Perella Weinberg Partners (PWP) Earnings Call Transcript & Summary

Okay. So we're going to get started with the next presentation, if everybody could take their seats. So we are delighted to welcome Peter Weinberg, who is the Chairman and CEO of Perella Weinberg Partners; and Andrew Bednar, who is Co-President and CEO-elect. Peter has over 35 years of experience in investment banking. He's a founding partner of the firm. Andrew has been a partner of Perella Weinberg Partners since its founding year, I think, in 2006. So they've worked together for a long time. And before that, Peter worked at Goldman Sachs in London, and I had the pleasure of working with him. So welcome back to the conference.

Thank you. Good to be here.

And welcome back to the Goldman Sachs event. So look, obviously, it's been a very important year for the firm, very important year for you. And I thought we could just start off with your decision to step down as CEO. So what drove that? How long have you been thinking about it? And how does it change the balance or the way which you spend your time?

Yes. So there are a couple of reasons that we made this decision. The first and most important is that we have a great leader in Andrew Bednar, who's sitting to my right. Andrew has started the firm, as you referenced, in the very early years and shown that he had been just a great practitioner of our craft, one of the best in the industry in my view. But in the last 2.5 years, he also served as Co-President of the firm and distinguished himself in that role, along with Dietrich Becker, the other Co-President, who will remain President. So that's really the -- that's the right thing for the firm right now. The second reason, I would say, is that I turned 65 this summer. I've been running this business for 16 years, and it's time. I mean it's just -- it really is time to do. I'm not going anywhere. And to answer your question on how I'm going to spend my time, I'm going to spend my time with clients and prospects around the world, which ironically is why we started the firm 16 years ago. So it's kind of come full circle, but that's really the reason.

Okay. So Andrew, maybe we can talk a little bit about your strategic vision for the firm as you take over as CEO. And I think you talked about a combination of continuation and evolution. Can you elaborate on what you mean by that? Maybe talk about what you think is most important. And then I think for this audience, it will be helpful, I think, for you to define what you think success looks like in your new role? And what are the milestones you think the market should use to judge your performance by?

Yes. Sure. Look, in the last 16 years, we've gained a very clear understanding of what we're really good at and how we can differentiate ourselves in the marketplace and how we can be recognized and rewarded by the market, and that's really to help our clients focus on their most complex strategic and financial challenges. And so we will continue to do that. That is our very singular mission that we had when we started the firm. That's not going to change at all. We're not going to veer off course on that. We've developed, we think, a terrific business. We have a brand that's recognized globally with -- for trust and excellence. And we've got every day an increasing level of clients that are highly attractive and also talent that wants to join the firm. And so we're going to stay on that mission and not, as I said, veer off course. We're not looking at new business lines. That is the line of business that we are in. So we will stay the course on that. I think having said that, we've built a terrific business, but it's time to scale the business. So the continuation of that is very clear. The evolution part is really about scaling. And so we've -- we spent 16 years building something. We've had a lot of testing. We've had some trial and error. We've definitely experimented in some areas. And now we're in a stage where we've got a mandate by our partnership, but also by our investors, so our collective owners. As you know, the partners own a significant amount of the firm. But our mandate is clearly to scale this business now because we're small. And we've got now the formula right, where we can continue to rinse and repeat and stay on the mission now of scaling.

So maybe we can talk about what that kind of looks like in practice. So how should we think about the size of the firm over the next, let's say, 3 to 5 years? They appreciate 3 to 5 years because this business [indiscernible]. How do you change the product suite at all? Do you feel you've got the right product suite? Or do you think there are things that are missing? Do you think you've got the right global footprint today? Or do you think that's something you need to make further investments in? And do you think you can actually get there organically? Or is acquisition something that you would consider?

