PJT Partners Inc. (PJT) Earnings Call Transcript & Summary

So I'm delighted to introduce our next speaker who is Paul Taubman, Founder, Chairman and Chief Executive Officer of PJT Partners, which is a global advisory-focused investment bank. PJT was founded in 2014 and, since then, has become one of the fastest growing but also one of the most respected, I think, advisory firms in the industry. Prior to founding PJT, Paul spent 30 years at Morgan Stanley where he ran their advisory practice for a very long period of time. So Paul, thank you very much for joining us.

I thought I'd start off with a question around your strategic priorities. And I think it's easy to forget that PJT is really only 5 years old. It's a relatively new firm. But you've come a long way in 5 years. And this year, you're going to hit this -- well, we think you're going to hit this milestone of exceeding $1 billion of revenue. So can you just take a few minutes to set out what you think the next 3 to 5 years looks like for PJT, what the key milestones are that you would like to reach and how you define success for the business from here?

Great. Well, first of all, Richard, thanks for having me. And as much as I enjoy being with you and doing this, hopefully, next time, we can actually share the same stage and have it filled with people. So hopefully, we'll have something positive to look forward to for next year. That is the question you've asked, which we think about all the time, which is where are we headed and how are we going to get there. And when we started this firm, we had a very clear vision to build the best advisory firm, period, full stop. And in order to do that, you need to have the ability to attract the best people. But that's only half of the journey. You need to attract the best people but then create a culture and an ecosystem that ensures that the best people work hand in glove with one another to best serve clients. And if you can do those two things, then your mission is still not complete because that needs to be appreciated by the client base and by the world at large. And we're responsible for the first two parts of that journey. And ultimately, if we can do that, then others will increasingly understand the sheer power of the firm. And 5 years in, we've acquainted ourselves well. We haven't done everything perfectly or nearly perfectly. But I think as I look back over the 5 years, we've been able to establish ourselves as a talent magnet. And we've created a culture of collaboration, a culture of putting clients first, an advisory-focused culture. So what's essential is that as we move to the next 5 years, that we can maintain all that got us here, which is to continue to be a magnet for talent and to be absolute in the need to have a collaborative culture. But at the same time, some of what was special in the first 5 years was we were starting with truly a blank sheet of paper. And it was the journey as much as the destination, an entrepreneurial culture. And as I look at where we are, as much as we've accomplished in 5 years, there's so much more to do that it's essential that we retain that entrepreneurial culture and spirit and recognize that firms go astray when they think they have it all. So you almost need to function at all times whether you have most of it, some of it or all of it as if there are other pieces that you can acquire to complete the puzzle. And what we need to acquire is additional talent. I expect you're going to see our firm be larger 5 years from now. We have geographic presence nearly everywhere around the globe. Although the physical offices that we have are few and far between outside of the United States, so we may well at some point in time add some additional offices outside the United States. I think we're always looking for gaps in what clients want and how they can best be served versus the capabilities that we have. And we're always on the lookout for how to approach advice-giving in a different way. And I suspect you'll continue to see more hiring of individuals who don't necessarily come out of a central-casting banker profile because the more looks and the more experience and the more perspectives that your team has, the better you can serve clients.

Has 2020 changed your strategic priorities in any way?

It has only reaffirmed our strategic priorities. But clearly, we have challenges sitting here today that we never could have dreamed we would be dealing with, one of which is how do you go from physical to virtual and potentially back to physical with your employee base. So that's a challenge that I think everyone faces because there is a health and safety purpose to keeping people mostly outside the office. There is an efficiency benefit. But we now have to ask ourselves, for all of the benefits, what are the long term consequences. And I think that's something that we spend a lot of time with. I think what the crisis has proven is that when there's an existential issue, being able to bring the entirety of the firm with lots of different disciplines, working seamlessly, has tremendous impact. And that just keeps us firmly on the mission of always asking ourselves, as far as we've come, what's the next great idea as far as working with clients. So one of the things which is clear to us, which it was the beginning of the year, is the importance of ESG and making sure that we can be a thought leader in working with our clients on all of those issues. Our capital markets expertise, we envisaged a capital markets business really from the day we began our firm because we always had a holistic approach to client service and client advice. I think what this crisis has done is it's highlighted the importance of being incredibly facile with all of the opportunities and challenges of raising capital, protecting capital for clients, and then the more narrow ones thinking the more limited the firm is. So it's really just validated most everything we've thought about, but it certainly has brought new challenges, which is how do you use technology to help you but make sure that you can preserve a world-class culture.

