Moelis & Company (MC) Earnings Call Transcript & Summary

Okay. Let's get started here. We are pleased to welcome Navid Mahmoodzadegan, CEO and Cofounder of Moelis to this stage. Navid took over the CEO role only about 2 months ago and was a Cofounder of the company, which is in 2007, he previously served as Co-President. Prior to Moelis, Navid held leadership roles at UBS and DLJ with over 30 years of investment banking experience and as a founder, I think he has a unique perspective both in the industry and the company. So thank you so much for joining.

Thanks, James. Great to be here.

Okay. So now I think this is your second conference since taking over as the CEO role. Have there been any surprises? And what excites you most about the future?

So thanks for inviting me. It's great to be here. No real surprises. As you pointed out, I've had the privilege of being a founder of the company and have been part of the senior team helping to lead the company since day 1. So I knew what our firm is about. I think that's one of the real benefits of me taking over this role is well known to our population. And I think there's just a ton of excitement within the firm about doing a seamless transition from within. A lot of what we do as a firm is about talent development. We talk about that a lot. It's been one of the foundational pillars of the company, taking bankers out of schools, developing them on our platform, having them well established within our culture and seeing them succeed as managing directors is something we're really good at and being able to do succession that way too, I think, really reinforces that. So it's been great so far. The mood around the firm is incredible. The excitement in the future is incredible. Our business outlook is really strong. And so I'm excited to be in this role.

Okay. Great. So you talked about on the last earnings call, how you focus on clients' growth and culture. I think those are the 3. So maybe you could just expand a little bit on those, but then maybe also just on the key strategic focus areas as you look ahead.

Sure. Let me start with culture. As I mentioned, the culture of the firm is very dear to us. We pride ourselves on having a culture of collaboration and teamwork, people working together. The firm has very much has a one firm feel, even though we have people who focus on sectors and geographies and products. What we like to do and what we're really good at is kind of bringing all the best of all of that -- of those capabilities to our client situations. And I think we're exceptionally good at doing that, which is, I think, part of the secret to our success. So as we've grown from starting a founding group of a few people to 1,400 people now globally, I'm really proud that the culture is very much intact and thriving and evolving in a really positive way. Growth. We -- over the last number of years, growth has been central to our firm, but I think really since COVID, we've had 4 big growth initiatives that have been very, very successful. Build out of our capital markets team, build out of our tech team, build out of our oil and gas team, our energy team and more recently, the build out of our PCA business. And each of those, and I'm happy to talk about each of those, has been enormously successful. The early returns on PCA are very, very promising, even though that team has only been with us here for a few months, very, very promising and very much on track with our going-in thesis. And so continuing to grow the firm intelligently with difference makers in lots of sectors that we're not currently covering is what I'm really excited about and something I'm going to spend a lot of time on.

Great. So I want to touch on a couple of those products or the growth initiatives, but maybe just one more big picture one here. So you've been there since the beginning, but I'd say the past 5 years have been a pretty big step-up in growth in terms of talent. So maybe you could just talk about the talent you've added in recent years and maybe how the talent has evolved over the history.

Sure. So again, we -- what we're trying to do is really look at what are the big market opportunities. What are the big TAMs where we think we have licensed to win and where we think there's big opportunities for client impact. And it became obvious to us, I want to go through each of those. Capital markets was an area we were in since the beginning. But when you looked at the evolution of the capital markets, growth of private credit, all of the different capital providers that were out there providing all different slices of capital structure, so many of those providers out there and companies trying to navigate all of those different providers, it lend itself to a much more advanced advisory opportunity there, helping companies and sponsors navigate private credit. Second, you had an explosion of new technologies and opportunities to finance growth companies. And so making sure we had an A+ capital markets team integrated across debt and equity to attack all of those opportunities has proven to be a spectacular success. Our Capital Markets group will have its best year ever this year. We're continuing to invest behind that and grow behind that. Similarly, technology. We've been in the technology business since the early days of the firm, but we were subscale in technology. And when we looked at that marketplace, we saw the biggest sector by fees. We saw a very vibrant and active sector, and we saw one where financial sponsors, a space where we historically played a lot in doing more and more tech deals, but we had a subscale tech team. And so being able to go in there and hire a group of people that we spent years developing a relationship with, bringing them onto the platform has been a really big success and done the same thing in oil and gas. And PCA is a product that's very strategic for us. So being able to be to provide financial sponsors with a GP-led secondary continuation vehicle product is in and of itself a big revenue opportunity for us, but it's also protective of our M&A franchise because lots of time sponsors are looking at portfolio companies and saying, I could CV this company, I could sell this company. I'm not really sure what I want to do, and they really want one adviser to come in and be a thought partner with them to help navigate that. And if you didn't have an A+ effort in EVs, it was a lost revenue opportunity, but it actually also threatened part of your M&A business, too.

