Moelis & Company ($MC)

All right. Let's get started. So we are pleased to have with us Navid Mahmoodzadegan, CEO and Co-Founder of Moelis. Navid, thanks so much for joining us.

Great to be here.

Always great to have you back. So let's start on strategy. So you're roughly 8 months into the CEO role. It feels like longer. It's been a busy year. So how have these last few months been? And what are the few things that you're most focused on as CEO?

Thanks for the question and wonderful to be here today. So it's gone great. I've really enjoyed being CEO of the firm and leading our great franchise. I think it's been what I thought it would be, which is exhilarating every day to wake up and do everything I can to support our bankers and the work of supporting our clients, growing our firm, which is a really important initiative to continue to expand our capabilities and to make sure our culture is the best it possibly can be. So all of those things are challenged and taking up a lot of my time.

From culture, as a co-founder, you've seen Moelis through various cycles and what parts of the culture are really nonnegotiable to you, especially as the firm expands and navigate different environments?

So culture is, as you say, absolutely critical to everything we do. It's a foundational thing for our firm. And the elements of the culture that I think are most important, first, collaboration. We were founded on the principles of bankers working together in seamless teams to bring the best of our firm to our clients. I think that's been one of the hallmarks of our success. And one of the reasons why even though we're now much larger than we were at the founding, the firm still feels like a family because we are all working together to do everything we can to help our clients. Second, to be nimble and innovative. I think we do a really good job and our bankers do a really good job of trying to go where the puck is going in terms of new business opportunities, new sectors, new spaces, and there's countless examples of that within the firm of our bankers coming together to attack new spaces. And I think third, a culture of people who are good people, high integrity, people who really care about the work they're doing, they care about the clients and want to work together to maintain and perpetuate that culture.

Let's shift to the environment. On the M&A side, I really want to start with what are you hearing from clients and have the conversations with clients changed over the last few months?

So I think it's -- generally, it's an active market. We feel good about the trajectory of the business, the deal volume and deal flows. I think if you look at our business, we've had a great start to the year, both in terms of announcements that we've made as well as the pipeline as it sits today and the overall level of activity, I think, is strong. And I think what's underlying that, back to your question about clients, is a real desire to -- on the corporate side for companies to get scale in an environment where the regulatory environment is accommodated of a scale and welcoming scale. I think that's further important in a world where there's a lot of tech disruption. And companies are trying to figure out how to win in an AI world, and oftentimes getting additional scale to put themselves in the best position to succeed in that world is super important. And on the private equity side, much has been made about the lack of deal flow in the middle market, the volumes there. And there are some reasons why the market hasn't opened up the way we all hoped it would. It's not a terrible market, but it's certainly not as frothy as I think many of us had hoped. I think the important thing to note there is there's still very, very strong desire from the private equity community to both deploy and more importantly, to monetize their portfolio investments. I think -- and I think that monetization will take many different forms and it will take some time to work through the system. I don't think we're anticipating you wake up one day and the middle market opens up dramatically. I think it will -- I think we've seen some signs of improvement, and I think it will further gradually improve over time, which I think will happen over a period of months.

So activity remaining strong and when you think about the areas of strength, you mentioned AI, is AI the big driver of strategic decisions on the M&A side? Or is it broader than that?

AI is on everybody's minds. It's in every conversation, every meeting we're having with clients. It's the #1 topic that people want to talk about, how is AI going to disrupt the specific industry? How should we, as a company best position ourselves to take advantage of that? How does M&A play into that? What should we be doing in terms of acquisitions or divestitures to put ourselves in the best position to win? Those are the flavor of the questions that literally every meeting we go to is on the front and center of every strategic conversation were happening. One of the things I think you've seen that has put a little bit of a damper on part of the market is we've seen some disruption in some sectors, software being kind of that first sector. They've got a lot of attention in terms of people questioning the ultimate value of some of these companies, the terminal value of these companies. And I think -- as I said on our earnings call, I think the market has painted a broad brush on a lot of those businesses today. And I think over time, you're going to -- we're going to learn that many of those software companies are, in fact, going to thrive in a post-AI world, some won't and some -- it will take some time to figure out where they sit in that spectrum. And I think until some of that plays out, it's hard to know what to do with some of those companies.