So 2020 looks as if it's going to be a very, very good year for you from a revenue perspective. I think on our numbers, you're going to grow the revenues by at least 35%. Do you think that's a sustainable base from which you can grow? So I guess asking the question differently, when you think about 2020, is there anything in there that, in your mind, you think is one-off in nature, that you think would be hard to replicate? Or is this just a reflection of the fact that you have grown the franchise, you've grown mind share, you've grown market share and this is just a point on a journey?

Well, there's always going to be a one-off somewhere in a business. You can't serve scores upon scores of clients and not have one-offs in any given year. The question is are you building something that is sustainable, that has an attractive growth trajectory. So the first place I start is our vision for the firm that if we continue to do the things we're doing, if we can continue to attract talent, and if we can continue to provide a better client proposition, will that be recognized and can our business be materially larger than it is today. Absolutely. So no one sits and says somehow that at $1 billion, we run out of altitude. I don't think any of us believe that for a moment. On the other hand, what the exact trajectory is to get to higher and higher levels, I don't know. Rarely is progress up and to the right with a 45-degree angle. Sometimes there's times where you're making lots of progress, but it isn't fully reflected in the financials. Sometimes, it goes the other way. I think when we imagine what this firm could be, recognizing that we have and are in the process of fortifying a world-class strategic advisory business, a world-class fund placement business, a world-class restructuring business, a world-class shareholder engagement business, if you were to look at each one of these and say how much larger could they be, the answer is they could all be meaningfully larger than they are today. But we're going to start by ensuring that the quality of what we deliver is uncompromised. And then if we're right about that, it will be evident with a much larger firm. But we don't start with how do we get to a much larger firm and what do we need to do, we start with, if we do the right things and the clients recognize what we have, can it be meaningfully larger. And the answer is absolutely.

So when you look at the product suite you have today, are there any areas that you think that you're underrepresented? And maybe as a follow-on, if you were to cherry-pick a business to buy from one of your peers, what would it be and why?

So do we have gaps at our product capabilities, I think we have gaps at our footprint, not gaps at our product capabilities. So where we lose business is chances are we're not even calling on the company, it's not that we present ourselves and there's a rigorous evaluation of what our value proposition is and we're deficient. Now when you think about footprint, some of it is are we fully built out in all of the geographies around the world. Of course, not. Now that, to us, is just opportunity. I don't view that as a liability, I view that as an opportunity because we focus and we compete where we have sufficient scale and where we have a competitive advantage. We will increasingly add stronger and stronger brand and presence in some of the most active markets. I don't believe you need to do that by necessarily populating the globe with offices, but I find it very affirming to know that with a firm that has 3 offices outside the United States, our client roster represents companies headquartered in 50 countries around the globe. So we're very much a global firm. But over time, our local presence and our brand and our competitive position in many of those markets should increase. That's just one example where you can think of it as a gap or you can think about it as an opportunity. I prefer to think of it as an opportunity. If you think about industry verticals and where there's deep domain expertise, we are systematically building out capabilities vertical by vertical by vertical, and I've long maintained that better to put 10 units of resources against 5 opportunities than 1 unit of resource against 50 opportunities because then you'll -- you won't have a commanding set of capabilities. So our approach has been to just systematically expand footprint focused on industry vertical after industry vertical. And there, I see tremendous opportunity because, as far as we've come in 5 years and while it's great to look back, there's just all this white space going forward. So the answer is there's an awful lot of white space, awful lot of opportunity. It's more on the industry verticals and the footprint and the geographic profile than it is on our product capabilities.

Okay. So you talked about the importance of attracting talent. What would -- how would you characterize the hiring environment today? And you also talked a little bit about attracting nontraditional talent. Can you just expand a little bit on that and talk about what that means and how you think that's differentiated PJT as a franchise?