Interesting. Okay. So you started out private capital advisory just there. So maybe you could touch a little bit on where you are in the process of building the private capital advisory business out. And then maybe just how should we think about the growth ambitions there for medium term?

Sure. So as I said, within PCA, the first business we're really focused on is GP-led continuation vehicles, GP-led secondaries. And that's the most strategic business within PCA for us. And right now, with our leadership team and with the people we've hired, including some people who are going to be starting with us next year after they sit out notice periods, we have about 7 MDs focused just on that space instead of our PCA business. And that's a good critical mass of people to get the business up and running and to have a credible platform to present the clients, which we've already been doing very successfully. So we'll grow that over time as the business opportunity expands. And so that's GP-led secondaries. From there, there's numerous other ways to grow the PCA business. One is in LP secondaries, which is less strategic, but potentially an opportunity for us if we can hire the right team. There's primary fundraising, which is more strategic, and then there's GP stake sales. And I think eventually, over time, we will look to add all of those capabilities.

Okay. So you talked about the 4 areas of hiring. It sounds like 3 of them are -- you feel like you've completed a lot of the growth there, one we just talked about. So how do you think about hiring talent from here? How much hiring do you think you can get done in this sort of backdrop?

Look, we look at -- when we look at industries in the sectors, we're in every major sector group with great teams. But within those big sectors, there's many subverticals where we just don't have coverage. And so the big opportunity for us is to fill in those white spaces within these sectors, especially the ones with the biggest fee opportunities. And so when I look at -- just to pick out a few health care and industrials, within health care and industrials, we have spectacular teams in parts of those ecosystems, but there's many other parts of those ecosystems where we're subscale or we're completely absent. And so hiring difference makers to bring into those businesses to establish and develop and grow those franchises, I think, is a major opportunity for us as we look to scale the company. As we do that, we'll continue to add product capabilities, M&A, capital markets and when we talk about PCA. But the big white space opportunity right now is to grow out verticals within our big teams.

Okay. Last big picture one here. So I think you're coming into the role at an interesting time in terms of AI disruption. What does that mean for your business and headcount and maybe margins? And how are you shifting investments in response to that?

Sure. So we have a couple of different working groups within our company with some of our brightest people who are really passionate about AI and technology and subject matter experts focused on precisely this set of questions. So I think right now, we're focused on what's practical in terms of analyzing, identifying, testing and ultimately deploying all the tools that are being created for our industry. And so there's a number of those tools we've already deployed to our bankers. A lot of our bankers are using those tools, finding them very, very helpful in terms of making them better and more efficient. And I think the number of those tools we push out to our bankers will increase over time. Second, we have a project going on trying to figure out how to integrate a lot of this data that we've collected over the last 18 years and making sure that our data is usable and can plug into these AI tools. I think that is sort of the next iteration that we're thinking about. I think your question about what is it going to do to our pyramid is subject to a pretty big debate within our company. I think some people within our company look at all of the productivity tools that have come before, spreadsheets, the Internet, mobile, et cetera, and said, well, that's made everybody better and more efficient, but we haven't chunk our headcount at all. So why is this any different and other people think this is such a transformational technology that's really going to take over a lot of the tasks that some of our people are doing right now. I personally don't believe, and right now, we are not changing at all our plans for headcount. So when we go and we recruit at schools, our analyst programs are as big as they've ever been. Our planning is still for full analyst programs. If I had to guess, I think that's going to continue into the indefinite future. And remember, those programs are important, not just to help support our teams. They're also the next generation of senior bankers. And it's very important, especially in an apprenticeship culture, an apprenticeship business that we're all in to make sure we're hiring the best people out of schools. We're developing them, and we're creating that next generation of Managing Director.

You brought up data. I think that's really interesting. One of your competitors has talked about how their view is that data allows you to show up when someone is about to do something like selling a family business, for example, and helps with that. And look, you've had a lot of transactions in the past what, 18 years now. So maybe you can talk a little bit about the data.

