I kind of look at it and say, this is just another example of Moelis & Company really developing a culture that allows people to succeed. If I was a young person thinking about which firm to go to, where do I want to work? I can't think of a better firm that sends the signal that we develop people internally and give them opportunities than I think what we've been exhibiting at Moelis & Company.

Great. So seamless transition. And with that seamless transition, any change in strategy at all people should expect? Just how do you think about strategy once you take that CEO seat?

The strategy that we've really been focused on the last few years is one that I've been central to and been helping to drive along with the rest of our senior management team. So I think we have the right approach. We've been aggressively hiring into major verticals with major revenue opportunities, tech, oil and gas, now with the hire of Matt Wesley and Paul and Jeff, a major expansion into what we used to call PFA, I think we're going to rename it, but it's the business of continuation vehicles and raising money for private equity firms. We're going to do a lot there. That's a major opportunity for us. And all of these strategic initiatives so far have been really well executed. Our teams are fantastic. They fit into the culture beautifully. The revenue ramps have been exactly what we predicted, if not better. And so that's the strategy that I want to make sure our foot is fully on the gas on going forward, and we think there's other opportunities like that.

Great. Let's turn to the environment. So in M&A advisory, April earnings call, Ken noted backlog was down March to April. Since then, we've gotten some relief on tariffs. I saw the quote in the journal article yesterday that seemed a little bit more positive. How are you thinking about where the backlog currently stands and how your clients thinking about the confidence to move forward right now?

I'm optimistic. It definitely feels better and better each day since kind of the announcements of April, which I think set us back a little bit in terms of the M&A environment. Everywhere I go, people want to transact. They want to lean into transactions, whether it's companies or private equity firms or capital providers. Sure, there's parts of the market especially companies that are directly affected by tariffs and trade and all of that, that -- where it's tougher to do deals right now and may be tougher for a while. But there's a whole segment of the market that's much less affected. And in those segments of the market, we're definitely seeing in our pipelines, a lot of new business activity, stuff coming into the pipeline. That really never stopped even through some of the volatility of April. We're seeing transactions get done. We're seeing new transactions get launched. We're seeing our clients push us to launch transactions even if the environment isn't crystal clear. And all of that leads me to conclude that we're hopefully coming back into the kind of environment that we thought we were going to get. Is it perfect? No. Could something happen? Sure, to take us off track. But I'm bringing a lot of optimism to this. And as I talk to our bankers, I'm seeing a lot of that same feeling in their client dialogues.

And so pipeline is up from April?

Pipeline is up. I think it's as high as pretty much as it's ever been at the firm or close to it. So we feel good about the pipeline. And as I said, our bankers are busy and working really hard to try to get deals out there and hopefully get them to the finish line.

Let's talk specifically about the sponsor clients. So we're going on 3 or 4 years now of limited exit activity. What are your conversations like with sponsors right now? And what will get them moving?

Yes. Look, the sponsor business is all about deployment, and it's about returning capital to their LPs. And I think given that over the last few years, sales and IPOs are down because of the turmoil in the M&A markets and in the IPO markets. There is pressure on private equity participants to return money to their investors. And so you're definitely seeing that in -- back to this point of desire to transact. We feel from our clients that they do want to sell some of the portfolio companies and return capital to their investors. They need to do that. Sometimes that reflects itself more in continuation vehicles, which is why we're super bullish on that business and the business Matt's going to develop for us because that's another alternative to get investors back some money. And so that focus on DPI is really there, which I think is a good indicia of what's to come on, on the M&A side as the market continues to recover. And on the deployment side, a lot of capital has been raised by a lot of different firms and that capital needs to be put to work. And so that's what we're in the business of doing, helping find and helping sponsors find places to put that capital to work.

And on the IPO front, we have seen some IPOs over the last few weeks. They are priced well. So there seems to be some build there. Do you need IPO market fully open for sponsors to get moving? Are they waiting for the IPO market to open more? Is it fully open? What are your thoughts?