Software is a manageable percentage of deal flow for you, meaning majority of your deal flow would not be impacted by AI disruption.

Well, I think if you just asked the question, how big a software? Software is an important space for us, but it's definitely not the majority of our deal flow. It's an important part of an important sector of ours, which is technology. And we have a great tech team and a great tech team covering lots of different software companies and they're in active dialogue with our clients over the kind of topics we're talking about.

What about large cap versus middle market? We've seen large-cap strategic decisions really drive activity in the U.S. over the last 12 months, supported by a regulatory backdrop that's more transparent. So what do you think it takes to get that core middle market piece moving in scale?

I think there'll be a few things that would be very helpful to get more momentum in that middle market. I think first, getting the war to a good conclusion, I think would be super helpful, getting past some of the inflationary pressures in the marketplace. Hopefully, we won't be getting a series of rate cuts that will dramatically impact the cost of capital. I think if we can get kind of kind of stability in the geopolitical front, stability on the rate front and time. I think for a certain segment of these companies, it just takes time for them to grow into valuations that make it compelling for the private equity sponsors to actually come to market. And so I just believe that with some stability in some of those macro factors and some time, things will gradually improve.

And on geopolitics and the themes of deglobalization, supply chain resiliency, how do you compare the level of activity in the boardroom of those themes versus AI? Is AI overtaken everything? Or is it equally meaningful?

I think supply chain and making sure that there are certain industries that are based and certain capabilities that are based in the U.S. is still an important theme. But yes, I agree with the general proposition that AI is the central defining question of our time and how companies take advantage of AI and put themselves in the best position to win is the topic that is most relevant right now in the boardroom.

Let's turn to sponsors. So how has activity changed year-to-date? And how has it changed versus your expectations?

As I said earlier, I think we all hoped that there would be a major uptake in sponsor level activity. I think we've definitely seen continued improvement. It may not be going at the pace that we all hoped, but there's definitely improvement. And I think, again, back to the desire, there is strong desire in the private equity community to transact. The whole essence of a private equity firm is to deploy capital and return capital. And I think there's just tremendous desire to get that flywheel going again in the private equity universe. And I think that's why it's really important. If you kind of take a step back and look at our firm over the last few years, we've really done a lot to bolster and enhance and create world-class capabilities on our product set. We've always had a great M&A franchise. We've always had a great franchise in capital structure advisory. We now, after a few years of investment in talent and leadership, have a world-class equity capital markets. That capital markets business, a lot of that business not only works with growth companies, but also works with sponsors to work on custom tailored capital solutions. And our newest business, private capital advisory is one we're super excited about. That is a business that really is facing the private equity GPs and helping them create CVs and other solutions to help with portfolio optimization and portfolio management and having that full suite of capabilities puts us in a beautiful position to have really strategic dialogues with our private equity clients beyond just, hey, can we help you sell an individual company here or there.

When we think about getting that flywheel spending for sponsors, one of the changes we've noticed in the last few months is the IPO market is active. The window is opened. Does that change the momentum in the flywheel?

I think it's very healthy. I think an open and active IPO market is good for our business. We participate in some of that. As I mentioned before, we have an active equity capital markets business that is doing IPO advisory and working in IPO underwriting groups with a lot of growth companies. So that's a business we're in. But I think even broader if you kind of take a step back, I think the ability to create more public companies if the IPO market is open, is a healthy thing for the whole ecosystem, and it's something I welcome.

And what about interest rates? So we entered the year expecting some cuts. And now there's discussion of maybe pause, maybe hike, how are clients thinking about those various scenarios?

The cost of capital is always an important factor in decision-making around transactions. I think the hope would be, again, that we see some of the inflationary pressures subside if we can get passed and have a decent settlement to the conflict in the Middle East. And again, my hope is that rates kind of stay within a zone that's conducive to activity. That's something we're monitoring really carefully, it's something our clients are monitoring really carefully.

And if there was a hike, would that put the sponsor return narrative on the pause?

