Perella Weinberg Partners (PWP) Earnings Call Transcript & Summary

I'm delighted to introduce our next speaker, who is Peter Weinberg, Chairman and Chief Executive Officer of Perella Weinberg Partners. Peter has over 35 years of experience in investment banking and is a founding partner of the firm. This is Peter's first time presenting at our conference, after they went public this summer, and we're very excited, hopefully, for this to be the first of many appearances in the years to come. So Peter, thank you very, very much for joining us.

Thank you, Richard. Good to be here.

So let's start off with the process of going public. And obviously, this is a pivotal year for your firm. I think you were private for 15 years beforehand. So maybe you could talk a little bit about the decision to go public, but also then talk a little bit about what being a public company has really changed, both in the terms -- both in terms of attracting clients and attracting talent.

Yes. Well, I think I probably -- I never would have said this when we started the firm 15 years ago, but I will say now that being public is a great thing for our firm. And the way I think about it is to say going public was positive and also being public is positive, but they're 2 very separate things. So going public, really allowed us to do a number of different things. We were able to simplify our firm, our complex partnership structure. We were able to pay back all of our debt, so we have no debt now. And we were able to create a currency with which we can hire people, who know what the value of what they're getting. I mean that was really in a nutshell sort of why we went public and that was a good thing. But that's kind of now in the distant mirror. Being public now, particularly because the people at the firm now own 50% of the company. I really like the transparent results reporting and the discipline that it instills in the firm because we're -- it has a very motivating and sort of clarifying influence on the culture of the firm and the performance of the firm.

Has it changed the way that you spend the time much relative to being a private company?

A little bit, but not as much as I thought. I mean, there are public company obligations, but the day before we went public, I ran the business and I worked with clients and the day after we went public, I still did the same. But obviously, we have to pay attention to a number of things that go along with being public, which has been fine and actually very interesting to get -- to have some really smart, sophisticated long-term investors come into our company and give us their thoughts about what they think.

Okay. So what are the milestones you'd like to market to judge you on in the longer term? What are the key things you think the market should focus on in terms of judging whether you're on track relative to what you want to achieve for the company over the next 5 to 10 years?

Yes. So let me start by saying, our ambition, our long-term ambition is to increase the scale, the scope and the influence of our firm around the world in the markets in which we operate. And so that's kind of our vision. The way we're going to do that is to continue to keep the very high quality of the firm right now, and also grow the firm, most likely in the form of people from outside the firm that we hire into the firm. And that gets to your question, which is that the result of that is revenue growth. And what comes after revenue growth is margin improvement due to scale as well as internal discipline and what comes from margin improvement is return of capital to shareholders. And so that's kind of how I'd like to be judged as a firm in terms of how we made our overall ambition. But if we do that, those financial metrics will follow.

Okay. So I think it's often challenging for investors to differentiate between the different advisory platforms. So when you think about PWP, when you think about your peers, what do you think is different from the strategy perspective, culture perspective, maybe a client mix, but even a geographic perspective that really stands out to you?

Yes. It's a complicated question because each of our different constituencies will differentiate us in a different way. So investors will differentiate us differently than clients versus recruits versus our own people. But I will say that -- what's the common thread of differentiation. I think there are a couple of things that are subjective and a couple of things that are factually supported. On the subjective side, we do spend a ton of time trying to get our people to collaborate. And we really -- we do it -- we spend time on it every single day. And that's -- I think that's different. I don't talk about this outside the firm that much because it's really something that's inside the firm. . But I do believe that, and I do think we're a client-centric organization, which I think is quite different. We're not product-driven, we're completely client-driven. I think on the other side of it, our business in Europe is different. We started our European business at the exact same time we started the firm, 15 years ago. And so we have deep roots in that market, and we've been successful in that market. And we're very optimistic, by the way, about that market. And also, I think another differentiating characteristic is that 50% of our ownership, as I said, is owned by people who work at the firm right now. So there's some differentiating characteristics, some that I see, some that I think the world sees, but that's how I would answer that, Richard.

So you talked about culture and I fully understand how important culture is. And maybe you can just spend a second talking about how you maintain the culture of the firm, but also grow the franchise as well. I mean, how do you balance those 2? What's the right balance to make sure that you're attracting the right people and integrating them into the culture of the firm. So you don't lose what is really in essence, special to PWP.

