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

Okay. So I think we're going to get started. So I'm delighted to welcome our next presenter, who is Paul Taubman, who is the Founder, Chairman and Chief Executive Officer of PJT Partners, which is a global advisory-focused investment bank. Since its founding in 2014, PJT has become one of the fastest growing and I think also one of the most respected firms in the industry. Prior to founding PJT Partners, Paul spent, I think it was at 30 years at Morgan Stanley, where he ran their advisory practice for a number of years. So Paul, thank you very much for joining us, and thank you for coming here in person. It's great to go back to something more normal.

Yes. Thank you. Thank you. Thank you for hosting, and thank you for putting this opportunity in front of us.

Okay. Great. Thank you. So maybe we can just start off with a discussion around the macro environment, and that's obviously been a very important theme at this conference. And I think really the biggest question people are asking is there's this transition that's taking place towards a higher interest rate environment. What does that mean? And what is the risk that inflation is going to end up being at a much higher level? And I'd just be interested in getting your perspective on what you think the macro environment looks like, what you're hearing from the corporates that you spend time with and how you think this evolution towards a higher interest rate environment is going to impact the advisory business broadly.

Well, why don't we take that in reverse order. As it relates to our firm, which is always start and look at everything through the lens of our firm and what we do. I'm not particularly concerned about interest rates and how they affect our business. I think they affect different parts of our business to differing extents. But fundamentally, we're dealing with extraordinarily low interest rates around the globe, both in real and nominal rates. To the extent those tick up even if they double, while there will be dislocations and there will be certain financial institutions or market participants who feel the brunt of that, I don't see that as a real impediment. That's not what's been driving M&A activity. What's been driving M&A activity has been this incredible transformation we're seeing around the globe. You have this digitization trend, which is not slowing down. It's only speeding up. COVID was an accelerant in that regard. You have the decarbonization trend. You have the electrification trend. You have so many macro trends where companies need to reposition their business. And as long as you have a relatively constructive backdrop as far as access to debt and equity capital markets, you're going to see a continued steady drumbeat of M&A activity. So from a macro perspective, I do think rates will rise. I think some of the inflationary pressures that we're seeing are transitory, but the risk and transitory pressures is that they can then lead to a change in expectations. And once you let that cat out of the bag, you can have some difficult efforts to maintain price discipline. But I think fundamentally, the M&A market is not being driven by low rates. It's being driven by either a strategic necessity or it's being driven by a tremendous influx of capital into alternative space and private equity. And at these rates or even at meaningfully higher rates, I still think you're going to see this market continue to grind higher.

Okay. So we've obviously been in this COVID environment for the best part now of 2 years. Hopefully, we're moving into a more normal post-pandemic environment, but every day brings new news. Can you just take a few minutes to reflect on how you think COVID has impacted your competitive positioning? I mean I can see positives in the -- its improved banker productivity, its improved touch points or the number of touch points that you can manage per day. But it's also -- I'm assuming the hurt, that it's harder to form new relationships. So when you think about the balance of the 2, do you think that the COVID environment has been positive or negative for your firm?

I think about the COVID era as being bookended by the beginning of 2020 to the end of '21 and then moving forward. I don't think COVID is leaving us. We're going to be living with these health challenges for an awfully long time, and I think that grim realization is dawning on all of us as we have these fits and starts as to how we reopen the economy, how we move forward. Clearly, as you have more vaccine, more vaccine deployment, more therapeutics, we're going to find that the disruptions caused by this, hopefully, are manageable, but they're going to be with us for an awfully long time. I look at these 2 years as very much a separate and distinct period because I'd like to refer to it as the great sequestration, where there was just a lockdown and everyone was working remotely. And I think regardless of where we head going forward, the trend is to get back in person, more physical contact, the fact that you're putting on this conference, that's what we're going to all benefit from and that benefits our firm. So when I think about the 2 years, there's no doubt we learned to work far more efficiently. We learned to operate in a more flexible manner. But we're building a differentiated culture. And when everyone is Zooming in from home, those differences, that competitive advantage that we have, some of that gets dolled and some of that is hard to capitalize on. We continue to be a recruiter of choice. We continue to add supremely talented people from all corners. But if those individuals can't engage in person just as we're speaking to one another, and meet a dozen partners and get the feel of the organization in person, whatever recruiting momentum we have is going to be slower when everyone is zooming in from home than when they're in person. The deals that we worked on in '20 and '21, there is no doubt we were more efficient. There was less travel, there were productivity gains. But a lot of our business model is in expanding our footprint in meeting new companies, in meeting new decision-makers and forging new relationships. And there is a power of incumbency when everyone is locked down. So I think it's been beneficial to certain of our businesses. Clearly, those businesses, where we are the incumbent, the shareholder engagement business at CamberView, the fundraising business at PJT Park Hill, our restructuring business, all of those where we're the de facto market leader and efficiency enables us to take that to another level. I think they've been beneficiaries. Strategic Advisory, I suspect we would have grown our franchise at an even more robust clip and about how many individuals we've on-boarded, we would have had even more recruiting momentum. But as I turn the page to '22 and beyond, I think we're getting back to a hybrid model, where we're going to use technology to add to flexibility, increase productivity. But at its core, this is still a relationship business. And the more that we are in person, the more that we're out seeing clients, that's going to be a net benefit to our firm.

