Perella Weinberg Partners (PWP) Earnings Call Transcript & Summary

I'm delighted to welcome with us here today, Peter Weinberg, Founding Partner and Chairman of Perella Weinberg. Peter is an industry veteran and stalwart on Wall Street with over 35 years in the business. He left Goldman Sachs as CEO of Goldman Sachs International in 2006 to found PWP with long-time colleagues, Joseph Perella and Terry Meguid, after seeing a need from clients for an independent, trusted and sophisticated adviser. Almost 17 years later, PWP is recognized as a premium advisory brand around the world and continues on a pathway of growth and expansion. Peter, we really appreciate you for your time.

So I'd like to get started on the evolution of kind of your role with the firm. First of all, congratulations for stepping down as CEO. And since then, you've kind of taken over more of an active partner, Chairman role. Is there any chance you could kind of touch on your day-to-day activities?

Sure. And let me first say thanks for having me, Mark. Good to be here with everybody. It's best, I think, to answer that question in kind of in context, which is that in February of 2020, I asked Andrew Bednar and Dietrich Becker to assume the role of co-presidents of the firm. They both did a great job through the pandemic, all that we know what was coming at that point. And then in October of last year, we announced that Andrew was going to succeed me as CEO, which he did formally on January 1. And so we're all very proud of the management transition, which doesn't always happen so smoothly at organizations where they're founders, but we're very proud of how smoothly this has gone. And I'm personally incredibly excited about the firm going forward under Andrew's leadership and also our other leadership partners. I'm spending much more of my time now with our people and with clients. I'm a partner of the firm. I'm serving as Chairman of the Board. But within the firm, I'm really spending time in that way, which is fun for me and interesting for me. And ironically, one of the reasons why I was so interested in starting the firm with Joe was the client dimension in the business.

Getting back to the fun stuff. So I wanted to take a step back, kind of being known as a preeminent M&A firm, what kind of environment are you seeing in 2023 and beyond? And do you have such a large reach being both in the U.S. and also having a large focus in Europe and Asia? So if you could kind of touch on both, I think we'd appreciate that.

Yes. So the M&A business is a very long-term business. So it's the opposite of a trading business in the sense that when companies make decisions to either sell a business or to buy a business, it has -- the implications are long in duration, and so the reason I say that is because we are engaged with clients right now talking about what they see beyond the surf. This environment is very different than other crises, if you want to call it that. In 2008, people really did not know what was going to happen, and there was a lot of anxiety associated with that. There was a different level of anxiety in the marketplace in 2020 when the pandemic hit, but people still didn't really know what was going to happen. This is very different because we're going to come out of this at some point. It's just a question of when and how rocky the road is between now and our recovery is unclear. But we -- our clients right now are looking beyond the surf, as I said, and it doesn't mean people are going to transact tomorrow. But it's really important for people to think longer term, and they're doing that. And that's really why we're so busy right now. With respect to your question on doing business around the world, we're in really the U.S., Canada and Europe. And we have 10 offices, but we do business around the world, including in Asia and other parts of the world, and that's really due to our industry expertise and our product expertise. And so -- for example, we sold a lot of timberland in South America, not because we have an office in South America, but because we understand that business very deeply, and there are many examples of that, both in the industry groups but also in the product areas where, for example, in restructuring, we might have a special expertise that really transcends geographic boundaries.

You spend a lot of time in boardrooms with CEOs and have a unique window into their mindsets. If forced to generalize, what is top of mind? Is there any kind of fears? Or is there confidence?

Yes. I would say that there's more confidence in boardrooms than you'd think at this point and not because the environment is so stable, and it's not because they have a clear vision on what's going to happen with interest rates or even in the equity markets. But again, I would go back to a comment I mentioned a minute ago about really wanting to position themselves best when the recovery does occur because one thing -- and this is maybe under the category of fear, when people -- one thing people are afraid of is to wait until the recovery is fully underway. Valuations are going to be very different then. Availability of assets is going to be very different then, and who knows what the financing markets are going to be. I mean, right now, interest rates are high on a relative basis. But they're not a lot higher than they were pre-financial crisis of 2008, which were very, very active M&A years.

It makes a lot of sense. Taking a step back from M&A, which is what you guys are generally known for, I wanted to touch on kind of restructuring and liability management or other non-M&A opportunities. How are other areas of your business affected in the current market backdrop? And can you walk us through some of the other service lines that may provide maybe countercyclical revenue sources?