Well, look, I do think we have a lot of information sitting within the experience base of our bankers within the 4 walls of our company. And how do we use that data to win business, to give better advice and to make transactions happen is really the key question. And I do think that's something we're focused on. And I do think AI and the promise of AI and integrating our data will help with that. I think there's clearly an opportunity in the future for the banking industry, our industry, our firm to be able to be much more productive at all levels of the organization. And that doesn't necessarily mean less people or a change of pyramid. It just means a much more productive business. And I think if we can harness data and harness AI the right way, that will be an important part of that.

Doing more for your clients, that makes sense. Okay. So maybe let's turn to the business trends. As we look ahead to next year, 2026, what's your mark-to-market on the health of the macro? And what does that mean for your businesses?

So as I look out to 2026 and dialogues with our clients, I think there's general optimism and confidence in the macro economy, data of the economy, direction of travel on interest rates, inflation being relatively contained. I think for the most part, there's general confidence and optimism. That doesn't mean there aren't parts of the economy that are less peppy or that are showing some cracks. But I think for the most part, people feel good about the macro. I do think there are secular forces, technology forces that are forcing a lot of companies to use M&A as a tool to make sure they're best positioned to be on the winning side of technology change as opposed to the losing side of technology change. And so I think the need for scale, the need to make sure they have good exposure to growth opportunities and growth factors within their companies, making sure that companies are focused. The market wants focused companies. They don't want disparate companies with -- or disparate businesses with inside of big conglomerates. So they want focused businesses. And I think M&A is an important tool to help facilitate those goals. My outlook for overall M&A activity is quite good going into next year. This has been generally a very good year this year, primarily led by larger transactions, primarily led by strategic transactions. I think you're going to see that continue given the regulatory environment and some of the things I just mentioned. But I think what's been missing in the market so far this year, there's been kind of that middle market, primarily sponsor-led businesses. I think if you look at of transaction sizes of $1 billion or so, the deal counts were actually down this year versus last year. And I think that's going to change. When we kind of look at our deal activity, our pitch activity, our mandates and the conversations we're having with our sponsor clients, especially, I think that's going to turn next year. I think the aperture on deal activity in that middle market is going to be much more positive.

So on the mid-market and the sponsors, what's the catalyst there? I mean rates are slowly creeping lower. Is that enough? Are there other factors that we should be thinking about that gives you that confidence?

Well, so I think this is another year or 2 of a lot of these companies seasoning into valuations that are going to be acceptable for sponsors to trade. I think it's another more seasoning in terms of sponsors hearing from their LPs of a desire for liquidity and monetization and DPI. I think the fact that strategics are leaning more into corporate transactions helps because sometimes sponsors sell to other sponsors, but a lot of times, they're selling to strategics. And when you have a regulatory environment that's more welcoming of strategic transactions, I think that bodes well for some of those assets trading as well. So I think -- I don't think there's a step function in any of those things happening, but I think the cumulative effect of all of those things becoming a forcing function for the inevitable churn of a lot of those businesses that need to trade.

So you talked about regulatory posture a little bit already. You talked about in the last earnings call. Are there still bottlenecks here? And maybe when you're in the boardroom, are there deals that these companies are looking at that they couldn't do a year ago?

For sure. Yes. Look, I think it's generally acknowledged that this administration is much more accommodative of larger transactions, strategic transactions, especially in some spaces where it was almost taboo to think about deals in the previous administration. I think this administration doesn't view size as is in and of itself is a out-of-the-box problem for companies to do transactions to get bigger. And so there's definitely more of a green light flashing for people to think about and actually execute deals that you couldn't do in last administration. We'll see as some of these transactions go through the regulatory process, how the Justice Department, the FTC actually treats these transactions, but there's generally a view that you can do things that you can't do in last administration.

Okay. So maybe just quickly on some of the sector-wise trends. Maybe firstly, the outlook for tech. I think that's the biggest sector so very important what's going on there. And then I think you've talked about strength in health care, industrials, other parts of TMT. So what areas do you think are -- 2 to 3 areas, let's say, are most durable in your view or likely to improve next year?

And transactional activity?

Yes.

Look, when I look at our firm and I look at our pipelines and I look at deal activity, it's hard to actually find a sector within our firm that I don't think is going to be up next year. I think it's really across the board. And so, yes, you could talk about tech and health care and industrials and some of these spaces that I think are going to be active. But it's almost easier to talk about where you don't think it's going to be active because there's not many of those. So I think the outlook and optimism is pretty broad-based. I don't think it's necessarily going to be concentrated in a few sectors. I think it's going to be pretty broad-based.