I don't think it's fully open. I think it's starting to open for certain types of companies, certain type of growth companies. I think if you see some success with those kinds of companies, I think the aperture then opens to other types of companies to access the IPO market. And yes, we'd like to see a healthy vibrant IPO market. That's good for the capital markets. It's good for our sponsor clients and it's good for overall transaction activity.

And before we get to private funds advisory, we have seen activity in stake sales from university endowments, local municipalities that are exiting, reevaluating their private equity stack. Does that impact sponsor ecosystem at all in a negative way?

No, I don't think so. I think -- look, I think the idea that there is liquidity amongst LPs to sell stakes if LPs need to do that for whatever reason, I think, is just part of healthy ecosystem that's developed around alternatives. And so if you have an LP to LP trade, it doesn't directly impact the sponsor, but the fact that there's liquidity in the marketplace to do that, I think it makes it more likely that LPs will invest in the next set of funds and the next set of alternative opportunities. And so this is -- again, this is why the team that Matt is going to be building for us once he joins the firm, which will be shortly, that's part of the opportunity that he's going to go after as well. The LP secondary opportunity is part of that whole panoply of businesses that we hope to build.

And then what about interest rates? Fed funds, there's 2 cuts priced into the forward curve this year, several more next year. Are sponsors waiting for cuts to get moving?

I think everybody wants rates to come down. Are people necessarily waiting? I don't know. That's a tough game to play because you just never know what's going to happen there. I don't have a lot of conversations with people where they say, everything else is right. I'm just waiting for rate cuts in order to move forward. I think that's a very tough line to follow just given the uncertainty in the world. If the business is performing well, if you think there's an active market of participants will show up to take a look at your business and you think you can achieve a good outcome to try to optimize that outcome on the margin because you think rates will be cut, I don't find a lot of people doing that.

What about long end of the curve, is rising 10-year yields coming up in client conversations at all?

Something to watch, not directly, but yes, something to watch. I think longer term, if you sort of said, what are the one of the risks to the market long term if the whole concerns about deficits and debt and fiscal -- the fiscal set of issues keep the 10-year at elevated rates, that's not good long term for business. Let's hope that doesn't happen. Let's hope our politicians can have some sensible fiscal policy to help get those issues under control.

All right. Let's turn to private funds advisory. We've talked about it briefly, but it's an area Moelis is very focused on building out. It's been a big growth area for the industry. You've announced several key hires in recent months. Can you just give us an overview of where you're at in building out the private funds advisory business and what your vision is for this piece of Moelis?

Yes. Look, this should be and needs to be a big part of our offering here. The firm is beautifully set up given our relationships with sponsors, our deep sector expertise to have a really big business in that set of businesses in what we used to call PFA, which I think we're going to rename. The hiring of Matt Wesley was a game changer for us in terms of having a real leader, a proven leader to help us build out those businesses and recruit the right people to do that. It's really important in those businesses to be a market leader. When you kind of look at who's doing well in those businesses, it tends to be pretty concentrated in terms of the top franchises in those space, and we want to have a top franchise. And I think Matt is exactly the right person to help us get there. He starts next week. So he hasn't even hit the ground running yet, but we've been able to recruit beyond that, Paul and Jeff, who were on the sell side of the business at Houlihan Lokey, went to the buy side and are now coming back to the sell side to help Matt build the business. And we also had a really good team of talented people within the company that we've been building over the years that I think are going to plug into that really beautifully, and we're going to be off to the races with more to come.

Can you walk us through the different products here, GP advisory, LP advisory, anything else and how investors should think about opportunities and challenges of each?

Yes. So look, I think the business that Matt is going to first start to build for us, which with Paul and Jeff is continuation vehicles. That's a very core strategic business. That's the business of helping financial sponsors get partial liquidity for their LPs in a specific portfolio company. That's on a continuum of exit options. It went into the spectrum is go sell my business for me. We're in that business in a big way, the sell side business. There's the recapitalization business. So sometimes sponsors won't sell a business, but they'll recapitalize the balance sheet and pay themselves a distribution or a dividend or bring in other investors that business we're in with our capital markets function. And this business, allowing LPs to cycle out, who want to get out and bringing new LPs in the continuation vehicle business is one where we have not participated in a meaningful way. And that's, again, very strategic to our sponsor coverage business and the first business we're going to focus on. But there are other ancillary businesses to that business that we think there's major opportunity LP to LP secondaries, which we've talked about as an opportunity, primary fundraising for private equity firms is an opportunity, GP stake sales, which we already do some out of our asset management group is a further opportunity to grow that business. And so when you look at all of that, that's a major, major, major opportunity for the firm.

