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

Okay. Let's get started here. Up next. Delighted to welcome Paul Taubman, Chairman CEO and Founder of PJT Partners. Paul founded PJT and just celebrated the first decade of the company, which has seen tremendous growth and reached one of the -- and become one of the preeminent investment banking firms out there. Before PJT, he spent nearly 30 years at Morgan Stanley, serving a series of leadership roles. Thank you so much, Paul, for joining us.

Pleasure. Thank you for having us.

Excellent. Okay. So Paul, on that first decade point, what are the key lessons you've learned? And maybe you could touch on your key strategic goals over the next 3 to 5 years?

I think the biggest lesson is if you're going to build it right, it's going to take time, and you need the right foundation. And we started out with a great deal of patience, but no matter how patient you are when you conceive the build-out. In reality, you need to be even more patient because everything takes more time if you're going to do it right. And we focused initially on culture, on attracting the right individuals on having the right filter, and we could have moved more quickly. We could have added more individuals, but I don't think we would be in a strong position we're in today if we had cut those corners. So to me, the first 10 years has really been the ratification of the strategy that you need to go slow to go fast. And now that we're 10 years in, and we have a lot of the foundation built and we're better appreciated, and we're much better developed as a global institution. I think it's time to be able to capitalize on that and to go faster not to change the standards but to sort of leverage all of the hard work and foundational investment that was made in the first 10 years.

When you think about investing today, are there specific businesses, areas, geographies that you're really focused on? Or is it more broad and opportunistic?

You always have to discriminate between where there's the biggest wallet and where you can get the right individuals. In an ideal world, those two are perfectly aligned. But the world isn't perfect and sometimes you know the spaces you want to occupy. But if you try and get to them too early, you'll end up with the wrong individuals. So when we look at our build-out over the 10 years, we're in almost all of the industry verticals, but our build-out is in varying degrees of progression. When I look at the biggest wallets, the biggest wallets would be in health care, writ large, the world of technology and industrials. And I think we have made major investments, but there's still a tremendous opportunity in those three spaces, which are very large, high wallet, high-impact opportunities. And the fact that we've come so far and not really made commensurate investment in those verticals with some of the other areas. I think to me, it's just more opportunity for upside because now as we get at those opportunities, we have the ability to take our franchise to yet another level.

Talk a little bit about being able to grow a little faster now in the second decade, so help us think about your hiring outlook. You did have, thus far, at least a stronger hiring year already. So is that just something that we should expect going forward a little more?

Well, when I talk about going faster, it's really it's just a compounding effect, right? You're spending a lot of the first 10 years building a foundation where you're meaningfully strengthening the firm, you're building it out, but you haven't fully capitalized on what you've built. The next 10 years, we really have the opportunity to capitalize on a lot of what we've built. So if you think about how the first decade has gone, everything we've done has been a de novo greenfield build on the strategic advisory side. And you need to compare that build-out to the best-in-class businesses that we inherited from Blackstone as it relates to restructuring and liability management and the fund placement business and capital raising. But on the strategic advisory side, everything we've done has been a greenfield build. And as a result, in the first 10 years, you have a lot of partially built networks. Every geography that you enter starts out with that first partner, that first client, that first connection. And until you light up each one of those geographic areas or one of those industry verticals, you have a lot of investment but not a lot of return on that investment. And as we get into the second decade, a lot of those partially built networks have transitioned to completed networks. And then all of a sudden, you're seeing the real power of that investment once it's all together, you get to a critical size, critical scale. And then the next leg up is when the brand and the perception of what we've built better matches what we've actually built. We spent the first 10 years focused on delivering the best client experience, the best advice to clients. And that takes time to be broadly appreciated in the marketplace. And with every passing day, every passing year, there's better appreciation, and we're increasingly seeing clients seek us out as opposed to us having to seek out the next client. So it's that compounding effect that suggests that a lot of the hard work and discipline and investment of the first 10 years should show compounding returns in the second 10 years. And then if you can marry that to then attacking some of the really high return verticals health care, industrials, technology on a global platform with best-in-class talent, then that's where you really see the acceleration in the results.