Interesting. Okay. So you've added some European talent recently. So maybe you could just give us your thoughts on Europe. And is there a structural growth driver there? Or is it really just that you're moving into the market in a bigger way?

So Europe is definitely lagging in terms of the health of the M&A market and the vibrancy of the M&A market. There are some structural reasons for that, that we could talk about. But if you sort of look at the trajectory of the U.S. M&A market versus the European M&A market, it's on a different slope. Having said that, it's a really important market. It's a really important market for us. It's important for us to be global and to have a great team and an active team there. And it's especially important for us to match our sector capabilities in Europe with great teams in the United States. So we do best in Europe, where our bankers are part of a global coverage team with our industry bankers in the United States. So that's what we're really focused on. We're really focused on in some of our sectors where we have real strength in the United States to make sure we have equally great strength in Europe and having those teams work together. So as I said, the European market is more difficult, but we're continuing to invest there, but we're doing it prudently.

Okay. Maybe just last one, near term. So I hear a lot of positivity here for the longer term. But maybe near term, we have the government shutdown. The trends I see suggests there was a little bit of a blip in completed volumes in October, November. So in hindsight, have there been impacts, anything structural? Or was it more of just a blip?

Nothing structural, more of a blip. I think, look, it's possible that a deal or 2 that would have closed in the fourth quarter may slip into next year, but not clear that that's going to be the case either. So I would say any impact from the shutdown is very, very modest and short lived.

Okay. Well, let's see if there's any questions in the room, there's a microphone. Is there a microphone? Okay. Well, I guess if anyone wants to speak up, I can repeat the question. So maybe I'll repeat the question. So just expand the definition of tech, including media and commentary on Paramount.

I'm not going to comment. We are involved. I'm not going to comment on that particular transaction. So -- and the first question on...

[indiscernible].

I'm not going to comment on that whole situation. Look, I think you're maybe taking a step back. I think you're definitely seeing more of a convergence of companies that have historically been thought of as technology companies and companies that you would have thought of as content companies. You're seeing that across numerous companies in the ecosystem. I think that trend of convergence is going to continue. At the end of the day, what really matters is what's best for consumers and consumers consume content and they do it increasingly through advanced technology platforms. And so inevitably, those worlds are going to converge. And I think you're seeing that play out in the transactional environment, in the operating environment, and I think you're going to continue to see that.

Okay. Great. So maybe just one more here before we turn away from M&A, which is just mid-caps. You talked about sponsors being a key driver of mid-cap picking up. But is there something else why that stat you quoted deal counts being down is happening? Is there something else that we're missing in deal cap that we don't have in large cap or we do have in large cap?

I think most of it is, again, a big chunk, not all. So when you look at a mid-cap company, the ownership of that really can come in 3 ways. It could be a privately-owned company, family-owned company, could be a sponsor company or could be a public company. So I think over time, you've seen a shrinkage of the number of mid-cap public companies, right, for a lot of different reasons, structural reasons. And I think the calculus for a lot of the private owners is similar to the sponsors, which is, can I get the price I want. And I think for the last few years, that's been challenging. It's been challenging because of rates, it's been challenging because of inflation, it's been challenging because of macro volatility and a general sense that there was malaise in the M&A environment. So as those constraints are lifted, I think you'll see more private companies, family-owned companies come to market, and I think you'll see more sponsor on companies come to market. Obviously, families are also -- the timing is dictated by other considerations, right, death, et cetera, state planning, those kinds of things. But I think you'll see -- as the M&A market comes back, in that part of the world, I think you'll see more of those transactions come to market as well.

Perfect. Okay. So let's turn to restructuring. I think you've guided to a somewhat weaker 2025 in restructuring. Maybe just help us think through some of the drivers this year and then maybe just the longer-term outlook for the business. I think within that answer, if you're willing to break down a little bit between the traditional bankruptcy versus liability management as well.

