Q2 2023 Perella Weinberg Partners Earnings Call

Participants

Taylor Reinhardt; IR; Perella Weinberg Partners LP

Andrew Bednar; CEO & Partner; Perella Weinberg Partners LP

Gary Barancik; CFO & Partner; Perella Weinberg Partners LP

Devin Ryan; Analyst; JMP Securities LLC

James Yaro; Analyst; Goldman Sachs Group, Inc.

Brendan O'Brien; Analyst; Wolfe Research, LLC

Presentation

Operator

Hey, standby, your program is about to begin. (Operator Instructions) Good morning and welcome to the Perella Weinberg Partners' second quarter 2023 earnings conference call. (Operator Instructions) This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhardt, Head of Investor Relations. Please go ahead.

Taylor Reinhardt

Thank you, operator, and welcome to our second quarter 2023 earnings call. Joining me today are Andrew Bednar, Chief Executive Officer; and Gary Barancik Chief Financial Officer. A replay of this call will be available through the investor page on the company's website approximately two hours following the conclusion of this live broadcast through August 10, 2023.
For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 3, 2023, and have not been updated subsequent to the initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP's expectations of future financial and business performance and conditions and industry outlooks. Forward-looking statements are inherently subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance. Please refer to PWP's most recent SEC filings for discussion of certain of these risks and uncertainties.
The forward-looking statements are based on our current beliefs and expectations and the firm undertakes no obligation to update any forward-looking statements. During the call, there will also be discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website. I will now turn the call over to Andrew Bednar to discuss our results.

Andrew Bednar

Thank you, Taylor, and good morning. Today we reported second quarter revenues of $166 million, up 10% from a year ago and up 26% from the prior quarter. Our first half revenues of $297 million were essentially flat year over year. This quarter is the first in five where we deliver a year-over-year increase even as global M&A market volumes continue to decline year over year.
Our above market performance speaks to the strength of our brand and our client relationships, the quality and tenacity of our team, and the continued effective positioning of our firm's resources. In the second quarter, our results were driven by strong relative performance in our traditional M&A business with activity spread across our key industries. Our revenue increase reflected more absolute transaction completions as well as more transactions with larger seats.
The market environment remains challenging, but conditions have improved. We see encouraging signs of activity across our business, and we are increasingly optimistic that the trough in activity is behind us. Our key indicators of forward volume are announced and pending backlog has steadily increased year over year and year to date.
We expect revenue related to this activity will lag as nearly all aspects of transaction timelines continue to be elongated relative to historical norms. Nevertheless, after nearly 18 months of sobering data points, we do see signs of a turning M&A cycle. Our financing and capital solutions business is increasingly active as we see opportunities to place and structured private debt and equity solutions for our clients in what has been a prolonged period of uncertainty of access to capital and increasing cost of capital.
Restructuring has continued to gain momentum in the year, both in the US and Europe with mandates driven by strong liability management activity, including new financings, maturity extensions, and debt exchanges designed to address 2024 and 2025 maturity walls. In what is expected to be a higher for longer rate environment, and given the surge in private credit, we anticipate a higher baseline of financing and capital solutions activity through the next M&A cycle. We continue to invest in scaling our franchise and make selective senior hires to enhance our client footprint and product offering.
Year to date, we have added four advisory partners and eight managing directors with an additional two partners committed to join in the third quarter. Our new hires bring expertise in strategically active sectors, including technology, business and consumer services, aerospace and defense, and stakeholder activism.
We have been at a mode of above market talent growth since the lead-up to our public listing with consistently 25% to 30% of our partners in their seat for less than three years. These partners are not yet at full productivity and represent a built-in source of revenue growth in the years ahead. We are confident that our steady investment in talent without lowering our high admission standards will prove to be highly accretive to our stakeholders over time.
Our financial results from the first half have positioned us very well to execute on our strategic and financial goals for this year and beyond. Thank you to our clients and to our teams globally for their commitment and dedication to our firm and to our mission.
Before I turn the call over to Gary, I just want to acknowledge our announcement in today's earnings release that Gary will be stepping down from his position as CFO at the end of the year. We have been so fortunate to have Gary with us since our founding over 17 years ago with his many contributions, so integral to the firm's growth and development, including our transition from a private partnership to a public company. Even that Gary will remain in his position until the end of the year to ensure a smooth transition, I'm sure we will both have more to say on this topic on November's call. But for now, I just want to say thank you, Gary, for your partnership and for your dedication to the firm since day one.
And also, I'll finish by saying congratulations to Alex Gottschalk, currently our Chief Accounting Officer, who will become CFO, January 1. We look forward to working with her and wish her success in her new role. Gary, over to you.