So there has been this gradual return to the office, and there has been a pickup in personal meetings. But what has been the appetite for your clients to meet in person versus virtual? And what's been the experience over the last few months? Because as you mentioned, there is this efficiency improvement on the behalf of clients as well.

I'd say 2 different things, 2 things to make 2 different points. One is it is very much a function of where in the globe you're traveling to. I was in Europe recently. In the U.K., it's as if COVID didn't exist. In France, there was a strong desire to meet in person but individuals were extraordinarily cautious in ensuring that there were the proper protections and vetting and we were dealing with lockdowns in Austria and Germany. So you've got this very localized approach, and I think that's true in the United States as well. Having said that, everyone appreciates that a fully virtual world is a nonfunctioning world and that you need to get back and to engage, but you just need to be thoughtful and make sure that your day is not cluttered with meetings of limited utility that you're not loading up the coach section of some airplane with a bunch of bankers just to go off just to travel around it. There's got to be a real reason for every meeting and that technology can be helpful and that hybrid meetings are good. But I think the good news has been the more that individuals get back into circulation, the more they appreciate that there's a benefit to it. And one of my challenges leading our firm is everyone forgot about all the benefits of being back together, all they focused on where the efficiency and productivity gains of being remote. So you need to do this in baby steps. You need to get individuals to feel comfortable and secure returning to the office. That's mission #1. Mission #2 is once they're back, they need to appreciate and remember all the things that they can get from the direct learning and engagement that they can't get over Zoom. And I suspect that's happening everywhere. So it's going to be lumpy. It's going to be spotty. It's going to have fits and starts, but I think the trend is clear. We're headed to a hybrid model going forward, where it can't all be in person, but at the same extreme, it can't be all, all remote rather.

Okay. So maybe we could spend a little bit of time talking about what's happening in the financial sponsor market. It's obviously been a very important theme this year. for M&A advisory firms, just listening to some of the private equity firms present here, they seem very, very optimistic around the outlook for capital raising, even as interest rates go up. So maybe you can talk a little bit about the success you've had in building out your sponsor franchise, talk about where you've got to in terms of building that out, and maybe spend a few minutes talking about what you think it takes to have a credible offering for those clients and maybe talk about how you differentiate yourself amongst that client base relative to your peers. I know there's a lot in that, but so you can unpack that the way you want.