I think if there was a meaningful move in longer-term rates, which are really kind of tied to a lot of financings that drive private equity activity. I think if there was a sustained increase in that cost of debt capital, that could have an impact on the margin short.

Got it. So it sustained significant move is bad, but maybe one like...

Yes, again, the Fed doesn't set the longer-term rates, the Fed set shorter-term rates and the market will determine longer-term rates. So I think at this point, people are assuming there's going to be a Fed hike towards the end of the year. We'll see what that does to longer-term rates. And we're -- as I said, we're monitoring that pretty carefully.

Great. So let's turn to restructuring. So on the restructuring side, how are companies adapting to a world where refinancing capital is structurally more expensive?

Well, I think when you look at what's happening -- we have -- we do have a series of debt maturity walls, really picking up in 2028, 2029, '30. There's something like $2 trillion of maturities that will have to be either refinanced or extended out or something has to happen with the balance sheets of those companies. Some of those maturity walls were really kicked out from a few years ago. And so I do think as we get closer to some of these dates, our teams are active in terms of advising clients and kind of what to do with those maturity walls and I think the flavor of the day for the last few years has been what we call liability management, which is working with creditors in different ways to extend out maturities and buy companies more time before they have to do something. But I do think in segments of the market, especially in some of these more disruptive segments, we're likely to see potentially more normal way restructurings, as we like to call them, as opposed to liability management exercises. So I think you'll see both liability management and more formal restructuring process with some of those companies.

And is there any specific industries where you're seeing any real signs of stress beneath the surface?

Look, I think a lot has been made about automation and job losses and job cuts. I think -- look, I do think it's easy to say call centers or something like that. It's kind of the paradigm for a business that really should be automated that shouldn't exist in a people-based format. We've talked about software and what that means. I think there's many innings to play to figure out what happens to SaaS and software companies. But that's the question right now is what's the next leg of disruption and where does it hit? And how does it impact those companies?

Let's turn to capital markets. So your Capital Markets business is an increasingly visible growth area and you're participating in more IPOs. You've added MDs and securitization and debt capital markets and private credit. Where are you seeing the most demand in that business right now? And how big can the capital markets business become for Moelis?

So we had a record year in capital markets last year, which we're really proud of, and that team is off to another great start in 2026. I think you're right to point out that we've significantly expanded our capabilities, both on the debt side and on the equity side. Our business on the equity side is really more facing growth companies. And so you can imagine the sectors where they're focused on today, space, alternative energy, blockchain and crypto where there's just a lot of activity both in the public and private markets, digital infrastructure being another good example. And on the debt side, we have an active business in customized debt solutions. A lot of that interfaces with the private credit markets and private lenders and securitization is a new business that we believe we could be very active in. So we're building a team to pursue that strategy as well.

And then another growth area is private capital advisory, we talked about it a little bit when we talked about sponsors, but want to dig in there. So you're investing heavily over the last year? And what are some of the lessons learned in your build-out of PCA? Has demand really met expectations?

We're really excited about the early days of our PCA business. Our assumptions going in were a few fold. One, that there would continue to be a long runway of these kind of customized GP-led solutions. That's really the first business we're starting with. And that's proven to be true. We think that market is growing and active and is now not just doing CVs in private equity, but also in private credit. And we think those businesses have long runways. Second, we knew that if we put a world-class team together, which we have that we felt strongly that our private equity clients would want to work with us. And that's proven to be true. That team is off to the races, lots of good early wins, lots of good early executions and a rapidly building pipeline of transactions. So the going-in assumptions both with respect to strength in the market and our ability to create a great team and our clients' desires to work with us is all proven to be true. And we're adding to the team and building the team. Right now, the biggest bottleneck is continuing to add resources there, so we can go after the opportunities that we think is pretty enormous.

Let's turn to non-comp. So investment banking industry is rapidly adopting AI? And how does Moelis approach AI adoption, big picture?