Gary Barancik

Thank you, Andrew. I just want to note that it's been an honor and a privilege to have been at PWP Advisory Partner since the firm's founding in 2006 and to have served as its CFO since 2018. I've worked very closely with Alex over the past five years and can attest to the fact that she's an exceptional talent who is well positioned to guide the firm as its next CFO.
Turning to our results, as Andrew already spoke to top line performance in his remarks, I'll begin with review of our expenses. We accrued adjusted compensation expense at 69% of revenues in the second quarter. This resulted in a blended accrual of 67% for the first half, a level that reflected our expectations at the end of the second quarter for our full year margin. The decision to increase our compensation margin was dictated by a few factors, including the revenue environment, investments in talent, and relative industry compensation levels. As we progress through the year, we'll continue to assess the appropriateness of this estimate.
Our adjusted non-compensation expense was $36 million for the second quarter and $71 million for the first half. Adjusted non-compensation spend grew 12% in the first half compared to the same period last year, largely the result of expenses, which will enhance our brands and help drive revenue, including those related to our new offices in New York and London and increased T&E spend. Our expectation remains that full year 2023 adjusted non-comp expense will come in 15% to 20% higher than 2022, largely result of infrastructure investments to support our next phase of growth.
In the future periods, we expect our non-comp growth rate to moderate without the impact of one-time expenditures, such as overlapping rent, which is projected to account for approximately $4.5 million of non-comp expense in 2023. Our adjusted, if converted effective tax rate for the first half of 2023 was 22%, which includes a tax benefit recognized in the second quarter, which will not recur in the second half of the year. And we, therefore, currently expect that our effective tax rate for the full year should be close to last year's 28%.
Year to date, we've returned a total of $47 million to investors through repurchases, net settlement in lieu of share issuances, common stock dividends, and pro rata distributions. Looking forward, we'll continue to return capital to shareholders through dividends and repurchases, although the cadence of repurchases will vary from quarter to quarter and will be dependent on the operating environment our business needs at such time.
On the balance sheet, we ended the quarter with $180 million in cash in short-term investments and no debt. This morning we declared a quarterly dividend of $0.07 per share. With that, I will now turn the call back to the operator to open the line for questions.

Question and Answer Session

Operator

Devin Ryan, JMP Securities.

Devin Ryan

Hey, great. Good morning, Andrew and Gary. It's been a pleasure. Best wishes. And I guess, we'll have another quarter with you, but just really appreciate the time together here.
First question, want to touch on -- thanks, Gary. I want to just touch on the financing and capital solutions. So the revenues were roughly flat in the quarter year over year. It was actually down a little bit year over year. Yet you guys talked about kind of the growing activity there.
We're tracking kind of a growing backlog in these businesses as well from the outside. And so maybe just talk about how you see that acceleration in backlog showing up in results. Is that a back half of this year? Is that 2024 and just kind of what was the magnitude of how much better activity is there? Thanks.

Andrew Bednar

Yes, sure, Devin. Hi, good morning. When you look back at the quarter and really the first half, it's a very well-balanced business across our platform, whether you look at it by industry or products or geography. So we're just really pleased with the results.
There's nothing that's one-off or anything anomalous. And so it sets us well. I think it sets us up for growth very well going forward. And looking at the mix, when you look at just the comparison back to 2022, we did have one revenue event in 2022, which was outsized and that makes for the comparison, which puts our revenue in the financing and capital solutions arena about flat. And again, most of our growth here in the quarter is coming from traditional M&A. And as I said, we like the balance of the business right now in the mix.
I think it's a strong foundation from which we can grow. We don't really predict quarter by quarter or even year by year when that revenue is going to hit, but we like the early indications of the activity levels. Historically, that type of activity can be more recent in hitting revenue versus the M&A cycle. But again, we don't really predict it by quarter or by year.