Yes. Well, look, we're in the M&A business. So certainly, we have to always consider M&A for ourselves. So like owning a restaurant, we kind of have to eat our own cooking. So we will think of that. But I think primarily, our most attractive opportunity today is to build it brick by brick, with occasionally adding a section of the house from time to time. So there may be some smaller acquisitions. There may be some team lift transactions that I see in the future. But largely, it's a brick-by-brick build. Today, we have 650 employees globally. We have 10 offices in 5 countries. I don't see the need to increase our geographic footprint in terms of offices at all. It's not something clients demand. They're looking for industry expertise and product expertise and aren't as focused on exactly where our teams reside. So I don't see the need to expand offices. In terms of our -- what I know the investment community, analyst community describes as product capabilities, there's -- in my view, they're service lines, but we'll call them products for the moment. We're obviously a core M&A firm, and that's sort of the DNA of the firm, but we have a very significant financing and capital solutions offering, which is traditional restructuring and liability management as well as capital markets advisory and private capital markets. And so -- and that's largely raising growth capital for earlier stage firms. We think we have the full service line or product contingent. I don't see a whole lot of ads in that area. So largely, what we're focused on is increasing our client footprint. So we need more boots on the ground, and we will do that by adding senior talent in our key industries where we don't have fully -- we have not fully expanded our capabilities within our key industry sectors. And we will also continue to enhance the boots that we have on the ground to make them more effective bankers with their clients and serve broad client needs from M&A through all the capital solutions and financing services that we offer.

So you mentioned brand a few times. So maybe we can spend a few minutes talking about what you think defines the brand. And also talking about what differentiates, you think, the PWP brand from some of your peers and also talking about how you develop it from here.

Yes. Do you want me start? Or do you want to...

Sure. I think we can both -- I think we both can talk about that. I think the -- first of all, brand is sort of an ephemeral concept. And -- but it's hugely important. It's like culture. It's unbelievably important but very hard to kind of put your hands on. It matters to us a lot in terms of recruiting, both on college campuses and lateral recruits. It matters with respect to clients. It matters with respect to our overall reputation. And the way you develop a brand is inch by inch. I mean you don't do anything 100% better but 1% better 100 times. And what we -- we are really focused on providing advice to our clients around the world on complicated strategic and financial challenges. And that is -- by doing that every day, we create a brand. And integrity, there's nothing more important in our business than integrity. And that's -- we stand for that. But again, you can't tell someone that. That has to be developed through your behavior, which we do, not only in the merger business and restructuring, but really across the products that Andrew was talking about.

I know when you were here last, Peter, you talked about how being a public company had really helped both attract talent and clients. I mean has that continued into the second year as a public company?

Well, first of all, I was surprised that, that happened. We did receive a lot of recognition and notice in the process going public. I didn't really think that would happen. It did. I'm not sure it's really continued to add value. I mean I think it's -- I think what adds value to our firm are the clients that we work with and the work that we do and the reputation that we develop with Boards. Much more so -- I think that had sort of an initial jolt. But then we don't really think that much about that anymore.

So let's talk a little bit about the recruitment market today, and let's talk about how you think it can evolve heading into next year. So what have you seen? I know that the talent market was very, very tight last year. Has it started to ease up over the course of this year? And given, obviously, this is going to be a very difficult compensation year across Wall Street broadly, what are your expectations in terms of ability to like scale the firm next year? And look, I guess, linked to that, it would be very helpful for you to talk about how you're thinking about the need to invest in the business versus the need to deliver short-term operating margins for shareholders.

Yes. Sure. I think continuous -- the work -- the management of the workforce is really a continuous exercise, and recruiting is also continuous. So that's something that doesn't stop for us. We do that all year long. There are pockets of higher activity, lower activity during the course of the year. We're about to anniversary a pretty extraordinary comp year from 2021. I think you've heard that from other speakers, and that's something very well known in the marketplace. So that will be, I think, a very encouraging early sign for the ability to recruit a bit more aggressively. I think we would look back at our history, particularly in '08 and '09, where we would look back and say we probably weren't aggressive enough in that time frame in investing during the down cycle. We turned that around in 2020. During COVID, we were quite aggressive, I think, relative to our history certainly into the peer set. And so we did add quite significant talent and quite productive talent since COVID had struck in April 2020. I think going forward, we still see a very steady stream of interest in our firm. And I think as long as you have very productive bankers, particularly on fully integrated financial services platforms, the larger banks where the correlation between contribution and compensation is just reducing seemingly every year, I think it creates just a level of interest and desire to seek a different platform to continue serving clients and hopefully increasing their correlation between contribution and compensation. So if that trend breaks, it will change the environment for us and for our peer set. But right now, the setup looks quite good. And with the anniversary-ing of the '21 comp in addition to what looks like pretty rough year for the entire sector, I think it sets up a good opportunity for us to add talent.