So nontraditional hiring would mean that you could be our next partner hire, Richard, because we've been hiring a number of partners who had previously been world-class research analyst. And they bring a different perspective and a different set of relationships and capabilities and insights. We don't have those who grew up as research analysts leading merger negotiations, but they can, as part of a broader ecosystem, those individuals who come to our platform because they have previously been investors, they have previously been research analysts, they have been leaders in the corporate governance community, they can take a banking team and fortify it and make it far more powerful than it was previously. So we have a big tent perspective, which is if you're going to give advice about a wide-ranging set of issues, you need to be current on the geopolitical environment, you need to have perspectives on what it is to do business in geographies around the globe, you need to be attuned to what the industry dynamics are, you need to understand what's going on in ESG, what's going on in corporate governance. So if you're going to give advice, and if your firm is going to be built around intellectual capital, then one of the cardinal rules is make sure you got an awful lot of intellectual capital. And it doesn't just come in one flavor or one shape or one size. So that's our approach to talent. Now what's the environment? You may tire hearing this from us, but we really are idiosyncratic in so many ways that we're not looking to exploit some level of dissatisfaction at big banks or challenges that European banks may have. We start with the proposition that if you build a firm that is advisory focused, where that's the main event, and if you can ensure that the platform that's being built can better compete and serve clients than where those candidates are coming from, then they'll want, at some point in their career, to leave their incumbent firm and come join us. So as a result, the hiring environment is pretty much as it's always been for us. We're competing mostly against inertia. The candidates that we're talking to at the most senior levels are very well regarded. They are very well thought of. They're highly active at their incumbent firm. But they recognize that if they want a different challenge, if they want to better serve their clients, that we may, in fact, be the perfect platform for them. And then it's just a question of when is the timing right. I do think that the pandemic has made it more difficult, but not impossible. The first thing it did was, for the first 3 to 6 months after the onset of the health crisis, for a lot of individuals, the last thing they could think of in a world that was melting down was changing jobs regardless of the attractiveness of our value proposition. So I think that it was not unlike the M&A environment where, for a while, there just was no deal flow. We saw a bit of a freezing-up. But that's no longer with us. And while it's a bit more complicated in a virtual world, many of the individuals we're talking to, we've known for long periods of time because they're well-established in the investment banking world. We've seen them on transactions, co-advised with them, competed with them, previously worked with them. So that's not much of an issue. And on campuses, I think we've done an extraordinary job at building our brand. And in many ways, some of the earliest adopters of our firm came from the college campuses. So we've continued to try and ride that wave. And then the other thing that we've done is we've tried to cultivate a lot of diversity initiatives to make sure that we're reaching out to women and other underrepresented constituencies and minority candidates just to make sure that we're thinking about where we will recruit in the most expansive way possible.

So you've used acquisitions very successfully, I think, to augment the growth of PJT. I think the last major acquisition that you did was CamberView. Can you just spend a few minutes talking about what you learned from that acquisition, what you think went well, what you would do differently with hindsight? And perhaps talk a little bit about the pipeline that investors should expect in terms of those acquisitions going forward.