Yes, that was very much on my mind last week. We had our global partners meeting and we had everyone come in. And we made 10 partners last year, which is a lot on a base of 60. We had 3 partners who are promoted from within the firm and 7 partners who are hired from outside. The process that we undergo when a partner comes in to the firm to interview, is really significant, and they see a lot of people. And frankly, we're not -- I'm not worried that these new partners are diluting the culture, quite the opposite. I mean they really embody the culture really as much as those of us who've been here since day 1. So I think it's all about people. It's all about hiring the people who fit culturally. And it's very tempting sometimes to hire somebody who might be very effective, but just not as much of a cultural fit, and we really try to stay away from that.

Okay. So maybe we can talk about the growth -- about growth and the growth strategy. You mentioned this as one of the milestones, and I agree, I think the market really care about this. So where do you see the best opportunity to deploy capital, whether it's human capital or action capital today, either by product, by vertical or geography? And how has that changed for the balance of the year? I mean, so much has changed this year? How has your thought process changed in terms of where you see the greatest opportunity set over the next few years?

Yes. It hasn't -- we haven't changed as much, and I'll explain what I mean by that. But we have a kind of a virtual war room, which has in it the exact positions that we wish to fill over the next 3 to 5 years. And that's in both -- in geographies, in products and in industry subsectors. So we -- and for each of those seats, we have a sense for the external candidates, people out in the market. It's a small world. So we know that. We don't know everybody, but in some cases, we're in conversations, some not. And then, of course, we have our great internal team who -- a number of which will be elevated into those positions. So that's really how we look at it. Now I think the best window into that room, if you want to put it that way, is just a look at who we hired this year of the 10 partners, who we elevated into the partner role. And those positions are financial institutions in Europe, fintech, health care services, digital infrastructure and health care services, what else I missed. I think that's -- chemical too, chemicals. And so that's just an example of sort of the opportunities that we see. But Richard, we're relatively small. We're 60 partners in a sea of an enormous market and where we operate. And so there are just a ton of opportunities for us.

I mean what do you think the greatest challenge is to achieving growth? Is it just attracting the right people? Or what do you think is the biggest bottleneck?

It's all, 100% of people. Because we know that the independent advisory space is working. We believe that the independents will continue to take share from the large firms. In our firm, our model is working now. Our brand is working. We're able to attract clients and people to the firm. So that tees us up, but you're absolutely right, we have to execute. And the way we're going to execute is by continuing to attract the right people, keeping our people and growing the firm in that context really.

So I think one of the big question marks, I think will have is you've seen this extraordinary improvement in banker productivity over the last couple of years. And I think part of it is just the opportunity set is much bigger, but I also think there's this recognition that an actual fact, working remotely has allowed bankers to read us increase their touch points with a number of clients today. I mean when you have to be on the plane and travel, which is a limiting factor in terms of how many people you could talk to in any given day. But this is the first in-person event that we've done in 2 years. I'm hoping we're going to do a lot more. As the world starts to go back to in person, does that impact productivity in any material way? And I'm curious to get your perspective as to how clients are responding to in-person versus virtual because this has obviously resulted in a significant amount of time given back to them relative to the past?

Yes. I mean the reason that productivity has increased in our industry and at our firm is because it's enormously busy. I mean that is, by far, the most important reason for the increased productivity. As we sort of hopefully get into a more normal phase where we can get out on the road again. I do think that you're right that there was a measure of efficiency that we noticed during the pandemic. But I think we surrendered personal interaction with clients and particularly with new clients. And so I think when things return to normal, whatever that is, I think that we will be more efficient. I think we've learned a lot in that regard. But I also think we'll greatly benefit from engaging with clients personally. And our younger people, our new people benefit so much from our apprenticeship model. I think we may surrender, take one step back on efficiency, but we're going to take 2 steps forward for those other reasons.

Okay. So this is obviously a very cash-generative business. It's a very capital-light business. How are you thinking about capital returns broadly? And I guess, you obviously pay people in stock, which is the right thing to do. How you wane up dilution versus buying back stock given the limited free float? And how are you thinking about the balance between dividends and special dividends as a public company?