Devin Ryan

Okay, perfect. Just on the M&A outlook, if you can just elaborate a little bit more on some of the green shoots that they track or alluding to where you're seeing some of that increased activity? Is it broad-based or is it specific sectors?
And then there's also PWP story. Here, you guys have higher number of bankers that are kind of ramping on the platform that have been on the platform for less than two or three years. I'd just love to kind of talk about also maybe some use in credit growth that you're seeing. Maybe it's just bankers are maturing and connecting with clients and there's more business coming through from more recently added talent. Thanks.

Andrew Bednar

Yeah, Devin. So as you well know, given our scale, we tend to be less tethered to the global M&A volumes. And so we, from time to time, we'll have outsized growth relative to what's happening in broader market. And I think we can continue to do that over time because of our scale.
We're really happy with our '21 and '22 class of partner hires, especially coming out of COVID, where we made some very strategic and very deliberate hires. And those sectors continue to be quite active. And we see very early returns in areas like energy transition, basic materials, and turnaround technology. So those have been good investments that we made.
We're very pleased with our very steady investment in that type of talent. I think generally, the activity and even though revenue always lags and certainly it's very hard to predict again, quarter by quarter, year over year with activity converting to revenue. That's always quite challenging especially in what is an elongation cycle here for M&A, things are taking longer.
I think we're finding that most managements and boards are just saying that there's going to be a time here where they have to stop thinking about when conditions will improve and start accepting that current conditions might be there for a while and setting a plan forward. And I think we're starting to see that type of thinking change. And that's been good for the increase in activity, which again, is happening across the platform.

Devin Ryan

Okay. That's great color. I'll leave it there and let someone ask. Thanks, guys.

Andrew Bednar

Thank you.

Operator

James Yaro, Goldman Sachs.

James Yaro

Hey. Good morning and thanks for taking my questions. With the benefit of hindsight, the restructuring tone from your peers have been quite different. Maybe you just speak to the trends that you're seeing in your business and maybe differentiate between chapter 11 versus liability management?

Andrew Bednar

Yeah, I think some of our peers may have had some extraordinary events they've certainly reported on, and those are well documented. I think for our business in this particular quarter, we didn't have those type of extraordinary events, but we have, I think, a very steady and growing increase in activity across our financing and capital solutions business. As I mentioned on the prior set of questions, my answer is there was a revenue event in '22 that was outsized that makes a bit more challenging comparison for the current quarter.
Going forward, we're seeing pretty broad activity around liability management and in our financing advisory business. I'd say that people have reported on the uptick in bankruptcies. I don't think we have a significant uptick, though there are some that are very well documented and well publicized. I think it's more about companies realizing that it's a more challenging market with respect to accessing capital and certainly a more challenging market with respect to cost capital.
We have the advent and the increase in private credit markets, which our new participants that have lot of our client base is unfamiliar with. So that is a helpful trend in our business for sure where our traditional corporate client base will need assistance in accessing the private credit markets. So we're seeing a request for a balance sheet management for complex stories where people need help and thinking through maturities a lot of which is coming in '24 and '25.
So I think some of that revenue always lags, and we look at the early indicators for what we see as positive trends. And we're seeing positive trends in that market, both across Europe as well as the United States where -- as you know in Europe, we've made significant investments in our team and feel very good about our positioning there.

James Yaro

Okay. That's very clear. Thank you for that. Just wanted to touch on the comp ratio, both in the near term and the longer term.
You've talked about additional hires coming on the platform. Could that result in additional near-term upward pressure on the comp ratio in 2023? And then maybe just if we could get your thoughts on over what time period you think the comp ratio could normalize back to the 64%, 65% range that you put up in recent quarters?

