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

Okay. If everyone can get seated, we will start here. So up next, I am delighted to welcome Paul Taubman, Chairman and CEO and Founder of PJT Partners. Paul founded PJT in 2014 and has rapidly become one of the most trusted firms in the industry prior to which -- he spent 30 years -- nearly 30 years at Morgan Stanley. Paul, thank you for joining us at the conference again.

Great to be here. Thank you, James.

All right. So I'd like to start maybe on the macro at this point. When you look at the macro post the election, how supportive is it for PJT's businesses?

Well, we can go through each of them. I think, as I've said before, 2024, each of our businesses should show growth and it's only the second time in 9 years that all 3 of our primary businesses, strategic advisory, restructuring and liability management and the Park Hill capital raising business, all 3 of them. And we think we're in a position where that can easily continue into 2025. No guarantees in some of those businesses, but where it's clear that it's up and to the right is strategic advisory. I think the M&A environment is far more constructive today than it was a year ago. In many respects, a lot of the planks need to be built and the foundation needed to be established for a multiyear M&A run. And I think we've seen it in 2024, you've seen rates go from cresting to starting to come down. We've gotten past an election. We have pro-business administration. There will be a lighter touch to regulation. I think you'll see less regulation coming out of the competition commissions in Europe because there's a recognition -- a growing recognition that, that has stifled some of the European industrial complex and put some of their companies in harm's way because of their inability to see growth and strength through consolidation. I think private equity, which has been imbalanced in terms of capital raised versus capital deployed and then capital distributed is slowly grinding back towards an equilibrium. The IPO markets are open. The credit markets are open. Stock market is up. I mean almost everything you would want to see for this to be a very pronounced uptick in M&A is now in evidence. We saw it coming at the beginning of 2024. We just thought it took about a year for that foundation to be established, and now we're going to start to see the fruits of that. And then as it relates to PJT, we started 2024 with an aberrationally light pipeline of announced pending closed transactions. We've done a terrific job in not only refilling that and being able to deliver growth in 2024. But more importantly, we've always had our eye on the prize, and that prize is 2025 and beyond. And I think we will enter 2025 with record pipeline of announced pending closed transactions. So that business sets up very well. The Park Hill business goes from strength to strength. We think we're very well positioned to capitalize on the trend to more liquidity options for private equity assets, greater use of continuation funds, more capital dedicated to the asset class. So that's a positive. And on the liability management, we've been pretty clear and consistent that this is a multiyear period of elevated liability management and restructuring activity. So the macro comports very well with how we can capitalize on it. So I think the macro will be strong in 2025, and our ability to capitalize on that will be equally strong.

Excellent. Okay. Maybe just a couple of points that I want to dig in on related to what you just said, but maybe starting on antitrust and broad deregulation. I think those are obviously related, but maybe you could just talk a little bit about antitrust. Do we need to see both changes at the DOJ and FTC before things can improve? How much of the way back to the pre-2021 environment do you think we could see? And then just your thoughts on cross-sector deregulation as well.

If you look at Trump 1 side-by-side with Biden administration, the number of deals that actually are withdrawn that failed to be approved remarkably constant between the 2 administrations. But that doesn't really tell the story. The story is, if you look at the time between signing and closing under Trump versus Biden, there's been a steady elongation because you've had a policy of the Biden administration to try and chill M&A activity. And what does that mean? It means more litigation, more use of litigation, less behavioral remedies. There's been a bit of opaqueness and unpredictability about which transactions they will go after and contest and which ones they won't. There have been more second request. There's been more just sort of job owning. So in my mind, what they have done is they have at the end of the day, produced similar results but they've made it much more unpredictable and giving companies far less confidence that they could sit down and negotiate a satisfactory resolution and get to behavioral remedies and that there is a reasonable chance of litigation and that there's an unpredictability to it. I think what that has done is it's not reflected in the percentage of deals that get bounced. It's reflected in the number of deals that never saw their way to the finish line were never agreed and never announced. And I think that sentiment change is going to be profound. And as I said before, you need to think about this in a global context. And I think the Competition Commission in Europe looks at it in a very similar way, which is have we somehow strangled innovation and have we, through these policy initiatives made Europe less competitive vis-a-vis the United States, I think there is a growing awakening of that. And if you look at some of the white papers that have been put out, there's that sense. And if you look at what's going on in the U.K., you're starting to see deals be approved, which may be in prior periods of time would not. So all of that should be much more favorable going forward. Having said that, if you ask me to call out 2 industries that will very much remain in the crosshairs, I would say it's big tech and retail. I think those are 2 industries that should clearly remain in the crosshairs. And I don't think this is going to be less a fair anything goes Wild-Wild West, I just think it's going to be much more constructive, much more predictable and more companies will find their way to deal their way through and get to satisfactory competition resolutions, which will accelerate deal activity.