Yes. And as I said before, this sort of -- this flywheel of revenue growth and margin improvement and return to cap. I mean, it's the most -- the final critical kind of piece of that equation, as you rightly point out. Our business model is one that allows significant return of capital, not only for us, but for others in our space. We, of course, started with a normal common dividend. And we are going to consider for sure, special dividends and repurchases over time. Repurchases are particularly important, as you rightly say, to address the dilution created by stock-based compensation. So we will do that. One of the reasons we have not bought back stock this year is because we have so little liquidity right now, just in the early stages of our being a public company. And what we did not want to do was to buy back stock, and we're not concerned about the share price right now. And we didn't think that was an appropriate thing to do. We are having some shares that will become unlocked this month. And we'll see what happens with respect to that, but it will likely improve liquidity in some way.

Okay. So maybe we can talk a little bit about the industry more broadly. And you spend a lot of time with corporate, you spent a lot of time with CEOs, you spent a lot of time in boardrooms. How would you characterize the mindset today? I mean, what would you say is top of mind in board rooms. And I appreciate it spans a broad church. It's going to be different by industry. It's going to be different by geography. But what are the common themes? And look, I think the market is very focused on supply chain disruptions, the prospects of interest rates going up much faster than perhaps the market is pricing in inflation, antitrust regulation. Maybe you can talk about all of that in the context of what you think it means for strategic M&A over the next 12 months.

Yes. I mean there are definitely clouds on the horizon, and you mentioned some and there are others. And -- but I feel that our corporate client base is today, they're very accustomed to these issues. And unless there's a significant shock, our experience with our corporate clients is that they're still very actively looking at growing their business through M&A and other reasons or restructuring or whatever they may be doing. The -- our advice is really almost long term in nature. Whether we're dealing with a merger situation, buy or sell, whether we're dealing with the financing, we're often not involved as much on the short-term financing side. And that long-term aspect of our advice is very linked to how clients think. And so I mean, right now, our clients are still very active. They are not restrained in any concerning way from our perspective.

And the executive order in particular around limiting consolidation from a competitive standpoint, is that something that comes up much. I guess it's been around for a few months now. So I'm just curious if it's much more.

No, I mean, the regulatory dimension of significant mergers is always a really critical point, and it is now. And so there's no question about that, and particularly in the high-profile industries. Those are -- there may be some transactions that don't perceive that might have before this concern evolve. But also, there's lots of restructuring results as the -- from that kind of regulatory concern, and there are those aspects at play as well.

Okay. So maybe we can talk about the geographic SKU. The U.S. has obviously led this rebound. But even before the pandemic, I mean, U.S. activity was running well ahead of Europe. As you mentioned, you've got a significant presence in Europe. We've seen activity in Europe start to pick up. So I'd be really interested if you could just unpack what you're seeing below the surface. And maybe talk a little bit about either geographies in Europe that are really standing out to your industries that you think are starting to see a pickup in activity.

Yes. So as I said, our European business is a really important business for us. It's performing. It's had a record first 3 quarters, as we've said, and it's attractive. And we think that the business is going to continue to do really well over there. I mean -- In terms of sort of a macro perspective, there are some factors in Europe that are almost identical to the U.S. in terms of this liquidity super cycle and low rates and enormous private equity involvement in Europe, and some other factors. Those are the same in Europe as they are in the U.S. What's different about Europe is that it's growing, as I think you all have said at around the same rate as China. I mean that's enormous.

Maybe even faster.

Maybe faster, but I mean that's an enormous opportunity. And Europe is still early in 2000 when the euro sort of came into existence, things we're consolidating and they kind of stepped back. But our feeling is, is that the opportunities going forward are very significant in that area, active on the continent and France, Germany and the U.K., which is really where our bases are there, all very active. And in terms of the areas, again, reflected by some of the hires that we've made, digital infrastructure in Europe, financial institutions more broadly in Europe, and fintech are 3 really interesting areas for us. But it's quite broad, though, I would say, quite broad even beyond that.

I mean I think one of the things that has held back activity in Europe has been the structural resistance for most M&A from regulators and from politicians and from the strength of labor unions. And I do think it's fair to say that's disadvantaged Europe over the last decade. I know you spent time with those groups. Do you think they recognize that they've got to allow more consolidation in Europe to increase competitiveness relative to the rest of the world?

Well, I'm not sure they -- I mean, there's no one opinion within the regulatory infrastructure of Europe. And I'm certain that some people feel exactly what you said. And I think some people feel that we're not -- the regulation is not enough. But I think on balance, I do think there's a recognition of that reality.