And then if you can just remind us around your expectations for the compensation ratio, either for the fourth quarter and full year. And has it changed since you reported a few months back?

Yes. Do you want to take that?

Yes. So what we said on our Q3 call is that we could see the possibility of increasing our full year compensation margin by up to a few percentage points. That view hasn't changed. That obviously means fourth quarter, if we decide that, that's necessary, would be an aberrant quarter because it would be a catch-up quarter. So the idea is that we are looking at determining what we think is an appropriate full year comp margin having accrued at 64% for the first 3 quarters. So if we choose to make that change for the fourth quarter, it will affect the fourth quarter more so that we achieve the result we're looking for, for the full year.

Okay. Got it. So you've talked about the elongation trend that you've been experiencing. And I think it's something that all your peers have been talking about as well. But if we look at the public data, it does seem to suggest that announcements, at least for PWP, have actually started to pick up in recent months. So I thought maybe you could just talk a little bit about that. Is that something that you see as a start of a trend? Or is it episodic? And how long do you think it takes in this environment for those announcements to actually turn into completions?

Yes. So last -- I would say in the first quarter of this year, we were kind of outliers as being quite negative about the future of our business for the rest of the year. And we're typically glass half empty types. I think now we're actually -- just in listening to our peers, I think we're a bit more constructive than our peers. It's not -- this is not extreme differences, but I think we're a bit more constructive. And I think part of the reason for that is that the strategic ambitions of our clients have not changed at all, I wouldn't say. I think what's changed is that the cost of capital is higher and capital is less available. And so it just means it's tougher to get things done. But what we're seeing now, and it's subtle, but our sense is our clients are starting to see beyond the surf. Rates are not going to stop rising, but they will slow. And I think we're feeling that clients are starting to see the end of that. And I think when that happens, I think the whole feeling of confidence is going to change. The other thing, too, on the same point is when you look at restructuring versus M&A, just as 2 of our areas that we focus on, with -- I'm not certain about anything except for one thing: rates are not going down soon. And so the restructuring business is sort of mounting. And I think that's a very attractive opportunity, not just for us but for the whole industry. And that, combined with the possible recovery of M&A, could be quite attractive. And so I'm just -- look, it's a super complicated world that I'm not saying otherwise, but we're a bit more constructive, I would say.

Okay. So let's talk a little bit about that because normally, I don't ask about specific transactions, but you were hired by Elon Musk to advise on the financing arrangement, and the acquisition of Twitter is obviously a very high-profile mandate. And more recently, I believe you're in the process of hopefully being appointed by FTX on the bankruptcy. So I thought that maybe -- and I know it's -- obviously, you're not going to talk about specific transactions. But I do think the market does view you as more of a traditional M&A firm as opposed to a firm that actually has got a broad base in terms of both M&A as well as nontraditional M&A, including restructuring. So maybe you can talk a little bit about the restructuring business, talk about how you got hired on those mandates, what you think differentiated you because I'm sure they were very competitive. And are they one-offs? Or is this really, you think, a start of a trend as we head into '23?

Yes. I mean those 2 assignments, which we're very proud to have been selected for, are really important to our business and exactly what Andrew was saying about the extension of our product suite. When entities like those and others decide who to work with, they -- it's all very competitive, obviously. But they're looking for confidence and they're looking for trust, in a nutshell. And we were fortunate that in those situations, we were selected. But the most important thing about those though is how it reflects our commitment to broadening our product suite. And Andrew, I don't know if you want to talk further about that?