So look, we have one of the leading restructuring franchises on Wall Street. We call that business CSA because it's really much more than just traditional bankruptcies. It's the liability management, out-of-court restructuring, so on and so forth, balance sheet management. It's a great team that's been very important to the success of the firm for a long period of time as both a deep pool of revenues for the firm, but also it feeds into M&A opportunities, et cetera, for the firm. We've grown that business over time. Last year, we hired and really focused on the creditor side of the business, which historically, we had just focused on company side, and we made 2 senior hires over the last couple of years on the creditor side of the business to enhance those capabilities, and that's gone well. In terms of the actual revenues this year, down a little bit from last year. Last year was a particularly good year for that franchise. I think they probably punched above their weight due to some unique fee situations last year. And so I think when you look at the overall health of the economy, lower rates, all of those things that are giving us optimism on the M&A side, they're also creating less new opportunities on the restructuring and liability management side. And we've definitely seen over the last bunch of years, a trend away from traditional restructurings, in-court restructurings. And part of that is because of the heavy costs associated with restructurings. As much as possible companies, creditors, et cetera, are trying to keep companies outside of bankruptcy as opposed to in bankruptcy given the tremendous transactional cost and friction costs there.

So one of the things that I found very interesting in restructuring is that there seems to be a somewhat finite pool of bankers. So even though the quantum of debt has expanded manyfold over the past decade, you haven't seen this tremendous growth in restructuring MDs or certainly not as much as you've seen growth in M&A MDs. Why is that? And why can't we see that catch up?

It is a very [ niche ] area. And it does require a particular expertise to work your way through and understand traditional restructuring, liability management, et cetera. You're 100% right. There's a finite universe of people who do that business at the highest levels. And having a team of people, a critical massive team of people who do that is really important. It's a big barrier to entry to be able to prosecute that business. One of the things that's unique about our business and one of the reasons we've been super successful at it is because of the collaborative nature of the firm and the collaborative culture of the firm. Our restructuring team works very closely with our industry bankers with our sponsor coverage bankers to bring all of those relationships and all of those strengths to bear to chase client opportunities. I don't believe many of the other franchises in the Wall Street are as collaborative within their organizations to go do that. A lot of them are much more siloed. And so one of the -- again, one of the hallmarks of the way we approach that market as we do other parts of our firm is working together to do that. And I think that's been part of our success.

So maybe let's just turn to margins. Maybe you could just update us with your outlook on the comp ratio. And I'm not talking about the next quarter, unless you want to give us next quarter, but maybe just the longer-term outlook? And what does normalized comp ratio look like for you?

So, look, we are very appreciative that our shareholders have been understanding around the investments we've made over the last couple of years in a market that was more challenging on the top line. That caused our ratios to go to levels that were not normalized. And we're very cognizant and have been working really hard to kind of bring those numbers down as you've seen this year. And we're going to continue to bring those -- bring that comp ratio down. I think, especially given the payoff from these past investments and what we're seeing, the overall macro environment and health of the M&A market, I think we can both continue to make investments in growth and bring that ratio down as we roll forward here over the next many quarters and years, and we're committed to doing that. Where that settles in, I could tell you where I'd like it to settle in. I think I'd like it to settle in, probably in the low 60s. But whether that happens will depend a little on the competitive environment. Again, we -- we're in the market for talent and we're -- we've got to protect our own talent. And so some of that's within our control and some of that's not within our control. And I'd like to see it get to that place. I think that's a fair balance between investing in growth, investing in our people and our relationship to our shareholders to make sure that that's balanced. But whether we can ultimately achieve that will depend a little bit upon the macro environment and the hiring environment.

Makes sense. Maybe just on capital return, you've built a strong cash position, no debt. I think that you're more focused on buybacks of returning capital than special dividends, which was something that you used in maybe 10 years ago much more prevalently. Maybe just walk us through your capital return philosophy.

Sure. So look, first and foremost, we want to make sure we have a pristine balance sheet that can weather any storm that was to hit in the marketplace and any reasonable shock to the system. And that's really important to us to make sure we have a fortress balance sheet. We want to make sure we can continue to make smart investments in growing the firm. And we want to make sure that we can protect our dividend, our dividends at a relatively healthy level, especially relative to our peers. And so making sure that, that continues uninterrupted. It's going to be really important. Having said all that, I think we can do all of that and still have a bunch of excess cash. And as we think about what to do with that excess cash, if the choice is dividends -- I'm sorry, share repurchases or special dividends, I think we're going to lean more into repurchases and special dividends.

Okay. So maybe one last one for you. As we look ahead to 2026, your first full year as CEO, any last words, anything we should be thinking about for next year?

Firm is in great shape, lots of excitement about the momentum of the firm, our hiring, the quality of the culture of the firm, lots of great conversations to continue to grow the firm smartly and a macro and deal outlook that looks really positive. So I'm excited about attack in '26.

It's great summary. Navid, thank you so much.

Thank you, James. Appreciate it.

Do it again next year.

Sounds great.

Thank you.