Andrew Bednar

Yeah. So I think we're still within our parameters and the guidance we put out when we had our public listing that we'd be around the mid 60s. We were precise in the statement, but that statement provides a little bit of flexibility, downside and upside. I think we're still within the band.
We've had an operating environment where I think it warrants a bit of an uptick in the comp margin. Gary has highlighted the reasons for that. And I think we've always been quite disciplined and very steady in how we think about hiring. And so even though it is a much more favorable recruiting environment in terms of the numbers and the people that are interested in changing their employers, we're still maintaining very, very high standards for joining the firm.
And so I think you always have a challenge culturally and financially with that type of growth that goes beyond a steady growth of talent. So we'll continue to be steady. We don't see any gap up in hiring. We're going to continue to be steady so that we can stay within our bounds in terms of comp ratio and also not require our current productive bankers to overinvest in growth.
So we're pretty disciplined there and pretty deliberate right now. As Gary said in the opening remarks, we believe that we're at a level that it is our current expectation where we'll end the year, but conditions can change. And we watch it very closely.
And as I said in prior calls, we are always going to invest behind our team. That would be foolish not to. And so hopefully we are in an environment where we don't need to move the comp ratio. But right now, reflects our best view, and that's at the 67 level, which is where we ended up in the first half.

James Yaro

Okay. That's very clear. Thanks a lot. And thanks a lot, Gary, for all your help over the past few years, and all the best.

Gary Barancik

Thank you, James.

Operator

Steven Chubak, Wolfe Research.

Brendan O'Brien

Good morning. This is Brendan O'Brien filling in for Steven. I wanted to follow up on the comp question. In the release, you indicated that you're undertaking some actions on the expense side. I was hoping if you provide more color on what the aims are of the business realignment initiative and what type of actions we should expect you to take going forward.

Andrew Bednar

Yeah. Thanks. Our actions were to really optimize our allocation of capital and less about reducing the overall expense base. And so we took a really close look at where we had resources both geographically as well as from an industry and product perspective. And our focus is around making sure that we have the right team on the ground in the right place and where we can win.
And so we've decided to make some changes across our platform at all levels. And we will redeploy that capital toward investment and toward making sure that we are positioning new resources in places where we see growth and where we see opportunities. So it's not about taking cost out of the system to get to a better earnings result. And I don't think of it as cost cutting, I think of it as capital allocation and where we're putting our resources so that we can better position the firm for growth.

Brendan O'Brien

That's great color. Thank you for that. I guess from my follow-up I wanted to discuss Europe.
Central banks in Europe are behind aside in terms of where they are in the rate hike cycle. And we've seen how certainty on the path of rates has impacted activity in the US. Would be great if you could give some perspective on the dynamics at play in the region and how conversations and activity levels compare there for US?

Andrew Bednar

Yeah, I think you're right that Bank of England and ECB are probably a step or two behind. But I think people are pretty well modeling in the expected terminal rates there. So perhaps some surprise. I think people have adjusted to what are likely to be conditions that persist for some time and this concept of higher rates for longer, I believe will be that conditions in the United States as well as across Europe.
I think Europe is seeing similar type of activity. I think, again, revenue always lags. But when we look at our key indicators of activity, they're very similar across Europe because what we're seeing in the United States, I think the lag effects are usually a little bit higher in Europe than what we see in the United States in terms of converting to revenue. But we are seeing increased activity across our European platform which is similar to the United States. And in terms of the early indicators, they're quite similar in spite of macro and central bank activity potentially being a little bit behind.

Brendan O'Brien

Thank you for taking my questions.

Operator

This concludes the Q&A portion of today's call. I would now like to turn the call back over to Andrew Bednar for additional or closing remarks.

Andrew Bednar

Okay. Thank you, operator, and thank you, everyone, for joining and for your interest in our firm and of course, for your support. And we look forward to talking to you in November. Thank you.

Operator

This concludes the Perella Weinberg Partners second quarter 2023 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.