Yes. There's a lot in that. There has been an extraordinary success in the alt space broadly defined, and that's for many good reasons, one of which has been that the returns have been quite attractive that in a low interest rate environment, there's a desire to put money to work where you can over long periods of time, get multiples return on invested capital that you can get high absolute returns. And then on a risk-adjusted basis, you can create some alpha. And I think as an industry, private equity is better set up for that than others. There are structural benefits that they enjoy, not least of which is they are able to capitalize companies with more leverage than public companies can. And as a result, they have lower cost of capital. I think they are both accountable to their LPs in the long term to produce returns and to make the right decisions, but they're not focusing quarter-to-quarter. So in many ways, they have long-term structural advantages. And it's not surprising that more and more dollars have flown into the alt space broadly defined, and that private equity has continued to build out strategies whether it's to get it to infra core venture capital, real estate and the like and that the most successful firms have been able to attract more successful to recruit more talented individuals to their platforms and that you're just seeing a bit of the pro cyclicality. So there's no doubt that financial sponsor activity is elevated. There's no doubt that it's for good reason. The question that we all ask ourselves is how high can it get? My own view is it's going to morph over time because what we're seeing right now is a lot of institutions have found themselves because of the extraordinary success of PE to be overweight, the asset class. These funds have put out so much capital in recent years that they're racing back in 2022 to reload and that there are a lot of fundraising initiatives out there, but it's not clear where all those dollars are going to come from. So I think that's something that the industry is going to work its way through over time. And one of the things that we spend a lot of time on is helping the private equity industry work through that. And that's why we've made such significant investments in our GP solutions business, in our secondaries business, both at the LP level and at the GP level because we recognize that over time, you need to find ways in which we can create more liquidity amongst LP so that they can reweight their portfolios, that they can create some free boards so that they can continue to commit ever larger sums of money to these private equity funds. And I suspect that over time, what you're going to see is less rates to create liquidity by private equity firms once they own quality assets. You're going to see less sponsor-to-sponsor takeouts. And you're going to see an ever more developed secondary market where potentially you could have the best of both worlds when you find quality assets, you can keep them under management for longer, but you can have a more developed secondary market. And one of our core initiatives is to be a leader in that regard and through our GP solutions and our Park Hill initiatives. We're a leader in that regard. That's one thing. The second is when people talk about covering sponsors, you need to have relationships at the highest levels of these organizations but you also have to have differentiated access and differentiated content. So regardless of what the relationship is with a private equity sponsor unless you have bankers who have deep industry expertise and can identify companies to bring to these sponsors to consider investing in, or if you have corporate relationships where you can serve as matchmaker between corporates and sponsors, those relationships will only take you so far. We have those relationships at the highest levels in our organization, and we've had those from day one. What we've been spending our time on has been building out our industry verticals, one after the other. And every time we have more corporate relationships, we have more domain expertise. We have more verticals that we have populated, we're able to address more of those sponsor needs. So our approach has always been to start with the broad capabilities across the board. And then as we continue to grow the platform and as we are increasingly relevant to the sponsors across all of their investing strategies, that's how we gain share with sponsors. And that's essentially what's happened. Every year that goes by, we do more and more business in absolute terms and in terms of having share of mind. And if you think about an organization like Blackstone with so many different pockets of capital. What you need to do is to continue to build out your organization, so that you can better match up against these very large asset managers and create propositions where they benefit from your access, your know-how and your capabilities. And that's why if you just track the percentage of our revenues that come from sponsors, it's grown most every year as the firm has grown. And then there's another element to it, which is because sponsors do make higher and better use of the leverage loan and high-yield markets than strategics do, invariably some of their portfolio companies find themselves in need of being restructured or a liability management exercise. And if you look at what we were able to do in 2020 and how much of our success was linked to working with sponsors to help them restructure existing portfolio of companies or opportunistically figure out how through some of their debt funds, they could make loan-to-own investments, that was a large part of our success. So I suspect that it's going to continue to grow in importance for our firm. It's going to continue to grow as we grow out our industry verticals.

So perhaps you can talk a little bit about what you're seeing in Park Hill because that obviously gives you a unique insight into the appetite to continue to allocate towards these types of strategies. And maybe you can talk about the overall demand picture, but also talk about what you're seeing below the surface in terms of this move towards core and core plus funds that have got lot -- longer maturities and whether you think that's a theme that's going to last for a while.

Well, look, I think the good news is the number of funds that have decided that they're going to come back in 2022 to raise capital and raise a new fund is sort of at record levels. The bad news is everyone is racing to raise their next fund in 2022. So 2 things are going to happen. One is there is going to be a crowding out of second-tier firms. There is increasingly a desire to have fewer relationships on the part of LPs to deal with large complexes where they can have a relationship with an organization and they can invest across at a rate of strategies. I think that trend was set in motion some number of years ago. That's going to continue. And we do have this issue of so many funds coming back to market in 2022. And as we said, because of the incredible success in PE land, you have over allocations in lots of places. So as a result, you need to find ways to deal with that. Some of it is over time, I suspect. There'll be further and further inroads into accessing retail as opposed to institutional channels to enable private equity firms to tap into a broader universe of investors. But equally important is to create a better function and secondary market, and we've been spending a lot of our time in that regard. So when we look at our calendar for 2022, it's at record levels to raise capital for private equity funds, hedge funds, real estate funds and the like. But the companion trend of more and more LPs wanting to rebalance by sales of LP interest or GPs trying to work with LPs to create liquidity, so that they have more firepower to re-up into the next fund. All of that plays to our strength. And that's why after what will prove to be yet another record year for our Park Hill business, I mean I'm confident that next year will be yet another record year.