You're still heavily involved in -- with clients in the boardroom. What do you think has changed under this administration in discussions versus the last when you're with Boards. And I guess, what sort of deals or how much focus is there on deals that you couldn't do under the last administration are you having?

It's a very different approach from the prior administration. The prior administration took the view that they were going to go after certain consolidating transactions vigorously with a view that the more difficult they made approvals and the longer it took to get those approvals and the more uncertain securing those approvals would be that there would be knock-on effects, and you would have a chilling effect on consolidating transactions. So there was really a policy decision which was sometimes they weren't shooting at that particular target, but the view was that by firing the shots, it was sending a message to others in the industry. And as a result, there was a lot of litigation. There was a lot of threat in litigation, and it had a chilling effect on a lot of large consolidating transactions because if you're in the Boardroom, and you're thinking there's a reasonable chance that your deal is going to be vigorously contested and it's going to result even if you prevail, even if you have legal doctrine on your side, but the time to close is going to be elongated, the risk that when you get to the other side and you close the transaction, the business that's presented to you is not in nearly the appropriate shape with the right operating momentum than when you would first stitch the deal together. That makes you more risk-averse and you start to price that into the deals and then it makes it harder for buyer and seller to come together. So you have this cascading level of degree of difficulty if you keep moving hurdles higher and higher you do get what you're seeking, which is to reduce consolidating transactions. This administration has taken a much more real politic approach to transactions, which is for the right degree of concessions and the right offerings, there may well be a path forward. And if you can go into that with your eyes wide open that there could well be a negotiated outcome that doesn't require litigation. And that if you have certain things that you're prepared to commit to whether it's bringing jobs back to the United States, whether it's trying to address affordability issues, national security issues, pro growth initiatives, it gives you a greater degree of confidence. There's no guarantee that any deal is going to be approved. But I think there's a view that the current environment for large consolidating transactions to be given a fair shake is meaningfully greater than what we've seen in predecessor administrations and it's likely to be as good, if not better, than in future administration. So in some respects, this is as good as it gets moment, and that has caused more companies, more Boards of Directors to look at those green deals and ask themselves, if not now, when? And as a result, you're going to see and we'll continue to see more of those deals brought to market.

So you just touched on the strategic Boardroom. But what about when you're with private equity decision makers? What's top of mind for them and their appetite to transact?

Look, private equity raised an extraordinary amount of capital in the last few years. They invested an extraordinary amount of capital in the late 2020, '21 period. And in many respects, there was too much capital chasing too few deals, paying too high a price. That's not true across the board, but that was a consistent theme. And as a result, there are many of those deals that today have not lived up to their full promise and for many private equity owners, they're waiting for the right time for the operating performance to get to a certain level. And for the realization prices and multiples to deliver to their investors attractive returns. And as they continue to sort of push out some of the monetizations, it has reduced the DPI, less capital is being returned. And what has occurred over the last few years is just a mismatch between capital that was drawn and invested and capital that was harvested and monetized and returned to LPs. And what that has done is it's caused notwithstanding all of the dry powder that the private equity industry has for them to be more cautious about deployments and more selective about realizations waiting for the right moment to monetize their investments. As we're getting to the other side, that mismatch between invested and drawn down capital and return capital is getting into a closer equilibrium. And as that occurs, you're going to start to see more of the dry powder expended on new investments on new initiatives. We're already seeing it. Sponsors' willingness to commit new capital has increased meaningfully in 2025. I suspect that, that will continue to increase as the rate of monetization continues to pick up.

Sound like what you're describing on the private equity side, is more of a steady build. There's not some sort of acceleration that we should be thinking about? Or is there a catalyst that you see that could cause this to really step up materially?