Okay. On tariffs, I think it's a little bit hard for us to figure out whether that's good or bad for M&A. I've heard different opinions even so far at this conference. So maybe you could just talk about what you think the impacts will be? And then on cross-border deals, factoring in the antitrust scrutiny there and how that could evolve? And also tariffs, what do you think that means for cross-border deals specifically?

So there's the rhetoric of tariffs, there's what actually gets negotiated away in broader global negotiations and then there is what ultimately ends up becoming operative and the reality is none of us know where we're going to end up here. So we talk about broad-based tariffs. I would imagine that there's going to be highly strategic use of tariffs or I should better say, the threat of tariffs to affect policies that are in the interest of the United States. Therefore, it's not clear to me, and I think it's very premature to predict exactly what this means. But if you step way back, when I go to Europe, everyone in Europe wants to figure out how to get to the U.S. They want to own more assets in the U.S., they want more exposure to the U.S. And if they have assets in Europe that are principally U.S., they're frustrated by having a European trading multiple and not a U.S. trading multiple. That is the direction of travel. If you go back and look at broad-based indices of publicly traded European companies, 10 to 15 years ago, roughly 15% of their assets were U.S. assets. That number has grown by more than factor of 2 and is probably sitting north of 30% today. I expect that, that yearning, that desire to continue to own assets in the U.S. is only going to grow. And if you can be inside that tariff circles so much the better. But I think that is going to continue, and that's going to invite more cross-border activity. And whether it's U.S. companies using their far more highly valued currencies to acquire European companies or Europeans who very much have a strategic imperative to get more exposure to the U.S. I think you're going to see more cross-border activity. Clearly, you're going to have to be conscious of politically sensitive industries and areas that relate to national security. But I think you will see more of that activity, not less.

Excellent. So one more on sort of the macro, big picture post-election landscape, which is just rate. So I think we're seeing short interest rates come down globally in the U.S. as well to some extent. That's obviously a positive for M&A, I would imagine. But what about the possibility of a longer -- of a higher long end of the curve? How much of an offset could that be? And then maybe you could also just comment on availability of financing.

The first thing is the direction of travel, I think, on rates is down I think, though, that with every passing day, it becomes clear that, that's going to be a longer timeframe than some of the early euphoria. I think that's actually good for our liability management practice. So the first thing I look at there is how does that affect that business? I think it's positive. Do I think that if there's a clear sense that not only have rates crested but that they are slowly headed down. I think that's a positive for the M&A business. And I think that principally because private equity firms are more comfortable beginning to initiate processes because they believe they will be coming to market with some tailwind behind them, which is financing costs are likely to go down, not go up, the amount of debt to put on these assets is likely to grow, not shrink, returns can then justify higher prices. So I think that dynamic is a positive. Clearly, central bankers do not control the long end of the curve. That's ultimately driven by expectations of future inflation and the like. I do think that this administration, more than most is going to be governed in large part by reactions in the credit markets and the equity markets. And as a result, I think the overall policy architecture is always going to be looked at through the lens in part, not exclusively, but in part by how the capital markets react to it. And I think that that's probably a comforting thing. That's clearly the conventional wisdom. I think this may be one case where the conventional wisdom is dead on. So I think that, that's all positive. There is clearly an abundance of capital relative to where we were 2 years ago. Spreads are tight. There's a lot of money that still is on the sidelines that want exposure to credit. I think bank deregulation is clearly one of the things that the Trump administration is going to focus on. What's unclear is how that deregulation presents itself and what does that do for their ability and willingness to lean in more in syndications and underwritings and the like. My sense is it's probably that direction of travel is probably positive. And I think if you have the syndicated market and the direct lending market, both falling over one another to provide capital. That's probably a good lubricant for the market. So I just think all of that is positive. I don't want to paint a euphoric picture like it's all going to be wine and roses. I just think we've seen what needs to happen for us to get off the mat and start to see a resumption in capital markets activity and M&A activity. We've all seen this 2 years ago. We've known all the necessary conditions to get to an uptick and as painful as it's been, we've kind of navigated through the last 2 to 3 years, and we're here. So this to me is just sort of the end of that first phase of creating constructive conditions. And now even if we have very significant up years, I still think I temper that by looking at it in a historical context because the reality is M&A activity has been by historical standards, relatively subdued for the past few years. And therefore, a modest uptick this year and a much more forceful uptick next year is still not going to put in crazy land. It's just going to push you back into forward-leaning land, which is probably where it should be after a handful of years of subdued activity.