So maybe we could spend a couple of minutes talking about your outlook for the restructuring business. And I think you previously said you expect it to revert to 2019 levels. Now obviously, last year was a really, really good year. As you think out, maybe not so much over the next year, but over the next 1, 2, 3 years, do you think things like supply chain disruptions, the deteriorating relationship between the U.S. and China, some of these concerns around interest rates going up, perhaps a disorder fashion will increase the pool of restructuring mandates with it just too difficult to predict at this stage.

My longer-term perspective has remained unchanged. I think there's going to be an extraordinary number of restructurings because you have too many -- too much disruption that has already occurred and that will continue to occur, which is going to create restructuring opportunities. The issue has been with the extraordinary monetary and fiscal stimulus that has been applied, a lot of companies that are long-term challenged are not in desperate trades today. So let me just unpack that for a moment. If you just look at the reopening trade, what we're seeing here is that there are a lot of companies where even though after the economy reopened, they appear to be well positioned. As time has gone on, it's clear that they are challenged. Just take the airline industry. The airline industry has far more debt in 2021 than it had going into COVID just because of the extraordinary battle they've had to waive for the last 2 years. It is clear that while there will be a bounce back in individual travel as everyone who's been locked down for 2 years wants to travel and wants to get reacquainted with family, business travel is not going to return to levels previously seen. You're seeing fuel cost potentially at risk of heading higher. You've got wage pressures and the like. There were restructurings in the airline industry in regular times. So the idea that everyone within the industry is going to be able to sort of successfully navigate every travel, every leisure company. I just don't think that, that's realistic. So that's one trend. The second is you still have a lot of companies that are operating on fundamentally thin margins. And when you have thin margins and if the access to capital gets reduced as investor mindsets change, if interest rates go up, if you have wage pressures, if you have supply chain disruptions, all of a sudden, those companies operating on thin margins, some of them will go ground. Then the third thing is, in addition to all the companies that may have been left behind as the economy transitions post COVID, what you've also seen is a number of new entrants get into all of these other industries. So if you think about all of the companies who are trying to create the next EV success and you think about all of those companies, they can all be winners. So there's going to be an inevitable shakeout as companies who don't have legacy businesses, but seek to enter what they see as a market opportunity, inevitably, there's going to be a shakeout. So everywhere you look, this economy is going to be punishing to those who don't survive. And you either have companies whose business models have been disrupted or you have new entrants where there's just not going to be enough chairs at the table. And as a result, I have no doubt that you're going to see a meaningful uptick in restructurings from the levels that we're currently seeing. But to me, this is not resembling what the new normal is going to be. This is an artificial normal because it's too soon after COVID, and there's been too much stimulus supply.

Do you spend time with those companies? Do you think they're realistic about their prospects today? Or do you think they're just looking at a wall of liquidity and the fact that they can finance themselves in debt markets on attractive terms and that is pushing the can down the road?

Well, it's been unclear. I think at any individual company, no one really knows until after the fact. But if you're looking at it in aggregate, it's impossible that all the companies are going to successfully get to the other side. So every company that has access to debt and equity capital in a risk-on environment is doing the prudent thing, which is to create optionality to try and get to the next level. But what we're learning and if you just look at all of the pandemic darling stocks that have been just beaten up mercilessly in the last few weeks, people are recognizing that the initial momentum in the reopening trade may not be what the new normal is and that the new normal may be one that severely compromises certain business models. And I'm not here to predict which ones are going to be compromised, but I know that there are too many companies whose business models have been severely pressured because of COVID and the acceleration to a digitized world. And on top of it, they've had to take on a lot more debt than they probably would have liked to, and that the capital markets are not going to stay as benign as they currently are. So inevitably, that's going to create a shakeout. And then as I said, you've got with the SPAC world and all of this risk capital that has come into entrepreneurial startup ventures, where the financing commitments are extraordinary, and they persist for years to come. and where it's a winner take most economy, you're not going to end up with every one of them successfully getting to the other side. You can't have all of this innovation and disruption and have everyone be a winner. And that's fundamentally the message. It's the companion to innovation and to new business origination is that not everyone is going to successfully get to the other side.

So let's talk about your strategic priorities. And we talked about this last year, a lot has changed over the last year. Have your strategic priorities changed in any way?