Yes. I mean people ask us questions about our restructuring business or our capital solutions business. And we're in the business of serving clients. And I think to echo your prior guest's comments, we don't sell products. We solve problems for clients. And often, solving problems for clients does involve a traditional Wall Street product, but that's not how we're organized. So we don't think about our business lines and P&Ls by products. We think of our businesses covering clients and serving clients' needs. And clients always come first. And so we have mobilized resources and built a corporate finance team that allows us to serve more client needs than we did 15 years ago, 10 years ago, even 5 years ago. Those are assignments that probably would not have been within our grasp 5 or 6 years ago, but we have 60-plus people strong in our financing and capital solutions effort, and that's augmented by another 500-plus strong in our industry coverage group. And so that's a very integrated effort for us, not something, again, that's aligned -- organized by business lines, but rather organized by clients and industries.

Yes. So maybe we can just talk again about the -- maybe we should talk about both actually the restructuring and the M&A market going forward. I think, Peter, one of the points that you've hit is interest rates are not coming down anytime soon. I think everybody probably agrees with that, i.e., interest rates are going to remain structurally higher for a protracted period of time than, I think, what we were accustomed to prior to this period. So what does that mean for the M&A market? What does it mean for financial sponsors? How quickly do you think financial sponsors are adapting to this new world in terms of both less availability of financing as well as higher rate? And what does it mean broadly for the velocity of transactions?

Yes. I think that with respect to the effect of higher interest rates on corporate M&A activity, there have been plenty of environments where interest rates have been around this level, where there's been lots of M&A. So that's not as much the issue. I mean if an investment-grade company is paying 5.5% versus 3.5% -- I mean, that's actually not as much the issue. Much more of an issue is the uncertainties in the economy, which are much, much more challenging, I think, for companies. I think on the leverage side, if you're paying 11% versus 5.5%, that's a very significant change. And so I just think that will change the complexion of the sponsor market to less leverage, of course. But I would not bet on the sponsor market quieting down for an extended period of time. There is, as we all know, an enormous amount of dry powder where LPs now, our senses are saying, take it a little bit slow. Ultimately, they're going to say, this is kind of what you paid for. And also, some of the best vintages of any vintage have been in these kind of periods. So I think that's -- I think the sponsor community -- maybe it's going to look a little different, maybe it's a little less leverage, maybe it's a little bit more creativity. But I would be amazed if we're sitting here a year from now and sponsor activity was as slow as it is right now.

I mean I think the catalyst for financial sponsors to pick up activity in 2020 was really the Fed bailing everybody out, I guess. We'll simplify it. That's clearly not going to happen this time around. So what do you think the catalyst is this time for financial sponsors to say, okay, we really need to step up the redeployment of capital.

Well, I think it's maybe even more on the sell-side. I mean when you're talking -- I mean, sponsors have, of course, an enormous amount of assets that they currently manage. So that activity is kind of separate from, I think, the direction of your question. I think with respect to new activity, I think time will be a catalyst in a way because I think, first of all, sellers -- price discovery will become more clear over time. And I think that just -- they're going to figure out a way to affect transactions much like we've seen with some of the sponsors even though the activity level has been so much less.

Okay. So let's talk about some of the geographic differences that are emerging. Obviously, again, you've got a very significant footprint in Europe. You've obviously got a significant footprint here, too. I mean, what are the differences you're seeing over the course of the year? And obviously, the appreciation of the U.S. dollar this year has been a very, very important component of what's happened in financial markets. How is that segueing itself into the strategic dialogue with companies, if at all?

Yes. No, it is and much more so than usual. I mean over the years, whenever there's a currency blip, everyone is always saying, gee, isn't the dollar so much more valuable? And it hasn't really affected M&A activity. Although this time, I think it will, although it may not have yet. But Europe and the U.S. are -- it's a tale of 2 cities. I mean Europe, I mean, put aside our firm and our industry, but the -- it's just a much more stressed environment there. Inflation is higher. Energy security is very, very different and more problematic over there. And so what we're finding in Europe is what we found in the early stages of other crises, which is the very strong and the very weak are active in the M&A market because they want to and they need to, respectively. And so it's -- and it's busy, but it's -- look, it's a very, very stressed environment there. And it's quite different than here, but we have a lot going on.