I want to turn to a high-level strategy question. So we're year 10 of PJT as a stand-alone entity. And on my estimates, you're now -- you've built a business that's about $1.6 billion in revenue for next year. What surprised you over the past decade, both positively and negatively? And what are you most excited about for the next 3 to 5 years?

I mean, what surprised me is -- you know this intuitively, which is there's a very, very long investment phase where you just have to get your house in order, you have to recruit, you have to train, you have to integrate you have to take all of the pieces that you've assembled knit it all together, and you know that that's going to happen well before it shows up in the P&L and well before it's broadly recognized. But no matter how much you steal yourself for that long travel through the tunnel -- it's just -- it's a longer tunnel than you can imagine. And it's taken us many years to put things together and really starting from scratch to build what we've built. So I think the biggest surprise to me probably is with all my optimism. I didn't appreciate how long we'd be traveling down this path of just building without being able to present all the benefits of what we've built. That's the sober assessment. The more optimistic assessment is when I look back and where we are after 9 years, I never could have dreamed we'd be this far down the field. So it's just -- you tend to simplistically draw progress is like 45-degree lines up into the right, like every year, just like a metronome, just gets better. The reality is it's more like a 747 taken off where you're just on the runway picking up speed, but you're not gaining altitude. And you know you're making progress and you know you're getting there. And then when you finally do take off, it tends to be a little bit more of a vertical and when I look back and I see all that we've been able to assemble and start to build out the global footprint and build out a very broad set of capabilities and start to really fill out a lot of industry verticals and build it with a differentiated, highly attractive culture. And now I start to see the perceptions of the firm starting slowly to catch up to the realities of what we've built and that, that's another gear that we have that hasn't yet kicked in. It makes me super optimistic about what the next 5 to 10 years is going to look like.

Great. Maybe just on the investments that you're looking forward to over the next few years, where do you see the best places to invest today, whether it's business, geography or sector?

It's interesting. It's all a question of what your time horizon is. If you're trying to get the highest return for 2026, then the highest return is going to be to strengthen your strong areas today. If you're trying to create growth for 2036, then you're going to have very unproductive investment in the near-term because you just have to put your toe in the water and start to scope out a new opportunity, a new leg. And that's constantly what we wrestle with. My tendency tends to be, let's focus on the things that are going to have long-term lasting impact even if it doesn't give us that pop of adrenaline in the short-term. And one of the reasons we do that is because we're confident that in our incumbent businesses, we have enough growthy businesses that we have the next few years kind of figure it out as far as growth, and let's aim very high in the steering wheel and look very far down the road, not right out in front. So what does that mean? It means some of our geographic expansion. We have made very small but steady consistent investment in Asia. We recently acquired a license in Japan. We have a small group of very senior dedicated individuals who are in country. We have a lot of us, including myself, who have spent many years doing business in Japan. It's not a market where you just ignore it and then wake up one day and are part of the business fabric and ready to do business, you need to slowly work your way in. We've done something similar in India. So there are small investments, but with a long-term perspective that we can, over time, have other engines of growth, that's on the geographic side. On the closer to home, the rest of Europe beyond the U.K. has always been an integral part of our strategy. We believed in the early days that if culture is everything. It's best to have nearly all of your European colleagues in one office where they're all working together, even though they speak different languages come from different backgrounds, and bring different skills, having everyone create one unified culture is what's most important. But when you're 10 years into the journey, you have a degree of confidence that it's now time to open an office in France, open an office in Germany. There may be 1 or 2 more European offices we opened. So that's the geographic side. On the industry side, when you start the firm and you have built out virtually no industry groups, you can be making investments in important industries for years, if not decades to come. And we're going to continue to steadily grow that footprint. And then the thing that's most important to us, which is where it all starts, is making sure that we have differentiated capabilities. And we've always thought about advisory in the broadest possible terms, whether it's capital markets, advisory, strategic IR, activist defense governance matters, geopolitical advisory. We're going to continue to grow that. And strategically, we're widening all 3 of those, geography, industry and capabilities, and that's kind of where we're headed. So we're making investments all the time. Some are relatively near-term for return others are down the road. But when I roll it all up, it suggests that we have a really long growth runway ahead of us.