Well, we've really done 2 significant strategic transactions. The merger of the PJT classic firm with Blackstone was, on a large scale, how to integrate in what is a difficult world historically, professional service firms. But we were quite confident after the fact with our ability to knit all of this together. When CamberView came up as an opportunity, it checked all of the boxes for us. But it started with the view of if you're going to have a leading advisory-focused firm, how can you better serve clients. And clearly, with the trends from active to passive, the increasing role of corporate governance and the need to be able to give differentiated insights to our clients and how an ever-increasing percentage of their shareholders would think about pay issues, ESG issues, contested M&A, proxy campaigns, it became quite clear to us that CamberView had built out space in the market that was occupied by no one else. They had done it in an extraordinary way. And in less than a decade, they had represented more than 100 of the largest companies and half of the Fortune 100. And they were best-in-class not just as practitioners but as people. We had a long history with many of the principals there, so we knew them. It was an acquisition or a combination that was large enough to matter and to move the needle, but it wasn't so large as to overwhelm the culture that we were building. Geographically, it was concentrated in New York and San Francisco where we have offices. So it was really the proverbial needle in a haystack. It just -- but we weren't hunting for it. It just -- it came to be, and we are able to seize on it. And our confidence in integrating the Blackstone transaction gave us the fortitude to lean in. I think those opportunities are few and far between, but they're out there. So we're always thinking about it. But it's like everything else, we have a tick list of aspirational individuals to attract to the platform. We have a short tick list of aspirational, inorganic opportunities. And if at some point, everything aligns, we may consider it. But we recognize the degree of difficulty, Richard, in doing these. Now you asked what did we learn. I think it's really reaffirming what we've always believed, which is if you do business with the right people, good things are going to happen. And therefore, you've got to get the people right more than the strategy because finding some firm that occupies a hot part of the market, but if it's not simpatico from a culture perspective, that's just like sand falling out of your hands. It's ephemeral. So we got the people right. We learned from the Blackstone transaction that you need to have a long lens that people need to get acclimated to one another. They have to have trust and confidence in the people. You need to build a common culture and you can't rush things. So if you look at how collaborative the advisory business is with restructuring today, that didn't happen overnight. That was really the progression of 5 years of careful trust, bonding, collaboration, building out a world-class culture and then, ultimately, the rewards come. If you lead with the rewards because you want to see where the results are on day 1, and you haven't built the right framework, you're not going to get very far. And that's been the approach with CamberView, which was how to enable it to continue to do what it does best and to slowly integrate it into the rest of the firm. And I think looking back, it's now 2 years and change, I think we're well ahead of anything we could have hoped for. It's going to get increasingly clear to the outside world just how powerful that capability knitted inside our firm is.

So let's spend a couple of minutes talking about the environment, both the M&A environment and the restructuring environment. And perhaps let's start with M&A. And I know you spend a lot of time in corporate boardrooms. You spend a lot of time with management teams across a broad range of industries, a broad range of geographies. I mean at the highest level, what do you think is top of mind? And do you think the exuberance that we're seeing in the financial markets is reflected in boardrooms today? Or do you think there's a disconnect?

I think what's top of mind is the world is changing with incredible speed and making sure that you're not left behind. And as you just look at the number of companies that have been left behind or crushed by this move to a digital world, that stack of companies gets larger and larger and larger. And you can't have a world where you're incubating all of these unicorns, where you have all these transformative technologies, new companies being built in a relatively short period of time and is seemingly overnight commanding these outsized market capitalizations, attracting best-in-class employees and taking share from incumbents and just dislocating markets without saying, "Okay, what do we have as our competitive advantage? How do we fortify it? Where are we at a competitive disadvantage? How do we either fortify it or do we recede from the market and maybe this business should be put in someone else's hands?" If we're going to be dealing with digital disruptors, we need to spend more money on R&D. And one of the ways to have the ability to do that is to have more scale because more scale enables you to spend more on R&D. So for almost all of our clients, the question is how has the world changed and, as important as that is, how is the world going to change and how well positioned are we. And what this has done, these financial markets, whether they're exuberant or not, it has created either powerful currencies that can be deployed as a strategic weapon; access to low-cost financing, which can be deployed as a strategic weapon; or companies that realize that they have emerged from this pandemic -- or maybe they haven't fully emerged, but they understand that when the pandemic is fully in the rearview mirror that they will be damaged or left behind or compromised in some way that maybe thinking about a sale of the business, which would have been unthinkable a year ago, is now something that needs to credibly be considered. So everyone is looking at their hand and asking do we need to redeal, and how do we get new cards and how do we create and play for a stronger head. And I think some of this is pent-up from the cessation of activity for 6 months, some of it is amplified by what has happened to buying behaviors and to the competitive dynamics as a result of the pandemic and then some of it is further fueled by these lofty market valuations and access to capital. So it's one on top of another and on top of the other, which has created a very robust M&A environment.

Can you just touch on the restructuring environment as well? I mean has the broad availability of financing that you just referenced change how you think about the restructuring opportunity or it just changed the time line? Or has that not changed at all?