Sure. The businesses that you're referring to, we call our capital solutions businesses, and there are 3 areas within that, and they're all a bit different. One is restructuring, which is our team that looks at companies in financial distress. It doesn't mean they have to be in bankruptcy, but that's what they're facing, financial distress. The second business is capital markets advisory, and we advise companies who have complex challenges related to raising capital either on the credit side or on the equity side. And then the third business within that area is private capital where we raised equity capital mostly, sometimes credit but equity capital for growth companies around the world. So they're all quite different. I would say with respect to counter market forces, restructuring is a bear market business, if you will, for the obvious reasons. And capital markets advisory, I would say is more active when the complexity increases. And complexity is high right now, which is why that business is good for us, and it's also why we're continuing to invest behind that business.

Makes sense. And how has the privatization of credit markets impacted the need for independent advice?

It's a huge development. I mean, again, stepping back, I think the 2 most disruptive forces in our part of financial services in the last 15 years since the firm has been around is the development of the boutique model, which has been a very disruptive force and also the expansion of the private credit business. Private credit has always been there, but it's ballooned very significantly, as you know, over the past couple of years. But it's a very positive thing for us for the very simple reason is that there's no underwriter, and we're not an underwriter. We have no -- we don't want to commit our capital. We have no debt, and we don't like to take on assets on our balance sheet. We're a pure adviser, and so that is really a great opportunity for us. We have very strong relationships with the big private credit providers, Blackstone, KKR, Ares, Blue Owl, and it's a very attractive business for us, and it's also -- particularly now, there are very active dialogues with those firms as the markets are so complex and as the big firms are less excited about taking on a lot of balance sheet risk right now.

No, it makes sense. In terms of kind of people and growing the firm as you increase your capabilities and stay an M&A firm but also move into kind of some more product lines, your TPH energy-related acquisition in 2016 has been a huge success. Would you consider another acquisition and team lift-out to drive growth? Are you more focused on growing brick by brick or growing internally through the firm?

Well, we're more focused on brick by brick only because we can control that, and we have a formula that works. We know exactly the areas in which we want to hire. We know the people out there who would potentially be able to sit in those seats, and we also know our internal team, which is terrific and who might be able to be elevated into those positions. So brick by brick is really plan A. We're totally open to acquisitions. I mean, TPH was a unique situation because we weren't really in the business -- the energy business, number one. Number two, there was a cultural fit, and number three, we knew the people. Two of the principals were at Goldman Sachs when a number of us were there. So that kind of ticked all the boxes, and of course, then the last part, which is arguably the most important, is it accretive? And so those things have to be met. We're open. We look at things all the time, but it's a high standard.

No, that -- when doing the team lift-out and to your point there, you hired a lot of people that you already worked with at Goldman Sachs. Do you think it's more difficult from a perspective of trying to get the right personalities? Or how do you think about when you are doing a team lift-out, what boxes are you looking to check?

Yes. The cultural fit is critical. I mean, our culture is -- I don't talk about it that much outside the firm because it's sort of an amorphous subject and hard to quantify. But it's -- there's nothing more important to us, the people fit in, in the culture, meaning they have an intensity that they bring to their work. They're collaborative, and they engage in the right way with the rest of our people. So you just have to make sure that whether you're hiring one person or 20 people, you just have to really make sure that, that works because otherwise, it's not going to have any long-term impact, and it's not going to work in terms of them staying at the firm.

What investment areas are your greatest focus right now? And are there any industry sectors or geographies that you currently are looking on building out?

So in the industry groups that we have, in every -- we have 6 industry groups, the ones that you'd expect. And in each of those, there are at least a dozen subsectors, and so there is lots of white space within our industry groups to hire people even in some of our larger industry groups. I mean, for example, in energy, which you mentioned earlier, sustainability is an area that we're investing in. And we're connecting with our energy business in a very important way. So -- but there are lots of opportunities in that area. There are also opportunities in our product areas that I mentioned, our capital solutions group with respect to restructuring, with respect to capital markets advisory and with respect to private capital. All of -- these are all growth areas that we see going forward.

And kind of going back a little bit into the recruitment market and competition for talent. What trends are you seeing in the market that gives you confidence that talent will continue to kind of move towards an advisory-focused model or independent advisory model?