And is LP more of a volume game where you need scale and infrastructure set up? Do you need to be bigger to have it be accretive to the margin?

Yes, I think we do. I think the LP to LP secondary business is more of a flow business and a scale business. And so again, we don't want to be in any of these businesses if we can't be a market leader. The spoils really do accrue to the market leaders in the space, and then that's why we're really focused on not necessarily being everywhere tomorrow, but being really great and then building out from there.

And the disclosure around how big this business is, is kind of limited across the industry right now. So any sense as on how big you are? Could it ever get bigger than M&A over time?

I don't know that it will get bigger than M&A over time. I do think M&A for the foreseeable future is going to be the key driver of our business right now. I don't know, M&A is 70% of our business, something like that, depending upon where we are in the cycle. I don't see this business necessarily overtaking that, but I think this will be -- if we do it right, and I'm really confident we're going to do it right, given the team we're building will be a very meaningful contributor to the company.

And on the secondary side, how do you think about the structural demand for secondaries through the cycle? So right now, we're hearing it's elevated, but in different parts of the cycle, how do you see it evolve?

I think there's going to be long-term demand for continuation vehicles and those types of structures because I think many sponsors look at some of their portfolio companies and say, I think this company is going to be great for a long time. I love this management team. I love this industry. I love this company. I do need to get my investors some liquidity, but that doesn't mean I need to sell the company. I want to continue to ride the upside of this asset. I'm going to give some of my investors the ability to exit because they want an exit and they deserve an exit. But others of my investors want to stay in, and we want to stay in and continue to oversee this company and the continuation vehicle is the perfect product to achieve all of those goals.

What about the restructuring piece of the business? Are client conversations still elevated? Are they picking up, slowing down?

There is a good steady stream of activity in what we call CSA, which is not just restructuring but liability management, balance sheet management, et cetera. We have a top-ranked franchise in that space, doing great. And in any given one year, you could have spikes if there's economic volatility or high default rates, we're not in that kind of environment today. In any given year, you could have extraordinary client events and we had some of those last year. So -- but our business is doing really well and they have a nice base, steady stream of clients and activity that we're excited about.

And if we do get resolution on tariffs and we get a soft landing and the economy starts growing again accelerating. Can restructuring decline from current levels? Or do you think it will still stay elevated?

I think there's going to be a steady stream of activity there because, look, even if the economy is doing great, there are some industries that are going to be affected. There are still companies that even if they've engaged in liability management exercise and pushed out maturities, they aren't going to necessarily solve the problem. They may need to come back again and reengage with the marketplace about further extensions and further optimization of balance sheet. Some of those companies still have balance sheet issues, and it's not like those problems have been solved. So I'm optimistic we've seen now. We've been in the restructuring business, CSA, now since 2009. And it's been a really good business for us. Sometimes it's a great business when you get these spikes like we saw during the financial crisis, we saw during COVID. But it's been -- if you have a leading business like we have a leading business, a market share, a company that is very -- a business that has very high market position and great reputation, there's going to be a steady stream of companies that need our services.

All right. Let's turn to expenses and hiring. So maybe just more broadly, we talked about the growth opportunities in the various businesses. Is it getting more competitive where on the hiring front, maybe you're seeing more competition out there? Or is that pretty stable?