I think the -- this M&A resurgence was led in large part by strategics in 2025. I expect that all the trends that were in evidence in 2025 to be present in 2026 and then some, because if you take a step back, we spent a number of months dealing with the uncertainties and dislocations resulting to the new tariff regime. And that did freeze strategic activity for the first half of 2025. Our perspective is that 2026 is going to look a lot more like how 2025 is finishing up from a corporate strategic perspective. So that says a full year of that type of activity in '26, should generate more activity than what we saw from strategics in 2025. Second, private equity contribution to deal activity, while it improved in 2025 sort of lagged strategic activity. We see in 2026, there will probably be more acceleration in private equity commitments and monetizations as the environment continues to be more favorable and build. And as a result, if you have increased activity from both sides of the equation, it shouldn't be a surprise that 2026 i setting up to be a really good year.

Maybe just your thoughts on financing conditions today. And I'd just love to specifically within that comment, get your view around the quantum of AI data center debt and whether that's having an impact on financing markets and whether there's any sort of concern that we should be thinking about there going forward.

Mean the amount of capital that's being deployed is breathtaking when you look at it in one perspective. On the other hand, when you look at the credit quality that underpins most of those long-dated commitments, these are investment-grade companies with enormous market capitalizations, enormous cash flow generating ability, I don't think that there is much concern at the moment from a credit perspective. I think there is a question as to what happens if the equity markets at some point, start to look at these hyperscalers and revalue the equities based on how much hard assets are in the ground, how much free cash flow is being redeployed to capital expenditures. And that model is shifting. What's unclear is whether this is transitory or whether this is the new normal but there's always the risk at some point for the equity valuation paradigm to shift. I see this more as an equity risk than as a credit risk. And most of the capital that's being lent is really backstopped by commitments that are very high quality on the obligor's perspective. So that's less of an issue from our perspective. What's a bigger issue is, what are the dislocations that are going to come out of this AI revolution, what business models are going to be disrupted, compromised and what are the knock-on effects. So to the extent that there are credit issues in the marketplace, it may well be that certain industries are severely disrupted as a result of AI deployment and innovation. And if that happens, then you can see a real uptick in default rates and the like in industries that are particularly vulnerable to AI disruption.

Just a couple more here on M&A. So you noted the rebound has been led by strategics. It's also been led by the largest deals is the impediment to the mid-cap improving or catching up to a commensurate level sponsors? Or are there other things that are weighing on mid-cap activity specifically?

These numbers can be a bit deceiving. If you look at a number of deals, number of deals are down, but number of deals are down at $1 billion and less. But number -- deal count is actually up from $1 billion deals and higher. So there's a lot that you can play with in all of these numbers. The fact remains that what we're seeing are larger deals because Corporates have very strong balance sheets, are searching for growth, a lot of growth in certain industries is not top line growth but it's cost rationalization and being able to create more efficiencies. And the way you do that is in horizontal consolidating transactions. You have more favorable regulatory regime. So you're seeing more there you're seeing private equity for all the reasons we've talked about, which tends to be smaller transactions because those are principally cash deals. Those are not large stock-for-stock transactions. They tend to be smaller in size. Those have lagged. It's not going to persist for very long. I think you're going to see an uptick across the board. And volumes are up meaningfully. Deal counts are down only in the very low end of the range where there's probably less access to capital and there's less attractive consolidating opportunities. But we see the world speeding up. There's more disruption, there's more dislocation, the cost of standing still is greater today than it's ever been. The real issue has been in light of all of that, why have overall M&A volumes been so sluggish? And the answer is, no one knows exactly why, but even today with this meaningful uptick in M&A volumes, the total M&A volume measured as a percentage of global market capitalization or global output is barely back to sort of average levels. So we're not in some sort of dangerous level here thinking that we're at an unsustainable level of activity. The fact is M&A activity was beaten down for a number of years, a lot of it, I think where the COVID hangover effects, a lot of it was very vigorous antitrust and anti-competition policies. A lot of that's been relaxed. And I think you're just seeing more of a return to a more normal M&A market, and that should continue for at least the next year. And beyond that, my crystal ball gets super fuzzy.