I mean you do have a very large energy practice, and that's obviously an area that there is a lot taking place. And can you talk specifically around some of -- how that is impacting either your business or how you're thinking about the longer-term opportunity in the energy business specifically?

Yes. I mean the traditional energy M&A markets are actually quite active. The asset markets have rebounded quite nicely. And I would say there's also a pretty healthy level of more nontraditional M&A business, which actually I would take a step back in some of the prior questions you asked that I think the business mix is changing for everyone where the traditional looking out for the M&A announcement and trying to track revenues, that's adjusting a bit because a lot of the work that firms like ours are doing are in nontraditional areas, things like joint ventures and working out situations with shareholders, et cetera. But I think on energy, we have a very significant investment and a very, very significant team down in Houston and in Calgary and in London. And that business also provides the platform for us to be a very significant player in energy transition. So it's really hard to be a credible adviser in something that's transitioning if you're not already a credible adviser in what it's transitioning from. And so we've got an extremely deep bench of talent and experience in traditional hydrocarbon markets but also incredible capability advising clients on thinking about energy transition, and that's a very, very active area for us.

Okay. Yes. And then on the restructuring side, liability management mandates, I think, were a large, early component of what we've seen. Have those continued to be active? Or has it really started to move more into more traditional restructuring at this point?

Yes. I would say that the earlier stage, earlier cycle calls that we're receiving to talk about their maturity tower or maturity wall and not a 911 call that we've got a bankruptcy potential, those calls came in very early, and those are quite regular. Once those get going, they tend to actually not stop. So those are not discrete transactions where someone says, can you help me with one issue of my bonds? And then, see you later. It's more, can you help me with my balance sheet? And once you start helping with the balance sheet, it's almost like a home renovation project, like there's always something else coming. And so that's a very good client for us, a very good type of relationship for us where we continue to earn fees as the evolution of our client's business occurs and as the balance sheet needs are evident over time. So those are not sort of on-and-off switches or episodic. More significant restructuring work, we're clearly getting those calls. You mentioned, obviously, FTX earlier. We're clearly getting more calls about concerns about having to completely restructure and potentially be in bankruptcy. And it's a combination of things that relate to rates and supply chain and slowing consumer activity in certain segments of the economy. And so all of those are combining to set up what we think is going to be a very active '23 and '24. There was $1.3 trillion of COVID-related debt that had an average maturity of 4-ish years. So '24, '25 is your maturity window. And I think it's backing up more than 18 months now because the windows have been opening and shutting with unpredictable and too much frequency in the last year. So it has treasurers and CFOs staying way ahead of maturities, way before they're even going to have a discussion with an auditor. And so traditional rule of thumb for a high-yield company was get out ahead 18 months of maturity. I think it's backed up 2 years almost. And I think that's a smart move. And to be in a position to really assess these markets and wanting to have an independent viewpoint and having a perspective and not just relying on an underwriter bank, that's where we come in and provide very valuable assistance to the treasury and CFO teams with our clients.

Okay. So Peter, since you were last year at this conference a year ago, the stock was under a lot of pressure, at least, I think, initially in the first part of the year. It's obviously regained quite a lot of ground in the last couple of months. So maybe you can talk a little bit from your perspective about what you think happened in terms of the performance of the stock. Maybe talk about what you think the market is potentially missing, and maybe talk about some of the technical factors that you think have impacted and where we are in that process.