Look, it's always competitive. We are trying to find the very, very best people in the world in these sectors and with these products, that kind of talent is scarce, and we're competing with other good firms to try to get that talent. And for us, especially, it's really important that, that talent fits culturally in our company. And the culture is really critical to our company. And so we're looking for incredible people who want to be on our platform who fit. And there's not a limitless universe of people who can do that in the spaces we want to be in, where there's the biggest market opportunity, right? So we also want people who can go after big revenue opportunities. And so whenever we find those people, it's competitive, it's -- it would be unusual for us to be the only person wanting to hire that person. And so yes, it's -- you have to be there. You have to convince people that we're the best place in the world to work. We've been able to do that. And because I think we are the best place in the world to work. And so it's always competitive, and you have to you have to attract the talent. And then once they're there, retain the talent, which is really important as well.

And on the pace of hiring, what are you seeing in terms of pace this year? Is it accelerating, decelerating? And then as you take over the CEO role, what's really your philosophy on the pace of hiring? Do you think Moelis needs to hire more and more.

Look, hiring at the partner level is a 365 endeavor. You're always monitoring, developing relationships, figuring out who the great people are. Look, our tech hire, Jason Auerbach, I had built up a relationship with Jason going back, I don't know, 4 years before we actually hired him. The reason -- one of the reasons we were able to quickly move to hire that team in the middle of the regional banking crisis because we had put in the work together to get to know each other. Jason had spent time with other partners of the firm. We've got to meet some of his people. So we knew him and we knew how great he was and we know how great this team was and there was a comfort level there. And so if we end up put that work in, I don't know that we get them once the regional banking crisis hit. So we're always out there trying to figure out who the great people are, who the people are who would fit on the platform. Right now, one of the big focus areas is obviously building out the CSA team -- I'm sorry, the PFA team, Matt Wesley's group. That's a very, very high priority, but we have other priorities within the firm, too. There are other big market areas, big TAMs where we don't have coverage that we need coverage and finding those people who can help us join our partnership to go after those opportunities is critical. But we're not going to hire anyone that we don't think is a top talent is going to fit on the platform.

And the regional bank crisis hiring spree was a great example because Moelis historically has been very nimble whenever there's uncertainty or things are slower and leaning in and then taking share in the next cycle. Is that still the framework you will deploy?

That's still the framework. I mean, look, Ken always talks about pristine balance sheet, and it's critical that we keep that, the fortress balance sheet, having the resources to move even if it's a scary time because you can't pick your time when the talent is available. And so if you've limited yourself without the resources to move, you've missed an opportunity. And so we're always going to, I think, adhere to that. We want to make sure we have the flexibility to create value when the opportunities arise. That's a fundamental tenet of the firm that we're going to keep. And then you obviously have to have the conviction to do it when the regional banking crisis has hit and the world looks like it's uncertain and you don't know when another tech deal is going to print, you actually have to have the nerve to follow through and hire those people, and I'm really happy we did.

And you talked a little bit earlier about white space and you're hiring in PFA. That's where you're focused. But any sectors in particular on the M&A side that you're more focused on or...

Look, I don't want to necessarily talk specifics. But yes, look, there's -- within industrial, there's some white space. Within health care, there's some white space. There's areas in Europe where there's white space. And look, pretty much in all of our sectors, even in some of our top ranked sectors, there are subsectors where we're not covering all the companies there and if we can find the right talent to do that. But I personally want to take a focus on the biggest TAMs, like where can we really move the needle? Hiring is hard. Hiring, there's a lot of energy and effort that goes into that, not just from me, but our bankers who meet the people because, again, the culture is important, our administrative staff, our ops team, our HR team, a lot goes into hiring any banker. And so I really want to kind of stay focused on the areas that can move the needle the most.

All right. comp ratio question. I have to ask. So it was 69% in the first quarter. Do you still feel comfortable at that level for the rest of the year? Any changes or things we should be thinking about?

Yes, we're not making any changes to that guidance that Chris gave on our first quarter earnings call. I mean, again, at the end of the day, a lot of that will be dependent upon how the year shapes up. And baked into that, too, was an assumption on some of the hiring we're doing, including the hiring we're doing behind that's build out. So as of now, that's how we're thinking about it.

And what do you think of as a normal comp ratio in a regular solid year?