I think fundamentally, for us, it's about footprint. We started building out capabilities. And when we look at our capability, we started out on day 1 focusing on capabilities. That's why we were early into debt advisory, debt capital markets. We were early into equity advisory and equity capital markets. We were early into shareholder engagement. We were early into capital raising more broadly defined. We were early into strategic IR. We were early into all of those and we recognize that if we built out a full suite of best-in-class capabilities that the limiting factor for us would just be footprint and getting into more industry verticals, having more bankers, more feet on the street, more engagement. And I think as the world has unfolded. I think we've been shown to be dead on in that regard. And having those equity capabilities enabled us to capitalize on the SPAC opportunity. Having the debt capital market capabilities has enabled us to get ahead of the direct lending opportunities that present themselves for us. We were early in building out an ESG capability, which is an opportunity and an integrated way to speak to our clients in a different way and to gain market share because it's a reset. When ESG becomes top of mind, clients typically find that their incumbent adviser may not be best positioned to advise them, and all of a sudden, they're prepared to look elsewhere. So for us, it's really all about footprint. We are committed to growing our headcount at a healthy clip, but at a clip that enables us to comfortably integrate and assimilate all of the new talent, and I suspect you're going to see that over the next few years just to continue.

I mean you've used acquisitions very, very successfully to grow the firm really since it's inception. What does the acquisition environment look like today? And is that something that shareholders should expect that you will utilize in coming years?

I think we're always open to things that make sense. We've proven from the Blackstone transaction and the CamberView acquisition that we have a unique culture, the ability to take like-minded individuals and knit them together and create something better. So our confidence on our ability to identify and integrate is off the charts. The question, Richard, is are there other opportunities that present themselves. And in order for those to make sense, there need to be situations where virtually all of the business that we'd be combining with is additive and not depictive to what we already do and that there is a shared sense of vision and values. That's what makes it difficult because it's typically difficult to find both of those. But to the extent they exist, we're all for that. But we've been doing a pretty good job at growing organically. I think our headcount growth and strategic advisory over the last 3 years is high teens percentage. And I don't see that slowing down much, if at all, over the next few years. So we're just going to continue to build out our own footprint and continue to add talent and by definition, an extension of capabilities. But if something were to come along and it made sense, I think we have the confidence to lean in because of our track record.

So there's been a lot of discussion around the competitiveness of the hiring environment over the course of this year. How would you characterize it today? And do you feel it's got to the point where perhaps people are overpaying based on an unsustainable assumption around revenue run rates in coming years.

There's a lot in that. So as far as the hiring environment, we had 8,500 summer applications. We are incredibly well-known on campus, and we have a great brand, and we're going to continue to tap into that because if you're going to build a best-in-class firm, you can't just do it at the senior levels. You've got to do it at the junior levels. And that doesn't show that there's been any slowing of our momentum on campuses. What has slowed us at the most senior levels is just the inability to be in person. And for someone who's quite successful at a competitive firm to leave and not be able to walk the halls and meet lots of partners in person, that just slows everyone down. I would make the observation that since August through end of year, I think we've added 5 partners, and it's clear that what's triggering that is just the ability to do what you and I are doing, sit across the table and have a conversation. So I think our biggest impediment has just been everyone in lockdown. And now that people are back circulating, I don't really see anything that should derail our hiring momentum.

Okay. So I think we've got a couple of minutes left. So maybe we can end with your thought process around capital returns. It's obviously an important part of the investment story. I think you repurchased $115 million of shares this year. You've obviously returned capital both in the form of dividends and special dividends. Can you just talk through the waterfall where you see the most attractive opportunities to return capital in the coming year?

Well, if you actually look at it, we buy back stock in the open market. We settle partnership units that are presented for exchange for cash, and we paid for the first time a special dividend this year. If you aggregate all 3 of those, Richard, I think we've returned more than $300 million of capital in 2021, which is probably double or close to double anything we've ever done previously. One of the reasons why we've been focused on share buybacks as opposed to dividends is we see extraordinary value in our shares. I think at these levels, we continue to see that. We're also mindful of the float, which is we want the float to grow, not to shrink, which is why most of our share repurchases tend to be by repurchasing partnership units that are not currently in the float as opposed to open market purchases. At these levels, I suspect that as we generate a lot of capital, you're going to continue to see that be our principal focus. But as I've also said, we're generating so much capital that we're going to need to, in a good way, revisit our dividend policy and whether it's more frequent specials or is just an increase in the base dividend rate, that's also going to be a companion part of our return to capital strategy.

Okay. I think with that, we are out of time. So Paul, thank you very, very much for joining us. And I really hope we get to do this again next year in person.

Great. Thank you, Richard.

Thank you.