Sure. Yes. I think there are a couple of reasons why our stock has traded the way it has. One is we became public through a SPAC. And so there are a lot of features of a SPAC that kind of had a downward effect on the price. We've cleaned up some of those. For example, the warrants that we had outstanding, we converted. And I always say we're not a SPAC, we're a company, but we still got swept up in the SPAC downdraft, number one. Two, look, I think people are just -- they're waiting and see -- they want to see if they can trust our growth ambitions, and I think they have every right to do that. We're -- I won't lament our valuation because everyone can do that if they want. But I just think it will take time. I mean we're here saying we're going to grow our firm. We're going to grow our footprint in terms of our financial metrics, revenues, profits, et cetera. We're going to grow our firm in terms of industry group coverage and our product suite, and people have every right to wait and see what they want to do.

So from a capital return standpoint, how are you thinking about that now? Because liquidity is also another factor, I think -- I know, that you're very aware of. So how are you thinking about capital returns broadly? How are you thinking about buyback specifically? And how are you weighing that up against liquidity of the stock?

Yes. Sure. So we have said to our investors that we will return all excess cash. So we will commit to do that and on a path to do that. We have already -- with our $100 million authorization, we've, I think, returned about 60% of that to date, which is not even a year in place. So we're well ahead of our planning on that metric. We've repurchased 10 million-plus shares since we've been public, and we had to issue 1.5 million for the warrant exchange, as Peter said. But again, way ahead of our expectations. I think the market gave us a terrific opportunity, as you mentioned earlier, with some of the volatility in the stock, and we will continue to take advantage of that if we see that occur again. But generally, we are also up against, as you say, liquidity constraints, and our investors, on the one hand, would like return of capital and, I think, prefer buybacks. And yet we do hear that they would like to see more liquidity, and we're hearing a number of investors that simply can't come into the stock yet because of liquidity constraints. And so we're mindful of that, have to balance that carefully. We have, obviously, a $0.28 dividend that we pay. We've been doing that, and we'll have to revisit how we balance the 2 as we see liquidity develop and as we see our own cash position. Today, we have no debt and significant amount of cash on the balance sheet. And part of that we have for -- earmarked for some investments. And part of that, obviously, will be subject to potential return.

Okay. We've got a couple of minutes left. Let me just see if there's any questions from the audience. Okay. Do you want to go ahead and -- they're going to bring a mic. Okay. Great.

I just want to ask about the comp ratio philosophy. Longer term, obviously, this will be, as you talked about, sort of an aberrant quarter to get to that -- up to a couple of hundred basis points higher comp ratio. How do you think about the philosophy for next year? Are you going to change it? Are you going to be a little more conservative in the first half of next year given how much the environment has deteriorated? Any sort of thoughts on the longer-term philosophy?

Sure. I mean, we should -- it's a really important question so we should both kind of answer it. I think, first of all, we feel very much the tension between keeping our comp ratio where we said it would be against making sure that we keep our team. And so we're very -- and there's -- one side doesn't win over the other. They equally kind of line up against one another. And we'll just have to see. I mean it's very hard to predict. We don't know what we're going to do this year, let alone next year. And so it's very hard to predict. But we -- listen, I think we understand that investors want us to have an organizational kind of cost structure, which is disciplined and that -- and we have -- we very much want to do that. But we need to keep our team -- we don't -- we can't have a situation where we have people leaving where they could have stayed had we made a small adjustment. So anyway, you should...

Yes. I mean the partnership owns 52% of the firm. And so we do care a lot about stock price, and we do care about value creation through the equity, but we also have to invest in our team. And part of our comp ratio -- I know it's not viewed this way by accountants or by investors, but it really is CapEx, and you got to be careful when you have lean times to not underinvest and you can make some really big decisions that are costly down the road. So we do not manage it quarter-to-quarter, even year-to-year is very hard. We're building, we think, a world-class business for the long term, and we've got a significant opportunity ahead of us given our size and the ability to scale right now. It's such a huge opportunity, if you look at our addressable market, our brand, our team, and being shortsighted on a quarter or 2 on comp ratio would be, I think, a mistake. We've heard nothing but encouragement from investors to make sure that we keep our team in place and continue scaling the firm.

Okay. Actually, I think with that, we're out of time. So Peter, Andrew, thank you very much for joining us.

Thank you very much.

Thank you all.