It's just changed the time line. If your business is headed to extinction and debt is plentiful, it may delay the time of the movie, but it doesn't change how the movie ends. And I think that's what we're seeing. So you've got to look at this in a few different dimensions. It's hard to -- with all of this promise of vaccines and all of this health news about the future, it's hard to appreciate just how raw the environment is today and how many people are sick and how many individuals are in hospitals and, unfortunately, how many people have died as a result of COVID. And if you go back to March, April and May when no one had any sense as to the contours of this health crisis, and it was amplified by an economic crisis, a lot of companies just overnight saw their business model corrupted, the revenue spigot turned off and there was just an avalanche of new restructuring opportunities. We're not going back to that fever pitch anytime soon, barring another exogenous event. Having said that, the ripples of what happened in the spring and summer of 2020, they flowed through for all of '20 and most likely -- most, if not all, of '21 as all of those companies get restructured. Then you have a whole second level of companies that but for this expansive fiscal stimulus and monetary support would probably have needed to be restructured as well, but they've been able to tap the capital markets. The reality is that they're still going to emerge in 2021 as demonstrably weakened companies from where they were pre pandemic. And for some, not all of those, it's just simply a matter of time before those balance sheets will need to be restructured. Then I think you've got another wave of companies where some of the changes that are afoot in buying by consumers as well as businesses have diminished their long-term earning power where, at some point, those companies are going to need to be restructured. And then the other question is at what point is there another exogenous shock to the market. So I think what you're going to find is you have a whole group of significantly weakened companies who are still operating because of all this enormous fiscal and monetary support. But at some point, it may just be a gust to wind that's going to knock them over because we have a lot more vulnerable companies. If you just look at the airline industry, I think the number is there's an additional $40 billion of debt that has been incurred by these companies. And thankfully, through the support of the U.S. government and the capital markets which follow that support, all of those companies continue to move forward, but there's no doubt that they're all significantly weakened relative to where they were pre-pandemic. And at some point, this injury will take its toll. So I think of this as a longer, slower play for restructuring activity. And the last thing I'd say, Richard, is it's very much corollary to what we're seeing in the M&A market, which is you're seeing all sorts of disruption. And disruptive forces either lead to M&A for healthier companies or they lead to restructuring for weaker companies.

Yes. So we've got a couple of minutes left. So I thought I'd ask you a question about the operating margin. And look, you've obviously seen a very significant improvement in the margin. But how do you think through the balance between accelerating growth and protecting the margin? And I appreciate it's not either/or, but how should investors think about that now given what you think the long-term opportunity is for PJT?

Most investment should not be marginal investment, meaning it's clear going in that the returns are sufficiently attractive that there shouldn't be much of a debate about whether or not to invest. So when we look at talent acquisition, we rarely are running financial models and having to take it out 5 decimal places because we're not sure whether to make the investment or not. It's either quite clear to us that it's highly accretive to the firm or, if it's not, we sort of move on. So in a sense, we have our own very high hurdle rate, and we see tremendous opportunities to invest. Clearly, you need to be mindful of both, which is you need to invest, but you need to be held accountable financially to all of this. Our belief is the investment that we're making today is clearly accretive. It's highly accretive. And therefore, there's no on the one hand and on the other hand. I think the lesson in this industry is companies that run aground are those that grow complacent or those that fail to invest or those that fail to anticipate what the competitive market is going to be going forward. So whether you think about it as offensive investment or defensive investment or just good common sense, the last thing to expect from us is that we're going to skimp on investment to flatter short-term results and then find out that we've left our firm hobbled for the future. So that's our main event. The second, though, is to be able to communicate with investors as to how the investment is building value to make sure that investors have confidence that the senior leadership of the firm think and act like shareholders. And if we can get those right, then I think we'll be able to chart the right course. But it has to start with investment first because short term-ism, you can always milk the cow. You can always create a higher-margin for the short term. But if what you're doing is you're leaving yourself vulnerable because you either don't have the feet on the ground or the expertise to prosecute the next opportunity, that's a short-term game, which hopefully we won't follow it.

Okay. Paul, with that, sadly we're out of time, but we really do appreciate your time. And I'm going to take you up on your offer to see you in person next year downtown. So thanks a lot, Paul.

That would be wonderful. I'll even wear a tie for you.

Thank you. Al right, thanks a lot.

Thank you.

Thank you.