Great. So maybe just digging a little bit there on the hiring environment. On my math, you've grown your strategic advisory partner base at an 11% CAGR since the end of 2019 and the total partner base at an 8% CAGR, is that level of growth that you see as sustainable? And then maybe you could also just comment on how the cost of hiring has evolved over the past year or so?

Well, the cost of hiring goes up in active M&A environment, but you may think I'm talking about financial costs. I'm talking about the opportunity cost of the talented individual to set out an active period and go on gardening leave and then have to start up all over again. And that's why we were so forward leaning in '22 and '23 because we understood that it was just simply a matter of time before we were getting to the next wave and while it was most pace to our margins to ramp up hiring in '22 and '23, that's the period of time where you get the most talented individuals because they're prepared to deal with their opportunity cost of heading to a sidelines opportunity cost is at historic lows. With every passing day, this M&A environment heats up, it's going to, I think, be more difficult to replicate that hiring pace of '22 and '23, not impossible, it's just going to be more difficult from a macro perspective. That's the bad news. The good news is that every day that goes by our firm is more attractive to the senior people that we're looking to attract because every day that we have more success that there are more individuals at our firm, they may have worked with some of these individuals who are sitting in other firms, the more that when they do a channel check with their clients about how they would react if they came to our firm. We have that -- I call that micro tailwind. And I believe that, that micro tailwind we have is unique to us. And I believe that, that micro tailwind can offset the macro headwind that the entire industry is going to have as things get more and more active. So that's really what I focus on the most. That's the opportunity cost. I don't really find that the cost of hiring is any different today because the best people want to work on the best platforms, and they want to be challenged and they want to go places where their clients are going to be most receptive to what they have to offer. And I think increasingly, that's us. As far as can we maintain those levels of growth. The real answer is, I don't know because we're never going to focus on the growth rate. We're just going to focus on -- these are the types of individuals we want to attract. And the market is going to tell us whether that results in 5% growth, 8%, 15%, there'll be somewhere in there, but we clearly understood that one big headwind was gone, which was activity levels in '22 and '23. And that's why we were so forward-leaning.

Okay. So just 2 business-specific questions here on a couple of points you made earlier. The first is on sponsor M&A and the recovery there. On the last call, you did talk about how you don't expect them to return to nearly 40% of M&A, which they did in '21 and '22. But maybe just your thoughts on the cadence of the recovery of the private equity ecosystem?

I mean 40% was aberrational and that was in a gold rush. You had private equity firms, all who wanted to go public. The way you go public is you accumulate more AUM, the way you accumulate more AUM is you deploy the capital that you have, you go out, you raise a bigger fund, you take that money, deploy more capital, rates are near 0, most everything you buy with leverage, surprise, surprise, shows attractive returns, rents and repeat, and that works until it doesn't. And we then entered a period where it didn't, and I don't think we're going back to 40% of the ecosystem anytime soon. It's just -- that's just not what we planned for. That's not reality. And that's why we never told you that the -- we're going to take over the world because they also are incredibly important in the world in which we live but they live there with a lot of other folks, including strategics and strategics have a very important place to play. And we've always believed that the best way to cover the financial sponsors is to have unique insights and access to the corporate world. So perversely, I know this sounds crazy. The best way to build out a world-class sponsor practice is to have ever-growing share with the strategics because the greater your share and influence with strategics, guess what, all those sponsors want to talk to you. And we see that time and time again that when we have marquee assignments with corporates, whether they're sports leagues or whether they're blue chip corporates with big chunky assets when we are identified as the adviser everyone wants to come talk to us about how they can place some role, whether it's to provide financing. They can partner on an asset, they can acquire an asset. So we're building up our sponsor practice, but a lot of it has been focused on first getting the strategic side right and then integrating that in. And we've had a lot of positive results, certainly, in our restructuring and liability management practice, we've seen ways in which we've been able to better integrate it into the Park Hill business. We've seen the growing strategic footprint growing it. So I focus more on the micro. But since you ask me a macro question, I think it is going to be reasonably active in the following ways. I think the mid-market private equity firms who have not been able to return a lot of capital who are finding fundraising difficult or truly challenging, very challenging are going to find increasing pressure to return capital. As a result, I don't know whether you call it a capitulation trade, but I think there will be a whole group of sponsors who may feel some added pressure to monetize some assets so that they have the best opportunity to raise their next fund. And I think that's probably the first wave that I see. I think consistent with that, when there are attractive corporate assets that are put on the block and they are like truly differentiated assets, everyone is going to look and I think you're going to see more of those assets put on the blocks by corporates. And I think you're going to see deeper buying interest on the part of sponsors for high-quality assets. The question is, for assets that are perfectly fine, but not differentiated, are you going to see the feeding frenzy and I just don't see that. I just don't see that. So I think it's going to be a steady growth. I think at the beginning. It's going to be the bigger firms pouncing on highly attractive assets, even if they have to pay up and I think you're also going to see companies that are in a difficult period, perhaps saying, you know what, we'd love to hold this asset for another 2 or 3 years but in the broader ecosystem in which we operate better to monetize it, which is going to create some really attractive opportunities.