The confidence that I derive in terms of the potential that we have to hire more people over the years is driven really more anecdotally than anything else. And the reason I say it that way is because there are thousands of bankers in the world. And there -- many of those are actually very good people and could be effective on an independent platform, whether it's ours or someone else's. When we approach people and go out to people, we have a pretty good record of at least connecting with them. Does everybody want to come work for our firm? No, but we can connect with pretty much anybody, and there continues to be, and this is the anecdotal part, interest on behalf of a lot of people to migrate away from the big firms and be on an independent platforms, as I said, us and others. And we find a lot of interest in us in that context.

Looking at senior bankers specifically, what differentiating characteristics -- and I know you said just from an independent advisory model, they'd be successful in anyone they go to. But what characteristics at PWP specifically do you think draw those bankers? And then what traits do senior bankers have that you think make them the most successful at PWP?

It's a great question. Well, first of all, you have to want to drive business and do so relatively independently. In other words, if you're at a big firm, you have armies of people who are supporting you in every respect. When you come to an independent firm, you need to work with people, which I'll describe in a second, but you also need to -- you have to sort of have an underdog mentality. And the people who have been most successful with us have an underdog mentality. And by the way, I recognize that quality from Goldman Sachs in the '80s, where everybody had an underdog mentality. We have that, and that's really important to driving business. But it's almost a dual personality because you need that external intensity, but that needs to be coupled with collaborative behavior inside the firm because that's all we have. We don't -- as I said, we don't use our capital. We have our people. And we have a tremendous group of people, experienced and have done -- I mean, if you gather together a group of 4 or 5 partners of our firm to talk about a certain issue, people have pretty much seen everything because they're representing years of experience and all sorts of different changes that have occurred in the market. And so that's really -- that's what we're looking for and what is distinguished people who have succeeded in our firm.

No, that's really great to hear. And are the incentives kind of aligned to allow for that collaboration?

They are. I mean, we reward collaboration. So we're not an eat-what-you-kill compensation model for the simple reason that it discourages collaboration. And so we -- people -- you need to reward people for their productivity because if you don't, you're not going to, like, keep people. But on the other hand, it's not all that. There are lots of other variables that determine compensation, and collaboration is a big one.

And are you -- is your investment banking groups, are they set up mostly by coverage or industry? How does that work within the firm?

So most of the partners are in our 6 industry groups, and those are global groups. There are people both in Europe and in the United States, and then we also obviously have our product areas, and we're -- but we don't really -- we try not to segment those businesses in terms of kind of distancing them from one another, quite the opposite. Because again, collaboration is so important because someone in the industry group will be trying to work with a company on a capital markets issue or a restructuring issue or a private capital issue. It's really important that the collaboration remains very, very strong.

I wanted to touch on kind of your sponsor coverage and current convos you're having with sponsors or private equity investments. With respect to sponsors, how is lower multiples and record dry powder kind of competed against a higher cost and credit played out thus far? And what direction are you kind of viewing that market going?

Yes. So let me first talk about our relationship with sponsors generally, and then I'll talk about what I think is happening in the sponsor market. We built the firm more so on a corporate franchise because we thought that was best for our brand. And so when we were kind of planting the seeds in the early years of the firm, we really spent a lot of time with large corporates. We still do that, but we also work a lot with sponsors. Dealogic, I believe, quantifies the amount of business you do involving corporates, and the number they had for us was about 40%. Now the reason is because sponsors now is a little bit of a different environment, which I'll talk about in a second, but sponsors are ubiquitous. I mean -- and there are some industry group bankers who spend almost all their time with sponsors because a sponsor would be so active in that market. Other areas, they're not, and they don't. But we still have a focus on large companies. We think that's really important for our franchise, but we also spend a lot of time with sponsors for that reason. With respect to sponsor activity going forward, right now, it's a difficult time for them purely because the public financing markets are not closed, but stressed, and so there's just a lot less activity now as we've seen. On the other hand, I think there is almost no chance that sponsors remain on the sidelines for the next couple of years. It's just -- I think it's impossible. And by the way, LPs I think, in a way, are expecting sponsors to seize opportunities, attractive ones that they see in this market. I think it will probably be a pretty good vintage based on all the dynamics happening.

Is there a distinction between the financing available for larger deals versus private financing available for smaller deals? And how are sponsors currently financing deals that they're working on?