Okay. So let's talk a little bit about financial responses. I mean this has been a really important theme this year. Sponsor activity, I think, is from what we can see is the most important as an overall percentage of M&A fees, at least going back over the last decade. So maybe you can talk about a few things, first is, how do you think about the sustainability of this level of activity? Maybe you can talk about your sponsor franchise, how you think that stacks up relative to the competition? And then just talk broadly about how you service that client base? And is it actually that different to how you service the corporate client base?

Yes. No, it's an important question today. My headline comment would be that the financial sponsor opportunity is very large, growing and to use your word, sustainable. I mean -- and the reason I say that is because, first of all, the sponsor opportunity is a multifaceted opportunity. It's the portfolio companies, entry into a transaction, exit from a transaction, everything in between. So that's kind of the obvious opportunity. Then there's working with sponsors as large complicated financial institutions that have their own strategic challenges. Third is the GP business, which is a very large and important business and then LPs secondaries. And so -- and there are others -- but those are kind of the main kind of headlines of the opportunity. And it's a very significant -- we're in many of those businesses, not in all, and it's important to be in. Right now, I think Dealogic said that 50% of our business touched the sponsor, which I believe is about average in our space. The way to answer your last question, we -- the way we cover sponsors -- covering a sponsor is different than covering a company. But I will say that it's really important to both constituencies that we cover each other. In other words, it's very hard to go into a company today, a big company and not have a really good sense for not only what financial sponsors are doing generally, but who's active in their space, what are valuations? What assets are for sale, how is that going to change the chessboard, et cetera? I mean it's really, really critical. And so it's the -- I mean, the way I always describe this is that our coverage sponsors is ubiquitous. I mean, every single partner myself included, we engage with sponsors as a way to understand our market and to provide the best advice to our clients, corporates, which is kind of where our DNA is, but also really, really importantly find more and more sponsors.

I mean just as a follow-on, I mean, I think one of the questions we get is, looks the velocity going to change in terms of the period that the sponsors hold assets for. There is this shift to the holding assets for longer periods, as they raise more money in core and core plus type products. I mean, is that all at the margin? Or do you think the velocity of turnover amongst financial responses could...

I think the transaction velocity is more geared to the amount -- the increasing amount of capital that's raised. Less so -- I think within a certain fund, let's say, or within a vintage, I think there'll be some periods where people hold on longer and some periods where people get out quicker. But I don't think that's a permanent change in the velocity. I just think that the whole ecosystem is growing. And there's -- that really is responsible for the velocity of transactions.

Okay. So let me ask about nontraditional M&A revenue streams. And we've obviously seen this real growth in terms of just nontraditional M&A advisory services from some of your peers. Can you talk a little bit around what you think the opportunity set is in terms of other advisory services and talk about where you're already focused in terms of growing that business over the next few years.

Yes. So we -- our kind of mandate and the way we sort of define our addressable market is that we advise our clients around the world on complex strategic and financial challenges. So within that, we're obviously in the M&A business. We're in the restructuring business. And the areas that we're focused on and growing and have a lot of growth to do is in the capital structure advisory areas. And we're finding that these services are welcomed by companies. They're welcomed in many cases by sponsors, and it's a very significant opportunity. And so that's kind of one area. And then the other area that I would reference would be the kind of other part of the financial sponsor ecosystem, which includes secondaries and GP interest, and that's just something that we're thinking about. But there's -- there are a lot of different areas of growth within the firm outside of our core business areas.

Okay. And maybe as a last question, I mean, how do you think about acquisitions for PWP as a tool to accelerate growth over the next few years. I know Tudor, Pickering was obviously a really successful acquisition for you. I mean, what does the landscape look like in terms of assets that you could buy? What's your appetite to do that? And how do you think about acquiring an asset from just a cultural standpoint, given that often those firms do have their own separate cultures?

So you're right. I mean Tudor, Pickering, Holt was a great acquisition because, one is, we really weren't in the energy business. Two, there was a cultural fit because we knew very well the principles from our prior lives. And thirdly, the economics were attractive to the firm. And so any time those 3 things exist, we are all ears as it relates to more strategic acquisitions for our firm. Now that doesn't happen all that often, particularly as we grow and we expand in our different areas. But there are places out there that we are looking at that we would look at, but it's kind of moon, and the sun and the stars need to line up really for that to happen.

Okay. All right. Well, Peter, thank you very, very much for joining us. It's been a real pleasure. And hopefully, we'll see you here next year.

Thank you very much.

Thank you, everybody. Thank you.