Okay. Just one last on the businesses. I think a number of your peers have talked about how the structural shift in the restructuring market to liability management lends itself to a longer and more permanent restructuring cycle and that there's more repeat business in a sense. I guess what are your thoughts on that? And then you've consistently talked about a longer restructuring cycle. So maybe you could just update us on your views for that.

How about if I agree with the conclusion but not the reasons...

Okay, great.

So I'll be half agreeable. There will be a long cycle here. I don't think it's because of liability management per se. I think liability management is the vehicle by which this long cycle is being dealt with. It's how it's being addressed. The reasons for it are pretty simple. You can't have a world where a lot of capital was put on in a near 0 interest rate environment, has to be refinanced in a fundamentally different interest rate environment and not have a bunch of [indiscernible]. So you've got that. You can't have a world in which you have all this innovation and disruption and technological transformation and only have winners. For every SpaceX, for every Tesla, that is a winner, there's a loser somewhere. And as a result, even if you have a very favorable macroeconomic backdrop. For every winter, there's creative destruction going on everywhere. And if you just look at the combustion engine and you just look at -- as you move to electrification, there's an entire ecosystem that was built up for a different world. If you look at where we can head with autonomous, there will be different implications for industries and companies that are left behind. If you go to a digital world where it's all streaming, movie theaters and the like will be left behind if people consume media, online, newspapers and the like will fall behind. So that, to me, is ground 0 for elevated restructuring activity. It's right there. It's the fact that we are dealing in a world that can only be winners, there are winners and there are losers and that can coexist in a positive macroeconomic environment. That's point #1. Point #2 is this elevated activity is only elevated if your baseline is a period of time of free money. So if you're comparing it to where it was 5 years ago, it looks like it's moved meaningfully. But if you compare it to long-term historical averages and the like, it's still not that high. And I think everyone understood we were in an incredibly anomalous easy money environment, and we're no longer in that environment. So guess what, we're going to go from aberrationally low levels of liability management and restructuring to more normal. Now as far as liability management, almost all the paper that goes out is covenant-light. If it goes out as covenant-light, your degrees of freedom and creativity and how you can help companies that are finding it challenging because they have near-term maturities. They have other barriers to operating their business. They have too much aggregate debt. They're having trouble refinancing because they don't have the interest coverage. Liability management is the most effective way. It's using the markets as opposed to the court system. It's a better mousetrap. It's a better way. It also creates a lot more creativity. It also means that cycle times are a lot less because from start to finish, you can get in and get out and be more responsive. So we're big fans of liability management. We have the leading liability management practice, but it all stems from, I believe, this issue of creative destruction.

Okay. And the last minute, just any thoughts on the normalized comp ratio where you think you can get to that?

No.

Fair enough.

I mean, look, here's what I say about the normalized comp ratio. We're entering a bull period, certainly relative to the last few years. The comp ratio was burdened by high degrees of hiring and low productivity, low productivity was a function of lots of new people on the platform and low aggregate M&A volumes. This next phase is going to have relatively fewer people who are new to the platform. It's going to have a much more constructive environment. Productivity levels will go up. And as productivity levels go up, the comp ratio is coming down. And I've said repeatedly, as long as we can grow our strategic advisory revenues higher rates than we're adding headcount the comp ratio will start that travel back to normal. But I'm not prepared to put a pin in it and say this or that or something else is normal, but normal is lower than where it is today.

Excellent. With that we're out of time. Thank you so much, Paul, I hope we can do it next year.

Thank you, James.