AI, we are spending a lot of time, and I'm personally spending a lot of time thinking about this topic. We have a number of internal working teams with some of our most tech-enabled tech savvy bankers who are spending a lot of time on this topic. I think the Phase 1, which we're right in the middle of, is testing and deploying and utilizing a lot of the tools that are available in our industry. So we've put out [ rogo ] and chat enterprise and the note taking tool and soon we'll have in our bankers' hands, some very functional tools around modeling and pitchbook creation and some of those things. So that's kind of the basic of kind of Phase 1. And then I think in the long run, the key is going to be how do we harness 20 years of internal data and kind of plug that into to our internal AI models and create maximum functionality for our bankers. I think AI has enormous potential at all levels of our organization to make us more productive, more efficient, more effective. And I'm very, very excited about the promise of that and what it could do for our business in a positive way. And I think all of that could be done and still have healthy staffing levels and still provide our bankers incredible opportunities to grow within our firm from right out of college all the way to managing directors one day.

And as cost of token having any impact or driving any conversations on the noncomp side?

Not yet. Not yet. We are making significant investments in a lot of the technologies I just mentioned earlier. Right now, token usage is not driving a lot of incremental cost yet. We'll monitor that, obviously, as we get these tools in people's hands and as they utilize them to serve clients. But there is, as you pointed out, there is additional costs in our noncomp expense for the work we're doing to harness AI in the most beneficial way.

And do you see AI longer term changing the fundamentals of the people-driven relationship-driven model that Moelis has? Or is it more a productivity tool layered on top of the same model?

I think it's more of the latter. I do think AI is an enormously exciting productivity tools as you put it. At the core of what we do, though, is relationship, judgment, discretion, trust. I think AI helps us put those other skills to the forefront in a more efficient way and a more productive way. But I think the essence of what we do, advising clients, corporate clients, governments, private equity clients, entrepreneurs, et cetera, on their most important transactions, it's still a very human endeavor, and I think is going to be a human endeavor for a long time.

Great. So thinking about total non-comp, not just AI, how are you thinking about growth for the rest of 2026? Any updates?

Yes, we're going to see -- as I think Chris said on our earnings call, we'll see some growth this year in non-comp. Part of that is AI, but part of it also is -- we just moved into beautiful new office space in London. I think that's really been transformative for our business there and morale and our ability to attract great talent there. So there'll be some incremental costs for office moves like that. There's some incremental moves for client events and things that we do as part of our franchise building, and there's some incremental costs for hiring and some of the infrastructure around hiring.

So on the hiring side, Moelis has consistently emphasized hiring difference makers rather than simply adding scale. So is there any change in hiring philosophy? What does that mean difference makers? And how do you view hiring plans for the rest of 2026?

So we're actively engaged in lots of exciting conversations around lateral R&D hiring. As you know, lateral R&D hiring is not the only way we grow our firm. Internal talent development and promotion is very, very important of what we do as well. But it's augmented by lateral hiring. This year, we will have 9 -- as of today, 9 new MDs joining the firm this year, some of whom have started, some of whom will be joining us later in the year, and we're really excited about that. All of those people fall into the label, you mentioned, of difference makers, we believe. And you're right. It really does matter the quality of the person, the quality of their client relationships and dialogue, their ability if they're a product person to really add value to a situation. We've just found over the years that it's better to not have coverage in the space than to have coverage with -- to have average coverage in the space. We'd rather wait, be patient. There's many, many parts of the world that we're covering well and doing an incredible job with difference makers. And there's other parts of the world that we're still developing talent or hiring -- or we're going to be hiring talent to cover those companies. And I'd rather be patient than a hire an average player. The vast majority of the client and transaction activity usually goes to the best bankers in the space. And my goal is to bring as many of those bankers onto the platform as possible, consistent with our culture. And that's what I spend a lot of my time thinking about.

So we're in a cyclical upswing for M&A banking activity, and we're seeing some increased competitive pressure on MD compensation. So how do you think about balancing hiring plans need to grow with efficiency?

So both are important. We are building the franchise for the long term. So all of our decision-making on people and investments are long-term decisions, but we can't be oblivious to the short term as well. So we try to do things in a balanced, measured way. Having said that, you mentioned that it's super competitive for talent. It is. It is very, very competitive. We're not the only ones who believe that difference makers matter, and those people are highly sought after. So we have to work really hard to convince them to join our firm. We have to convince them that a collaborative platform that has many, many growth levers ahead of it, is the right place for them to be. We have to be competitive on how we bring them in. And we have to think about being prudent in the short run in terms of how much of that we do, but all consistent with building the very, very best franchise we possibly can.