Well, I mean, large deals are hard to do if you're going to use the public markets because the public markets are so stretched and stressed. And large banks are not in the mood to write big capital commitments for large leveraged deals. I mean, that's kind of a clear point certainly in today's market. Small deals are -- the markets are the markets, and so it's not like small deals are immune from the stresses in the market. But private credit is really ticking up the slack, even though there are stresses in that market, too. That market is not without its stresses. But I think things will come back here at some point, not as much when rates go down, but more so when there's a little bit more clarity on where things are going to go.

That makes sense. You've been tested on a lot of high-profile deals recently. In your business, do you find that's kind of a flywheel effect? People see that you guys did a good job on one, and it kind of leads to others. Or how have you looked at, I guess, kind of the complicated deals as of recently?

Working on these large transactions, I mean, they're all very different. But often, they take years to put yourself into a position where you're working on those transactions. In other words, and then that's -- you get -- in our business, you get hired for 2 reasons. One is your expertise, and two is your relationship. It's very simple in that regard. But -- and so it doesn't often happen that you get a pitch, and you pitch and win. I mean, that does happen. But that's not how these very, very large complicated situations come up because they often do very much require the trustworthiness and the relationship of trust between banker and company. But it does have a flywheel effect because when you work on these large transactions, if it's public, and we work on lots of things that are not public, by the way. But when our involvement is public, people know it. And when there are situations, particularly in the restructuring space, when there -- our job is to sell off assets, I mean, we'll get calls from hundreds and hundreds of people around the world who are interested in talking to us about particular assets for sale. I mean, that's a franchise-enhancing exercise and which is one of the reasons why we like these large complex transactions.

We kind of talked about it a little bit earlier. With changing market conditions, there's a lot of complications going on right now, and any time there's a lot of complications and things are changing, they need expertise, which is where you guys come in. I'm sure there's a large pipeline of deals. How many of those are you seeing going through the finish line? And kind of how has that pipeline been trending as of recently?

Yes. We look at 2 statistics, which I think answer that question. One is backlog, which is probability-adjusted revenues, and the other is pipeline, which is unprobability-adjusted revenues. Year-to-year, the pipeline is not that different. In other words, there's lots of things that people are working on. But the backlog is more stressed because of the environment as you would naturally expect. And so it's unclear, I mean, how 2023 is really going to evolve. I mean, I think it's unlikely that we're going to snap our fingers and see an active M&A environment. But I do think that M&A is crawling back at maybe even a more brisk pace than people think, but we'll see. We'll see how the year unfolds. Restructuring is -- we've said publicly that we think restructuring is coming back, and it may not be immediate, but it's definitely coming back. And I think -- I don't know anything for sure, except for one thing, which is rates aren't going down soon. And so there's this enormous wall of debt that we're -- we all see that's coming due in the next 2, 3 years, and the stresses associated with that will require advice, and we're anxious to provide it.

Is there any areas that I didn't touch on that maybe you'd like to touch on before I open up for questions?

I don't think so. I think that's -- we -- I had 4 or 5 things I want to make sure that we talked with you about, and I wouldn't add anything else.

Perfect. Do we have any questions from the audience?

Yes. So as we think about this from a sponsor standpoint, we have lower multiples, record dry powder but also a higher cost of debt financing. How do you think that's played out so far? And how do you see that trending going forward?

How we're thinking about that challenge going forward? Yes, I must say at the beginning of this period, I was wrong in the sense that I thought that the improvement in value in the equity markets from the point of view of the sponsor would offset the increased cost of financing. That's what I thought. It turns out that, that's really not the case in part because it's not just the increase in interest rates, but it's the very deep uncertainty that a lot of companies have about where they're going to be headed. But sponsors are -- I mean, there's such an enormous amount of dry powder and capital available as you say. And it's very intelligent capital in the sense that if we have a client who has a financing need, doesn't make sense to go to the public markets and is sort of searching for a way to finance a certain project or situation or even acquisition. When you go to a sponsor, you get a very creative, often very creative and interesting approach. They may not want to do it, but it's positive. And so the reason I say that is because the way we're approaching sponsors, we're continuing to work with sponsors. We're continuing to work with our corporate clients. And I just think that based on the opportunity set that is kind of beyond the surf as I say, I think, is really significant. And we haven't stopped our dialogue and don't see a need to.

Great. Was there any other questions? Awesome. And with that, Peter, we really appreciate for your time.

Mark, thanks so much for having me. Appreciate it.