Yes. Look, we do not want to be at 69%. That's not what we think of as sort of equilibrium for our company. I think we've said through cycles, we'd like to be in the low 60s, plus or minus a little bit, depending upon how any particular year shapes up. That feels right to us. Having said that, we have this pristine balance sheet with the resources to move to go build value and capitalize on opportunities. What we've asked from our shareholders who've been great about giving us this flexibility in the past is allow us to go capitalize on those opportunities in the short run, like don't let the comp ratio be the limiting factor in our ability to go and create value. And if you allow us to do that, we promise we're always going to be super mindful and respectful of what equilibrium needs to be over the long run. And our pledge to you is we're going to do everything we can to bring it back down.

So it sounds like nothing structural changing that's changing comp ratio outlook over the long term?

No.

All right. Great. On noncomp, target for noncomp growth this year is 15% year-over-year. How do you think about balancing investing for growth versus getting efficiency?

Before we get to noncomp, the one thing I do want to talk about is I do think -- and again, I don't want to put out benchmarks there, but I think there really is an opportunity, hopefully, for technology, AI to help us with comp ratio and managing that on the margin. I think -- and we're testing out some applications that really good early feedback on from our bankers and we're rolling that out more broadly about how do we get more efficiency, especially from our -- at least for now from our junior bankers and making, a, their lives better so that there's a higher percentage of their work that's intellectually stimulating as opposed to just wrote. I think AI can help us with that. And I think if we're successful in smartly adopting technology, the right technology when it's available, I think that could help in terms of the size of our pyramid. And if the size of our pyramid can be managed down a little bit, I think that will make the lives of our junior bankers better, and I think that could help with comp ratio over time. Again, early days. I don't want to predict anything yet, but I think that's something that we're staying on top of carefully. And then look, on noncomp, look, we have a great team. They're very mindful of what we spend money on. There are parts of our business where we do need to be and have good office space, good real estate. We've upgraded our real estate in New York, recently in L.A. We'll be doing that in London soon. That's in process. And so I do think it's important to have good facilities that impacts culture a lot. It impacts client perception a lot, but we're very mindful of the spend on the noncomp side as well.

When you talk about the pyramid getting a little smaller. Is that the bottom of the pyramid, the associate?

I think so. Again, I don't know what it's going to look like. Once we really embrace technology the right way. But my instinct is it will be a little tighter. Again, if we can have our junior people doing more in a way that's more intellectually stimulating for them, we're never not going to have a pyramid. We need a pyramid because we're in the advice business, and we want to develop talent. We need to keep developing the next generation of people who are going to interact with clients and all that. So -- but on the margin, can we be a little more efficient on the pyramid down the road if technology develops the way I think it will, I think there's a possibility of that.

And what about the revenue side of AI? Are you seeing clients...

Yes, that's the big -- well, for sure, AI is impacting lots of spaces. And so our tech bankers, other bankers in the firm are becoming experts quickly in how AI is developing. And so there's a crop of companies to bank that are playing in the AI space and related spaces. And then I think even further than that, even if you look out even in the horizon, I do think AI has the potential to help senior bankers be smarter about opportunities to put companies together, be smarter in their dialogues with clients, be more efficient in our ability to create transactions. If you think about what really expands the pie, it's that, right? How do we make more smart transactions happen faster, AI can help with that.

I want to pause. Are there any questions in the room for Navid? All right. No questions. So maybe just let's wrap with overall thoughts. You're taking over as CEO. What do you really want to leave investors knowing about what your overall strategy and approach will be?

Yes. Look, the fundamental pillars of the company, collaboration, shareholder-friendly, transparency, fortress balance sheet, culture, none of those are changing. That's very much part of the philosophy we all created together, Ken, Jeff, myself, the whole management team, I really believe in all of that. And what I hope to do is to help execute at the very, very highest level, our strategy. We want to continue to strive to be the best independent investment bank in the world and more than anything clients front and center. All of everything we do, every success we've had, every reputational advancement, every dollar of revenue that comes in the door is directly tied to doing a great job for clients and building these long-term relationships. And relationships and clients are front and center in everything we talk about as a company, and that's not going to change.

Great. Navid, thank you so much.

Thank you. Appreciate it.