So putting it all together, hiring plans, revenue growth that impacts your comp ratio mechanically. So any update on comp ratio expectations for this year?

I don't have an update beyond what we said on our first quarter earnings call. Look, we, I think, have made meaningful progress over the last few years to bring the comp ratio more in line given the market dynamics and given the heavy investments we've made in really upgrading our platform over the last bunch of years. I do believe, as I said in the last earnings call, there's opportunity to move our comp ratio and we intend to bring our comp ratio down further. How much further, on what time line, I think a lot of that will depend on the pace of hiring and also on the revenue performance of the firm this year and into the future. But I want all of our investors to know we're very, very focused on trying to do that the right way, again, consistent with the long-term nature of our build.

And on long-term view, is there a comp ratio level that you think would be appropriate?

It's hard to say. I think just so much of that does depend on the competitive nature of what we do. Again, we're in the market for talent, attracting and retaining talent. And we, on our own, can't determine what our comp ratio should be if the marketplace is in a different spot. That's an input along with many other inputs and us figuring out what -- where we can get that comp ratio down to. I will tell you again, though, the intent is to bring that ratio down further, again, consistent with continuing to build a vibrant, healthy, great long-term franchise.

Let's turn to capital allocation. So you continue to balance a strong balance sheet, capital return, investment in the platform. So how do you think about capital allocation in the current environment?

We just think about it in terms of orders of priority. I think the first priority, as I mentioned, is using our capital to make smart, great long-term investments in people and in the platform. I think second, maintaining our dividend. We have a, I think, a good healthy dividend and we don't want to do anything that's going to risk that. I think after that, I do think, on balance, as you've seen recently, we've leaned more into share repurchases then we have things like special dividends. And I suspect that will continue to -- that will continue to be the order of priority for a while. We bought back a fair number of our -- a very good chunk of our annual dilution in the first quarter, which I'm happy about. I think that was the right thing to do. And I think you'll continue to see actions maybe not at that magnitude every quarter, but we continue to believe that share -- prudent share repurchases are part of a smart capital allocation strategy.

And then some of your peers recently have announced acquisitions on both the M&A advisory side and the private capital advisory side. So how do you assess inorganic opportunities?

So really, we are very open to doing an acquisition that falls within a certain set of criteria. I think those criteria, I think, are fairly straightforward, which is it's got to be in a space where we want to add talent or bolster our existing capabilities. It has to be with a team of, back to the term, difference makers who can really elevate our franchise. And third, it's got to be consistent with our culture. And fourth, we have to do a sensible deal. We know that any very high-quality firm, no one's going to be able to do an incredible deal there, but it's got to be sensible and it's got to be aligned, maybe even more than sensible, the word is aligned so that we're in it together to create long-term value. We have been actively looking at many of the opportunities that are out there, including some of the deals that have been announced by others. We haven't found the right one yet for us. But if that comes across and if we can hit the criteria I talked about with people we want to be in business with and they see the upside in our platform, we wouldn't hesitate to do that.

It could be in either part of the business?

Yes, it could be sectors, it could be geographies. Could be products, probably less likely to be products, but I think sectors for sure and geographies as a possibility.

So before we wrap, I want to give you opportunity to answer what you think the market most underappreciates about the Moelis story?

Look, I think when you look at our franchise, we're still a very, very young firm. We've been in business for 19 years. The brand is still young relative to a lot of the firms we compete with. If you look at the composition of our bankers, about 1/3 of them have really only been on the platform for a short period of time, 2 or 3 years. And so the maturation of the brand, the maturation of the people on the platform, all the investments we've made to really significantly expand our product capabilities, some of our sectors, the hiring we're doing. I think there's much payoff to come from a lot of that work that we've been doing that we continue to work and can continue to do. And I could not be more optimistic about the future of the firm.

Excellent. Well, Navid, thank you so much for your time and for...

Thank you.

[indiscernible] the conference.

Thank you to be here.