This quarter has also had some headwinds, most notably the government shutdown. In hindsight, was there any impact? Anything structural that you've seen either on your business or on the economy?

I think at the margin, it probably made management teams and Boards more cautious because you never know what the collateral effects are as you get further and further into the shutdown. I think this was more a case of what might have been the case had the shutdown persisted for another 1 month or 2 or 3 and what those unforeseen consequences were than the actual damage that was presented during the period of the shutdown, was certainly a period of time when merger reviews and the like ground to a halt, but I think that's mostly behind us. And it's as if we're back to a more normal operating cadence. And we haven't seen much impact on our business.

Let me turn to restructuring, which for you, and I think the industry generally has remained persistently strong Help us think about the forward from here, how do you think about the moving parts of elevated liability management versus bankruptcy and the I'd say divergent tone we've heard from various participants around whether it could continue to grow, stay this level or slow.

Well, I can only speak to what we see, of course. And whether or not that comports to what others see is really more for others than for us. Here's what we see, which is we've been constructive on restructuring liability management for more than a couple of years now. We think there are secular trends which are going to continue to keep activity high relative to what we've seen before. Why is that? First of all, we're dealing in a world of greater dislocation and disruption, changing buying patterns, consumer preferences, use of technology, onshoring, all of those factors are disruptive to existing business models. There are winners and there are losers when there is disruption. We tend to focus more on the winners and the innovators. But for every innovator, there who is disrupting, there is someone who is disrupted. And as a result, there are business models that worked when the capital structure was initially created that no longer work and you need to address that. That's just a fact. The second is when we look at activity levels, we're anchored in what the "normal was, but if the normal is a near 0 interest rate environment, that may have been where we were, but that's not a normal credit environment. So where rates are today, where default rates are today is closer to what normal looks like than what we saw 4 or 5 years ago. as a result of those two factors, you should see increased levels of liability management and restructuring. Add to that, the fact that the size of the addressable market has grown by leaps and bounds and the quantum of debt outstanding is meaningfully greater. So if you have higher debt outstanding, if default rates are closer to normal by historical levels than what we've seen in the last few years, if more companies are being disrupted or disintermediated, you're going to see more concentrated stress. All of those things are secular trends that suggest that activity should increase even if the overall macroeconomic environment is reasonably benign. Then you take from our perspective, what are our own tailwinds, one is that we continue to grow geographically. As we expand outside the United States, our ability to bring our best-in-class restructuring and liability management capabilities to markets outside the United States grows, our addressable market grows in that dimension. The second is we have a significant market share with certain financial sponsors in liability management. But as we continue to build out our sponsor coverage efforts, our addressable market grows on that dimension as well. And then the third is just the interplay between our Strategic Advisory build-out and restructuring and liability management, the more industry expertise, the more personal relationships we have. So we see all of those as suddenly increasing our addressable market. So even if the overall market is flat, we should be able to gain share. And if we can get those two things going together, we could have an environment where we have increasing M&A activity and increasing liability management activity.

You alluded to the growth in the quantum of debt, one of the things that I find entering is the fact that restructuring MDs don't actually grow that quickly, whether at your firm or across the industry. Is that just the nature of restructuring and why if there's so much more debt, is there not the commensurate growth in senior bankers.

Well, first of all, we are aggressively adding to the resources committed, some of it comes from dedicated restructuring and liability management practitioners, but some of it comes from all the other areas that we talked about. If you have more sponsor coverage professionals. if you have more individuals who are running country office outside the United States, if you have more industry bankers their ability to work alongside our best-in-class restructuring liability management bankers is where you're getting incremental capacity. And they're not taking the leading role in actually dealing with the liability management issues, but they're identifying the targets. They are important in prospecting and presenting our credentials providing industry expertise. And as we take advantage of that interdisciplinary approach to all of our assignments we're able to do more without necessarily meaningfully increasing the dedicated number of individuals. But if you look at just our headcount and the effort, it continues to grow, but the reality is it's a specialized area, and if you're looking for the best of the best, they're not being grown every day. They're really being trained through an apprenticeship model. So where we're getting a lot of that is getting our VPs to operate at a higher level of responsibility and everyone sort of moves up because they're seeing so much activity and they're learning from the best, their ability to operate at a more senior level is enhanced.

One more on the restructuring side. When you think about the growth in the quantum of debt, mostly been in private credit. Do you see any risks in private credit today?

I mean private credit has a place alongside the more traditional syndicated model. I think there will be moments in time where each market is better and more aggressive in terms of pursuing credit opportunities. Our job is to increasingly tap both markets and give our clients the best opportunities. But over time, you would expect that the composition of underwrites of lending standards and the like to be reasonably consistent across both markets. And oftentimes, you'll see a deal that's underwritten in private credit, and then it gets refinanced through the syndicated market. And there's a back and forth. I think when you're first starting up a business, there is that pressure to sort of get market share to get into the game, but you very quickly realize that in order to have a robust business model, you need to have credit quality and underwriting standards that, look, like everyone else, and you can't be a laggard in that regard. And I think as the industry matures, that's precisely what you're going to see. But the idea that anyone is infallable and won't make lending mistakes or underwrite mistakes, that's not realistic either.

Let's turn to margins here. Maybe you could just help us think about the competitiveness of the hiring market and how that's impacting comp ratios. And relative to today's 67.5% that you put up last quarter, how should we think about the normalized comp ratios over the medium term? And I guess, over what time frame?

Well, the first thing you have to focus on is the supply of bankers and in a high-velocity environment, the supply diminishes. What do I mean by that? When everyone is sitting around with nothing to do because M&A is dormant, M&A activity is dormant. The only activity you have is to think about changing. When everybody is working full out, they don't have time to think about a career move or if they do, they're deeply concerned about the dislocations to their clients if they go on gardening leave. So we've talked about this for years in a low velocity M&A environment, the switching costs are the lowest, and therefore, we lean in the most in terms of our recruiting efforts. In a high-velocity M&A environment, the switching costs are high and your yields are going to be lower. That has less to do about the competitive dynamic than it does just about the supply and those bankers who are willing in a busy M&A environment to investigate changing jobs or career opportunities. Then if you layer on to that, the fact that everyone seems to have recommitted to investing in their banking franchise, you have more firms looking for talent. You have fewer individuals who are willing to make a move, not surprisingly, recruiting is going to become more difficult in that environment. But since we believe we're offering a unique value proposition to candidates. The fact that it gets more competitive, doesn't make that much of a difference on our yields because ultimately, what we're presenting to senior bankers is fundamentally different than what they can experience at a large bank. The biggest challenge we have is just when everybody is active and they're busy, and they don't want to hit the beach for 3 months or 6 months, it just -- it takes longer to get individuals to make the move because the switching costs are higher. And as far as the comp ratio goes, it's in large part a function of how much investment are you making at that moment in time? And how quickly are you getting a return on that investment? And not surprisingly, because we've made major investments in the last few years, and we have not come near getting full return on that. We will in the coming years, but it takes a while, you're seeing an elevated comp ratio.

Touch on AI a little bit in terms of the market, but what are the impacts on your business, whether it be in terms of headcount, margins or productivity?

The easiest one to answer is productivity. How can it not go up? So productivity is going to go up. The question then becomes, what do you do with that productivity surplus? How much of that goes back to the client? Because you just need to provide more services to that client on every transaction. And in many of the technological innovations of the last 20 or 25 years that should have been productivity tools. What ended up happening is they were productivity tools, but the clients ended up with better service, better advice, better data, better response times from bankers, better analytics and the like. So the first question is, it needs to go back to the client. To the extent that there's additional productivity gains, which I suspect there will be, because we're in a growth position, I would imagine that we would take most of that productivity increase. and we would be able to do more with the same resources than we did previously.

Okay? That's a great place to end. With that, we're out of time. So thank you so much, Paul. Hope to do again next year.

It's a pleasure, James. Thanks for inviting us.